Bruker Corp (BRKR) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Bruker Corporation quarterly earnings conference call. My name is Kathy, and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today's call to Ms. Stacey Desrochers, Treasurer and Director of Investor Relations. Please proceed ma'am.

Thank you. Good morning and welcome to Bruker Corporation's third-quarter 2011 financial results conference call. With me on today's call are Frank Laukien, Bruker's President and Chief Executive Officer; Bill Knight, Bruker's Chief Financial Officer, and interim Chief Operating Officer; Brian Monahan, Bruker's Vice President of Strategic and Financial Planning; and Tom Rosa, the Chief Financial Officer of our Bruker Energy & 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 may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change, and therefore, you should not rely upon these forward looking statements as representing our views as of any date subsequent to today.

In addition to the financial measures prepared in accordance with Generally Accepted Accounting Principles, or GAAP, we will discuss certain non-GAAP financial measures, including adjusted EPS, adjusted operating income and adjusted operating margin, which are non-GAAP measures that exclude certain items. We exclude these items because they are outside of our normal operations and/or, in certain cases, are difficult to forecast accurately for future periods. We believe that the use of non-GAAP measures helps investors gain a better understanding of our core operating results and future prospects consistent with how we measure and forecast the company's performance, especially when comparing such results to previous periods or forecasts.

A reconciliation of our GAAP to adjusted numbers can be found in our press release issued earlier today and is located in the Investor Relations section of our Bruker.com website.

Today, Frank will provide an update on the business and certain 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 in more detail.

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

Thank you Stacy, and good morning, everyone. We appreciate your joining us today.

Before I provide a business up date and discuss additional highlights for the third quarter and the first nine months of 2011, I would like to welcome our new sell side analysts, Amanda Murphy from William Blair, and Derik De Bruin from Bank of America Merrill Lynch. Welcome.

I believe most of you have read our earnings press release issued at 7 a.m. this morning and you are now familiar with the key numbers in the earnings release. In the third quarter of 2011, we continue to deliver excellent top-line growth. Specifically, in the third quarter 2011 our revenue increased year over year by 35% to $418.4 million.

Revenue in the third quarter 2011 increased by 11% organically when we exclude the effects of foreign currency translation and acquisitions.

GAAP net income for the third quarter 2011 was $19.8 million or $0.12 per diluted share compared to GAAP net income of $27.4 million or $0.17 per diluted share in the third quarter of 2010.

Adjusted net income, which excludes acquisition-related restructuring and other charges, was 36.2 million in the third quarter of 2011, or $0.22 per diluted share, compared to adjusted net income of $35.2 million or $0.21 per diluted share in the third quarter of 2010.

For the nine months ended September 30, 2011, our revenue was $1,176.6 million, an increase of 32% over the first nine months of 2010 or 8% organic growth year over year.

GAAP net income for the nine months ended September 30, 2011 was $53.2 million or $0.32 per diluted share compared to GAAP net income of $66.1 million or $0.40 per diluted share during the nine months ended September 30, 2010.

Adjusted net income for the nine months ended September 30, 2011 was $92.7 million or $0.56 per diluted share compared to adjusted net income of $79.9 million or $0.48 per diluted share during the nine months ended September 30, 2010.

As a result of our competitive portfolio of high-performance systems and solutions, our new order bookings continued to grow strongly in the third quarter, both year over year and sequentially, and our already high contractual backlog has grown even further. We believe that Bruker can continue to grow considerably faster than our markets even in a slowing macro environment.

We continue to monitor the academic and government research budget in Europe. The EU Commission scientific research budget is expected to increase by approximately $1.2 billion or 13% in 2012. The German scientific research budget is expected to increase approximately $1.6 billion or 10%, which will more than offset the anticipated (technical difficulty) of 1% and Spain of 3.5% and the continued flat budget in UK.

The German budget proposal has a high chance of being adopted because research has been the key investment in the country's future growth. Also, research and infrastructure budgets in many and newer European Union member states in central Europe, as well as in Russia and Turkey, have grown dramatically.

Moving on to our new Chemical & Applied Markets division, or CAM, which was established on May 19, 2010, when we purchased the three former Varian Inc. product lines, Laboratory GC, GC Mass Spectrometry -- GC Triple-Quad Mass Spectrometry, and ICP Mass Spectrometry for $32.5 million at the time.

As a reminder, during the first half of 2011, we moved all the manufacturing locations out of the old Varian locations to new Bruker facilities, and the ICT in that factory was moved from Australia to Fremont, California.

