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Executives

Frank H. Laukien - Chairman, President and CEO

Charles F. Wagner, Jr. - EVP and CFO

Stacey Desrochers - Treasurer and Director, IR

Analysts

Jon Wood - Jefferies & Co.

Isaac Ro - Goldman Sachs

Amanda Murphy - William Blair & Company

Tycho Peterson - JPMorgan

Daniel Leonard - Leerink Swann & Company

Peter Lawson - Mizuho Securities

Timothy Evans - Wells Fargo Securities

Stephen Unger - Lazard Capital Markets

Sung Ji Nam - Cantor Fitzgerald & Co. Equity Research

Daniel Arias - UBS Equities

Jonathan Groberg - Macquarie Capital

Derik DeBruin - Bank of America

Bruker Corporation (BRKR) Q3 2012 Earnings Conference Call November 5, 2012 9:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the Bruker Corporation’s Quarterly Earnings Conference Call. My name is Darcelle and I will be your operator for today. At this time, all participants are in a listen-only. Later we will conduct a question-and-answer session. (Operator Instructions)

I’d now like to turn the conference over to your host for today, Ms. Stacey Desrochers. Please proceed.

Stacey Desrochers

Thank you. Good morning and welcome to Bruker Corporation’s third 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; and Charlie Wagner, Bruker’s Executive Vice President and Chief Financial Officer.

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

While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change and therefore you should 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 margin, 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 and segment level details 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 Charlie will discuss the financial results. I’ll now turn the call over to our President and CEO, Frank Laukien.

Frank H. Laukien

Thank you, Stacey, and good morning, everyone. We appreciate you joining us today. Overall, we’re pleased with our third quarter 2012 financial results, including reported revenue growth of 7%, organic revenue growth of 13.8%, and adjusted operating margin of 15.5% and adjusted earnings per share of $0.28.

Revenue growth in Q3 was driven mostly by significant contributions from BioSpin and BEST. BioSpin got off to a slow start in the first half in 2012, but had stronger backlog conversion in the third quarter. BEST revenues in Q3 of 2012 included $16.4 million from our previously announced contract with a Russian agency, Rosatom. Despite the continued strong organic growth in Q3, we saw a decline in our Q3 new order bookings compared to the third quarter of 2011.

Our year-to-date bookings and backlog remained healthy, but we faced some of the same macroeconomic headwinds reported by other companies, including slow demand in Europe, weakness in the U.S. research markets, and amongst Asia Pacific industrial customers along with a slowdown in the global semiconductor and data storage markets.

In our quest to sustain our good organic growth rate, in spite of economic conditions during the third quarter, we continued to expand our product portfolio by introducing 10 new products across our divisions. One important launch included our High-Performance LC-Triple Quadrupole Mass Spectrometer platform called EVOQ.

The new EVOQ series is targeted at LC-Triple Quad Mass Spec performance leadership and major advances in robustness, ease of methods development and productivity. Further adding to our product portfolio, subsequent to the end of the third quarter, on October 1, 2012, we completed the acquisition of Carestream's Preclinical In-vivo imaging business.

We believe that these newly acquired optical molecular imaging product lines as well as the continuation of the global OEM distribution of the Albira Preclinical PET, SPECT, CT product line by Bruker will complement our other preclinical imaging solutions, consisting of magnetic resonance imaging or MRI, magnetic particle imaging, or MPI and X-ray micro computed tomography or CT.

The acquisition of the SkyScan microCT business in the first quarter of 2012 and now of the Carestream In-vivo optical and PET, SPECT molecular imaging business provides Bruker with a broad range of high-performance preclinical imaging modalities.

As we continue to review our product portfolio, on August 30, 2012, we sold our low margin non-strategic thermal analysis business in Japan to a strategic buyer with a stronger position in thermal analysis. This is one of the many steps we’ve taken and are taking this year to improve our cost and margin structure. As we continue, our 2013 business planning, we will review our products, supply chain, cost structure and systems for additional areas of improvement and optimization.

I’ll now turn the call over to our CFO, Charlie Wagner, for additional commentary and analysis on our third quarter results.

Charles F. Wagner, Jr.

Thanks, Frank. Here are some additional color on the financial results for Bruker Corporation during the quarter. Third quarter 2012 revenue of $447.8 million represented a 7% increase over Q3, 2011. The increase was 15% excluding the effects of foreign currency translation, and our organic year-over-year growth rate was 13.8% excluding the effects of foreign currency translation and acquisitions.

Year-to-date revenue of $1.274 billion represents a reported increase of 8.3% over the first nine months of 2011 and a year-to-date organic growth rate of 12.6% or 14% excluding the effects of foreign currency translation.

Our Q3, 2012 adjusted gross margin of 48.3% and adjusted operating margin of 15.5% benefited from the impact of the high margin Rosatom revenue. Operating margins also benefited from a slowdown in the rate of operating expense growth as our Q3, 2012 operating expenses were only slightly higher than in the third quarter of 2011.

