Bruker Corp (BRKR) 2011 Q2 法說會逐字稿

Hello, you have joined the Bruker Corporation second quarter and first half 2011 earnings conference call. Sorry for the delay, we had some technical difficulties with the phone company. I'm Stacey Desrochers, Treasurer and Director of Investor Relations. With me on today's call are Frank Laukien, Bruker's President and Chief Executive Officer, Bill Knight, Bruker's Chief Operating Officer and interim Chief Financial Officer and Tom Rosa the Chief Financial Officer of our Bruker Energy & Supercon Technologies division or BEST. Before we begin let me briefly cover our safe harbor statements.

Various remarks that we may make about the Company's future expectations, plans and prospects constitute forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those described in the Company's filings with the Securities and Exchange Commission. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change and therefore you should not rely upon these forward-looking statements as representing our views as of any date subsequent to today.

In addition to the financial measures prepared in accordance with generally accepted accounting principals, or GAAP, we will discuss certain non-GAAP financial measures including adjusted EPS, adjusted operating income, adjusted operating margin, and adjusted net income, 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 the results to previous periods or forecasts. Reconciliation of our GAAP to adjusted numbers is available on our press release issued earlier today, and is located in the investor relations section of our Bruker.com website.

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

Thank you, Stacy, and good morning everyone. We appreciate you joining us today. Again, we apologize for the telephony issues. I think at this point we are still without a conference call operator. Hopefully that will reserve itself prior to the Q and A part. Let me then continue. In the first half of 2011, Bruker delivered solid revenue and excellent bookings growth. With revenues increasing by 31% over the first half of 2010, and bookings growth of more than 50% year-over-year of which more than 20% was organic bookings growth.

We ended the second quarter with another record in back log which positions us well for the second half of 2011 and beyond. Our rapid revenue and bookings growth is driven by healthy demand, particularly in our industrial hi-tech clinical security and applied markets. And even more so by excellent new product, market share, and competitive momentum, in essentially all of our divisions. We expect double digit organic revenue growth in the third quarter, and with current foreign exchange rates and our excellent bookings and record backlog, we now expect to reach revenue in the range of $1.60 billion to $1.62 billion which is $30 million to $50 million higher than the original high end of our 2011 revenue goal of $1.57 billion.

Our solid competitive positioning and new product momentum is further underlined by a 230 bps, or basis points, improvement in adjusted gross profit margins in the first half of 2011, compared to H1 of 2010. This, again, bodes well for our margins and profitability, once we see expense leverage from our major jump in bookings and backlog. However, while we see better than expected revenue and margins, from our new Bruker Nano Surfaces Division, which we acquired from Veeco in October of 2010, it is taking us longer than expected to turn around the Bruker Chemical and Applied Markets, or CAM division.

That said, we are making a lot of progress with CAM and as of the end of the second quarter of 2011 CAM has now completed the final two factory moves for GCMS systems within California and for ICPMS systems from Australia, to our new CAM factory and division headquarters in Fremont, California. CAM also has been very active in new product introductions with a new ICPMS product, Aurora, being introduced already at Pittcon earlier this year, and the new GCMS product line called Scion just announced two weeks ago.

Overall, our expenses have grown faster than anticipated in the first half of 2011, partially due to current, to SX currency, and partially due to commission expenses being due in part when orders are received while our bookings have grown considerably faster than revenue in the first half of 2011. Early in the second quarter, we declared a hiring moratorium with very few exceptions and we are attacking discretionary spending and expenses while at the same time trying not to restrict our rapid expansion this year.

For the full year 2011, we expect to achieve our BSI, segment, adjusted EPS target, of $0.90 to $0.93 per share. Which would result in an increased and adjusted EPS of 18% to 22% for the full year. However, we expect to achieve our fiscal year 2011 EPS growth in a different manner than anticipated when we announced our 2011 goals in February. With higher revenue growth, better than expected gross margin expansion, but higher operating expenses. Moving on to additional financial highlights of Bruker Corporation, revenue in the second quarter of 2011 was $401.2 million, an increase of 33% year-over-year or a currency adjusted increase of 21% when compared to the second quarter of 2010.

