Bruker Corp (BRKR) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, welcome to the Bruker Corporation quarterly earnings calls hosted by Stacey Desrochers. (Operator Instructions). I would like to advise all participants this conference is being recorded for replay purposes. So without any further delay, I would like to hand the call over to Stacey to begin. Please go ahead.

Thank you. Good morning and welcome to Bruker Corporation's first quarter 2012 financial results conference call. I'm Stacey Desrochers, Treasurer and Director of Investor Relations. With me on today's call are Frank Laukien, Bruker's President and Chief Executive Officer; Bill Knight, Bruker's Chief Financial Officer; Mike Knell, Bruker's Chief Accounting Officer; and Tom Rosa, the Chief Financial Officer of our Bruker Energy and Supercon Technologies, Inc., or BEST subsidiary. 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, and adjusted operating margins, 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 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. Our 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 overall Bruker Corporation 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, or BSI, segment.

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

Thank you, Stacey, and good morning everyone. We appreciate you joining us today. Before I provide a business update and discuss the financial highlights for the first quarter of 2012, I would like to welcome our new analyst, Jon Groberg from Macquarie Capital. I also would like to introduce all of you to Bruker's new Chief Accounting Officer and Vice President of Finance, Mr. Michael Knell. Mike is a CPA and was a partner at Ernst & Young and joined Bruker here in Massachusetts just a few weeks ago.

Starting now with the financial highlights of Bruker Corporation, which most of you may have read in our earnings press release issued earlier this morning, Bruker had a good start to the year 2012. Bruker revenue in the first quarter of 2012 was $405.6 million, a GAAP increase of 13.6% or a currency adjusted increase of 15.0% when compared year-over-year to the first quarter of 2011, and a 13.7% year-over-year organic growth rate.

GAAP operating income in the first quarter of 2012 was $34.4 million, compared to $25.7 million in the first quarter of 2011, an increase of 33.9%. Our adjusted Bruker operating income in the first quarter of 2012 was $43.6 million, compared to $35.8 million in the first quarter of 2011, an increase of 21.8%. In the first quarter of 2012, our GAAP net income was $15.1 million, or $0.09 per diluted share, compared to our first quarter 2011 GAAP net income of $11.3 million, or $0.07 per diluted share, a 33.6% increase in net income.

Adjusted net income in the first quarter of 2012 was $23.8 million, or $0.14 per diluted share, compared to adjusted net income of $21.3 million, or $0.13 per diluted share in the first quarter of 2011, an increase in adjusted net income of 11.7%. Exceeding our own expectations, our backlog increased yet again in the first quarter of 2012 due to strong new order bookings.

We feel that the tone in many of our end markets has improved since the fourth quarter of 2011. More importantly, most of our products have excellent competitive positioning and we are benefiting from tail winds due to major secular trends, new scientific frontiers, and technology transitions, which for Bruker just tend to be more significant than macro economic or geographic trends.

To try to put this into perspective quantitatively for you, please consider the following global life science R&D spent numbers, on which I just got an update yesterday at the semiannual ALSSA meeting. ALSSA is the industry association and it stands Analytical and Life Science Systems Association.

So, anyway, the global annual life science R&D spend consisting of all pharma, biotech, CRO, hospital and medical school, and other academic and government R&D spent in the life sciences is estimated at $250 billion per year in total overall in all countries. This $250 billion life science annual R&D spend is growing at about a 4% CAGR with a 3% CAGR estimated in the developed world and an 8% CAGR in the emerging countries.

For perspective, Bruker's life science tools revenue are about $1 billion, with the remainder of our revenue in other applied materials, research, Homeland Security, or industrial markets. So, therefore, Bruker accounts for less than 0.4% of the global life science R&D spend, i.e., a tiny, tiny fraction.

Other numbers that you may wish to consider are that Bruker's total addressable markets are about $45 billion to $50 billion per annum and our presently served addressable markets are about $8 billion to $10 billion per annum. So for Bruker, the crucial drivers for profitable growth are whether we have fresh and competitive products and whether we are proactive in serving the life science research, pharma, biotech, CRO, and emerging diagnostic technology trends within this $250 billion annual life science R&D spent.

Examples of the secular life science trend that are benefiting Bruker are post-genomics and systems biology, epigenetics, personalized healthcare and protean, or metabolic biomarkers, more and more differentiated approaches to proteomics from quantitative proteomics to post-translational modifications, up/down proteomics intact protein analysis, proteomic imaging, etc.

Further examples of major life science technology trends benefiting Bruker are the dramatic shift of pharma biotech drug pipelines to biologics, which really plays to our unique capabilities in top down and intact protein mass spectrometry. As well as the increasing role of pre-clinical imaging or the paradigm shift in clinical microbiology identification to MALDI-TOF, etc.

So if Bruker can, for example, double it's tiny 0.4% fraction of these very large life science R&D budgets over time, then we can more than double the size of Bruker over time. In comparison, at least for Bruker, it is just less important whether or not the overall $250 billion annual spend grows a little bit more slowly or faster overall. So while overall NIH budgets or European macroeconomic trends are of some importance, in general, they are of limited value in trying to predict the key market drivers and growth potential for Bruker.

