Bruker Corp (BRKR) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Bruker Corporation quarterly earnings conference call hosted by Stacey Desrochers. My name is Pam, and I'm your event manager.

During the presentation, your line will remain on listen-only. (Operator Instructions). I'd like to advise all participants that this call is being recorded for replay purposes.

Now, I'd like to hand over to Stacey. Please go ahead.

Thank you. Good morning and welcome to Bruker Corporation's third-quarter 2010 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, Brian Monahan, Bruker's Chief Financial Officer, Bill Knight, Bruker's Chief Operating Officer, and Tom Rosa, the Chief Financial Officer of our Bruker Energy and Supercon Technologies Inc. subsidiary, or BEST.

Before we begin, let me briefly cover our Safe Harbor statement. Various remarks that we may make about the Company's future expectations, plans and prospects constitute forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those described in the Company's filings with the Securities and Exchange Commission. While we me 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. 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 management measures and forecasts the Company's performance, especially when comparing such results to previous periods or forecasts.

Today, Frank will provide an update on the business and certain financial highlights. Tom will describe the financial results of our BEST segment, and then Brian will discuss the financial results of our Bruker Scientific Instruments segment. I will now turn the call over to our President and CEO, Frank Laukien.

Thank you Stacey. Good morning everyone. We appreciate your joining us today.

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

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

I believe most of you have read our earnings press release issued earlier this morning and you're now presumably familiar with the key numbers in the earnings release. In the third quarter of 2010, we continued to deliver solid organic topline growth, as well as significant margin expansion.

Specifically, in the third quarter of 2010, our revenue increased year-over-year by 17% to $310.2 million. Revenue in the third quarter still increased by 17% organically when we exclude the effects of both foreign currency translation and of the Chemical Analysis Division acquisition, which we completed in mid May of 2010.

GAAP net income for the third quarter of 2010 was $27.4 million, or $0.17 per diluted share, compared to GAAP net income of $16.4 million, or $0.10 per diluted share in the third quarter of 2009. Adjusted net income, which excludes acquisition related, restructuring, and other charges, increased by 90%, 90% year-over-year, to $31.5 million in the third quarter of 2010, or $0.19 per diluted share, compared to adjusted net income of $16.8 million, or $0.10 per diluted share, in the third quarter of 2009.

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

GAAP net income for the nine months ended September 30, 2010 was $66.1 million, or $0.40 per diluted share, compared to GAAP net income of $37.7 million or $0.23 per diluted share during the nine months ended September 30, 2000 -- I beg your pardon, during the nine months ended September 30, 2009.

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

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

We continue to monitor the academic and government research budgets in Europe. We were satisfied with the outcome of the UK budget debate as it relates to research spending, which now is not expected to be decreased but rather will be held constant the next few years. The UK is an important scientific market for us, accounting for approximately 5% of our overall revenue.

Germany announced the intent to increase their Federal Ministry of Education and Research and German Research Foundation budgets by 7% and 5% respectively for 2011 and to also increase the budget for the Max Planck society and the Herman of Helmholtz Association, and also will put in place R&D tax incentives for business.

Spain's Ministry for Science and Innovation budget is now expected to increase by 1.2% for 2011. As we discussed previously, France announced an increase in French budgets for higher education and research by 2.7% each and also put in place R&D tax incentives. Finally, the European Union announced an increase in the Central Funding Research Fund by 12% for 2011. The US is also planning to grow the NIH budget by over 3% in 2011. So this provides further evidence that key countries will continue to invest in academic and government research for their future.

Moving from academic research to our new Chemical Analysis division which was established on May 19, 2010 when we completed the acquisition of three former Varian Inc. product lines, the laboratory GC, GC triple quadruple mass spectrometry, and ICP mass spectrometry systems. Our integration efforts here are on track and in the third quarter of 2010, our new Chemical Analysis division generated revenues of $17.1 million, which exceeded our baseline goal of $8 million for the quarter.

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

For the fourth quarter 2010, we expect CAD revenue of greater than $12 million. But this is an increase compared to our prior guidance of $8 million per quarter. Subsequent to the end of the third quarter on October 7, 2010, we also completed the acquisition of the AFM and SOM instruments businesses from Veeco Instruments for $229.4 million, and we used $61.8 million of cash and borrowed $167.6 million at a variable interest rate based on LIBOR, which is currently under 1% per annum.