Additionally, during the year, we have made significant investments in revamping and developing new products, specifically the aurora M90, a new ICP MS system with new levels of sensitivity, dynamic range and productivity, along with the game changing SCION triple-quadrupole and single-quadrupole mass spectrometer for GC, or gas chromatography detection, designed to enhance data quality and productivity in routine testing for food safety, forensics, doping, environmental, industrial and other applied markets.

We are also continuing to invest in our CAM direct and indirect distribution channels to be able to better address the greater than 2 billion of additional market potential for our new CAM products. Due to this very significant investment, our BSI segment's first nine months adjusted operating margin declined from 14.9% in 2010 to 12.9% in 2011. Excluding the CAM division for a moment, the adjusted operating margin of the remainder of our BSI segment improved slightly to 15.1% for the first nine months of 2011.

For CAM, our financial goal is to leverage these startup investments and reduce the CAM division loss by more than half in 2012, and to be about breakeven in 2013 with significant addressable markets and a considerably strengthened portfolio of products and solutions, we expect continued rapid CAM top-line growth during these periods.

Subsequent to the end of the third quarter on October 12, 2011, we completed the acquisition of Center for Tribology Inc., or CETR, a highly regarded tribology mechanical testing and nano-indenting company with projected fiscal year 2011 revenue greater than $10 million and EBITDA greater than $2 million. With these additional industry-leading systems, Bruker is continuing its commitment to provide the world's most innovative (technical difficulty) of high-performance applications enabling instrumentation.

With that I will now turn the call over to Tom Rosa, the CFO of our BEST subsidiary and segment.

Thanks, Frank, and good morning. Revenue for the BEST segment during the third quarter of 2011 increased by 24% to $27.7 million compared to $22.4 million in the third quarter of 2010. Excluding the effects of foreign currency translation, third quarter 2011 revenue increased by 13% year-over-year. The BEST adjusted operating income in the third quarter of 2011 was $0.4 million compared to a BEST adjusted operating loss of $0.6 million in the third quarter of 2010. The adjusted loss per share for the third quarter of 2011 for the best segment was $0.01, consistent with the BEST loss per share of $0.01 in the third quarter of 2010.

Revenue for the BEST segment during the first nine months of 2011, increased by 30% to $79.8 million compared to $61.2 million in the first nine months of 2010. Excluding the effects of foreign currency translation, BEST revenue for the first nine months of 2011 increased by 22% compared to prior year.

BEST adjusted operating income during the first nine months of 2011 was $0.5 million compared to an adjusted operating loss of $2.4 million in the first nine months of 2010. Adjusted loss per share for the first nine months of 2011 for the BEST segment was $0.02, consistent with BEST adjusted loss per share of $0.02 in the first nine months of 2010. The BEST external backlog as of September 30, 2011 increased by approximately $20 million or by 13% to $172.2 million from $152.1 million as of September 30, 2010. Included in BEST backlog was a follow-on order received in the third quarter for two crystal growth magnet, or CGM, systems for semiconductor applications from a Korean electronic materials company. This order, valued at approximately $1.5 million, followed the successful factory acceptance testing of the first CGM system which was shipped in the first quarter of 2011.

During the third quarter 2011, $3.4 million of deferred operating costs related to the proposed initial public offering of BEST, were expensed. Although BEST remains in registration, we believe this approach is appropriate at this time as the timing of the BEST IPO is uncertain, particularly under the current financial market conditions.

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

Thanks Tom and good morning, everyone. Since Frank has already commented on the overall Bruker financial highlights, and Tom provided a summary of our BEST segment, I will focus on the third-quarter and first nine months year-to-date results for our Bruker Scientific Instruments, or BSI segment.

On the top line for the BSI segment, during the third quarter of 2011, revenue increased by 36% to $394.6 million compared to $290.5 million in the third quarter of 2010. Excluding the effects of foreign currency translation and acquisitions, BSI revenue in the third quarter increased organically by 11% year over year. For the first nine months of 2011, BSI revenues increased by 33% to $1,108.3 million, compared to $835.7 million in the first nine months of 2010.

Excluding the effects of foreign currency translation and acquisitions, BSI revenue in the first nine months of 2011 increased organically by 7% 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 margins for BSI in the third quarter of 2011 was 48.2% compared to 51.3% in the third quarter of 2010, a decline primarily driven by still very low gross profit margins in the CAM division, which we do not expect to normalize until CAM has fully settled into its new factory in 2012.

For the first nine months of 2011, adjusted gross profit margin for BSI was 49.0%, compared to 48.5% in the first nine months of 2010. So we continue to make good progress on gross profit margin.

Without CAM, the adjusted gross profit margin for the remainder BSI would have been 50.1% for the first nine months of 2011.