We are optimistic that Bruker will remain a fast-growing company in 2012 and beyond. Our strategy and goal remains to drive innovation, focus on products, fast, profitable, organic growth, and occasionally we may pursue some selected small or midsized high ROIC acquisition opportunities where they compliment one of our core focus areas.

For example, in the first quarter of 2012, we acquired an excellent small company called SkyScan in Belgium. They develop, manufacturer, and distribute advanced high resolution micro computed tomography, or CT systems, for three-dimensional x-ray imaging. These micro-CT products fit nicely into our global materials research and pre-clinical imaging distribution channels and compliment our other x-ray analysis and pre-clinical MRI, or magnetic resonance imaging, products.

During the first four months of 2012, we already launched 13 new high performance analytical products, which address an expanding array of life science, pharma, biotech, clinical research, food, petrochem, environmental, Homeland Security, materials in nanoscience, as well as academic research and education markets. At PITTCON, our new SCION GC Triple Quad MS product released in July of 2011 won two awards, the 2012 Laboratory Equipment Readers' Choice Award winner and the 2012 PITTCON Editor's Silver Award.

The SCION Triple Quadrupole and the SCION Single Quadrupole Mass Spectrometers for gas chromatography detection were designed especially to enhance data quality and productivity for analysts working in routine testing in applied markets, and these systems combine performance and value like never before on GC-MS.

At the 53rd ENC, or Experimental NMR Conference, in Miami in April and at the Analytica 2012 Conference in Munich, Bruker, also in April, Bruker introduced or showcased more than a dozen new products or entire product lines, including our advanced 3-HD for high definition next generation NMR spectrometer platform, our XFlash 6 next generation performance-leading EDS detector product line, our SCION next generation standalone high performance GC product lines, which incidentally replaces the last of our legacy (inaudible) products, and our S1 Titan next generation best-in-class hand-held XRF, or x-ray fluorescence product lines for elemental analysis in many applications and industries.

So this is a good start to the year with a large number of important new product introductions already year-to-date and very good first quarter organic revenue growth and solid double-digit increases in GAAP and adjusted operating income and net income year-over-year in the first quarter.

With that, I'll turn the call over to Tom Rosa, the CFO of our BEST segment.

Thanks, Frank. During the first quarter of 2012, revenue for the BEST segment increased by 25% to $30 million, compared to $24 million in the first quarter of 2011. Excluding the effects of foreign currency translation, first quarter 2012 revenue increased organically by 30.4% year-over-year.

BEST adjusted operating income in the first quarter of 2012 was $0.3 million, compared to a BEST adjusted operating loss of $0.6 million in the first quarter of 2011. Adjusted EPS for the first quarter of 2012 for the BEST segment was a net loss of $0.01, the same as a net loss of $0.01 in the first quarter of 2011. During the first quarter 2012, we continue to make progress on the commercialization efforts of our new products.

BEST announced the successful completion of a milestone in the development of a novel, shielded, inductive, superconducting fault current limiter, which is to begin field test operations in Germany in 2013. During the test, the device functioned as predicted in more than 100 triggered short circuits. Fault current limiters are devices that can protect electrical equipment in the transmission or distribution infrastructure from damaging power surges caused by fault currents arising from short circuits, power generation disturbances, or lightning strikes.

Backlog in the first quarter of 2012 was $219.4 million, as compared to $172.1 million in the fourth quarter of 2011, an increase of $47.3 million, or 27.5%. The backlog increased as result of demand for our low temperature superconductors, including new, longer term supply orders from major manufacturers of clinical MRI systems, along with orders for RF cavities, couplers, and other superconducting devices from customers across the globe.

BEST made excellence progress over the last three years, consistently beating it's internal financial goals, but we decided to withdraw our S1 registration statement in March 2012, as a result of current equity market conditions in our industry sectors and in order to save on legal, accounting, and other costs associated with keeping the S1 filing current.

BEST is still investing heavily in new product development and marketing for crystal grown magnets, inductive superconducting fault current limiters, and next generation high temperature superconductor scale up, as well as in capacity expansion in order to be able to deliver on it's already booked orders, which have caused a substantial increase in external backlog from under $10 million back in March 2009 to now approximately $219 million as of March 31, 2012.

BEST revenues over the last three years have increased from $59.8 million in 2009 to $90.5 million in 2010, and to $113.4 million last year in 2011, almost doubling within just two years. If equity market conditions improve in BEST industry sectors of clean tech and advanced industrial technologies, then Bruker and BEST have not ruled out re-filing the S1 at some point in the future, but most likely not before 2014, 2015. As a result of withdrawing the S1, we can now provide BEST segment guidance for 2012.

BEST expects organic revenue growth of 15%, near break even adjusted operating income, and an adjusted loss per share of $0.04 for the full year of 2012. BEST plans to spend between $3 million and $4 million in 2012 on relocating it's LTS and device business to new, larger facilities designed to provide us with enough additional capacity to be able to deliver on our existing and planned orders. We are committed to the success of BEST, as it continues to execute on its growth and emerging profitable strategy.