The industry-leading AFM, scientific instruments business headquartered in Santa Barbara, California, as well as the Stylus and Optical Metrology business based in Tucson, Arizona, along with the global AFM/SOM field sales applications and support organizations because part of the Bruker Nano division, which is part of the Bruker group, adding more than 350 employees in 11 countries. We are very excited about the addition of these highly regarded AFM and SOM businesses to Bruker as they complement our focused product and market strategies very well. With these additional high-performance and industry-leading products, Bruker can now serve its global customers and markets even better.

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

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

In our press release issued earlier today, we talked about the outlook for the fourth quarter and full year 2010 and also provided some color on 2011. Later on, on this call, our Chief Financial Officer, Brian Monahan, will provide more detailed information, but the key takeaways are we again expect the fourth quarter of 2010 to be the strongest revenue quarter of the year, but not to the extreme extent as in prior years. If you recall, in 2009, our Q3 to Q4 revenue jump was almost -- was about $100 million, Obviously, it will be less so this year and hopefully in the years going forward.

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

Through the first nine months of 2010, we have seen significant expansion in BSI -- in the BSI segment, adjusted operating margins, and expect the fourth quarter to be the highest operating margin quarter of the year 2010. So for the full year 2010, this should result in adjusted BSI operating margins of greater than 14%, again above our stated 2010 goal of a 125 [bips] increase compared to BSI adjusted operating margin of 12.7% in the full year 2009. Based on our very good year-to-date 2010 bookings trends and high backlog, our two recent acquisitions, and our encouraging outlook for funding in most of our key markets, we believe that we will be able to deliver total revenues in excess of $1.45 billion in 2011.

Lastly, we have demonstrated our ability to expand operating margins over the past few years and we believe the drivers are in place to continue our steady margin expansion in our BSI segment in 2001 and beyond.

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

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

The BEST operating loss in the third quarter of 2010 was $0.8 million, compared to a BEST operating loss of $1.2 million in the third quarter of 2009. Loss per share for the third quarter of 2010 for the BEST segment was $0.01 consistent with BEST's loss per share of $0.01 in the third quarter of 2009 also.

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

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

As previously announced, in September, our RI Research Instruments, which is a majority-owned subsidiary of BEST, was awarded a EUR24.9 million or approximately $33 million contract from Daisy in Hamburg, Germany for the supply of 300 superconducting radiofrequency accelerator cavities for the European XFEL facility. BEST expects volume deliveries to start in 2012 and last until 2014.

RI also announced a new contract from CNRS in France for the supply of 670 high-power radiofrequency couplers for the XFEL project. This EUR14.8 million or approximately $20 million contract was awarded to a project consortium of Thales Electron Devices located in France, and RI under the leadership of Thales. Each company contributes its specialized technological expertise to the project, and RI's financial share of the total contract is slightly under 50%, or just under $10 million. The majority of these RF couplers are expected to be delivered in 2012 and 2013.

The new orders contributed to BEST's external multi-year backlog, increasing by 190% in the last 12 months from $52.5 million as of September 30, 2009 to now $152.1 million as of September 30, 2010. This external backlog figure excludes Bruker intra-company orders. Some of the backlog will take several years to convert into revenue, specifically the [Eater] Wire and XFEL cavity contract, which have deliveries scheduled through 2013 and '14 respectively.

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

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

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

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

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

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

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

Adjusted GAAP net income for the BSI segment in the third quarter of 2010 was $33.4 million, or $0.20 per diluted share, compared to adjusted net income of $18.4 million, or $0.11 per diluted share in the third quarter of 2009. Adjusted GAAP net income for the BSI segment during the first nine months of 2010 was $78.6 million, or $0.47 per diluted share, compared to net income of $42.6 million, or $0.26 per diluted share in the first half of 2009.

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

We continue to work on balance sheet management and have realized additional improvements in our working capital metrics. We define working capital as Accounts Receivable plus inventory, less Accounts Payable. On a trailing 12-month basis, we improved our BSI working capital to revenue ratio further to $0.50 at September 30, 2010 compared to $0.51 at September 30, 2009.

