Bruker Corp (BRKR) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your second quarter Bruker BioSciences' earnings conference call. My name is Rob and I'll be your Operator today. Throughout this conference, all lines will be on listen-only. [OPERATOR INSTRUCTIONS]. I would now like to turn the conference over to your host for today's call, Mr. Bill Knight, Chief Financial Officer.

Thanks, Rob. Good morning, everyone and welcome to the Bruker BioSciences' second quarter 2006 financial results conference call. With me on the call is Frank Laukien, President and CEO of Bruker BioSciences, and Brian Monahan, our Corporate Controller. During the call today, Frank will provide an overview of the second quarter 2006 results and then I will discuss the financial results in more detail. After that, we will open it up for questions. Before we begin, though, I would like to start off by reading the Safe Harbor Statement. This discussion will include forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected, including, but not limited to, risks and uncertainties relating to technological approaches, product development, manufacturing, market acceptance, costs, and pricing of our products, exposure to currency fluctuations, dependence on collaborative partners, suppliers, competition, intellectual property, litigation, and other risk factors discussed from time to time in our filings with the Securities and Exchange Commission. We expressly disclaim any obligation to release publicly any revisions to any forward-looking statement. These statements may not be rebroadcast, recorded, transcribed, or otherwise used without the written consent of Bruker BioSciences.

During this call, we may refer to certain financial measures that are not in accordance with Generally Accepted Accounting Principles, or GAAP. Non-GAAP financial measures are not meant to be a better presentation or a substitute for results of operations prepared in accordance with U.S. GAAP. We believe that discussing these measures helps investors to gain a better understanding of our core operating results and future prospects, consistent with how management measures and forecasts the Company's performance, especially when comparing such results to previous periods or forecasts. A reconciliation of non-GAAP financial measures used on this call to the most directly comparable GAAP measure is available in our earnings press release.

Before I turn the call over to Frank to discuss highlights from the quarter, I would like to talk about our recent acquisition of Bruker Optics, which was completed on July 1st of 2006. You may recall when we announced the planned acquisition of Bruker Optics in April, that due to the Laukien family majority ownership of both companies, this acquisition is required to be accounted for as a pooling of interest. Since the acquisition was not completed until the third quarter, our second quarter 10-Q financial statements will exclude the results of Optics and our third quarter 10-Q will include the results of Optics in the financial statements for all periods presented. During the call today, we will first discuss the results of operations for Bruker BioSciences, excluding the results of Bruker Optics. Then we will discuss the combined results of operations, which present the Bruker BioSciences results described above, combined with the results of Bruker Optics for both the three- and six-month periods ended June 30, 2006 and 2005. With that, I'll turn the call over to Frank Laukien, our CEO.

Thank you, Bill, and good morning, everyone. We appreciate you joining us today. During the second quarter of 2006, excluding the results of Bruker Optics, we grew our currency adjusted revenues year-over-year by 9.6%, which is up from 7.1% growth, currency adjusted growth in the first quarter of 2006. Acquisitions contributed approximately 3.5% of our growth in the second quarter. For the first half of 2006, our currency adjusted revenues increased 8.3% over the comparable period in 2005, with acquisitions, again, contributing approximately 3.5% of our growth. On the bottom line, our GAAP net income was essentially flat in the second quarter of 2006, at 0.5 million, or $0.01 per diluted share, compared to 0.3 million, or $0.00 per diluted share in the second quarter of 2005. However, included in our GAAP net income in the second quarter of 2006, are approximately 1.2 million of acquisition-related charges related to our acquisition of Bruker Optics, and also 0.2 million of stock-based compensation expense. Excluding the acquisition-related expenses, our second quarter 2006 non-GAAP net income was 1.7 million, or $0.02 per diluted share. For the first half of 2006, our GAAP net income was 1.3 million, or $0.01 per diluted share, compared to 0.7 million, or $0.01 per diluted share in the first half of 2005. Again, included in our net, in our GAAP net income in the first half of 2006 are approximately 2.4 million of acquisition-related charges and 0.4 million of stock-based compensation expense. Again, excluding these acquisition-related expenses are non-GAAP net income excluding acquisition-related expenses for the first half of 2006 was 3.6 million, or $0.04 per diluted share. Thus, we have made rather good continued progress at BRKR, at Bruker BioSciences even before the acquisition of Bruker Optics.