This corresponds to an organic growth rate of 7.5%, in which we disregarded estimated CAM revenue in the first six to seven weeks of Q2 2011 so that this represents a true estimate of our organic growth rate. For the first half of 2011, revenue was $758.2 million, an increase of 31% over the first half of 2010, or a currency adjusted increase of 24%. Adjusted operating income in the second quarter of 2011 was $52.2 million compared to $42.4 million in the second quarter of 2010, an increase of 23%. For the first half of 2011, adjusted operating income was $89.8 million, compared to $71.9 million in the first half of 2010, an increase of 25%.

In the second quarter of 2011, our adjusted EPS was $0.20 per diluted share, compared to second quarter 2010 adjusted EPS of $0.16 cents per diluted share Adjusted EPS for the first half of 2011 was $0.34 per diluted share, compared to $0.27 per diluted share in the first half of 2010, an increase of 26%. We continue to be very innovative and during 2011 we have already launched more than 25 new high performance analytical products which address an expanding array of life science, pharma bio tech, clinical, food and food safety, Petro-Chem Environmental, Homeland Security, materials and nano science, as well as academic research and educational markets.

In particular, we believe that the novel SCION triple quad introduced in July just two weeks ago, represents game changing technology and will lead and greatly accelerate the inevitable change over of the GCMS market, to GC triple quadrupole mass spectrometry technology to deal with today's ever more challenging analytical problems and matrices, in environmental, forensics, doping and food safety applications. Concerning reductions in U.S. government spending past and signed into law yesterday, we estimate that sales to the US government will represent 2% or less of Bruker's 2011 revenue and primarily USNIH or NSS funded academic business will represent 5% or less of Bruker's 2011 revenue.

So overall, a good first half of the year with a large number of new product introductions, exceptional bookings trends and solid increases in revenue, adjusted gross profit margin, adjusted operating income, and adjusted EPS. I will now turn the call over to Tom Rosa, the Chief Financial Officer of our BEST division.

Thank you, Frank. Revenue for the BEST segment during the second quarter of 2011 increased by 55% to $28.1 million compared to $18.1 million in the second quarter of 2010. Excluding the effects of foreign currency translation, second quarter of 2011 revenue increased by 38%. Revenue for the BEST segment during the first half of 2011 increased by 34% to $52.1 million compared to $38.8 million in the first half of 2010. Or by 27% excluding the effects of foreign currency translation.

Adjusted operating income for BEST in the second quarter of 2011 was $0.6 million compared to an adjusted operating loss of $1.5 million in the second quarter of 2010. For the first half of 2011, the adjusted operating income for BEST was $0.1 million, compared to an adjusted operating loss of $1.8 million in the first half of 2010. The adjusted loss per share for the second quarter of 2011 for the BEST segment was zero compared to a loss per share of $0.01 in the second quarter of 2010. The adjusted loss per share for the first half of 2011 for the BEST segment was $0.01 compared to an adjusted loss per share of $0.02 in the first half of 2010.

So far in 2011, we have continued to make progress on the commercialization efforts of our new products. BEST announced an order for three Superconducting Crystal Growth Magnets from a European customer. BEST also announced that it passed factory acceptance tests and shipped its first Superconducting Crystal Growth Magnet System which was ordered in 2010 by a Korean customer. Superconducting Crystal Growth Magnet Systems are used in the semiconductor industry, especially for larger diameter ingots in order to improve the quality of Monocrystalline silicon.

BEST is also working on demonstrating the positive effect of Superconducting Crystal Growth Magnets on photovoltaic conversion efficiency and manufacturing yield of single crystal silicon, thus potentially increasing the overall cost effectiveness of solar power. BEST external backlog as of June 30 2011, increased by approximately $19.4 million or by 13% from the end of 2010. Backlog for BEST has almost doubled over the last 12 months to $171.6 million as of June 30 2011, compared to $94.9 million of external backlog as of the end of the second quarter of 2010.

An increase driven not only by LPS orders but also by orders for RF cavities, couplers and other superconducting devices from customers across the globe. So overall, BEST has been making good progress executing on its business plan during the first half of 2011. I will now turn the call over to the interim CFO of Bruker Corporation, Bill Knight.