Operating cash flow for the first nine months of 2010 was $62.7 million, compared to $67.3 million in the comparable period of 2009. Free cash flow was $42.2 million during the first nine months of 2010 compared to $58.4 million during the comparable period of 2009. In the third quarter of 2010, are operating cash flows were $10 million compared to $16 million in the third quarter of 2009. Historically, our Q3 cash flows have not been the strongest of the year, as we build up inventory to meet the challenges and demands of our Q4 revenues. We ended the third quarter of 2010 with cash, cash equivalents and restricted cash of $190.5 million and net cash of $69.1 million although, as Frank stated earlier, we used cash on hand and assumed additional low interest rate debt in early October when we completed the acquisition of the AFM and SOM businesses.

I would now like to provide an outlook for the fourth quarter and full year of 2010 and some initial remarks about the full year 2011. We have been successful in reducing our historically very strong seasonality by strengthening our financial performance during the first three quarters of 2010 and becoming less reliant on the fourth quarter to deliver our full-year financial goals. We still expect the fourth quarter of 2010 to be our strongest revenue quarter of the year with anticipated revenue of greater than $360 million, which will result in sequential revenue growth of greater than 16% from the third to fourth quarter of 2010.

In the fourth quarter of 2010, we expect a $0.06 to $0.08 combined GAAP dilution from transition effects associated with our new Chemical Analysis division acquired in May 2010, and in our new AFM and SOM business units acquired on October 7, 2010. Both businesses had inventory valuation step-ups at closing, operated in part under temporary transition services agreements until we can relocate some of their factories and IT infrastructure which, as Frank talked about earlier, is expected to be completed in the middle of 2011. These acquired businesses also generate increased non-cash intangible amortization charges.

Moreover, after the closing of the AFM and SOM businesses (technical difficulty) have adopted the Bruker revenue recognition policy, essentially shifting most AFM and SOM systems revenue back by six to eight weeks, which is a one-time shift in the fourth quarter of 2010. This implementation of the appropriate but conservative Bruker revenue recognition policy is also expected to result in increased AFM, SOM backlog at the end of 2010 compared to pre-acquisition historical levels. Excluding the newly acquired Chemical Analysis division and AFM/SOM businesses, for the BSI segment, we expect an adjusted operating margin of greater than 16% and adjusted EPS of greater than $0.21 in the fourth quarter of 2010, both up sequentially compared to the third quarter of 2010.

We now estimate total full-year 2010 revenue of greater than $1.25 billion, which corresponds to greater than 12% revenue growth compared to the full year 2009. This would be well above our stated full-year 2010 goal of currency adjusted revenue growth of 5%. Excluding the newly acquired Chemical Analysis division and AFM/SOM businesses, for the BSI segment, we expect an adjusted operating margin of greater than 14% and adjusted EPS of greater than $0.68 for the full year 2010.

Based on our solid year-to-date 2010 bookings trends and high backlog, our two recent acquisitions and our encouraging outlook for funding in most of our key markets, we believe that we will be able to continue to grow revenue significantly next year. We expect that our full-year 2011 revenue will exceed $1.45 billion, and it is our goal to continue our steady margin expansion and working capital ratio improvement in our BSI segment.

So with that, I'll turn the call back over to the operator for Q&A.

(Operator Instructions). Ross Muken.

This is Vijay on for Ross. Congratulations on the nice quarter, Frank. Maybe a quick housekeeping question -- could you express (inaudible) color what the impact from M&A was in the quarter?

This is Brian. The impact from M&A in the quarter was about 5%. That obviously helped revenues. FX actually adversely impacted revenues by the same amount, 5%, so the two offset in the third quarter.

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

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

So over time, I think you'll see a gradual shift over multiple years that changes our geographical and our end-user customers to a -- I mean we certainly like the academic spending and government research spending. We've done very, very well with that, and it's a very large budget or very large budgets that are continuing to grow, but I think it will be good for us longer-term to be a little bit more balanced in our geographic and in our end market exposure, if you like.

Sure, thanks. That's all for me.

Tycho Peterson.

Good morning. Actually, I just want to pick up on that last question just about your mix. Frank, I'm wondering if you could provide just a little bit more color on Veeco, maybe what the customer mix looks like, how much of their business was exposed to the semiconductor industry and other areas. Then any color on geographic spread, sales footprint, things like that?