For our reporting segments, BSI adjusted operating margin improved by 110 basis points from 12.8% in the third quarter of 2011 to 13.9% in the third quarter of 2012 and BEST adjusted operating margin improved from 0.7% in the third quarter of 2011 to 34.7% in the third quarter of 2012 largely because of the Rosatom revenue.

For the nine months ended, September 30, 2012, our adjusted operating margin of 11.5% was basically flat to the nine months ended September 30, 2011, of 11.6%. As Frank mentioned, we’re not satisfied with our margin development and are in the process of evaluating margin expansion opportunities as part of our planning for 2013. Interest expense was $3.6 million in the third quarter of 2012 and $10.7 million for the first nine months of 2012 compared to $1.7 million in the third quarter of 2011 and $4.8 million for the first nine months of 2011.

As a reminder, in January 2012, we replaced our short-term revolver borrowings with longer-term debt at attractive, but higher average interest rates. Also in the third quarter of 2012 we had a foreign currency loss of approximately $2 million compared to a gain of approximately $3 million in the third quarter of 2011.

Our third quarter 2012 tax rate on adjusted pre-tax income was 26.7% compared to 33.3% for the same quarter a year-ago and this was – the change was driven by a mix of earnings in different tax jurisdictions. The Q3 decline in the tax rate drove the Q3 year-to-date adjusted tax rate of 29.8% compared to 30.3% year-to-date Q3, 2011.

GAAP net income for the third quarter of 2012 was $39.7 million, or $0.24 per diluted share compared to GAAP net income of $19.8 million, or $0.12 per diluted share in the third quarter of 2011. Adjusted net income, which excludes acquisition-related restructuring and other charges, was $47.1 million in the third quarter of 2012 or $0.28 per diluted share compared to adjusted net income of $34.4 million or $0.21 per diluted share in the third quarter of 2011.

GAAP net income for the nine months ended September 30, 2012, was $64.7 million or $0.39 per diluted share compared to GAAP net income of $53.2 million or $0.32 per diluted share during the nine months ended September 30, 2011. Adjusted net income for the nine months ended September 30, 2012, was $91.6 million or $0.54 per diluted share compared to adjusted net income of $87.7 million or $0.53 per diluted share during the nine months ended September 30, 2011.

For the third quarter of 2012, our working capital ratio per dollar of revenue improved to $0.47 compared to $0.50 for the third quarter of 2011. Operating cash flow for the third quarter of 2012 was $0.4 million compared to $21.3 million in the comparable period of 2011. Capital expenditures were $19.5 million in the third quarter of 2012.

As a result, we had negative free cash flow of approximately $18 million in the third quarter of 2012, compared to positive free cash flow of $14 million during the third quarter of 2011. Operating cash flow for the nine months ended September 30, 2012, was $42.2 million compared to $4 million use of cash in operating activities in the comparable period in 2011.

We continue to see an opportunity to significantly improve working capital efficiency and free cash flow, so this will also be reviewed during our 2013 planning process. We ended the third quarter of 2012 with cash and cash equivalents of $242.1 million and net debt of $94.8 million.

Now let me turn to our revised guidance for the year. Given our third quarter performance, we’re updating our full-year 2012 revenue outlook to a range of $1.73 billion to $1.76 billion corresponding to a year-over-year reported revenue growth of 5% to 7% and we’re raising our full-year adjusted EPS guidance to a range of $0.75 to $0.79 for fully diluted share.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jon Wood with Jefferies. Please proceed.

Jon Wood - Jefferies & Co.

Hey, thanks a lot. Frank, you mentioned new orders down organically in the third quarter. Can you give some context around that in terms of magnitude and how that broke out between BEST and BSI?

Frank H. Laukien

Hello, Jon. So, our orders year-over-year, in the third quarter year-over-year are down in the single-digits. Our Q3, 2012 book-to-bill ratio is still around 1 and as you know BEST is very lumpy, BEST orders were actually relatively low in Q3 of 2012, but I don’t recall the ratios on that one in particular.

Jon Wood - Jefferies & Co.

Is this something that you see as an ongoing effect or just talk about comparisons over the next several quarters versus the prior-year and just how you see that macro related weakness playing out of vis-à-vis the comparisons?

Frank H. Laukien

Yeah, I mean, I think a little bit of color on that. Our orders in the second half of 2011 were very, very strong, very – book-to-bill ratios were much higher than 1 and our orders were still quite strong, also with book-to-bill ratios greater than 1 in the first half of 2012, although not as strong in terms of growth rate as in late 2011. And as I just said, so our orders compared to Q3 of ’11, which was very strong are down in the single-digits, book-to-bill ratio is still solid and backlog is still very solid.

But we're clearly seeing – I mean there are some pockets of strength geographically or in certain areas, but more selective countries, selective programs. Overall the market conditions are relatively weak in Europe, in the U.S. for all the well-known reason, also in Asia in industrial demand. So it’s certainly a period of weaker demand. We are still satisfied with our orders, but they’re clearly not as strong as they were in the first half or particularly in the second half of last year.