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

Thanks, Tom. I would now like to give you further details on our Bruker Scientific Instruments, or BSI segment. On the top line, during the first quarter of 2012, BSI revenue increased by 12.6% to $378.1 million, compared to $335.8 million in the first quarter of 2011. Excluding the effects of foreign currency translation, BSI revenue increased by 13.7% year-over-year, and BSI organic revenue growth was 12.4% year-over-year.

Now moving further down the income statement, adjusts BSI gross profit margin expanded by 80 basis points in the first quarter of 2012 to 50.1%, compared to 49.3% in the first quarter of 2011. Please keep in mind that Bruker, as of the year 2012, and for all prior year comparisons made in 2012, is including all noncash compensation expenses and adjusted operating income and adjusted EPS, whereas in 2011, we had excluded these noncash comp expenses from adjusted operating income and adjusted EPS.

With that in mind, BSI adjusted operating income was $43.7 million, or 11.6% of revenue in the first quarter of 2012, compared to adjusted operating income of $37.7 million, or 11.2% of revenue in the first quarter of 2011, a 40 basis point increase. BSI operating margins for the first quarter of 2012 without our chemical and applied markets, or CAM division, were 13.9% as compared to 13.3% in the first quarter of 2011, a 60 basis point increase.

During the quarter, we invested 12% of revenue on R&D for developing new products, which drives our above-average organic revenue growth rate and our continued gross profit margin improvement initiatives. Below the operating income line, adjusted for first quarter 2012 net income for the BSI segment was $25.2 million, or $0.15 per diluted share, beating guidance and consensus, compared to adjusted net income of $24.0 million, or $0.15 per diluted share in the first quarter of 2011.

During the first quarter of 2012, we had $3.0 million of foreign currency losses, which came primarily from our Swiss manufacturing and distribution entities. Also in the first quarter of 2012, we had $3.5 million of interest expense, an increase of $2.0 million from the first quarter of 2011, and was a result of refinancing our debt.

Our GAAP effective tax rate was 43.9% during the first quarter of 2012, which was in line with our tax rate of 43.5% during the first quarter of 2011. Our tax rate was negatively influenced by the unbenefited losses in CAM in the US and legal and compliance costs. Our adjusted tax rate was approximately 34% during the quarter, which is included in the reconciling tables in our press release issued earlier this morning.

Before we open up the call for questions, I wanted to comment on some balance sheet and cash flow metrics. Cash flow provided by operations was $4.8 million, compared to cash used in operations of $29.4 million in the first quarter of 2011. In the quarter, our inventory level increased partially due to seasonality and partially due to our strong bookings performance during the first quarter of 2012.

In the first quarter of 2012, our BSI working capital to support $1 revenue remained flat at $0.47 as compared to the end of 2011. Working capital and particularly inventory turns is an area of opportunity and we expect improvements this year which will positively benefit our operating and free cash flows.

As of March 31, 2012, Bruker had cash, cash equivalents, and restricted cash of $233.1 million and net debt of $86.5 million. So overall, a good and very encouraging start to the year. Given our strong revenue and adjusted operating income momentum, we continue to feel very positive about 2012.

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

Thank you, ladies and gentlemen. (Operator Instructions). The first question comes from Jon Groberg. Please go ahead.

Thanks a million for taking the question. I may have missed this at the very beginning of the call, I was on another call, but what were the revenues for CAM? I know you gave the BSI margin ex-CAM, just curious what the revenues and the drag was from CAM.

Hi, this is Mike. Total revenue for CAM for the quarter was $22.2 million.

Okay. And for the year, you thought that would be around $10 million loss on the operating income line, is that kind of -- are you tracking that?

Jon, this is Frank Laukien. We believe we're approximately tracking that.

Okay. So it looks to me like in the first quarter, you had pretty good -- you were higher than I was expecting on the ex-CAM margins quite a bit. Frank, can you -- obviously, this is like the key crux of the story that our investors are focused on, can you maybe qualitatively talk about as kick off the year here how you are thinking about the progress and what -- kind of how you expect that to continue to play out through the year?

Yes. I think it looks as if we are on track to reach our annual goals. At this point, I think it's too early to consider looking at changing our overall guidance plus we generally don't do that during the year unless something change dramatically. But I think we had a good start and I think we're generally on track or even a little bit ahead of schedule.

So there's nothing to kind of pull forward about this particular quarter that isn't likely to repeat as you move throughout the year?

No, especially in view of the strong bookings that, indeed, we were optimistic, but this has exceeded even our somewhat optimistic assumptions, so our bookings were very really good for the scientific instrument segment. And our bookings for the scientific instrument segment also grew in the teens year-over-year, and so our backlog grew even further even though we had originally anticipated in our business plan, and I think we had communicated that to the street that we might use up some of our backlog, and, quite honestly, we still hope to reduce our backlog overall, but I guess we have not succeeded in that in Q1 because the orders were stronger than we had anticipated. So we're very pleased with that, and that sets us up on a solid footing for going forward in the year.