Again, I'll have to take the 2009 full-year data, because that's statistically meaningful. By the way, this was in our October 7 press release, if you want to look it up. So they are more -- they had about -- their -- largest geographically 38% of their revenue in 2009 came from Asia Pacific, including Japan, about 31% from the Americas, and 31% from Europe, so obviously stronger in Asia-Pacific, stronger in the Americas, compared to traditional Bruker revenue, geographical revenue mix.

In terms of they also received 55% but not 70%, 55% from academic and government customers, so very similar sales and business model. But it's closer to 50%. Therefore, they had 45% from applied and industrial customers.

Now, however, the applied and industrial customers, really most of that goes into non-cyclical or not very cyclical industrial research projects. The part of the AFM and SOM businesses that I would perhaps characterize as the more cyclical exposure to semiconductor data storage is probably overall only about 15%. Since it's cyclical, you might say 10% to 20%. In some years, it may be 20%, maybe a little beyond that, and in weaker years, in that cyclical business it may be 10%. So overall, it's not a very cyclical business. 80%-plus of that has the same not-so-strong cyclicality, or lack of cyclicality, that we see in the rest of Bruker.

That's helpful. Then for the CAD business, you're guiding for kind of a sequential decline here into the fourth quarter. Can you just comment a little bit more on what's behind that, and any color on where you stand from an integration process on that front?

Was that referring them to the chemical analysis business?

Yes.

Okay. Yes, well, we've only owned that division for 1.5 quarters, so we still lack meaningful -- and it wasn't really a division that we took over from Varian Inc., but we bought three separate product lines businesses, three different factories, and we are merging them into a division, hence not a lot of historical feel for that. We think there were a couple of effects where we may have overshot a little bit in Q3. Hence, greater than $12 million or maybe $12 to $15 million range is closer to our estimate for Q4. But again, a lot of that. In this new business, we are literally shifting from first into second gear I think characterizes it well. And so we're ramping up. Obviously our long-term -- longer-term goal for that is $80 million to $100 million per year or $20 million to $25 million per quarter. But until we get there, probably we expect that would be late or in the second half of 2011.

The integration on the field side, sales application service I think is going quite well, maybe not -- maybe 80% completed might be a good estimate. The factories are operating but they are operating at their original ex-Varian now Agilent locations. We expect to move two of the factories in Q1, namely the factory in the Netherlands and in California, to our own factory locations that we are presently getting ready for that purpose. The third factory, the Australian factory, we expect that move to occur in the second quarter of next year. That may go a little bit into the third quarter. So at the end of the first half, we think the factory moves will have been substantially complete, and I think were probably 80%, 90% along on the field organization. That's really working well now and they are generating orders and backlog and revenue. But right now, we are still doing this, as I said, in part under this more expensive transition services agreement where we get the IT infrastructure and the factory infrastructure. We basically -- that is provided to us from -- by Agilent. So, we are not in a steady-state financial or operating margin mode for that business yet, and won't be really until the second half of next year.

One last one on stimulus -- I'm wondering how you think about your visibility in kind of a post-stimulus environment. I guess, as you think about what's in your sales pipeline now, how do we think about stimulus dollars here in the US wearing off? Also, are you still seeing any flow through from stimulus in Asia? You talked a little bit about Europe but I don't think you talked about Asia.

Yes, in Asia, in Asia, I don't know that any of the -- our Asian business is quite healthy. I don't know that any of the orders that we're receiving now are characterized as stimulus orders in Asia. I believe they are not. At least I haven't heard anything like that. We do have orders that have not turned into revenue yet from so-called stimulus budgets in Asia, so that's coming into revenue. But the new orders that we receive today I don't believe are typically considered stimulus orders from Asia whereas, in the US, a lot of the big-ticket item orders that we've received recently and that we continue to receive, actually, or expect to continue to receive into Q4, still have partial and very often the majority is funded by US [Arab] funding. So it turns out that US stimulus funding, a lot of that is turning into orders, and since a lot of these are really high-end equipment, like 900 MHz type equipment, 800 MHz type equipment, large FTMS systems and so on, most of that actually will go into the second half, and some of it up to 2001 and even into 2012. So compared to what we had previously expected, I would say, Tyco, that because the stimulus funding globally has been spread out so much with the US going relatively late but now coming in at a pretty satisfactory rate, that on the revenue side, until we recognize that -- have acceptances and recognize it as revenue, the stimulus funding actually goes beyond the middle of '11 and into the second half of '11, and even into the first half of 2012.