Thanks, Tom. Since Frank has already commented on the overall BRKR financial highlights and Tom provided a summary of our BEST segment, I will now focus primarily on Bruker Scientific Instruments or BSI segment. Before I talk about the results for BSI, I wanted to briefly comment on the 8-K that we filed with the Securities and Exchange Commission yesterday. As the 8-K stated, this is an on going investigation, and we are not able to comment any further on details, or the status of our efforts beyond what was included in the 8-K but will at the appropriate time.

Back to the BSI. During the second quarter of 2011, on the top line for the BSI segment, revenues increased 33% to $377.9 million compared to $284.9 million in the second quarter of 2010. Excluding the effects of foreign currency translation, revenues increased by 21% in the second quarter of 2011. For the first half of 2011, BSI revenues increased by 31%, to $713.7 million, compared to $545.2 million in the first half of 2010. Excluding the effects of foreign currency translations, revenues increased by 23% in the first half of 2011. And excluding the effects of foreign currency translation and acquisitions our BSI organic growth rate was 5% in the first half of the year.

Now moving further down the income statement, adjusted gross profit margin for BSI in the second quarter was 49.5%, and 49.4% for the first half of 2011 compared to 47.0% in the second quarter and first half of 2010. A 250 basis points and 240 basis points respectively increase year-over-year in adjusted gross profit margin. Adjusted BSI operating margin in the second quarter of 2011, was 13.7% compared to 15.7% in the second quarter of 2010. For the first half of 2011, adjusted operating margin for BSI was 12.8%, compared to 13.7% in the first half of 2010.

GAAP net income for the BSI segment in the second quarter of 2011 was $22.4 million or $0.13 per diluted share compared to net income of $25.1 million of $0.15 per diluted share in the second quarter of 2010. GAAP net income for the BSI segment during the first half of 2011 was $36.5 million, or $0.22 per diluted share compared to net income of $42.3 million, or $0.25 per diluted share in the first half of 2010. Adjusted net income for the BSI segment in the second quarter of 2011 was $34.0 million, or $0.20 per diluted share, compared to adjusted net income of $28.8 million or $0.17 per diluted share in the second quarter of 2010.

Adjusted net income for the BSI segment for the first half of 2011 was $59.2 million or $0.36 per diluted share. Compared to adjusted net income of $48.0 million, or $0.29 per diluted share in the first half of 2010. Before I turn the call back over to the operator for Q&A I wanted to briefly discuss certain cash flow and balance sheet metrics that relate to the overall Bruker Corporation.

Cash flow from operations in the first half of 2011 was a use of cash of $25.6 million, compared to a source of cash of $53.1 million in the first half of 2010. Our capital expenditures or CAPEX were $31.2 million in the first half of 2011, compared to $10.7 million in the first half of 2010. Capital expenditures were unusually high in the first half of 2011, due to significant investments in BEST R&D and protection capacity, along with the move to three former variant factories and associated SAP ERP implementation to our new, two new CAM division factories in the Netherlands and Fremont, California.

Free cash flow, defined as cash flow from operations less capital expenditures, was the use of cash of $56.8 million in the first half of 2011 compared to a source of cash of $42.4 million in the first half of 2010. Inventory levels increases resulted in the use of cash of $82 million in the first half of 2011, and this inventory build up is directly linked to our strong bookings performance during the first half of 2011. We ended the second quarter of 2011 with cash, cash equivalence, and restricted cash of $173.1 million, and net debt of $114.7 million.

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

(Operator Instructions). Our first question comes from the line of Ross Muken with Deutsche Bank.

Good morning. I'm trying to put the bookings commentary and backlog growth in context, with sort of the revenue pull through we are seeing. So if you can maybe walk us through how you are thinking about maybe is it backlog duration, or your kind of trending of backlog relative to revenue recognition. I'm just trying to sort out the sort of back half confidence in that conversion versus sort of the BSI, organic growth that we have seen, and trying to understand the components of backlog and how much of it is coming from BSI also versus BEST.