Okay. And, Frank, I know you get this a lot, but I mean is there any -- are there any comments you could make around the geographic or the industry in terms of weakness. You know, you've heard varying comments from other players in this space, particularly on the instrumentation side, but it sounds like you're still not -- you're able to be a little bit more nimble as you've talked about, but any broad comments you'd make about what you're seeing there?

I think we do definitely do see a relatively weak or flattish US academic demand; that's not a surprise. We don't expect that to change very much in the next three years, quite honestly, and so not a surprise. Mediterranean Europe is not particularly strong, although Turkey as part of Europe is very strong. There are plenty of other strengths in Europe. India has been strong for us. Whether China is growing at 8% or 10%, we couldn't tell the difference. For us, it's strong. Japan has been all right for us. Actually, I would say strong.

So other than US academic funding and southern Europe or Mediterranean Europe, I think basically everything has been quite solid with many pockets of strength. I think we're a little bit surprised on the positive side with data storage and semicon has turned around much more quickly than what we had anticipated and other industry players seem to confirm that, as well. We don't sell a lot into solar and PV, but that's obviously an area of downturn and weakness; we sell very little into that. But we sell more into semicon and data storage of the order of $100 million per year all together.

Not all of it is fab line stuff; a lot of it is also semiconductor and data storage research equipment. And they are not -- the big secular trends there is to go to 450 millimeter fabs and to go to smaller and smaller feature size is 28 to 20 nanometers. All of that, again, plays to our strength. But here, in addition to these secular ten-year trends, we definitely see a faster turn around than what we had expected, so that's been maybe another area, you know, a less than 10% area for us, but nevertheless an area of greater orders than what was anticipated.

Other than that, it's been pretty much been solid and I would just say there's an incremental improvement in tone just about anywhere. I think the concern about a significant -- or a downturn or slow down, which was around in October/November of last year, it'sgreatly reduced and there's more optimism in the markets in general.

Great. Thanks for all the color, and congratulations.

Thank you, Jon.

Thank you. The next question in the queue comes from Derik DeBruin. Please, go ahead.

Hi, good morning.

Hi, Derik.

Now that we're able to talk about the BEST business a little bit more, can we just talk about how you see that business progressing over the next couple of years with this? I mean, you're talking about 15% organic growth in the business this year, is that a relative run rate for it, and I guess, before you talk about that, you talked about doing some R&D collaborations maybe to absorb up some of that cost of the business, can you talk a little bit about that and is the business profitable next year?You're about break even this, but just a little bit more color on how you see that kind of unfolding.

I'll start, actually, and then I'll turn things over to Tom. Sort of big picture of the last three years at BEST, we had asked them to be at or near or break even and to grow as rapidly as possible to take advantage of the growth opportunities and the many unchartered markets that they're getting into,and I think they've succeeded with that really very nicely with doubling in two years, essentially doubling in two years, and then ten-fold improvement in backlog, a multi-year backlog.

So if the last three years were sort of near break even and a 40% CAGR the next three years, we'd like to see -- we will not likely see 40% CAGRs but maybe 15% to 20% CAGRs, so reduced but still very fast growth with emerging profitability. That's sort of the highlight direction and, Tom, you could maybe give some preliminary color what you might expect for next year. This year is an operating break even year.

Yeah. Hi, Derik, this is Tom Rosa. I'll address that in a couple of ways. The 15% organic growth rate this year is actually just about equal to last year's growth rate on a currency adjusted basis. We're facing some FX headwinds, so on a currency adjusted basis, we expect about 20% growth this year, just as we had 20% currency adjusted growth last year.

For 2013, we're still in the planning stages, but we believe that kind of growth rate will again be achieved. We're continuing to see good growth across our materials and devices platforms. As far as the bottom line outlook, we are -- we do have a number of R&D efforts under way, collaborations, etc., and this year, as an example, we expect R&D to be up about $3 million over last year.

So as we continue to invest in R&D, and, for instance, we just set up a new R&D center to promote the development of our FCL product in Fremont, California late last year, which will add to our R&D costs this year. But our goal is to be break even on an adjusted basis this year and as we complete our relocations in 2012, our goal certainly would be to become profitable in 2013.

Great. That's very helpful. The commentary around the end markets has been rather mixed and there's been some talk about delays in some of the pharma companies. Frank, your NMRs are certainly big ticket items that could potentially be subject to these types of delays. Did you see anything unusual in the pharma markets in Q1?

I think it all depends on what's been called the pharma market these days. When it's focused on the top 20 pharma companies, I mean they haven't been growing. They've been consolidating. That's not been a fantastic market, but I think that's just the wrong definition these day. I would call it the pharma, biotech, CRO/academic environment.

So much of pharma (inaudible) these days gets outsourced to medical schools and universities. So much of development goes to CROs, whether they are here or in India or China or elsewhere. A lot of the pharma R&D really occurs in biotech companies; the successful ones get purchased. It's a completely changing industry.

So, yes, the top 20 pharma companies, that's not a great market and the trends haven't been good. But if you look at the pharma, biotech, CRO, academic continuum, which is really relevant, it's a very healthy market.

Great. I'll get back in the queue. Thank you.

Thank you. The next question in the queue come from Amanda Murphy. Please go ahead.