Now, there is a new stimulus, I guess in France they call it -- you've done a good research report on that -- they call it a big loan or Grand Emprunt. I guess it's not called stimulus policy, but it is essentially the same. It's a significant additional investment in scientific, in research infrastructure in Spain. We see similar intentions in Germany. Other budgets are more flat in the UK, which was a relief, as you know, compared to the potential specter of those budgets being cut.

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

Thank you very much.

Isaac Ro.

Good morning. Thanks for taking the question. Just first off, Brian, I was wondering if you could maybe go through the gross margin pieces. Obviously, nice improvement this quarter. If you could maybe comment on sort of the impact between volume leverage versus maybe the operational improvements you're making.

Bill, do you want to take that question or do you want me to take that one?

Sure. I am in Germany at the moment. Can you hear me? I would say a significant -- yes, there is a little bit of factory leverage coming through here, but the real important contributor are the new products that we've been introducing the last 18 to 24 months that have carried significantly higher margins than their predecessors. The quality footprint is much better. Some of the installation processes that we have to go through are shorter. So I think those that have been the real drivers.

Now, we continue to have opportunities. We are putting programs in place to continue to pull our costs out of our existing product lines with some sourcing activities. We continue to look at our brick-and-mortar and see where we can leverage. Also, everything that we have in our R&D product portfolio, our development portfolio, is designed for lower cost/higher quality. So those are (multiple speakers) contributors.

Got it. That's helpful, thanks. Secondly, if I look at your guidance that you guys are putting out for 2011, I want to make sure I have my math more or less right on the organic side of things. So if we exclude the impact of acquisitions, it looks like your guidance for the rest of this year would imply that basically this will be more or less $1.2 billion in revenues, and then if we back out the acquisitions next year, it looks like the base business will be about $1.26 million, so 5% growth there. Assuming my math is right, that plus currency, which should look like it will be a tailwind, I guess that assumes the organic growth for the base business you guys are only implying would be low single digits. If that's right, it seems pretty conservative given the visibility you have in your backlog. So is there something I'm doing wrong there, or are you guys just taking a conservative outlook to the underlying demand?

This is Frank. We're going to give our 2011 detailed financial goals when we report the full year 2010, which we tend to do at the end of February. Then we will obviously spell out not only a greater-than revenue goal, but also margin and EPS goals and probably some working capital goals and so on. So we just wanted to give an initial glimpse when we stated that -- we just wanted to alert everybody to the pretty significant revenue jump that we expect from 2010 to 2011, and have at this point simply indicated that we expect, as a baseline, greater than

$1.45 billion. I don't think we're prepared to discuss any specific organic revenue growth rate for 2011 at this point. We just wanted to give a first outlook for 2011, but not guidance for 2011. We are not prepared for that at this point, but intend to do so of course at the end of February. So I would not read -- I would not agree with that conclusion. I think it would be premature, based on the very limited data we have given you so far, to conclude that we are aiming for a low single-digit or 5% organic revenue growth rate in 2011. That is not the case but we just wanted to give you some baseline.

Got it. Thanks very much for the color.

(inaudible)

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

We can't respond to that as a result of it being on the S-1 filing. That's all we have to say about that.

Great regrets, but we are limited in what we can address here. We can just not address that question.

Jon Wood.

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

Yes, as I commented on briefly earlier, our cash flows, you look at the last several years, a vast majority of our operating flows, more than 50% have come in the fourth quarter of the year, and we expect this year to be comparable. Typically, if you take each quarter during the year, our Q1 cash flows are not typically very strong. That's when we have a lot of cash tax payments becoming due here and commission bonuses, a lot of those types of things. Q2, we typically have an increase in cash flows over Q1. Q3, it is back down again as we really ramp up to meet the Q4 results. So that's the way this year is tracking.

As we talked about earlier, we expect at least a $50 million increase in revenues between Q3 and Q4. That will turn that inventory buildup into revenues and profits and cash flow. So, we would expect Q4 to be the strongest revenue or cash flow quarter of the year.

Great. Now, in third quarter, did the Chemical Analysis business make money if you take out all the charges?