Good morning, Ross. Good question. So our backlog reach while we don't disclose exact backlog, but our backlog right now reaches well above, well beyond two quarters. So we have very good visibility. Of course, some of that backlog is, we will have, get new orders in the next two quarters that will also already turn into revenue quickly, whereas other parts of that backlog have, extend beyond one year's delivery time, and revenue recognition. But it is by far the highest backlog that we ever had, and in fact, with the growth and with the ramp up, we would have liked to maybe turn even more of that backlog into revenue, and organic revenue growth in the first half.

But we had not fully planned for the 50%, or greater than 50%, bookings growth in the first half. So we have a little bit of a catching up to do, which is not a bad problem. But we are going obviously through some, through a growth spurt right now, if you like. Trying to catch up with the higher than we had planned bookings growth, which as I said earlier, for the first half, and for the first second quarter, really, we are greater than 50%. And if you take out acquisitions in FX, it was organic growth in the first half or in the second quarter in bookings of greater than 20%.

Great.

Backlog growth, it was the second part to your question?

Yes.

Backlog growth has been very strong as BSI ended.

Great, thanks, Frank. Maybe just also, and this is more just on sort of the numerical calculation. So I think you said on the call that organic growth all in was 7.5%. Now the implied M&A impact from the math is about 14% which would be about $40 million or so of M&A revenue, so I'm just trying to understand sort of that calculation. Because it seems like there's not much contribution from Varian. Or the contribution from Varian is sort of accounted for different than we had been thinking. So maybe walk us through what is in the M&A number, and sort of how that plays into the calculate organic growth rate.

I don't know that I can. We're not usually going into that level of detail, but one of your, we certainly did subtract when we calculated the organic growth rate, we did subtract the estimated CAM revenue in the first six or seven weeks of this 2011 second quarter to arrive at a growth rate, so our growth rate was not materially effected. Organic growth rate by the fact that we acquired CAM on May 19, 2010. We tried to correct and adjust for that.

Yes, I guess the point is in Q1, you did somewhere, based on what you reported, around $60 million of acquired revenue, and so obviously this quarter it's down about $20 million sequentially, and you only did $3 million in Q2 last year. So I am just trying to understand in the context that there was the assumption that you only didn't count the first six weeks so the quarter was more back end weighted in terms of where revenues came.

That is correct, yes.

Okay that makes sense.

That's the useful clarification.

I just wanted to make sure and then lastly (multiple speakers).

(Multiple speakers) revenue in the last month, yeah.

On the gross margin commentary, I mean if we think about sort of the steps you have taken and the mix of business we are seeing in terms of relative growth, what sort of the more of the drivers, is it some of the cost actions taken, is it leveraging the revenue, or is it sort of mix improving?

It's, Ross, it is Bill Knight. It is several things. Certainly the new products that we continue to introduce as we have stated before. Do we have lower costs designed? We have more volume running through our factories now which we are able to leverage that fixed factory overhead, and gain some benefit. And we clearly, the offshoring sourcing exercise that we started last summer is clearly starting to show some benefit on obtaining high quality but lower cost components and in some cases minor sub assemblies that go into our products.

And the fourth element on that is really also our ASP, average selling price. Obviously with a very new product line with excellent and often unique selling points. When you add additional features or capabilities on your products we often can get an incremental average selling price for that.

Great, thank you, guys.

Thank you.

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

Good morning guys. Thank you for taking the question. Frank, I just want to ask for your broader thoughts on academic funding. Clearly a theme this earning season that has recent concerns if you give us some commentary on your confidence in the backlog that you have toward the half of this year, and then whatever visibility you might have in the next year for some of your longer conversion products. I would be interested to know what you are seeing in terms of cancellation rates and how those have been trending?

Okay, Isaac, we essentially have no cancellation rates. It is very rare, not impossible, but very rare to have any cancellations in our business. The backlog extends, in principle, if it all came in in the second half of this year, which it won't, but it extends beyond two quarters very comfortably. So we have as much or more visibility with the strong bookings trends including strong organic booking trends. As we have said, academic funding growth, and academic order growth is slower than Applied Industrial, Homeland Security, clinical markets.