Hi, good morning, thanks. I had a follow-up on the margin question. It sounds like if you look at ex-CAM, the margins might have come in a bit better than you expected in the quarter, so I'm curious is that a fair characterization and also can you just remind us again where you stand with the various initiatives that you have in place to drive margins through the year?

Hi, Amanda; it's Bill Knight. The initiatives are ongoing, certainly, and evolve around the standard. As we've described before, every new product that Frank has mentioned, I think 13 new products that has come out, every new product we introduce has a lower cost structure than it's predecessor, along with improved capabilities and solutions to for customers that obviously helps with gross profit margins.

We continue to work on optimizing our factories, whether it's taking some of the non-core activities, whether it's the machining or cabling, whatever, and outsourcing that, relaying out our factory floor to improve production flows, certainly working with vendors nearer to factories and throughout the globe to improve both quality and pricing and delivery. So it's a whole series of events that we are working on or processes that we are working on.

And so I think quarter-to-quarter, there will be a little bit of variability, but I think we have started these initiatives, really focused on them about three years ago, and I think that the total product line that we have in the marketplace now is really starting to deliver the margin targets, gross profit margin targets that we focused on for quite a while. And we certainly expect improved margins, operating margins, gross profit margins, as we move out through 2013/2014.

So is there --

Amanda, a couple of additional comments on that. Actually, subsequent to the quarter, we divested a small Bruker optic machining operation in Texas. It's incremental change, but it's all good steps that are part of our operational excellence program.

And one thing that I'm really pleased sort of by mid-way through this first quarter and hopefully very visible in the second quarter, our CAM centralized factory in Fremont, California is really beginning to click and provide the output that we had hoped for and I'm sure that's going to have a good impact on gross margins and operating margins on CAM. So I'm very pleased with the CAM progress. It's not fully visible in Q1 yet, but I know we've really made a lot of progress and I think it will really show in Q2 and Q3 and beyond.

So if you just look at it on a high level, is there a way for us to think about how far you are even if it is the 10%, 50%, how much more room do you have there? It sounds like quite a bit, but just when you think about it conceptually.

Gross profit margins, we started a long ago and that will never stop. We just raised the bar by another 2% or 3% every three year or so. I really think that's a continuous process. And, yes, we're sorter approaching at BSI over around 50%, which at some point, a long time ago, was our goal but I'm sure we'll move those targets up, too. This is not for a specific year, but we'll move those targets up 50% or higher.

I don't see why over time, and I'm not going to specify the timeframe right now, but over time, our margins, gross margins should be in the mid-50s. So that will never end and I don't know what inning we're in; that's just an ongoing investment. The outsourcing to low-cost countries, the further divesture of certain context, machining, cabling, electronic, I think there were -- we're not at half time yet. We started with -- some things have taken place, some things are ongoing, it's still early innings. I don't know what the percentage is; maybe we're at 30%.

Okay. That's helpful. And then just last one for me switching topics. I curious if you could provide some more color on the applied markets, what you're seeing there. You had talked in the past about CAM's sales force in that market, is that something that's progressing well for you guys?

The applied markets are doing well and CAM is growing particularly fast. I think at CAM, not surprisingly where we have new products on the market already, the ICP-MS, the Aurora, and SCION GC-MS and GC Triple Quad that we brought out last year, they're really growing very nicely.

Our GC standalone products, which were still the older variant products with the Bruker logo, were not growing until recently, but now that we have also a mixed generation Bruker redevelop Bruker standalone GC product line, we think that will also begin to move in the right direction. And, yes, we are, to some extent, using CAM -- or life science products and selling them into the applied markets via CAM.

It's not a huge factor; it's sort of an incremental, less than 10%, and, of course, where also some CAM products, if you like, are ultimately also going into traditional life science or clinical markets. Those are just the 5% or 7% cross-selling synergies; they're not the big drivers, but they're nice, they're incremental, and they're easy to get.

Got it. Thank you.

Thank you. The next question in the queue comes from Tycho Peterson. Please go ahead.

Good morning. Thank you for taking the question. First one, I know you don't like to give a lot of color on backlog, but can you just give a sense of how much of the growth you're seeing in backlog is kind of old legacy versus maybe some of the acquisitions? And then can you also maybe just address the backlog conversion?I know you talked about it in your comments, Frank, about you haven't been able to work down the conversion times, but how big a priority is that and how should we think about your ability to work down backlog conversion over time?

Yeah, so our backlog grew overall. We thought we would begin to chisel away a little bit in Q1, but the [importers] were just very, very good. The BSI backlog also increased compared year-over-year for sure and also compared to the fourth quarter, which is unusual, actually, but we really had very good bookings in Q1. And we actually already have to slightly modify our own business planning. We had planned for somewhat less new orders. We actually need to increase our output in some of our divisions. I don't want to go into too many details there for competitive reasons, even further.

And, yes, backlog, backlog conversion, and shortening the length or the time we have from our backlog actually remains very much a priority through operational excellence, order execution, and production logistics that goes with that is a very high priority for Stephan Westermann, our Executive Vice President who is running that part of BSI, and things are in very high gear to accomplish that, and we're making good progress so I think you'll see a lot of that. If we fall back a little bit due to high orders, we're not too unhappy, obviously.