Charles F. Wagner, Jr.

Jon, this is Charlie. Just adding to Frank’s comments, you can see a little bit in the revenue performance in the quarter, BioSpin had a very strong third quarter. Bookings for BioSpin in the second half of last year were very, very strong and it takes more than a couple of quarters to convert that into revenue. So one phenomenon we’ve seen in 2012 is that BioSpin had a kind of a soft first half from a revenue standpoint, but those strong bookings from the last half of last year are now converting into revenue in the second half of this year.

Jon Wood - Jefferies & Co.

Okay. Got it. Good color. Then Charlie just for you on the operating expenses of the Company, I mean, obviously a very significant step down sequentially. Is there any structural actions reflected in that number or is that mostly FX and kind of what I’d call temporary slowing in the expense trajectory. I guess, what I’m looking for is, is that kind of that SG&A level, a good level to use prospectively obviously adjusted for seasonality, but any color you can give around – SG&A levels will be great?

Charles F. Wagner, Jr.

Yeah. I’d say John that it was more tactical. Obviously, we were very disappointed with the Q2 results and put the brakes on pretty hard in the quarter in terms of headcount additions and carefully looking at programs, some to cancel but some to postpone. So the operating expense performance – I mean, we’re happy with it in the quarter, the organization responded well, I think to the – to constraints we put on them, but I wouldn’t call it structural changes at this point.

Jon Wood - Jefferies & Co.

Okay, great. Thanks a lot Charlie.

Operator

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

Isaac Ro - Goldman Sachs

Good morning, guys. Thank you for taking the question. First off, I wanted to ask about market share trends in the quarter. Could you maybe touch on how you guys think you did qualitatively across the major areas, specifically BioSpin and then maybe across the other businesses?

Frank H. Laukien

Hello, Isaac. Frank taking this question. I think in most businesses, we’re quite pleased with our market share performance. And so I think we’re in relative terms are doing quite well. In BioSpin, I think we were doing very well in terms of market share and competitive performance.

Isaac Ro - Goldman Sachs

Great. Thanks so much. And then, if I could ask just a follow-up on just qualitatively how you feel about the pricing environment heading into the end of the year. There is obviously a lot of new consternation about budgets and overall economic demand for all products in your book. How do you feel about pricing power into the end of the year and then maybe for next year is there any view there that you think could change or evolve? Thanks.

Frank H. Laukien

Yeah, I mean, all the things you’re saying are of course correct. There is some pricing pressure in some markets you particularly see it in some of the industrial markets relatively quickly. It’s – so that’s a concern, but they’re not untypical for an economic and demand environment like the one that we have right now. For 2013, obviously, when we give guidance for next year and we tend to do that when we report Q4 we’ll try to give you obviously a better outlook at that point. Right now we’re still very much focused on this year and of course getting ready for next year. So not a lot of color right now for – on next year.

Isaac Ro - Goldman Sachs

Okay. And for this year could you maybe comment on what you think price realization will be for the overall business? Just trying to ballpark what it is this year and we will certainly wait for next year when you’re ready? Thanks.

Frank H. Laukien

Well, I’m not sure I will be answering the question properly, but – Isaac but – I think it won’t have much – that much of an effect this year. I mean, there are some areas that have been competitive not so much for macro trends, have been quite competitive in the last 18 months and those tend to be in our backlog. So I think what we see in pricing in, so far year-to-date we will see in Q4 because it’s pretty much in our backlog. I’m not sure that answers your question, but at least I tried.

Isaac Ro - Goldman Sachs

That’s okay. Thanks so much.

Frank H. Laukien

Yeah.

Operator

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

Amanda Murphy - William Blair & Company

Hi. Thanks. So, I had question on some of the things you talked about last quarter. So specifically, just the decentralized nature of the business and obviously Charlie you’ve been there a few months now, but I’m curious are you able to talk to just how do you might change that – not change the structure, but how might sort of improve through the decentralization side of it and communication between the groups? I know that’s probably a longer term fix, but I’m curious if you have any more color there that would be helpful? Thanks.

Charles F. Wagner, Jr.

Sure. Well, I can report that the Company is still decentralized. We are making progress. Over the course of the quarter we’ve started to put in place some I would say more comprehensive management practices, I’ve been on board about a 100 days or so now, maybe a little bit longer and working with the finance team to really get a better handle on the nature and the quality information that needs to flow up. Of course, we’re doing a lot of that manually right now, but again the organization I think is responding very well.

We have kicked off a project right now to define what Bruker’s kind of financial system of the future will look like. We are working with an outside firm on that. That project will – once we kind of get past this initial planning phase, we will kick into high gear throughout 2013. At this point, I think a stretch goal would be to get it in late in the year. I think it's more likely that we would go live sometime in early 2014 with the expectation at that point we would have more automated set of financial systems that are appropriate for the Company.

But we’re working through a variety of changes from organizational to just process – management process the way we do things and then we will be backing that up with systems over the course of – on the financial side, over the course of next year. ERP and other adjustments are going to take longer than that.