It did not make money. This is Frank. I did not make money, and I don't know that we can cleanly dissect it yet. What if we were in our own factory already? It's too much -- that would be too many assumptions going in. But the long and the short of it, no it did not make money, it won't make money in Q4 yet either. We hope to get it to breakeven in 2011 and in fact towards profitability in the second half of '11. We, for 2012 or so, aim to be hopefully in that 12%-plus operating margin and hopefully higher the following year. So that business is a real significant integration effort. It will take a couple of years of patience as we ramp up, but we are on track. I think it's going quite well, given that we are basically building a new division from different pieces.

On the Veeco side, so you comment on the revenue $15 million to $20 million. What's the impact from the accounting shift, a ballpark figure?

This is Brian. We had talked about in our press release on October 7. Obviously, the expenses, they don't get shifted but the revenue gets shifted with this revenue recognition policy. So we are expecting, with that $15 million to $20 million revenue contribution, that this business will generate a GAAP operating loss between $6.5 million and 7.5 million, or a GAAP loss of $0.04 to $0.05 per diluted share in the fourth quarter. There are some intangible amortization and other transition services. Kind of add up those one-time or non-GAAP charges. Those are just under $4 million. So it will be certainly dilutive in the fourth quarter.

So your estimate on the non-recurring side is like $4 million on Veeco?

(inaudible) $4 million. Yes, just under $4 million, $3.8 million.

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

Yes, absolutely. Q1 of 2011, we will enter the year -- we expect to enter the year 2011 with backlog higher than the historical pre-acquisition levels because of this shift. So we'll go in and we won't have any effect from that one-time shift in 2011. But we will have certain costs associated with the transition services agreement that, not unlike the Chemical Analysis acquisition, they will be present probably the first half of 2011, and then we'll as quickly as we can remove ourselves from needing to rely on those services. So probably the middle of next year, we'll be out of many of those transition services agreements.

If I may add -- this is Frank -- we expect that this AFM and SOM business [embedded] will be at its full normalized revenue run rate already in Q1. Yes, there will be still some higher expenses due to the transition services agreement, due to the need to move -- we acquired their Santa Barbara facility. We will need to do some renovation, but we are staying there. We own that building. We did not acquire their facility or building in Arizona, and therefore will need to move that to another location somewhere in near Tucson sometime during 2011. So there's some transition effects, but it's a very different story in terms of integration. It doesn't require a lot of integration. Other than the one-time revenue shift, I think this business will be in fourth gear and accelerating hopefully already by Q1, although you still see some additional expenses primarily in the first half of the year. But that's why we have given the non-GAAP adjusted EPS guidance of it being accretive $0.06 to $0.08 next year with greater than 15% operating, adjusted operating margins and $130 million-plus of revenue for the full year 2011. So that business should be humming right along except for the one-time Q4 effect that we've explained.

Great. That was good color. Then last one, Frank, just comment on the agreement with Becton on the multi biotyper, just talk to the rationale there? Why did you do the partnership, and basically any financial characteristics you can offer on that?

Yes, okay, we did not disclose any financial details, but it is not an agreement that's primarily driven by financials or any payments one way or the other. This is really a logical alliance, if you like, with one of the leading microbiology companies in the field. We think they have additional marketing and distribution reach. I think their AST systems and also especially their market-leading blood culture system, combining or integrating that with the output of our multi biotyper for faster time to result ID -- and I should caution this again, this is not yet FDA approved in the United States but it has the IVDCE mark. So my comments for the United States should be construed as for research use only. Different elsewhere in the world. We think that just made an awful lot of sense and I think they're very nicely complementary technologies by BD, Becton Dickinson, and by Bruker. I think they clearly appreciate the value of this disruptive, or you could say revolutionary technology for microbiology ID that is presented by the multi biotyper and our very clear market-leading position there worldwide. So, I think it's a very sensible alliance to make things more integrated and provide smoother workflows and additional distribution reach for microbiology customers.

Got it. Thank you very much.

Derik De Bruin.

A question on the Q4 guidance -- so it looks like, on an apples-to-apples basis, that when you compare it to Q3, you're guiding to marginally up EPS growth in Q4. Yet you're getting higher volumes, more profitable, the operating margins are improving in the BSI business in Q4. So I'm just a little bit curious as to why there wasn't a little bit more juice in the EPS line. Am I missing something below the line?