Some of the things I mentioned earlier, as far as some process change and a little bit of outsourcing, it's not only to pull some costs out, but as Frank just alluded to, we really are looking to increase the output on our existing brick and mortar and we have opportunities to do that. That will help, I think, bring down some of the delivery times and get our backlog we feel at a more acceptable level. But it was certainly a strong quarter for orders and it's a nice problem to have.

And then in your comments earlier, Frank, you talked about some of the strength in international markets and I think you said Japan was fairly strong, can you just talk about specifically where we are in the process of rebuilding infrastructure. You had previously called out I think $200 million in the Japanese budget to rebuild infrastructure. So just wondering if there's a (inaudible) of demand here that you're seeing.

Okay, good question, Tycho. I'm not sure I have all the details at my fingertips. I know we did already last calendar year receive some of these orders, rather large orders, for the Sendai Province and Tohoku University, in particular, for a lot of our product lines, and some of that has been delivered. I can't tell you right now whether all -- I suspect some of these have been delivered and some of them still will come through.

I think, however, my impression is not that this is the (inaudible) of rebuilding after the tsunami; I think the demand just generally has been healthier in Japan. And, for instance, also, Japanese semicon customers, or whether it's research or fab lines, orders have been coming through. I don't think they're all in revenue yet, but it generally seems like a healthier picture and not -- but there was an element, and I can't quantitate it and time it for your properly right now, also of some sort of rebuilding after the -- in the Sendai and the other provinces. Most of the orders we have had probably, and some of the revenues have come through and some it hasn't, but I don't have it quantitatively.

Okay. And just last one on capital deployment, it sounds like we should expect maybe some continued bolt-ons on a go-forward basis. Has the M&A pipeline changed dramatically for you guys in the past six months or so or are you seeing more deals come your way?

Well, certainly since -- I think there was a bit of, maybe in Q2 of last year, Q1, Q2 of last year in some deals that we did look at, M&A evaluations were a little too rich in our opinion and we did not proceed with those. The M&A pipeline for us and what we're looking at, which are smaller to midsize acquisitions, it's really not so much -- I don't see it so much dependent on economic factors or on seasonality or anything like that, I think it's more of a continuum of smaller to midsize companies that have very nice products but don't have the global reach and for whom Bruker might be an interesting partner.

Okay. Thank you.

You're welcome.

Thank you. The next question in the queue comes from Dan Leonard. Please, go ahead.

Thank you. Just two questions. First off, on CAM for the quarter, if it was about a 200-bip delta on your operating margin, I'm coming up with a $6 million loss for CAM. Does that sound about right? And if it does, can you walk me through the pacing of how you get to the $10 million loss for the full year?

That's approximately correct, and we believe while -- if you multiple that by four it's higher, but I think the trends that we're seeing, we believe that we will -- that $10 million is still a reasonable number. It's obviously an estimate, but I think it's an reasonable number for the year.

And my follow-up, Frank, could you quantify the boost to margins that would occur if your bookings grow -- did in fact slow and you were able to draw some of your backlog?

I understand the question, I'm presently not -- I don't think I can do that piece of analytics ad hoc, I apologize. But it's a very good question; I don't think I have a sensible -- a quantitative answer for you here.

Okay. But presumably there should be some boost because there's been a catch-up issue from the compensation standpoint, correct?

Okay. Generally, that is correct. Yes, indeed.

Okay. Thank you.

Thank you. The next question comes from Dan AriasPlease go ahead.

Hi, thank you very much for the questions. Frank, I appreciate the notion that technology and the secular trends you're seeing are the key factors for you guys, but I guess just on the bigger picture, what are your assumptions for growth this year including in terms of the macro climate for Europe?Do you assume that the EU sort of stays where it is or declines modestly? What's the implied move forward overseas there?

Well, for European Union research budgets, we don't assume a decline, even if there is a small contraction in the European Union and most European countries seem to be shrinking their economies slightly. I think the dynamics for research and development at universities and R&D also among the industrial customers, excluding some Mediterranean countries, I think are really quite healthy because everybody understands that there's an enlightened element that that's a good thing to invest in on the political and for societal reasons. I think it's also competitiveness of nations.

I think people see what investment occurs elsewhere in the so-called emerging markets, which really aren't emerging, they're just rapidly growing markets, and so the R&D spending in most of Europe is healthy, for the European Union it's very healthy, central Europe, eastern Europe, Russia, it's dramatically growing. Within China, it's dramatically growing. I mean whether China grows 10% or 8% really doesn't matter this much for the industry. When China says they want to go from GDP of 1.7% spend on R&D to 2.2%, that's the big news. Those are the big trends for Bruker, not whether they grow at 8% or 10% and more or less road or apartment buildings.

Same for Russia, they have declared pre-election, but I think generally the trend is there that they want to bring their R&D spending to over 2%, I think to 2.5%, which is an ambitious goal, but nonetheless that means in certain R&D zones, in Moscow, St. Petersburg and a few other areas, there is very dramatic improvement and increase in R&D spending. Those are the important trends, not the macro trends. The headlines don't matter that much; these trends are much more important.