Amanda Murphy - William Blair & Company

Right. Okay. And then, in terms of the backlog conversion obviously that went a little better for you this quarter. Is there anything specific there that you can call out in terms of improvements in the conversion and sort of how to think about that going forward?

Frank H. Laukien

Yeah. We made some progress obviously in backlog conversion. We didn’t make enough progress yet in my opinion, but we made some progress without going through the individual divisions right now. I think our backlog conversion is gradually getting stronger with further room for improvement. Our backlog is still very high. It is still up, year-to-date and – but there is room for improvement there as well. But on the other hand, it’s of course not a bad situation to continue to have, strong year-to-date bookings and strong backlog.

Amanda Murphy - William Blair & Company

Okay. And just last one for me on CAM, any update there, so that business has been doing – performing fairly well on the top line, obviously there has been integration issues, but it’s taken a little bit longer. Where do we stand now with CAM?

Frank H. Laukien

It’s still taking us some time; it’s still financially not satisfactory. On the other hand, we did have some major product introductions for CAM that came out in Q3 and of course they’re not really contributing to revenue and margins at this point yet, but we still have a lot of work to do at CAM. We’re not satisfied with our financial performance there at all yet, but we still think it’s a tremendous opportunity so we will diligently keep working on it.

Amanda Murphy - William Blair & Company

Have you been able to look at some of the – I think you talked about pricing strategies within CAM relative to the rest of the business, is that something that you’ve been able to address at this point?

Frank H. Laukien

Yeah, we think so. We think we will have a better approach to pricing and margins there worldwide or perhaps we did not always have the right regional management in place. But I think that’s something we’ve very much tried to address …

Amanda Murphy - William Blair & Company

Okay, thanks ….

Frank H. Laukien

… which would then contribute – which may slowdown its growth a little bit, but would contribute to margins.

Amanda Murphy - William Blair & Company

Got it. Okay, thanks.

Operator

Your next question comes from the line of Tycho Peterson with JPMorgan. Please proceed.

Tycho Peterson - JPMorgan

Hey, thanks for taking the question. I want to go back to the earlier question on SG&A. Charlie can you just give us a sense of how much of the delta there from the second quarter was cash versus non-cash? In other words, what amount of the decrease came from stock-based comp around the stock price versus actual expenses that you either deferred or took out?

Charles F. Wagner, Jr.

The impact from stock-based compensation is minimal. I don’t have the number off the top of my head, but it’s pretty minimal in terms of the delta. So it’s almost entirely cash based.

Tycho Peterson - JPMorgan

Okay. And then on the gross margins, can you just give us a sense of some of the gives and takes there? How much was from currency versus it sounded like you called out the Russian order as being driver of some of the margin improvement?

Charles F. Wagner, Jr.

Yeah, I mean, the Russian order obviously is significant at north of $16 million of revenue and it’s the license – technology license. So it’s basically pure profit. So if you think about the impact of that on the margins that’s – it’s probably worth 200 basis points on corporate gross margins. So, that's a pretty significant driver. Aside from that, I think we saw a mix bag overall in the quarter.

Tycho Peterson - JPMorgan

Okay. And then maybe just last one for Frank; can you just give us a rundown of how you're thinking about the major geographies in the fourth quarter U.S, Europe and Asia, and just maybe preliminary thoughts on each of those markets as you think about '13?

Frank H. Laukien

Yeah – gladly, Tycho. It might be bit of a recap what I said earlier. I think we do see a weaker European demand, not a surprise. Already in Q3, we had stated that this wasn't, no longer a Mediterranean symptom, but really affected much or all of Europe. The United States research markets until we sort out our fiscal cliff over here I think are going to be very constrained and conservative in spending.

Again not exactly headline, you’d probably hear that in every call that you're attending. And we did see also with China's growth slowing down and other Asian economies of course also selling to China quite a bit. We did see also a – overall in Asia a slower growth and slower demand, particularly in the industrial side.

I would say European research and academic investment, except for the Mediterranean countries is actually still okay, and I would say the same for Asia Pacific as well as Latin America, but overall, it's not a strong demand picture at this point in time.

Tycho Peterson – JPMorgan

Okay. Thank you.

Operator

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

Daniel Leonard - Leerink Swann & Company

Thanks. I'm going to take a run at the operating expense question again. So, Charlie, by your communication that the sequential decline in OpEx wasn't anything structural. Should we interpret that to be then that, putting your foot on the brakes is more of a temporary phenomenon and there are going to be some catch-up cost going forward?

Charles F. Wagner, Jr

Yeah, there would be, I mean, again keep in mind that with R&D in particular, a significant element of R&D cost is materials related to various projects. Q2 saw a significant chunk of that in R&D. We had some ability to differ some of that in Q3, but that means those expenses will come through in Q4 and Q1 of next year. So, some of it is clearly timing. Some of it is permanent in the sense that we're putting more controls in place around headcount additions and certainly as we head into the budget season, I’m going to have the ability to control that as well, but definitely some of it is timing.