Adjusted BSI operating margins in the third quarter of 2011 were 13.3% and 12.9% for the first nine months of 2011 compared to BSI adjusted operating margins of 17.1% and 14.9% for the third and first nine months of 2010, respectively.

As Frank already stated, our BSI adjusted operating margins without CAM were 15.1% for the first nine months of 2011.

Excluding CAM, our adjusted BSI operating margins have remained relatively unchanged year-to-date. As we had stated in our Q2 2011 earnings call, this is partially due to FX and to commission expenses being due in part when orders are received, while our bookings have grown considerably faster than revenue in the first nine months of 2011.

Some of the steps we are taking to reduce SG&A spending include our hiring moratorium, selected staff reductions and reductions in discretionary spending.

Adjusted GAAP net income for the BSI segment in the third quarter of 2011 was $38.7 million, or $0.24 per diluted share, compared to adjusted net income of $36.9 million or $0.22 per diluted share in the third quarter of 2010.

Adjusted GAAP net income for the BSI segment during the first nine months of 2011 was $97.9 million, or $0.59 per diluted share, compared to net income of $84.9 million or $0.51 per diluted share in a similar period for 2010.

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 acquisitions, charges for the amortization of acquisition-related intangible assets, fees related to the Bruker Optics China investigation, and expensing of a previously capitalized BEST IPO fee and settlement of a Swiss multiyear tax audit.

Operating cash flow for the third quarter of 2011 was $21.2 million compared to $9.6 million in the comparable period of 2010. Free cash flow was $14.0 million during the third quarter of 2011 compared to use of cash of $0.2 million during the comparable period of 2010.

We ended the third quarter of 2011 with cash and cash equivalents and restricted cash of $198.8 million and a net debt of $112.6 million.

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

(Operator Instructions). Tycho Peterson, JPMorgan.

Good morning. First question maybe for Frank, you commented on some of the dynamics in Europe. I think in general you've been a little more positive than some of your peers on Europe, and some of them have commented on particular softness in Europe this quarter. Can you just talk about the dynamics in the market today and what gives you a little bit more confidence that the trends you're seeing will continue?

Good morning. Yes, as we have stated, some of the dynamics we've given you, we find -- we see Europe continues to be strong. And it's obviously patchy. There are some countries that are very strong. There are some regions that are absolutely surprisingly strong and will be next year as well. And others -- and usually those are well-known -- are weaker.

But the macro events really -- the headlines really don't reflect the situation on the ground. It's not a lot of business, but ironically we are getting higher business out of Greece this year than in any previous year. There is money out there if you can find it and if you have the right products.

Now the real drivers are Germany, the European research budgets. France has continued to be quite strong. Eastern Europe is astoundingly strong -- eastern and central Europe. Turkey and Russia, extremely strong. So if you know your way around Europe and you're local in enough places business is strong, period.

And then as we think about the CAM business, specifically, you've obviously touched on some of the investments you're making there and the business seems to be progressing quite well. Should we be thinking about a phase of kind of complete portfolio overhaul or expansion here? You talked about the SCI and then the aurora products, but are we going to enter a phase here where you're going to rapidly expand the portfolio for that business?

Yes. I would concede first of all that now that you really understand the CAM business 18 months or so into or after the acquisition, we have to concede that it will require more investment than what we had initially assumed when we acquired it in May 2010. And the path to break even -- it's taking us about a year longer than what we had initially estimated in May 2010. I think that's simply fair to state.

On the other hand, yes, I can confirm that we are looking at a substantial or nearly -- substantial, not complete -- but substantial overhaul of the product line and also a significant expansion of the product line. We're obviously going to move eventually LC triple quads as well, a very large market, so there will be additions -- and other additions on our product roadmap that have not been even qualitatively in the acquired Varian Inc. portfolio.

And for the systems that we did get from Varian Inc., there is a substantial investment to make them -- to bring out very significant improvements and capabilities in performance, as evidenced already by the IC PMS and the SCION GC triple-quad introductions that have occurred already and where the full rollout is underway.

As we get to know CAM better, while we face the reality that we didn't buy a division but three businesses and three factories that we have to merge into a division, and that we requires longer and more investment as we have explained in more detail this time, I think we're becoming even more excited about the total size of the opportunity and where this business could go in terms of revenue and margins, although it is taking us somewhat longer than what we had initially predicted.

Okay. And then two other just quick ones. Can you talk on backlog conversion times -- are you happy with where they are today and if not where you think they can go? And then the second one, any update on the China group? Thanks.