They are, they grow faster, some of our product lines there are growing 30% or 40% in booking which brings our overall average to a 20% organic bookings growth. More than 20% organic bookings growth. But academic funding has really been decent, not fantastic, but not bad really. Even including in the United States. We expect that to be weaker in the second half of the year in the United States, but again, for us that's less than 20% of our revenue in total. And that we have on the call earlier try to quantify US government funded revenue, or US government direct revenue and [IHNFF] funded revenue, which are less than 2% and less than 5% for us respectively. So not a very high exposure.

Academic funding in Europe has been quite good for us. Academic funding in Asia has been quite good for us. There are many other pockets of strength around the world that on balance while not everything is lining up perfectly, has given us the very strong bookings growth, including organic bookings growth. No let up in the second quarter, sequentially or anything like that. So we are actually very optimistic and given the geographic and the markets diversification that we have achieved I think we are in, and the great visibility that we have, we are not only optimistic about the second half of the year, but really have pretty good visibility into the first half of next year in terms of revenue.

Great, that's very helpful (multiple speakers).

(Multiple speakers) all of next years, half year of revenue in our backlog for sure, but the trends have overall been very strong, even though there is some pockets of weakness.

Okay, thanks for that. Bill, just a follow up on the numbers. I know you guys have previously committed to about 75 bps of operating margin expansion in BSI, wondering if you are still committed to that. And then secondly on the tax rate, I think it was in the high 20% you had previously said for the year that it would be low 30%s. Just wondering if the current run rate is sustainable.

I think, Isaac, for this year you will certainly see increases in absolute dollars on adjusted operating income as far as a percent of revenue, it's probably going to be flat with prior year, and again, we expect an improved top line growth profit margin, but we have hired some extra head count and operating expenses have gone up which is an area that we're looking at very hard right now. As far as tax rate, I think we would continue to go with what we have stated earlier.

Got you. Thanks a bunch.

Yes.

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

Frank, just on the increased revenue guidance, are you implying better than that high single digit organic growth that you previously talked about?

Yes, Peter. In Q3 we expect from our forecast that we would exceed a 10% organic growth rate for Bruker overall. And though we see an accelerating organic growth rate based on our strong organic growth in bookings.

And that 10% is for BSI or total Bruker?

That is for total Bruker.

Thank you. And then just --

I don't want to break out for that between BEST and BSI right now, but we expect double digit organic growth in the third quarter. Which if you recall in the second quarter, 7.5% it was lower in the first quarter, and that simply makes sense given the strong organic, not only the strong bookings growth, but also the strong organic bookings growth of greater than 20%, both in Q2 as well as in the first half of this year.

Great. On the pockets of weakness you talked about in academic. Where were those pockets?

Well, it's more anticipated, really. So far it's not really been many pockets of weakness. Japan after taking a dip in March and April, has come back quite strongly. And we actually expect fairly strong Japanese spending and orders going forward. Including some 311, or tsunami earthquake reconstruction funds including for some universities. We expect slower academic spending in the United States, primarily, in the second half of this year.

So slow orders there. I think those are the, the European countries that are notoriously weak are relatively small, and they seem to be, they are more than made up for by strength in the major markets in Europe, strength in eastern Europe, Russia, Turkey, elsewhere. So Europe overall is really quite strong, and stronger than we had expected. US so far has been quite strong, but we fully anticipate and have built that into our forecast, that academic spending in the US will be weaker going forward. But it's been good so far.

Great, thank you so much.

Your next question comes from the line of John Wood with Jefferys. Please proceed.

Hey, good morning.

Hi, Jeff.

Hey, so Bill, obviously with the revenue growth, you are chewing up quite a bit of working capital here. If I look at your prior forecast, I think and correct me if I'm wrong, you said $0.46 of networking capital per dollar of revenue in 2011, can you update us on where you stand relative to that forecast.

We are still, we had both [creep] and DSOs in inventories this quarter, so we are getting back to probably more aggressively managing those DSOs, to get back down to what I would call our normal run rate levels and there's significant opportunity there. Inventories, some of the build up is due to this anticipated second half shipments, but we continue to have to work to improve the turns. I don't have any, I will say, revised guidance that I would give you now. I haven't changed any internal targets for our divisions. But we've got work to do in the second half.

Okay, great. And then on the margin side, is it possible to try to parse out the impact of FX and potentially you talked about commissions related to bookings. And any color you can give on both the FX side, as well as the commission related impact would be very helpful.