I think other than the adjusted -- we gave the adjusted -- most of you on the sell side and most of our other investors we believe at this point are modeling from how did BSI look at the beginning of the year, and then how do we compare apples with apples to the previous year. So that's the guidance we have provided for Q4.

On top of that, we have the impact that we've explained of the two acquired businesses, which in Q4 will be dilutive $0.06 to $0.08 I think we have stated. So that's the --

Right, but the $0.21 is excluding the $0.06 to $0.08, so you did $0.19 in Q3. You're guiding to $0.21 excluding these items in Q4, so that's your apples-to-apples. An yet the BSI margin is going up. So I'm just curious as to why there isn't more oomph.

Sequentially -- Well, we haven't reported Q4 yet, so we thought it would be $0.21 or more. We didn't say $0.21, but we are not ridiculously lowballing this or something like that. We think $0.21 is a -- as stated, is a good baseline. Maybe we can do a little bit better, but we think it's a good baseline, and we obviously will endeavor to do slightly better.

Fair enough. Just can you give us -- you've acquired the CAD and the Veeco business. Can you basically give us just what the new revenue and geographic mix is for -- customer mix and geographic mix for the new business, just percent academic, percent Asia? I just want to get the numbers out so I can update my marketing handout.

Okay. I don't have numbers ready that would predict that for 2011, but we did -- for AFM/SOM business, i.e. the Veeco acquisition, if you like, we did provide that in our -- it's printed in our October 7 press release. There, we had 38% Asia-Pacific, 31% America, 31% Europe, so a different geographic mix, and 45% from applied industrial and 55% from academic government customers. I had explained earlier that of the 45% of that business for applied industrial customers, only about a third or maybe 15% of that business overall tends to be of the more cyclical semiconductor data storage type nature, so that may go up between 10% and 20% as an estimate. So it's also a small part of that business is cyclical.

On CAD, we probably can provide some better statistics once we've had it for 7.5 months at the end of the fourth quarter. Right now, we don't have statistically meaningful data on that yet. But directionally, it also has a greater revenue percentage of Asia, and it's pretty strong in Europe. It is not quite as strong in the Americas. Its strongest market is Asia-Pacific, so Asia-Pacific -- I don't know what the number will be, but it may be close to 40% for CAD - -and obviously caters much more to food safety, environmental, industrial petroleum, synthetic chemistry type markets, and has a relatively small academic and nonprofit component. But again, these are qualitative directional indications rather than statistical percentage figures. We hope to give you something better than this by February once we have observed that business for 7.5 months.

One final question -- if I remember correctly, the IC PMS business that Varian had, it is headquartered in Australia. I know Varian used to get an enormous FX benefit from having that, particularly when the Aussie dollar was a lot stronger and that's kind of the situation you're in right now. Is it -- I guess does it make more sense to basically integrate that into operations or does it make more sense to keep that out of essentially the currency hedge out there? I'm curious as to some of the rationale in terms of some of the manufacturing consolidation.

Good question. Right now, it doesn't move the needle yet either way because it's obviously still relatively small volume. You're right, of course, the Aussie dollar has appreciated quite a bit against the US dollar. But we haven't -- to be honest, we haven't modeled it because it's relatively small numbers that don't move the needle, so I'm afraid I don't have a good quantitative answer for you. Longer term, we will keep the R&D and the marketing for that in Australia and consolidate it with our facility in the Melbourne area, in the state of Victoria there, and consolidate the manufacturing with our Californian GC triple quad manufacturing operation.

Great, thanks.

Dan Leonard.

Thank you. A question on the fourth-quarter guidance -- why are you projecting a flat to a year-over-year revenue decline in the fourth quarter?

We again have given a greater-than number, and we just have structured or tried to plan our business to make it less -- to have less extreme seasonality. So I think we may be experiencing this year of a $50 million or a 16%-plus sequential jump between Q3 and Q4 and still getting very good growth rates and margin improvement for the full year. I think it is the better way for us to run our business, and hopefully that will be the new baseline for the Bruker scientific instrument business, rather than the somewhat excessive, in our opinion, seasonality we had last year went from Q3 at about $260 million to Q4 at about $360 million. We jumped at around $100 million, obviously almost a 40% sequential jump. That's not our preferred way of running the business. So hopefully -- the quarterly trends of this year with an overall very good full year I think are a preferred way for us to manage the business. Hopefully also for the Street, at least going forward, a more steady quarterly, sequential -- flow of sequential increases during the year. That's how we'd like to plan and execute this year and hopefully in the future.