The backlog conversion is improving. I am not happy with it yet, but it has improved in Q3. I think it will continue to improve in Q4. But with the very significant step up in orders in many of our divisions, it has taken us a couple of quarters at least to begin to adjust to the very significant order rates, which if you recall for the first half, orders were up by about 50% in the third quarter. Recall that CAM was with us the full third quarter of 2010, so the third-quarter orders were up about 40%, but that's comparable really to the first half of the year because CAM again, as I said, was with us for the full quarter -- third quarter of 2010. So there is further room for improvement but we are pretty rapidly moving in the right direction there.

And -- to the second part, the China -- Bruker Optics China investigation by the audit committee is continuing. And since that is driven by the audit committee it is not my place to make any comments here at this time. And I think they will make the appropriate announcement, if any, at the appropriate time. But it has not impeded in any significant way our ability to do business in China.

Okay. Thank you.

Amanda Murphy, William Blair.

Just a question on the bookings growth. Did you give us a perspective on the organic bookings growth? And then if you could talk to across all of your product lines, where you're seeing the key strength at this point in terms of orders?

We have not quantified the organic bookings growth, but it is higher than our organic revenue growth. So -- it is higher than what you've seen in the organic revenue growth, and our book-to-bill ratio continues to be above 1.

Okay. And then what about sort of the various product lines that you have -- is there any area that's particularly strong at this point in terms of bookings?

It's really been pretty broad-based. Clearly, for the -- in the third quarter the trends for the full year have continued, which means bookings in the applied markets, industrial markets, Homeland Security, clinical markets, seem -- have the stronger growth compared to bookings in the academic markets.

Okay. And then you mentioned in relation to CAM that you perhaps are seeing potential for bigger opportunity there. Are you able to provide any more color on what you meant by that?

Not at this time. We will do so when we give our goals for the full year 2012 in February. But longer-term and without being able to give you a year when we would get there, we see that the CAM division, over several years, not next year and not in 2013 yet for sure, can grow to $250 million to $300 million division for us and eventually even larger. But I think that's sort of a multi-year plan? And we will try to give more color on that when we give our goals for 2012 in February.

Okay, and then just last one on the margin side -- so you talked previously about your offshoring initiatives and some of your procurement initiatives as well. How far along are you in those efforts at this point and did they have a meaningful impact this year?

Those efforts certainly continue. We continue to focus quite a bit on gross profit margin improvement, which is coming from as we've stated a number of times improved product design, lower cost. And then the offshoring procurement efforts remain significant to bring in higher-quality, lower-cost component for those products. So I think 2011 versus 2010, we have made significant improvements in bringing in those lower cost components. And I think these efforts will be for sure ongoing in the coming years.

Okay. So still room to go in other words.

Absolutely.

I think it's still early days on the offshoring. I think we're further along in redesign to costs, which has been going on for some years. There's further room to go there as well. There is further room in factory efficiencies, especially the CAM factories, which we have just moved altogether into one very efficient new factory. And there is more room on the outsourcing and offshoring. There, it's really still relatively early innings, if you like.

Okay. Very helpful. Thanks.

Isaac Ro, Goldman Sachs.

Good morning. Thanks for taking the question. I wanted to spend a minute on the profitability in the business; you guys have obviously run a lot of great assets over the last year plus, and the business is on a good trajectory for the long-term, but I think the one thing investors have brought to me over the last couple years has been the hope that margins would improve. And so appreciating some of the initiatives you have here, could you maybe walk us through what you expect the CAM gross profit to sort of look like on the other end of this consolidation you just touched on?

And then secondarily, if we think longer-term on the margins -- operating margins of the business, where can they ultimately go? Because I think -- you started at the beginning of the year about $350 million in revenue with a 12% margin, 12.5% operating margin -- I'm sorry -- the 10% operating margin and you're up to 12%, but I think in the past years you talk about closer to 75 basis points a year. So just trying to look at what that projection will look like over the next few years.

You are right, this year, even without CAM, we are moving sideways, or have very modest improvements in operating margin. We have good growth in -- or reasonable growth in the adjusted EPS overall, which ultimately is even more important, but we are committed to both. And we are committed to resume our margin growth for the company overall. But I think the first part of your question was the CAM business, and yes, we are investing and all but where is that going.

I don't see a reason why the CAM business, once we really are in full in force [the year] and have all the new products and they are ramped up to volume, and this will take several years why that business should not have -- be able to reach 15% to 18% adjusted operating margins. So I don't think that CAM inherently in the medium term will be a drag on margins, but it's clearly going to be an investment and ramp to volume on what new products that have haven't even launched yet, that will launch in the next couple of years and then ramp to volume over the following one or two years. Over a multiyear period CAM I think will have similar margins, or can have similar margins to the rest of our Scientific Instruments business.