Got it, okay. Thanks for that color. And then I guess within mass spec, there's been some speculation on changing dynamics in a few tough markets. Can you just comment on the uptick of maXis and whether or not you're seeing anything different in terms of customer preference or maybe overall share gains on your part?

Yes, the maXis -- obviously, ASM, as it's not far from now and we'll have a press release and product announcements, I'm sure there will be other companies with product announcements, so most of the mass spec comments I would perhaps defer by a few weeks until we have our press conference in Vancouver. But yes, our maXis had excellent gains in -- excellent uptick and gains in market share for sure.

Okay. How about NMR, mostpeople tend to focus on competition with Agilent there, but I'm just wondering if you can comment on your experiences in Japan or China? Is there anything you can say about the regional competition that you see there with JEOL or maybe an opportunity for share gain there?

JEOL has JEOL's NMR business, JEOL Resonance, as they are called, have done some interesting innovative things in a few niche markets and solid state NMR and so on, at the recent ENC conference, they had some -- a couple of nice new product introductions. So I think it's not only Bruker and Agilent for sure. I mean, there are -- that's a third viable competitor and they're stronger in Japan and parts of Asia Pacific and they're present elsewhere, as well, so I would never underestimate them.

Thanks, Frank.

Thank you. The next question in the queue comes from Isaac Ro. Please go ahead.

Good morning. Thank you for taking the question. If I could just ask the first question on BSI and then the second one on BEST. On BSI, obviously if I look at your organic growth and compare it to peers, I think was the last question pointed out, pretty solid, and it would assume -- it would imply that you guys are doing pretty well in market share, so could you offer some color as to where you think you're doing the best in terms of incremental share gains across the portfolio?

We think it's actually pretty broad. I couldn't isolate one product or even one division. It's pretty broad based. I think we're really gaining market share from EDS, EBSD to x-ray tools to atomic force microscopy. We certainly haven't seen any market share erosion in our mass spec in the qTOF area, in microbiology we've been gaining.

And this is not the complete list, so it's not -- whatever I didn't mention, we're losing. I think it's really pretty broad-based. I'm not aware of any area right now where, let's say, we're in trouble or back peddling and losing, so it's pretty broad. It's really quite healthy. I mean, yes, in mass spec, it's been -- in life science mass spec, it's been good, but in many other areas, it's been solid to growing in terms of market share.

Great. That's very helpful. Secondly on Best, if we sort of look of the move forward planning from here, clearly from a gross margin perspective a little below the corporate average, and so just wondering as you look at ways to improve or maintain the growth rate on top line as well as improve profitability, how would you break out the opportunities at gross margin versus OpEx side?

Hi, Isaac, this is Tom Rosa. The gross margins this quarter were about 22% and, absolutely, we're well below the Bruker standard, but I do want to point out that three or four years ago, we were at eight. We've made tremendous strides on improving gross margin. It's still a material intensive business. I think over 84% of our sales in Q1 were wire and other material type product related; that's abnormally high. We expect the second half of the year to be more device-oriented but still on a 70/30 type ratio in favor of materials.

So we do have opportunities, we think, down the road to improve our gross margin as we transition into more device-oriented products, but for now, the gross margin number you saw in Q1 is probably pretty representative of what we'll see for the full year.

If I may add, I think the P&L appearance of BEST even in five or ten years, even if it succeeds wildly, it will always be very different from a scientific instrument's P&L appearance. On the material side, your SG&A is much, much lower than the high SG&A we generally face in the scientific instruments or life science tool space.

Gross margins are lower but much lower SG&A. And even for the device business, a lot of the device business will be the OEM partners in the future. And so the P&L appearance, even long-term is -- at the operating margin, I don't see why the BEST business over quite some time cannot go into the mid to high teens eventually, but the way to get to these operating margins I think will always be very different, generally with lower gross profit margins and lower expenses.

That makes a ton of sense. Okay, thanks a bunch.

Thank you. The next question comes from Jon Wood. Please go ahead.

Hey, thanks. Can you hear me?

Yeah, Jon.

Good morning. Can you guys comment on the Veeco metrology business in the quarter, anything you're willing to offer on kind of revenue, and then the bookings trajectory would be great.

Yes, that was actually another positive surprise. They had a very strong year last year and because of some of the weakness in semiconductor and data storage had been pretty conservative in budgeting bookings and revenue for the year. So I think on revenue, they were a little bit above their plan, nothing that remarkable, but in terms of bookings, they were quite a bit better than their essentially flat plan compared to last year, so that was a positive surprise on the booking side.

And, Frank, I know you're cycling up against a backlog flush there in terms of revenue. Was that business flat up or down off of that comp last year when you actually flushed the backlog from the fourth quarter of 2010?

Hmm, good question. I know that the BNS business, ex-Veeco as you called it, but the Bruker Nano Surfaces Division, they had a very unusual first quarter last year. It was very, very strong, very high margins, but that basically had a lot to do with them settling into that new revenue recognition model.