But now including the results of Bruker Optics, our combined currency adjusted revenues in the second quarter and first half of 2006 increased by 12.7% compared to both comparable periods in the prior year. Our combined net income in the second quarter of 2006 was 2.5 million, or $0.02 per diluted share, compared to 1.4 million, or $0.01 per diluted share in the second quarter of 2005. Included in our combined GAAP net income in the second quarter of 2006 are approximately 2.8 million of acquisition-related charges associated with our acquisition of Bruker Optics, and 0.2 million of stock-based compensation expense. Excluding the acquisition-related expenses, our second quarter 2006 combined non-GAAP net income was 5.3 million, or $0.05 per diluted share. For the first half of 2006, our combined net income, including Bruker Optics was 5.8 million, or $0.06 per diluted share, compared to 2.7 million, or $0.03 per diluted share in the first half of 2005. Included in our combined net income in the first half of '06 are approximately 4.0 million of acquisition-related charges associated with our acquisition of Bruker Optics, and 0.4 million of stock-based compensation expense. Excluding these acquisition-related expenses our combined non-GAAP net income for the first half of 2006 was 9.8 million, or $0.10 per diluted share. Later on, Bill, our CFO, will provide some additional details on certain one-time gains reflected in our combined net income during the first and second quarters of 2006.

Overall, we are very pleased to have completed the acquisition of Bruker Optics in early July and continue to believe this acquisition is a great fit and opportunity for the customers, employees and shareholders of Bruker BioSciences. Our more recent acquisition and smaller acquisition of KeyMaster Technologies, Inc., on July 18th will enable our Bruker AXS business to gain access to the fast-growing handheld or portable x-ray analysis market segment. The addition of the rather innovative and versatile KEYnologies to our existing x-ray portfolio further enhances our position in the materials analysis space. Before I turn the call over to Bill, I also wanted to briefly mention our significant recent announcement from Monday, with ISIS Pharmaceuticals, between ISIS Pharmaceuticals and Bruker Daltonics for the manufacturing and European distribution of their IBIS T-5000 system, which is a fairly universal mass-spec based system for infectious disease detection. This collaboration with ISIS leverages our existing mass spectrometry and automation instrumentation manufacturing experience, as well as our global installation and service capabilities, and our European applications and distribution capabilities to meet unmet infectious disease identification needs, both in government applications, as well as in important clinical and pharmaceutical research markets. Now, with those remarks, it's back to Bill Knight, our CFO, again, for a more detailed overview of our financial results. Bill?

Thanks, Frank. I would like to take the next few minutes to provide a little more information on the financial results for the second quarter and first half of 2006. I'll first discuss the results of Bruker BioSciences, excluding Bruker Optics, and then follow-up with combined results, which include Bruker Optics. Excluding the results of Bruker Optics, our second quarter 2006 revenues were 77.8 million compared to 71.4 million in the second quarter a year ago. For the first six months ended June 30, 2006, revenues were at 152.3 million compared to revenues of 146.3 million in the comparable period of 2005. Gross profit margins on products and services in the second quarter of 2006 showed solid improvements year-over-year, improving to 43.5% from 42.3% in the second quarter. For the first half of 2006, our gross profit margins were 43.6%, compared to 41.9% in the comparable period of 2005. We are pleased with the progress we have been making with our gross profit margin improvement programs, and anticipate continued improvements in various product lines over the next several quarters.

Sales and marketing expenses as a percentage of revenue increased to 19.9% in the second quarter of 2006, from 18.9% in the second quarter of 2005. For the first half of 2006, sales and marketing expenses as a percentage of revenue increased to 19.4% from 17.6% in the first half of 2005. The increase in sales and marketing expenses as a percentage of revenue reflects ongoing incremental investments and sales and marketing initiatives related to both our recent acquisitions and also our core operation, and increased commissions on new order booking. Research and Development expenses as a percentage of revenue decreased to 13.7% in the second quarter of 2006, from 15.5% in the second quarter of 2005. For the first half of 2006, research and development expenses as a percentage of revenue decreased to 13.9% from 15.1% in the first half of 2005. We expect to continue to leverage our investments in research and development, as we grow the topline.