And for the Scientific Instruments business, we remain committed to an adjusted operating margin goal of 18% by 2014. We had much faster than 75 to 100 basis improvement in 2010 and 2009. This year we have -- we're moving sideways without CAM, and with CAM obviously we're going backwards. We are aware of that, and we will -- we endeavor to get back into the trend of improving margin percentages where they continue to focus also on fast top-line growth, and fast adjusted EPS growth. So our goal remains the 18% for the Scientific Instruments business, by 2014.

If I could ask just one follow-up on some of the below-the-line items, tax rate, if you had an update on that, that would be helpful. I just did -- tick up this quarter sequentially. And then share count -- I think in the past you focused on repayment of debt and accumulating some cash rather than buyback. Just wondering if that's still the case?

Bill, do you want me to take the tax rate?

Go right ahead.

This is Brian. Tax rate as you said was higher this quarter. Really the major drivers there are the IPO fees that Tom talked about earlier that we weren't able to tax benefit; also the settlement of the Swiss tax audit as well. Adjusting for those, we are about 35%. and then if you adjust for the losses in CAM that we didn't expect, we are down to about 32%. So those are the reconciling items to get to our normalized tax rate.

And then just looking at the balance of the year, how should we think about tax rate, and is that the right run rate to look at for next year?

Yes, I think for the remainder of the year, we expect to continue to be at that 32%, which is what our -- generally our goal was for the full year 2011. I expect that that would continue to decrease as CAM becomes more profitable or loses less money next year. Some of the other tax initiatives we'll put in place, I think we would expect to be below 32% next year, but we'll be more specific when we come out with goals for 2012.

And share count? Or the share count relative to other uses of cash?

We do not anticipate any share buybacks. I wouldn't rule it out categorically, but as you have seen with two larger acquisitions last year, although they were very capital efficient, and a couple of smaller acquisitions so far announced this year, I think we have excellent uses for our cash with much higher returns on invested capital, so that's what we are focused on. I believe we can generate a lot of shareholder value with disciplined acquisitions, with multiples that are fair for the sellers but also fair for our shareholders. And I think that's a good additional driver off our, if you like, currency-adjusted growth because we are obviously very efficient in deploying our capital and acquisitions.

Okay. Thanks very much. Appreciate it.

Peter Lawson, Mizuho Securities.

Frank, just wondering if you could -- just again about this weakness that peers are seeing in academia -- is there anything on the periphery that you are worried about, and any deterioration in compensations around higher-priced products, or is there any delay in that process?

Good morning, Peter. Well, I mean it's not all -- not everything is aligned perfectly. Clearly there is weakness in US academic spending; NIH slightly down, although not as much as many had feared, and probably not going to grow rapidly or -- so we're taking that into account. So the academic spending being the slower growing part of our business is sort of our assumption for the next 15 months or so. And beyond that we just don't have a good crystal ball.

So nothing surprising. And in some ways, the healthy academic R&D increases in certain parts of Europe and Asia are a part of this surprise in the last three months.

I guess in the US it could have gotten -- it could have been worse. So for us at the end of the day, it's not so much -- and the macro trends play a role -- but far and more important is our relative product positioning. And for us the NIH budget is still infinitely large. And the question is how do they allocate it rather than whether it's going up or down 1%.

And in terms of allocation, in terms of secular trends towards epigenetics and proteomics and more applied research, I think we are extremely well positioned with many of our products. So -- we are not just a ship that's going up and down with the tide. We are not immune to that completely, but far more important are our relative product trends and I feel very good about those.

And then a follow-up on that, the commentary about growing faster than markets -- is that more of a mixture of new products, or is it more share gains? And where do think you're gaining share?

These two are very much related. Obviously new products with unique or advanced capabilities very often help you with gross profit margins and possibility. They often also help you expand your market share. And -- we feel that pretty broadly in many of our divisions and product lines we are actually gaining market share, and really it's a pretty broad phenomenon. I think it's not isolated to one or two product lines or divisions. But pretty broadly I think we are on an excellent track and are growing faster than the markets because we are gaining market share, mostly with new products or relatively new.

So last year's product introductions and headlines are making a difference in the market this year. And this year's product introductions and headlines are likely to have a positive impact next year. Sort of a delay until these products ramp to volume, as we say, after you see the initial product press release.

Thank you. And just one for Bill, just around the benefit in that interest or other income line, was that FX gains? And how should we think about Q4?

That -- yes. And I think we look at any FX effects that we can moderate, and we don't try and consciously try and make money. We don't do active hedges, so we look at any quarter-to-quarter as getting it near break even as best as we can.