Generally in most of our divisions and most of our sales, our distributor sales people, we pay approximately half the commission when we accept the order. And half the commission when we recognize revenue. So that's why with bookings growing almost 20% faster than revenues in the first half you see more, qualitatively, you see more SG&A, faster SG&A growth than we had anticipated. In part due to currency effects and in part also due to stronger than expected bookings.

Okay, is it possible, Frank, to parse out the FX impact on the margin side.

I think we've said in the past, it certainly still holds true, that as you move down the income statement from revenue to gross profit, to operating income to net that the FX impact becomes less. That certainly still holds true. But the gross profit margin improvements, we clearly are bringing in lower costs sub assemblies, we have stronger designs as we mentioned earlier, and depending upon the product or the marketplace, improved applications, improved solutions where we are getting better pricing.

So in some ways, John, it's not possible to really parse that out. And we cannot fully parse that out at each gross profit operating margin net income. By the time we get to net income and EPS, we are somewhat cushioned against Euro and dollar exchange rate fluctuations within reasonable ranges so we're not that sensitive to it.

Okay, great, and then the last one, on the CAM business. Frank, you commented, the integration is going a bit slower. You guys have talked about a $3 million to $5 million operating loss for those product lines, if you will, in 2011. Can you give us an update on what you expect vis a vie the comments that it is going slower on the integration side?

Yes, it is going to be higher than that number. We don't have a new target number. But it is going to be higher than what we had anticipated. With settling into the new factories we are shipping both GCMS and ICPMS now from our new Fremont, California factory. But the factory moves in general were a couple of months later than we had anticipated. And of course by the time you move the factory and ship the first few products, until you get to normalized gross margins in the new setup, takes another quarter or so.

Okay, thanks a lot.

You're welcome John.

Our next question comes from the line of Tycho Peterson, with JPMorgan.

Thank you for taking the questions. May we just appreciate the color on the end markets before. Frank, I think in the past you talked about in Japan the research replacement budget potentially kicking in in the back half of the year, are you still kind of anticipating an uptick from the infrastructure replacement?

Yes, we do, and that would effect our orders in the second half, and turn into revenue sometime next year.

Okay. And then on Europe, any additional color you can give there? Sounds like Germany and France still holding up, what about UK and some of the other markets?

UK has been slightish so a lot of the other, been a lot with Austria, Eastern Europe, Scandinavia, Russia, Turkey, all strong, or stronger than expected even. So, except for the small countries that have real financial problems in which contribute very little to our revenue and bookings, it's really been Europe stronger than expected and not just Germany or France, it really adds up in most places. UK is somewhat flat. But that was anticipated.

And then maybe on the portfolio post ASMS, and Pittcon before, can you talk about the level of interest in traction from the refresh [QTOF] portfolio and, I know you aren't shipping Michrom yet but can you talk about how you are thinking about [captive spray] in the back half of the year too?

We are shipping the [captive spray], we are not shipping the LC, only in very small quantities, it's not fully launched yet. So that is correct. The maXis 4G, the high end instrument that we brought out at Pittcon, and the previous maXis performance and better in a bench top format with a maXis impact are getting very good traction, very good interest. You probably don't see that in the revenue line yet because that's orders, but order uptake is strong, and that is one of many elements that are contributing to strong bookings and backlogs.

Are you seeing any change in the selling cycle around mass speck? One of your piers talked about delays coming out of ASMS, but I'm wondering if you are seeing anything from your customer base?

I am not aware of that. ASMS has been somewhat recently, and generally with a number of new products not only from us but from competitors coming out as well, customers, maybe take another look, so that's plausible. But I'm not aware of a trend. So Q2, it hasn't been anything unusual that I would point to.

And then maybe one for Bill on the margin expansion initiatives. Can you just talk to whether this is an acceleration of some of the additional cost control measures you had in place? Or are you looking at adding new ones on? Again, how much are you prioritizing on manufacturing versus other levers in the back half of the year?