Daniel Leonard - Leerink Swann & Company

Okay. And then my follow-up, how should we think about modeling the Rosatom contract going forward?

Charles F. Wagner, Jr

In an order of magnitude, you could expect no more revenue this year. If the contract goes as planned, we’re probably looking at $6 million or $7 million next year and somewhere in the neighborhood if $8 million to $10 million the year after that, but overall it's all dependent on milestones.

Daniel Leonard - Leerink Swann & Company

Okay. Thanks.

Operator

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

Peter Lawson - Mizuho Securities

Frank, just wondering if you could talk through the trends you’re seeing in the first month of Q4; what’s got better, what’s got worse?

Frank H. Laukien

You were chuffed-up a little bit. Could you repeat the question please, Peter.

Peter Lawson - Mizuho Securities

Just on the trends in the first month of Q4, which markets have got better or worse, or is it a steady state?

Frank H. Laukien

Yes, I don't have any particularly remarkable insights on October compared to the Q3 trends.

Peter Lawson - Mizuho Securities

Okay. And then with the businesses that you’re reassessing or restructuring; what’s the scale of that reassessment and has there been any change in the outlook on potential M&A and the stance on the BEST business?

Frank H. Laukien

So that's several questions. In terms of M&A, I would not say that M&A is a high priority for us right now. We have a lot of foundation building in terms of processes, IT, organization, talent and we have a lot of organic growth opportunities in all of the division, that's clearly our focus.

Although from time-to-time we will do some typically smaller acquisitions like the acquisition of the two pre-clinical imaging product lines that we just closed on October 1, and we're actually quite excited about. We think that's a really excellent complement to all other pre-clinical product lines. In – remind me of the other elements of your question, please.

Peter Lawson - Mizuho Securities

Oh, just for the stance on the BEST business?

Frank H. Laukien

The BEST business? The BEST business obviously has had a tremendous benefit from that contract in Q3 and Charlie just gave the further outlook on that. So, that's not – that’s a one-time occurrence for BEST if you like; a very nice contract. So, I think BEST continues to have a lot of backlog. It's just a lumpy business even if it doesn't have a lot of bookings in Q3 it still has a very strong backlog. Its core businesses continue to be reasonable, and there’s really not a lot of other perspective on the BEST business. Charlie, you'd like to add something?

Charles F. Wagner, Jr

Yeah, Peter if I could add -- perhaps you’re keying off the – Frank’s earlier comments about our divesture of the thermal analysis business which is a pretty small non-strategic business for us. As we're entering the planning season, we’re looking at all our businesses, all our investments. I think in terms of divestures it’s mostly very – its fine tuning. I mean, its things like the thermal analysis business, we’re not looking at large scale divestures at this point.

Frank H. Laukien

Yeah, a very good point.

Peter Lawson - Mizuho Securities

And just finally on the R&D tax credit, is that included in the guidance?

Charles F. Wagner, Jr

I would say essentially it is, yes.

Peter Lawson - Mizuho Securities

Okay. Thank you so much.

Operator

Your next question comes from the line of Tim Evans with Wells Fargo Securities. Please proceed.

Timothy Evans - Wells Fargo Securities

Hi, thanks. Frank, if we're looking at a bit of a slowdown in BioSpin orders. I was wondering if you could parse a part of the -- how you're thinking about that coming from a macro slowdown versus what might be just having picked a lot of the low hanging fruit as far as share gains are concerned and that getting a little bit more difficult going forward?

Frank H. Laukien

Actually BioSpin orders have continued to be quite reasonable -- quite strong actually in the first nine months of this year.

Timothy Evans - Wells Fargo Securities

I mean with -- what would you say would be the outlook for that then kind of going forward? In other words are you -- is that sustainable, I guess, is what I'm trying to get at.

Frank H. Laukien

That remains to be seen. It's obviously been not -- it’s not been sustainable in the United States where presently the academic spending is just weaker. But how that will evolve into 2013? I think we may see some changes in that perspective in the next three months, but who knows, I mean, we’re speculating like everyone else. But certainly in the second half of the year, in the U.S, it's been a slow down. Now, the U.S. is about less than -- it is about 20% or less of our overall demand and there's enough pockets of strength elsewhere.

Timothy Evans - Wells Fargo Securities

Okay. And maybe just one quick one for Charlie on the tax rate; longer term, do you feel like there's room to really bring this down in a meaningful way?

Charles F. Wagner, Jr

Yes, I do and we'll be kicking-off some tax planning work in the next few months to look at our global tax strategy and our positions around the world. As you know when we would get some insights from that and start to implement some programs, it wouldn't necessarily flow through the rate right away. But over a few year period of time, I do feel like we can impact the tax rate meaningfully.

Timothy Evans - Wells Fargo Securities

Great. Okay. Thank you.

Operator

Your next question comes from the line of Steve Unger with Lazard Capital Markets. Please proceed.