So that shift from negative 5 to 6 last quarter to was it close to 2, that was really just -- that was FX; there's nothing else going on?

Primarily, yes.

Yes, that was primarily FX. There was certainly some interest income and expense in that line, but that sequentially was not materially different, so the primary driver in that delta, Peter, is absolutely FX gains this quarter versus losses, both last quarter and for the first half of the year.

Great. Thanks so much.

Dan Arias, UBS.

Thank you very much. Frank or Bill, I was just wondering if you could separate FX from M&A contributions during the quarter.

I think -- Dan, hi. This is Frank. Our FX adjusted revenue growth in the quarter was 26%, and our year-to-date FX adjusted revenue growth was 24%.

Okay. Thanks. And Frank, not to harp too heavily on the academic markets, but can you just make a comment on the continuity or pacing of the business you're seeing in terms of ordering patterns relative to previous periods or historical levels?

Orders in the third quarter in some of the divisions that have more of an academic exposure, which we prefer to call opportunity, like the BioSpin NMR, MRI division, or the Daltonics division, orders in the third quarter have been excellent.

Okay, thanks. I guess Bill, just wondering if you can, with everything going on with CAM, give an expectation for CapEx for the year.

We -- I think year-to-date we have spent a little over $40 million versus the Q3 year to date 2010 was about $22 million. We have made some -- and are making some investments in brick-and-mortar expansion and obviously increased activity with some of the new acquisitions. So fourth quarter will add to that, not significantly but I think on a linear basis, you would see that the year would be probably in the $50 million range.

$50 million, okay. Thanks very much.

Ross Muken, Deutsche Bank.

This is Vijay in for Ross. Thank you for taking my question. Just had one question. Can you comment on your orders? Did you see anything geographically, the US versus EU when it comes to orders for license [limitation], particularly from the academic segment?

Yes. Our US academic orders in Q3 have been excellent.

Perfect, thank you.

That is not the answer that he's looking for, but those are the facts.

Thank you.

Dan Leonard, Leerink Swann.

Thank you. First I want just a housekeeping question. Can you give us the revenue contribution of currency and acquisition in the BSI segment?

Can you repeat the question one more time, Dan, please?

From the quarter, BSI grew organically 11%, but what was the currency in the acquisition component of the BSI growth?

This is Brian. The currency impact was a little over 9%, so almost 10% for the quarter. As you said, we grew 11% so the delta is the benefit from the acquisition. BEST did not have any acquisition-related revenues this quarter or for the first nine months of this year.

Okay, thank you. And then also we've been talking a lot about academic markets. Frank, can you give us some commentary on what you are seeing in the applied and industrial markets you serve?

They are generally strong, with some weaknesses emerging in semiconductor and data storage, which is a very small part of our business. And interestingly, since we tend to have more of the high-end research well or the -- it's not research tools, even for fab line systems, we tend to get orders for instance now from consortia or companies that are going to invest right through the cycle for next generation 16-inch 450 millimeters semicon. metrology tool -- we've got some excellent orders there. Even as I look at the pure Semicon metrology tool companies, as their orders are sequentially declining. But even for the 2% or 3% exposure that we have to those cyclical Semicon data storage LED solar markets, we see a little bit of softness there. But again it's a small part for us, and we more than make up for that with strength elsewhere.

Okay, thank you. And my final question, can you give us an update on the COO search, in terms of what type of background you're looking for, whether you're looking internally, externally, anything you could offer?

We are looking for an Executive Vice President of Operations very much focused on production and logistics, and we are searching externally.

Thank you.

Jon Wood, Jefferies.

Good morning. So on CAM, is CAM going from I think last quarter you said $5 million operating loss or so, and based on that $0.11 number you quoted in your press releases, is that number $25 million now in terms of an operating loss for this year?

No. (inaudible).

No, Jon. We are talking operating losses. I think the $5 million you referred to is correct, but then the net loss is when we're talking about the $0.11 for the full year. So you've got some other below-the-line items, but the $0.11 is for the full year, and it's a net loss contribution, not the operating loss contribution.

Okay. So what was that number before this update? So that $0.11 number was what as of last quarter? I'm just trying to figure out how much your (technical difficulty) increasing that loss estimate from prior guidance?

Yes. I mean basically the way the CAM business has been developing is that our original goals were that the losses during the year would steadily decline as we were integrating factories, moving factories, a number of those things. As Frank talked about, it's a challenge we are happy to take on, but just taking a little bit more time than originally planned. So essentially in Q4 we do not expect increasing losses over Q3. We expect those to be modestly lower and to continue that trend through 2012.