General and Administrative expenses as a percentage of revenue decreased to 7.1% in the second quarter of 2006 from 7.5% in the second quarter of 2005. For the first half of 2006, general and administrative expenses as a percentage of revenue decreased to 7.4% from 7.5% in the first half of 2005. We expect G&A to continue to decline modestly, both in dollars and as a percentage of revenue. For the second quarter of 2006, we incurred 1.1 million of income tax expense on a pretax income of 1.7 million, resulting in an effective GAAP tax rate of 68.2% compared to a tax rate of 78.2% in the second quarter of 2005. During the first half of 2006, our GAAP effective tax rate was 67.3%, compared to 79.2% in the first half of 2005. The high effective tax rate is primarily driven by net operating losses in the United States, including charges related to our expected acquisition of Bruker Optics incurring in the United States, which currently cannot be tax benefited. Excluding the acquisition-related charges described by Frank earlier, our effective tax rate for the second quarter and first half of 2006 were 39.6% and 42.8% respectively, which represents considerable improvements year-over-year.

Now, including the results of Bruker Optics, our combined second quarter 2006 revenues were 100.5 million, compared to 89.3 million in the second quarter a year ago. For the six months ended June 30, 2006, combined revenues were 195.3 million compared to combined revenues of 179.7 million in the comparable period of 2005. Combined gross profit margins in the second quarter of 2006 showed solid improvements year-over-year, improving to 46% from 45% in the second quarter of 2005. For the first half of 2006, our combined gross profit margins were 46.1% compared to 44.4% in the comparable period of 2005. Combined sales and marketing expenses as a percentage of revenue increased to 20.8% in the second quarter of 2006 from 17.9% in the second quarter of 2005. For the first half of 2006, combined sales and marketing expenses as a percentage of revenue increased to 20.4% from 19.2% in the first half of 2005. Combined research and development expenses as a percentage of revenue decreased to 12.2% in the second quarter of 2006, from 14% in the second quarter of 2005. For the first half of 2006, combined research and development expenses as a percentage of revenue decreased to 12.6% from 13.9% in the first half of 2005. Combined general and administrative expenses as a percentage of revenue decreased to 6.4% in the second quarter of 2006, from 6.9% in the second quarter of 2005. For the first half of 2006, combined general and administrative expenses as a percentage of revenue decreased to 6.7% from 7% in the first half of 2005.

To expand briefly on what Frank mentioned earlier, during the first and second quarters of 2006, included in combined net income, were one-time gains of approximately 0.6 million and 0.9 million respectively on foreign exchange contracts that were marked-to-market. The gross amounts of these gains prior to taxes were 0.9 million and 1.4 million, and are both included in other income. On a combined basis for the second quarter of 2006, we incurred 2.6 million of income tax expense on pretax income of 5.2 million, resulting in a GAAP effective tax rate of 50.4% compared to a GAAP effective tax rate of 56.9% in the second quarter of 2005. During the first half of 2006, our effective tax rate was 49.9% compared to 61.2% in the first half of 2005. The high effective tax rate is primarily driven by net operating losses in the United States, including charges relating to our expected acquisition of Bruker Optics incurring in the United States, which currently cannot be tax benefited. Excluding the Optics acquisition-related charges for the combined companies, our effective tax rate for the second quarter and first half of 2006 are 38.2% and 40.4% respectively. While we ended the second quarter of 2006 with 96.6 million in cash, excluding Bruker Optics, our net cash balance is subsequently reduced by approximately 62 million upon a completion of the Bruker Optics acquisition on July 1, 2006. The use of cash and additional debt taken on to finance a portion of the Bruker Optics acquisition will decrease our interest income by approximately 0.8 million and increase our interest expense by approximately 0.5 million per quarter in future quarters. With that, we would like to open it up for questions.

Okay, thank you, sir. [OPERATOR INSTRUCTIONS]. Sir, I have your first question this morning coming to you from Derik De Bruin of UBS.

Hi, good morning.

Good morning, Derik.

So could you just give us a little bit of granularity on the segment growths? Last quarter, I guess, Bruker Daltonics was down around 12% year-over-year. Did you see a rebound in Bruker Daltonics sales this quarter? And just give us a little bit more color on the revenue contributions.

Yes, this is Frank. Derik, I'll take that. Perhaps just within -- I mean we're reporting one segment now, as you can tell, and the growth rates relatively for the three combined businesses, Bruker Daltonics, Bruker AXS and Bruker Optics is that Bruker Daltonics grew in the high single-digits, which we believe is roughly the growth rate of the mass-spec market at this point. Bruker AXS grew in double-digits, and is growing quite a bit faster than its market -- markets. And Bruker Optics was the fastest growing part of our business in the second quarter. And by and large, that also is the trend for the first half year.

And what's the big driver in the Bruker Optics is it the industrial end market contribution?