Stephen Unger - Lazard Capital Markets

Thanks. Good morning. Frank, I was wondering if you could give us just maybe a little bit more color on the year-to-date growth of bookings and backlog. Is it low-single digits, mid-single digits, double digits?

Frank H. Laukien

Yeah, hello Steve, I understood the question. And I think it's all in the single digits; that is correct.

Stephen Unger - Lazard Capital Markets

Okay.

Frank H. Laukien

And the backlog is, yeah, bookings are up in the low-single digits, but then again there's also some, as we say it's quite a bit of currency headwind year-to-date. So if you were thinking of an organic component it’s probably above 5% if you thought about an organic growth rate year-to-date.

Stephen Unger - Lazard Capital Markets

Year-to-date, okay. And then I was wondering if you could characterize by division sort of who is growing the revenue year-to-date in excess of the Company average and which divisions are exceeding the Company average from a profitability perspective?

Frank H. Laukien

All right. So year-to-date I think we are -- we actually saw our MassSpec business both the life science clinical and the CAM business as well as the related detection, Bruker detection business, which uses some aspects some other technologies, grow at fairly higher rates. Our Bruker Nano Analysis Division all of those divisions have been growing in the double digits year-to-date. So, I think that’s -- and yes of course that's particularly due to the Rosatom contract, has been the fastest-growing or just about the fastest-growing of our divisions, but that was somewhat unusual occurrence in Q3 with that large chunk of Rosatom licensing revenue coming through.

Stephen Unger - Lazard Capital Markets

Great. And then, just from a profitability perspective, which divisions are sort of exceeding the Company average at the moment?

Frank H. Laukien

Well best by far, again due to the aforementioned reasons, and I think we’re reasonably pleased in the third quarter certainly with the BioSpin division. Our Bruker Nano Surfaces, ex-Veeco businesses continues to do quite well. Year-to-date our MassSpec business has done well with some lumpiness. I think those are perhaps the highlights.

Stephen Unger - Lazard Capital Markets

Great, okay. And then, I was wondering if you could give us an update on the U.S. approval process for the MALDI Biotyper?

Frank H. Laukien

Yes, we continue to work on that. We’re in clinical trials. We do not expect FDA approval this year, for sure, but we’re working on it diligently towards hopefully obtaining that next year. Very difficult to predict quarters or exact timing.

Stephen Unger - Lazard Capital Markets

Okay, so sometime next year, sort of …

Frank H. Laukien

We certainly hope so unless there were something more fundamental than our approach or our clinical data that the FDA was not happy with. We have no indication of that at this point in time, so hopefully sometime next year.

Stephen Unger - Lazard Capital Markets

And could you just talk about sort of how that product has been selling in a sort of capital constrained European environment at the moment, and are you generating any preorders for the instrument in the U.S?

Frank H. Laukien

The instrument is also being used in some microbiology food safety or pharmaceutical testing. It is used by some state and local, regulatory agencies and on as a research use only system. So, there are clearly are some U.S. orders for this system that do not go into typical routine clinical environment which maybe awaiting FDA clearance.

As far as the growth for that product line has been particularly fast in Asia Pacific, because we also started in Europe and so in Asia Pacific our growth rates are from a lower base. In Europe the business has continued to grow though at a slower rate because of capital constraints and also simply because we started from much higher basis, I mean, that business initially was driven primarily in Europe, maybe that gives you some overall global color on the MALDI Biotyper.

Stephen Unger - Lazard Capital Markets

Yeah, good. So that’s continuing to grow in Europe?

Frank H. Laukien

I couldn’t quote it for every country, but probably yeah I think overall there is growth although its slower growth of course, but again slower growth on a much higher basis because we grew so fast in the last few years.

Stephen Unger - Lazard Capital Markets

Got it. Great. Thank you.

Operator

Your next question comes from the line of Sung Ji Nam with Cantor. Please proceed.

Sung Ji Nam - Cantor Fitzgerald & Co. Equity Research

Hi. Thanks for the questions. Frank, if you could comment on kind of the trends you’re seeing in the end-markets that you haven’t commented on yet, such as the applied markets maybe pharma/biotech, and also the clinical market, I know you have small exposure there, but if you could provide any color that would be great.

Frank H. Laukien

Okay, just taking some notes here, clinical. So, so that in reverse order, clinical which for us essentially is all the MALDI Biotyper. I think I basically just gave the comments overall. Still good growth, still double digit growth for us, with particularly fast growth in Asia, because that’s where we also had a smaller base so far for the MALDI Biotyper. Pharma/biotech is -- pharma/biotech I think is very much tools dependant. I think the money is there, the demand is there, but it is very selective.

So if pharma/biotech finds that they have compelling tools that really add to their capabilities they’re willing to make investments and so I would note that we’ve -- generally are quite pleased with the progress there for demand, particularly from the biologic side from some of our very unique MassSpec product for biopharma.

And in the applied markets, I think there has in -- some pockets of that are also I think seeing the economic macro slowdown and I think you -- I think they’re still overall healthy, but are also feeling a slowdown in growth rates.