Frank, when you mentioned that you're managing the business to lessen the seasonality, I guess what does that mean? Does that mean you're offering better terms to folks who purchase instruments earlier in the year, or I guess what are some of the mechanics behind that management of the topline?

It really has to do with manufacturing and installation and inventory management. It really doesn't affect customers at all, so there is no impact on customers or how we deal with customers or early versus late incentives. Actually, we don't do -- we don't play these marketing games of special sales actions. We are very consistent to our customers because their sales cycles are so long anyway. Most of these deals have 3 to 6, sometimes 24 months of a sales cycle. You can't surprise them and say, hey, we now have a year-end special, or a midyear clearance. We don't do that. So it's really all of our internal operational planning, which a lot of people are driving. Bill Knight in particular is our Chief Operating Officer. It's better for us in the way our cash flow is running and the way we balance our capacity, but it's not something -- it clearly is internal. It is not something a customer would see.

Just to clarify the 9% organic growth for the full year, that includes both BSI and BEST, right?

Correct. Yes, it does.

My final question -- the impact of FX on EPS in the quarter?

In the quarter, it really did not have an affect on our -- third quarter of 2010 is your question?

Yes.

No, the FX really didn't have a tremendous impact on the topline. We've had bigger impacts. But the way we are designed and set up, it works its way from revenue through gross margins down to operating income. It has offsets in each places. But ultimately, they wash out. And the third quarter FX changes did not have a meaningful impact on our EPS. For the full year, it did not either.

Thank you for taking the questions.

(inaudible). (technical difficulty) (Operator Instructions).

Thank you very much. Could we talk a little bit about the long-term strategic plan with regards to new product rollouts? Because the margin expansion that we've seen this quarter and frankly over the last year has been driven partially by volume, but also largely by the products you kicked out in the last 18 to 24 months. So where are we -- out of the nine innings in the game, where are we in terms of developing a full-blown-out pipeline that looks -- that has still room for margin improvement? How do these new acquisitions play into that over the course of the next few years?

This is Frank. Good question. I don't mean to be flippant, but I would say it never ends. It's not that we'll be -- this is an ongoing innovation, a new product cycle that really -- I don't -- it's a continuous process. I think we have -- I would submit that we have one of the best new product and innovation and R&D engines in the industry. We get a lot for it, not only in terms of growth, including organic growth, but also in terms of margin improvement, so that never ends. It's not that we're halfway there. I have no idea where we are. We always have to do that. We have to do that next year and the following year, and we intend to do so.

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

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

Yes, I think, for this year, we talked about in the low 30%, and year-to-date we are at 32%, so we're achieving our goals. The third quarter was slightly below the average of the first half of the year; it was at 27%. So we are making progress on the tax rate, still have a ways to go but I think we will provide specific guidance in February, as Frank said. But our goal is certainly to bring that 32% rate down closer to 30%, and more midterm bring it below 30%. But we are not prepared to comment on specific 2011 rates just yet. I think we are making progress and we're delivering on the tax rate that we did set out for 2010.

Will you expect that -- again, as you're thinking about 2011, is that the impact (inaudible) would be similar to this year, because we always had a lot of swings up and down. So what's the most conservative assumption to work with in your mind?

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

(multiple speakers) and again, it's directional not quantitative, I apologize. But most of the profitability of the newly -- the former Veeco businesses, the AFM and SOM businesses, is in the United States. That's always been one of our challenges in tax planning, is that we weren't profitable and could not in the United States. This will make a big step in helping us towards US profitability, which should have a good positive affect on our tax rate not only for '11, but for several years into the future. Again, a qualitative comment only, but that was one of the attractive features of this acquisition with the two factories being in California and Arizona.

We have no other questions at this time.

Great. Again, thanks very much operator, thanks very much to all the participants. I appreciate you joining us today. This concludes our third-quarter earnings call. Good-bye and see you next time. Thank you. Bye-bye.

That concludes your conference. You may now disconnect.