It's pretty broadly based. There is one significant order in Q1 that didn't kick in yet, but in Q2, which is this Chinese SFDA order, which now contributes strongly to growth, but it's pretty broadly based.

Okay, and could you just give us some -- what you're feeling in terms of the end market, particularly what you're hearing from pharma regarding spending plans for the rest of the year?

Yes, clearly as -- everywhere we're looking, pharma in the first half of the year sort of -- even in new order bookings, as you know, some of these sometimes then turn into revenue for us several months later because of our long lead times and our backlog. But it's been healthier than, let's say, a year ago. So clearly pharma and biotech are still restrained in their spending, but it is healthier in general.

Okay. And, Bill, what's your current total debt?

We currently have about, as of quarter end, we did not use our debt facility, but we have borrowed an additional 30 million since quarter end. So in total, it's about 65 million as we sit today.

Great. Thank you.

Okay, thank you. We'll go to Jon McCarthy of Infinium Capital.

Good morning, guys. Was wondering if you can touch on the working capital initiatives in the second quarter, as well as the cash from operations numbers, both excluding and including optics?

Sure. As you know, we have focused quite a bit the last 12 months on generating good cash flows, and obviously, we look at receivables and inventory as the two primary assets to go after. We didn't make as much progress, I think, as we wanted to the first half of the year in receivables, and so we're pretty much neutral without looking at optics for the first half. We do expect improvements in the second half of the year, both on receivables and inventories. With optics, the first half of the year, we had about 7 million of cash flow from operations.

Thank you.

Okay, thank you. We'll go to Kenneth Harrisburg of [Fitzburgh Capital.]

Good morning. Congratulations on the excellent progress you've been making.

Thank you.

Would you please discuss the potential for the triangulation identification for genetic evaluation of risk technology, which you just announced a couple of days ago to revolutionize the analytical diagnostic market? And I have a whole bunch of series of questions, hopefully, you can cover in this, including what is the competitive landscape facing the T-5000 biosensor? What needs to be done for the T-5000 biosensor system to go from its current research use-only status to being a FDA-approved diagnostic tool, and how long might that take? I'm kind of curious about how accurate it is in terms of false negatives and positives in identifying known pathogens? What is the turnaround time for taking a sample to have any output? How many samples an hour can be processed? Does it identify multiple pathogens from single samples? What is the expected listed price --?

If I may chime in here for a second. It is obviously a product of ISIS Pharmaceuticals. And we're a partner to that. But it is their product and they are much, much better positioned to answer most of your questions. I can take some of your earlier questions and we'll probably be in a better position to discuss some of your additional questions in three to six months into the partnership. But ISIS Pharmaceutical clearly is in a much, much better position and I would really have to defer it to them.

We think that the present, as we take on and transition this to Bruker Manufacturing, it already uses our electrospray TOF at this point, but so far, now we're taking over, over the next few months the entire manufacturing of the system for installations and service worldwide. So we think that this will -- we hope, this will further improve the quality of this already excellent product and also, obviously, together with ISIS, we will work very hard on ease of use and throughput and those features. It's a fantastic fundamental design and so we're very optimistic that this will become a better, and better product.

In addition, and as you know, we have beyond our manufacturing and global installation and service capability, we have a very considerable applications labs and applications experience, also to some extent in infectious disease, although more on the proteomic side and rather good distribution capabilities in Europe, as well as the Middle East. But we're particularly focusing on Europe and setting up a demo lab in collaboration with ISIS in Germany. And really ISIS has made very good progress in driving this product in the United States and have, optimistic for various infectious disease and clinical research applications, some forensics applications even, and we will, hopefully, begin to mirror some of their success over in Europe. And that's probably as much as I can say at this point.

Okay. Sounds like a very exciting system.

We think so, indeed.

On a separate note, can you remind us where you stand with your Homeland Security endeavors and if those efforts are ultimately successful, when they might translate into meaningful contracts?

Gladly. We have had very strong new order bookings in our security and Homeland Security and NBC Defense Business in the first two quarters, with a particularly large contract on which we had a press release, I believe it was in April, for a suite of NBC detectors that ultimately will go to the United Arab Emirates. That was a contract of the order of $14 million. However, most of that revenue will be recognized in '07 and in '08 rather than this year.

Our steady state business, not looking at these singular large contracts, is encouraging and has been healthy on the NBC side. There are always some rather large, sometimes longer-term opportunities, some of which are -- I don't think any of those are eminent or ready for decision in the next couple of quarters. So it's more the steady state business, plus the rather large contract that we had received in April, which will be delivered mostly in '07 and '08.