Sung Ji Nam - Cantor Fitzgerald & Co. Equity Research

Great, that’s helpful. And then for the Japanese thermal analysis business, with the divesture there, are you guys exiting that business -- thermal analysis business altogether?

Frank H. Laukien

Yes.

Sung Ji Nam - Cantor Fitzgerald & Co. Equity Research

Okay.

Frank H. Laukien

Yes, we are. The only place in the world really where we weren’t thermal analysis for some are for historical reasons was in Japan with very few exports to a few other APEC countries, so really about the -- $10 million or so of thermal analysis revenue that we had in Japan was our only involvement in that market that was not a global business for us, hence it wasn’t strategic and scalable and hence the decision that actually this business, I think is in --quite honestly in better hands with an NETZSCH group, which is one of the global leaders in thermal analysis and they wanted to make a big push in Japan and I think this enables them to do that, so I think that was very sensible for our customers and employees.

Sung Ji Nam - Cantor Fitzgerald & Co. Equity Research

Great. And then one quick one for Charlie, any trends on kind of the material cost for you guys? Thanks.

Charles F. Wagner, Jr

No. I’ve nothing to add on material costs at this point.

Operator

Your next question comes from the line of Dan Arias with UBS Equity. Please proceed.

Daniel Arias - UBS Equities

Hi, good morning guys. Charlie, just one on CAM. One of the things you had talked about was the need to sort of change the business mix there in terms of accepting higher margin sales. Is that something you’ve started turning around or making progress on?

Charles F. Wagner, Jr

As Frank commented I think we’ve identified the problem and started to address it. I don’t – we did not see the result of that effort in the quarter for sure. So there’s still work to do there in terms of resetting and reorganizing the sales force in terms of how they go to market. So, I think we know where the problems are. The CAM management team is working to address that through better sales leadership and through better control over the sales force, but that certainly did not show-up in third quarter results.

Daniel Arias - UBS Equities

Okay. And then apologies if I missed it, but can you just comment on the BNS business growth during the quarter and I guess where might we be in terms of looking for new targets for CAM and BNS specifically just relative to the targets that you had earlier in the year?

Charles F. Wagner, Jr

Yeah. BNS saw some slowdown in the quarter, but certainly it had good growth year-to-date. We’re not going to break that out at that level but it’s -- it’s certainly a continuation of very strong growth in that business. They are seeing some slowdown in semiconductor and data storage markets and that’s definitely affecting revenues in the second half, but overall the year-to-date growth is quite attractive. I think Frank’s point around acquisitions, we’re not totally out of the M&A market, but we also have a lot of work to do inside the existing walls of Bruker. So, we are not pushing hard on M&A right now as a lever for the Company.

Daniel Arias - UBS Equities

Okay. And then, I guess just lastly, are you maybe getting to a point where you feel like you can sort of give a guess as to where you think R&D as a percentage of revenue comes in or tracks in the longer term? What the right level might be going forward there?

Frank H. Laukien

Dan, we probably would prefer to take that when we give or discuss that, give some color on that when we do our – finish our long-term planning or three-year planning as part of our 2013 budgeting process and then we'll give some color on that when we give 2013 guidance in February.

Daniel Arias - UBS Equities

Very good. Thanks, Frank.

Operator

And your next question comes from the line of Jon Groberg with Macquarie. Please proceed.

Jonathan Groberg - Macquarie Capital

Hi, guys. Sorry for getting in here at the end, but first of all I don’t think anyone has congratulated you on a pretty remarkable quarter from second quarter here. So, congratulations. I wanted to just, kind of on that note, I guess Charlie or Frank, as you did the forensics from 2Q, even if I adjust for the $0.06 be from BEST and the margin impact, I mean it looks like the main – one of those significant improvements was pulling back on the SG&A as you said, some of the tactical maneuvers that you took. But I’m curious, as you’ve done the forensics and you think about going forward, I think a big concern last quarter was that you had a lot of the bookings and the backlog that you had may have been mispriced. So, and as you’ve gone back and evaluated that, how are you thinking I guess a little bit more insight in terms of looking at 2Q, getting into more detail, seeing what you reported in 3Q, just kind of what you found as to what happened and how are you thinking about this going forward?

Charles F. Wagner, Jr

Jon, thank you. If you look back at Q2, we still are experiencing price declines in certain product lines and that is evident in the backlog. If you take out the impact of Rosatom and gross margins in the quarter, you don't see too much of an improvement year-over-year or sequentially. So, to the extent that we've had some discounting priced into the backlog that's still in there and we'll continue to rollout over future quarters.

Again, whether it's CAM or BioSpin or other businesses, we are going back and looking at our pricing strategies to make sure that we're taking the right approach there, and so I think that there is opportunity there going forward. Some of it is on the OpEx, some of it is controlled obviously some of it is timing. We just had some significant expenses hit in Q2 that are more timing than anything.