So it's not that we suddenly had to make a bunch of investments to increase the losses. They're expected to sequentially go down from what they were for both Q3 and then first nine months of this year.

Okay, got it. Thanks. Just based on you guys' commentary on the call, did the Veeco business do like $43 million? It seems like that's a very big number given what's going on in the semiconductor markets. So is that math right that it did, let's call it over $40 million in revenue in the third quarter, the Veeco business?

That's about right. Although we don't break out the exact numbers, but you're basically very close. And -- but keep in mind, their exposure to -- even though Veeco had a misnomer for that division by calling it the metrology division, it's far from a metrology division; its metrology exposure might be 15% or something like that.

And again, even its metrology business with some weakness in data storage, which is always the early indicator, has had some fairly good orders from, as I've said, sort of next generation tools for 450 millimeter fab lines, which were some very major players and consortia are investing throughout the cycle because that's -- they want to get that ready for the future.

So -- but I think the key part of the answer is our -- the ex-Veeco business, our Bruker nano services division primarily -- 80% plus is not dependent on data storage or Semicon cycle.

Okay, great. That was good color. Thanks, Frank. Do you expect that business to be up sequentially? It's seasonally stronger in the fourth quarter, I know, but do you still expect a sequential uptick there?

For that business in particular?

Yes just -- yes, yes. Sorry.

I don't have all the numbers at my fingertips. I don't expect any unusual trends. They tend to, like everyone else at Bruker tend to have a decent fourth quarter, although this year, we have obviously tried to not become so fourth-quarter dependent. And -- but that's -- so nothing unusual in that division, BNS division, ex-Veeco compared to the others that I can think of right now -- compared to the other Scientific Instruments business, which has some seasonality, of course.

Okay, great, thank you. Last one on cash flow -- it looks like the working capital metrics actually got quite a bit better in the quarter, but the cash flow is still very weak. So was that just an FX dynamic on the working capital? And I wonder if Bill can give us an update on what do you expect in the fourth quarter in terms of cash conversion. And if you want to state it in terms of dollars or kind of the working capital commitment relative to your goal, that would be great.

Sure. We did have improvements in both DSO, and modest improvements again in inventory turns. That continued to be an area that we aggressively work. I would expect to see continuing improvements in DSOs. We have given extra attention to that because that is typically a very quick conversion from -- to cash. So the -- and there our working capital to revenue ratio also had improvements in Q3. We would expect that trend to continue again in Q4.

Specifically, on the cash flow, do you -- just looking at the fourth quarter, is that number expected to be up year over year, down year over year, about the same? Can you give us some direction there?

Very difficult to forecast. We expect reasonable cash flow in Q4, but quite honestly it's not just like we're hedging on the answer. Cash flow, because of our lumpy payments, is difficult to predict on a quarterly basis.

Okay. Fair enough. Thank you.

Derik De Bruin, BAM.

Just -- a lot of my questions have been answered, so -- and I won't try to beat the academic course there. But can you -- when you kind of look at some of the science projects that are beyond BioMedical research, so like some of the ones where your BEST business areas and some of the high energy physics and that type of stuff, is -- are those projects receiving the same amount of attention as BioMedical research, or are those projects potentially more in the [gun] site from some of the bean counters?

That's sort of a multi-year trend really, rather than -- so -- and this is not something you don't know. For a number of years with the genomics revolution and sequencing, I think a lot of money has gone into genomics and sequencing. And that has made enormous progress.

I think people have also realized that good old or stray genomic sequencing, while it gives us a lot more data has not really given us as many medically relevant insights as we had hoped, because we probably all overestimated the role of the genome as some sort of blueprint.

And it turns out that epigenetics and systems biology and protein and metabolite analysis, and the macromolecular switches basically on the genome, what people call epigenetics are more important, which is good for Bruker because we are not a genomic sequencing company. And we think a lot of the funding trends, because of the scientific trends and the therapeutic diagnostic trends in molecular medicine are coming our way very much, so that's an excellent trend.

To the -- really the first part of your question is fundamental research outside of molecular biology, in recent years that has had a bit of a renaissance if you like. I think for a few years, anything medically oriented or life science oriented soaks up all the budgets, and that trend has at least normalized in the last few years. Which again is good for our materials research or for our big science projects that you have mentioned, for which BEST is providing some of the infrastructure.

So that has been a normalization to where I think people are not only investing in life sciences, but also in non-life science fundamental and academic and energy research. So I think that trend has also been healthy -- healthier I should say in the last two or three years than perhaps in the seven years before that.