Thank you very much.

Okay, thank you. [OPERATOR INSTRUCTIONS]. And, sir, I have Mr. Steve Hunger [sic] from Bear Stearns.

Hi, good morning. First question, Frank, did I hear you correctly in that the impact of the Chinese order on Bruker Optics did not impact the second quarter?

No, it did not. I'm sorry. Steve, it did not impact their first quarter.

Okay.

But it began to ship -- it began -- well, it began to ship earlier, but we began to recognize revenue on that order in the second quarter at Bruker Optics.

Okay. And then is there a way that you can quantify for us the incremental revenues associated with shipments under the Chinese order, either for the rest of the year or in total?

We have not broken that out generally.

I think what we've said in the press release, it's in excess of 15 million or a little higher and we will probably recognize that over a two-year time span.

Okay, two-year period. And then the marked-to-market on the foreign exchange hedging instruments, is that -- did you complete those -- I mean will that be marked-to-market every quarter going forward?

Those are contracts associated with our newest operating units. They expire, I believe, in early 2007. It is probably unlikely that we would continue using those types of vehicles.

Okay. So we may see some gains or losses associated --?

You could see them either way for the next few quarters until we wind down from those activities.

Okay. And then what's your expectation of the combined company tax rate going forward? Is it 40%, 45%, or even lower?

Well, we certainly think -- we made, excluding the acquisition charges that we've incurred to date, we've made significant progress here in the U.S. as far as profitability, which significantly helps our tax rate. So the statutory rate is right around 40%. That is our first target, and then as we continue to improve profitability in the states, we certainly expect to get below that 40% rate.

Okay. So going forward, we should -- you're targeting at least a 40% tax rate and perhaps more?

Exactly. That's certainly the statutory levels.

Excellent. And then finally, just in terms of the mass-spec business itself, Frank, maybe could you comment on which products of yours sold well in the quarter, and the first half of the year, and which ones, perhaps, have not?

Steve, the fastest growth that we have been seeing is in our newest fourth product line, which tends to be electrospray time-of-flight and electrospray Qq time-of-flight. I don't know that that's necessarily the market trend, but that's because we are relatively new to that market, to that part of the mass-spec market and that certainly had the fastest growth rates at Bruker Daltonics. That's because we started at a lower level and it's been growing rather rapidly in the last two years really. But from a low -- from a small base. So every -- that's really the one part that -- other than the NBC business, which also includes quite a bit of mass-spec, the strong orders on that. Those are the two things that stick out as a -- not being -- having higher growth than the average.

Okay. How are your FTMS and MALDI-TOF businesses doing?

They have moderate growth. And FTMS had a very nice rebound last year, sort of to historical levels in '05 in terms of new order bookings and we're benefiting from that now also in revenue. And whereas we had a significant dip due to competitive pressures in the FTMS business in '04 and perhaps early '05, but we've recovered from that and it's now a healthy business again. But with more of a shift to high field and high field magnets and top-down proteomics and very sophisticated complicated -- mixtures that you might, for instance, find in metabolomics.

So it's not so much a routine proteomics tool because you can do just as well with a very good ion trap. And, in fact, our ion trap has recently -- our high-capacity ion trap has recently won a number of these proteomic competitions both in Europe and the U.S. as the best mass-spec tool in identifying a large number of unknown proteins, as well as our TOF/TOF which has won a similar at the ABRF competition in conjunction with other consumables and reagents for labeling for quantitative proteomics.

Okay, and then -- it was a while back when Waters put out a press release that said that the acuity is now open to work with Bruker Instruments; is that true? I never got a clarification on that.

We did -- there was some lack of coordination with us and we did at the time send out a correction on that press release, that that was not in the press release that we had mutually agreed to. And so it's not a big part of our strategy to work with the acuity.

Okay, it's not. Okay, great. Thank you.

And we're not actively selling it, for instance.

Okay, great. Thanks.

Yes, thank you.

Okay. Thank you. [OPERATOR INSTRUCTIONS]. Sir, I have no further questions for you at this time.

All right, ladies and gentlemen. Thank you very much for joining us this morning and we'll talk to you again in another quarter. Thank you, and bye-bye.

Bye.

Thank you, sir. Thank you, again, ladies and gentlemen. This brings your conference call to a close. Please feel free to disconnect your lines now at any time.