So, some of that could have happen in Q3, some things that were intended to happen in Q3 were pushing out to Q4 and beyond. So, I think we’re -- given the slowdown on the top-line and I think just given overall uncertainty we're marching forward with at a more cautious pace and keeping control over headcount, looking more carefully at the timing of projects, but then we're also through the planning process we're looking at whether we should continue certain projects altogether. That’s not going to affect the third quarter or the fourth quarter, but it certainly could have an impact on 2013.

Jonathan Groberg - Macquarie Capital

Okay. And I mean, I guess one concern also is that you kind of made some of these tactical spending decisions. I guess, how much of what are you seeing on the top-line and do you think it’s just macro and is there any impact as you think about the next quarter or next year on the top-line that is maybe due towards pulling back or rating in on the spending. Are you able to kind of parse those two out?

Frank H. Laukien

No, I don’t think you'll see except for the TA divesture that we just mentioned, which isn't particularly material and I don't think you'll see anything on us. I think our investments in marketing and sales or R&D are fully adequate to continue. Certainly, the trends this year that we have predicted which would still for the full-year lead to very, very good organic growth.

And as I said, we still have a very strong backlog year-to-date, orders are up. So, we just want to be cautious because we realize we had a good Q3, but we also had a bad Q2. And so we want to be somewhat cautious in seeing how that – whether we really – some of this develops into trends, and it's a little too early to tell.

Jonathan Groberg - Macquarie Capital

Sorry, and one last one just to be clear. So, if you do the math it looks like you’re kind of guiding to mid-single digit organic growth in 4Q. You said double-digits for next year, so if you assume kind of mid-single digit for ’13 organic growth kind of like in the fourth quarter. Given what you're seeing in these stripping out the Russia deal, I mean, are you expecting -- would gross margins given the backlog that comes through, wouldn’t that be down year-over-year, that core kind of gross margin or are you -- I'm just curious if it’s nothing you can do about or are there different drivers like, depending where currency ends up or is there anything you can do to kind of offset what may have been priced in, in the backlog?

Frank H. Laukien

I don't think we want to get to that level of granularity, I mean often in the Q4 we have decent gross margin, because Q4 tends to be a reasonable volume quarter, in any Q4. I think maybe the only -- the only additional comment that may shed some light on our guidance is that we roughly expect still about 2.5% currency headwind in Q4. So, whatever -- obviously our guidance is on reported revenue and on top of that, we expect about the 2.5% currency headwind.

Jonathan Groberg - Macquarie Capital

Okay. Thanks for the color.

Frank H. Laukien

Okay.

Operator

(Operator Instructions) Your next question comes from the line of Derik DeBruin with Bank of America. Please proceed.

Derik DeBruin - Bank of America

Hi, good morning.

Charles F. Wagner, Jr

Hi, Derik.

Frank H. Laukien

Hi, Derik.

Derik DeBruin - Bank of America

Hi. So, Charlie what’s the M&A impact for the full-year, particularly with the last -- this deal you just closed?

Charles F. Wagner, Jr.

For the full-year, it is around a percentage point to a percentage and half depending on – this acquisition that we just announced, we are making some changes to the revenue recognition policy. So it’s really unclear actually what Q4 revenue will be. But so for the full-year all acquisitions would be a point to a point and half.

Derik DeBruin - Bank of America

Right. And …

Frank H. Laukien

And in Q4 you will have roughly the TA divesture and the new acquisition very roughly offsetting each other and as Charlie has pointed out this new business will have very little – with the preclinical imaging business that the two product lines we added we will have very little systems revenue in Q4, because we tend to experience a six to eight week revenue recognition delay when we acquire companies such our – businesses such as this one where they previously did a systems revenue recognition upon shipment than we do it upon acceptance. So you will see that business for the first time really show up in 2013 guidance.

Derik DeBruin - Bank of America

Okay. And how big was the overall business?

Frank H. Laukien

Their overall business revenue was between $10 million and $20 million.

Derik DeBruin - Bank of America

Right. Okay. That’s helpful. And, I guess, you’ve launched the new Triple Quad and how do you – what’s your type of target for the go-to-market on that? I mean, how are you going to take on, obviously there is a number of well established players in the Triple Quad space, what’s your thoughts on that process?

Frank H. Laukien

Right. So we – the way to launch this product, I think, will be to have maybe not the largest number of customers in Q1 – sorry, in the first year in 2013, but to roll it out and get it to those customers that we think we can fully support and make sure that they’re very satisfied. And I think in terms of technology and what’s fundamentally built in, in terms of performance and robustness and ease of methods development and ease of use, I think it’s going to be a very strong, high-end product that I think will be competing in the high-end and top tier of that market. But our ramp up in terms of units and volume, I think, will – it will take several years to really ramp up to an appreciable market share position.

Derik DeBruin - Bank of America

Okay. A lot of my other questions have been answered. So I will just get off the line.

Frank H. Laukien

Thank you, Derik.

Operator

And there are no further questions at this time.

Frank H. Laukien

All right. Then thank you very much to all of you for joining us today. This concludes our Q3 earnings call and good bye and talk to you next year. Thank you very much. Bye, bye.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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