We certainly continue to, this offshoring program that we started last summer, we're really, we've gotten an excellent start to that. There's still a lot of opportunity remaining. We continue to qualify a lot of, as I said, earlier components, minor sub assemblies so we have a fair amount of opportunity remaining there. I think the other thing, again, as we improve or grow this top line, we also expect to continue to get good factory leverage on our fixed factory costs. And as Frank alluded to earlier, Bruker's history of continuously developing and introducing new products with new solutions also means better cost structures and better pricing because of the solutions that we offer. So I think this margin expansion that we've seen over the last two or three years, we expect that to continue in some form or fashion, in the coming years.

You know Tycho, we are walking a fine line here. We want to obviously restrain spending growth and expense growth, but at the same time, we have to, we're dealing with the good problem of having 20% organic bookings growth, and 50% bookings growth. We don't want to strangle that rapid expansion, but we're managing through a very major expansion of the Company this year both from acquisitions, from proven acquisitions, and from organic bookings growth. So the expense control measures mostly effect SG&A, not so much R&D, and a little bit manufacturing. Again, walking the fine line of not wanting to overdo that and not being able to deliver the revenue growth and organic revenue growth that we would like to deliver in the second half and beyond. From our strong bookings and backlog.

And Frank, since you just mentioned acquisitions, in light of kind of what's gone on in the broader markets, are you rethinking your capitol deployment strategy or priorities at all? Both in terms of M&A and other methods of deployment?

Well, we did two excellent larger acquisitions last year with CAM and Veeco. The Veeco and now Bruker Nano Surfaces that is performing, as we had stated previously, that is performing a well, well ahead of its expectations. I think that we had anticipated $130 million of revenue for 2011, or greater than that, and $0.06 to $0.08 accretion for adjusted EPS, and about greater than 15% operating, adjusted operating margin. That division is far ahead of those estimates and doing much better than we had anticipated. So investing in that division, investing in CAM, investing in BEST is really the priority this year.

We did some smallish acquisitions. We're not likely to do any large acquisitions, but really focus on what we like to do anyway, which is organic growth. Now, of course also, organic growth, very soon it being organic growth out of CAM and out of that DNS division, and we continue to invest quite heavily in BEST. We think there is some significant opportunities there for profitable growth going forward. It's a major opportunity for us, with a little bit more of a medium to long term horizon, but there's a lot of CAPEX and obviously justified by their enormous backlog expansion over the last two years. I think it's almost a factor of ten. And so exciting, we have a lot of exciting opportunities internally, we are much more focused on those than on acquisitions.

And other methods, buybacks or other things, any commentary there.

That has never been a priority for us, or our board, and I don't anticipate it being going forward. I think we have, between repayment of debt and if we accumulate a little bit of cash, I think that's fine with us as well. And given, compared to dividends or repurchase of shares I think there's some smallish bolt on acquisitions would be a higher priority for us, and we always look at some of those. As I had commented earlier, and you are aware of that, earlier in the year maybe up to eight weeks ago, I think M&A multiples got a little out of, became a little bit too optimistic and lofty for us to be a participant, That obviously may change a little bit. But again, we aren't focused on announcing an acquisition every other quarter or so. We are focused on driving the significant internal opportunities that we have and are creating. So that's our focus.

And then last one, just on this CFO transition, I think you have talked about a couple different strategies, that are having Bill, moving into the permanent CFO role and hiring a COO, or hiring a new CFO. Any thoughts on which way you are leaning and sense of time lines?

No, it is still, a decision is probably still two months plus away. We are still looking at a dual track approach. We are looking at both opportunities and we, the one option is that Bill, indeed, again becomes an operational oriented permanent CFO, and that we find a VP of production and logistics. And we're looking at both options and looking at candidates. And I think either way we will be in very good shape. With Bill either being a financial savvy COO or an operationally oriented CFO and us then strengthening in the other position. So we are keeping our options open probably for another two months plus.

Okay, thank you.

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

Yes, hi. Thanks for the questions. Frank, I think you mentioned that you are seeing some positive things in terms of market share, where would you say you are having the most success in improving your position within some of the markets you serve?