That's all relatively long-term perspective. I don't detect any change in priorities that affect the last quarter or even the last year, except perhaps that I think that people, in my opinion, are realizing that just doing more genetic sequencing doesn't give us enough biological and medically relevant information. And one has to look at other tools as well, which, again, we very much welcome.

You actually kind of jump started my memory this morning, so when we go back and we look at what happened back in the 2000, 2001 timeframe, kind of after the initial sequencing orgy, there was a focus more on proteomics, and biomarker research. There are companies that were -- instead of setting up farms and DNA sequencers they were talking about setting up farms of mass spectrometers. You had the whole [PET-off-off] wars in terms of doing that type of project.

I guess you know when you look at some of the stuff that is going on in the sequencing market as people potentially having too much data, have you seen -- are you starting to have conversations with people that maybe mass spectrometry -- which has been a good market for many, many years, much better than people expected, have you seen more interest in that? Are you talking with people perhaps outside of the United States and Asia who are thinking about setting up larger proteomics efforts to kind of go after the translational research projects in that sense?

There are some places like this, but I think proteomics and systems biology research mostly will not necessarily be done in these large-scale facilities, or some factories like what [Gene Prock] set up in early last decade, and some other examples.

In some ways it's probably healthier in that you see many, many sensors that use that for fundamental and applied and diagnostic and therapeutic research. And they don't have 50 mass specs, but they may have three or five or seven, depending.

And I think with a range of different mass spectrometers that can do the traditional bottom-up to the functional, to the top-down, to perhaps looking at the proteins and peptides and distribution, i.e. multi-imaging, I think it's a much more differentiated picture today that you need multiple tools, and you need to go really deep and have -- also look at the functional aspects rather than just getting sheer sequencing or number of ID in protein.

So the picture is becoming more differentiated, and but the trend that I am seeing is not towards ultra high automation or factories, but really the right set of scientific tools in many, many different fundamental applied, diagnostic and therapeutic groups. So it's not necessarily the big sequencing farms or sequencing outfits that you see in genomics, I don't see that trend in our business.

Great. Thank you very much.

Tycho Peterson, JPMorgan.

You had mentioned some of the spending controls on the call. Is there any way you can quantify and put some parameters around some of the cost containment initiatives?

Well we certainly Tycho -- (inaudible) by looking at headcount. As we said there will be some reductions there. We are looking at discretionary spending. There has already been some reduction there, and that will be ongoing. And we are -- obviously as we've talked we've done a pretty good job of growing the top line. We work continuously on margin improvement, but there is much more focus on how we spend our operating expenses. I think the R&D budget will remain intact. Product development is key to Bruker, but we are taking a very hard look at reducing SG&A expense.

As far as quantifying it, I don't necessarily want to put numbers to it yet, but if we move into the fourth quarter into 2012, operating expense are under a pretty tight review and control.

Okay. And then just one follow-up

Maybe a follow-on onto that, Tycho, just to give you the smaller effect. if you like. is absolute expense cutting that will be less than $10 million in the aggregate but -- as far as we can see right now. But the bigger effect for us is that we do not ramp up our number of people and our expenses and our capacity at the very fast rate at which we -- at which our orders and backlog and so on have grown.

So I think by simply stepping on the brake even already a couple of quarters ago, and now seeing more of that backlog conversion with continued fast orders, I think you'll see some very nice leveraging going forward. But we are really not in a position to cut expenses sharply because we are investing in CAM. And we also, if anything, could've made the case of significantly investing in a lot of the other divisions that have very, very significant order increases. And we are trying not to do that, but tell them, look, guys, you've got to do it via productivity, which means expense leveraging.

Okay. And then one other quick one. Frank, you'd previously talked about maybe the chance of a pickup in the back half of the year in Japan as a result of some of the infrastructure being replaced. Are you seeing any signs of that at this point?

Oh, absolutely, yes. We are getting significant -- bookings in Japan has been strong. Take Tohoku University, very much damaged in the Sendai area by the earthquakes or dual earthquakes even in that followed a month within each other.

And we've gotten very, very significant workers for many of our divisions, NMR, x-ray, mass spectrometry, AFM, I think as well. And they are the most significant major university where I remember that we got significant orders, but also elsewhere in Japan it's picked up quite a bit.

And some of it is reconstruction post-earthquake. And some of it is just a normalization in Japan. So that's very much probably even worked out better than we had predicted. It's turned into orders so far, not into revenue yet.

Okay. Thank you.

With no further questions in the queue at this time, I would now like to turn the call back over to management for closing remarks.

Thank you, Kathy, and thank you very much to all of you for joining us today. This concludes our Q3 earnings call. Good bye and thank you very much again.

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