Pretty broad based, Dan. I think we're clearly doing well with in growing the businesses that we have acquired, so the AFM, and Optical Metrology, the former Veeco, if you like. We're making good progress on revenue and product launches. Obviously with our CAM division, we are particularly strong right now also in additional order of bookings in Homeland Security and a lot of the industrial instruments from Bruker AXS x-ray analysis instrumentation, to metals analysis instrumentation, whether they are handhelds XRF to OES. We are doing very well with our Bruker Nano Analysis, EDS, EBSD and other electro microscope accessories.

We are doing well with Life Science Mass Spectrometry, and doing well in micro biology. The nice thing is there really isn't one that I would single out. The nice thing is really that it is pretty broad based and I think our fundamental focus on innovation, on R&D processes, on getting good strategic marketing input to bide our R&D is really working very well across the board. It's very broad based, Dan.

Okay, great, thanks for that. And then on the revenue line for the quarter, I think there was a delay of $10 million or so from 1-Q. Did all of that come through in 2-Q?

Hard to differentiate exactly. We anticipated, and we think that is still true, that most of that came through in Q2 but some of that also is still going into Q3 and Q4. But then we make up for it by accelerating other deliveries and installations. So I think it's essentially a one time effect that's gone. Although, if I drill down specific systems, some of them may still be delayed into Q3 and Q4, particularly in Japan if the labs are not ready.

Got it. And then I guess lastly, any color on demand in China and how you see that in the second half of the year relative to the first?

Demand in China for us has continued to be very strong in the first two quarters of this year. And we are not aware of any, in our days and our businesses we are not aware of any slow down or it going flat at this point.

Thanks for your time.

The last question comes from the line of Steve Unger with Lazard Capital Markets. Please proceed.

Hi, Bill, did you have any trouble with component parts from Japan or getting component parts in Japan in the quarter.

In Q2?

In Q2 yes.

I think that it has pretty well stabilized. We had some initial, there were a few key components that we, fortunately with this new outsourcing team we put together, we were able to relatively quickly find alternative sources. So I would not say that the unfortunate incident in Japan really profoundly, even negligibly, impacted Q2.

Okay, and then are you guys having trouble building products to ship in terms of keeping pace with demand? Is that what I'm taking away from your previous comments?

Well, we are straining really in all parts of the organization. We're ramping up production. We have done a good job in ramping up production, but we need to do more of that. And in addition we don't recognize, on most of our systems, we don't recognize revenue when shipped, but really when delivered and installed and accepted by the customers. So it's that entire logistics chain of delivery, field installations, lab preparations. I would almost say that the latter part of that, rather than production, is the part that has been slowing us down a little bit in the first half of the year in getting even more revenue accepted and so more so than production.

Okay. And then how (multiple speakers).

(Multiple speakers). When you take such a big step in revenue, you feel it in every department. But a little bit more so at the back end after things have gone on to a truck and been delivered from the factory, getting that larger volume through our field organization, field service and installation organization, that there we have more growing pains.

Okay, and then how should we think about that in terms of the context of the hiring freeze that you talked about? Are you (multiple speakers).

[We did hire quite a bit] and we wanted to slow it down, in the second quarter and second half of this year. So our hiring was front loaded a little bit. That also contributed to the faster than expected expense growth in the first half and we really do need those people. But we also want to make sure that we don't hire too fast and that's why we've put in that de facto hiring moratorium, which in selected cases with the management decision, we can make exceptions and we do where needed. But hiring was also a little bit front loaded and of course a little bit still already in the second half of last year. So we think we did enough and we want this to settle in and get productivity out of that. And that's why we have gone with a hiring, essential hiring moratorium for the remainder of the year.

And that's to the end of the fourth quarter?

At least to the end of the fourth quarter. We will see it, we will assess our trends in the productivity we get. We have done a very substantial jump in employees and hiring not only from the M&A, obviously, with a new division, but also in totally ramping up and so we want to have those people fully trained and with great productivity before we look at adding additional resources.

But it's certainly continuously monitored, as Frank said earlier, it's not complete. There's very, very selective hiring and it's something we take a very hard look at the end of each quarter to see how we are staffed for the next quarter.

Got it. Great, thanks guys.

There are no other questions at this time.

Okay. So again, our apologies for the slow start in getting the telephony going, but I think it all worked out. Thank you all for joining us today, and this concludes our Q2 earnings call. Goodbye and thank you very much again.