They had a very weak Q4 2010 because a lot of their revenue got deferred (inaudible) to our more conservative revenue recognition rules, and then Q1 was unusual for them last year. Having said that, I am not sure -- how can we provide some additional color on that, Jon?

Just the revenue level in the first quarter.

Mike, do you have it.

Yes, revenue was $44.4 million for BNS, a GAAP gross margin of 45%, which was up from last quarter 2011's 38% margin.

All right. That's wonderful. Thanks.

And the adjusted gross margins on BNS are in the mid-50s.

Okay. All right. Great. And, Bill, last one for you, just the -- you guys have talked $80 million to $120 million of free cash flow as of last call, can you just give us an update ofhow you're tracking for the plan currently? Are you still within the range or the top end, tracking lower end, any qualitative commentary around that would be great.

I think we're still with the financial goals tat we talked about in our call on February 22nd, I think we're still very comfortable with those targets.

Okay. Thank you very much.

Thank you. The next question in the queue comes from Robert Carlson. Please go ahead.

Congratulations on the quarter. Just a real quick question. Could you comment a little on the ITER fusion project? It seems like -- well, I sort of perceive it as a sleeping giant, but don't know too much about it.

Hi, this is Tom Rosa again. For the benefit of others that are listening, the ITER nuclear fusion project is something on which we booked a $36 million order for LTSY back in late 2009. We began shipping on that in a very small amount last year, $2 million to $3 million.

We had approximately $4 million of shipments in Q1 on that same project and with very good margins for us. The second half of the year, we expect to be stronger. We don't expect any significant shipments in the next quarter. But it is progressing well. It's a major nuclear fusion project that's going up in France and very pleased to be part of it.

Thanks, Tom.

You're welcome.

Thank you. Your next question in the queue comes from Steve Unger. Please go ahead.

Hi, good morning. Just a couple quick questions. Frank, as far as capacity in your internal infrastructure, last year you were controlling expenses, you had a hiring freeze. Are you running sort of a tight model as far as having service personnel and installation personnel to get the products in?

Well, we're trying -- good question, Steve. We're trying to get it right, of course. So in terms of capacity, we had quite a bit of capacity investment last year, including at BEST and, of course, ongoing this year. Last year, we hired a little too front loaded early in the year, which hit our expenses, and so in hindsight last year, if I could do it over again, we would do it more gradually through the year.

We tried to plan that very well this year, and so if we grow at 10%, we hope that our headcount grows by 5% or less this year. And I think we're very good this year at pacing it throughout the quarters from what I can see, so we're trying to get it right, which we didn't do optimally last year. And so I think we're neither too tight or too generous. I hope we're at about the right level.

Great. And then could you comment on the progress of the MALDI Biotyper as far your development plan? I know that bioMerieux is planning to at least file the VITEK MS, is what they call it, by the end of the June quarter. Do you have similar plans?

Well, for the MALDI Biotyper, we brought the -- a key conference for that was in London in early April at the so-called ECCMID Conference, and we were delighted. And so we have now over 500 installations, all paid for either by lease or by payment worldwide, which makes it the clear market leader. We also brought out some very important new products.

The products were not a new box or a piece of hardware, but a very crucial fungi library and methods, as well as a separate micro bacteria, including tuberculosis products, and a number of other further innovations. I think those were the only MALDI-TOF innovations at this particular conference. We have a large number of partners, including some very major partners, Siemens Healthcare and BD, plus a number of other integrators that all use the MALDI Biotyper, so very good progress. A lot of enthusiasm, continued innovation, more assays going on to that platform, other things that are work in progress that may come out next year as additional assays and products for that platform, so it's quite strategic for us.

We're working with the FDA. I would like to think that we may, in the second half of the year, have FDA clearance, but as you know, that's always very difficult to predict and it's obviously up to the FDA.

Got it. And just lastly, on the Varian transition of those products, those legacy products, could you point to what would be the key enhancement to the legacy products that have done specifically in the SCION platform?

The SCION -- so the GC-MS platform, SCION's last year that we brought out last year, that's been a substantial redesign and you're probably familiar with that already. I mean, it's faster, it's more sensitive, smaller footprint, incredible convenience for doing MSMS, making MSMS, basically, as easy for relatively untrained operators as running GC-MS, which hasn't been the case previously.

The GC SCION, the SCION standalone really is a new electronics platform with much better -- electronics platform with also a lot of other better -- I'm sorry, that's called a plumbing improvement in various GCs, the valves, the injectors, and so on where we, in some cases, I would say, even with other market leaders were previously Varian had some disadvantages and in some cases where we can now comfortably exceed the specifications of other products on the market.

So you feel like you've got a product now that's directly comparable to the Agilent platform?

Yes, I think it has a number of unique selling points and some of the -- I don't know how analytically important they were, but if you want to go into specimenship and so on, which some customers like to do that, I think we're, let's call it, roughly comparable with some nice advantages in certain areas.

Got it.

Very good platform also. It's not only what can it do for us in 2012, I think it's a very new good platform for the next seven --.

And if I could just sneak one quick financial question. As far as capital deployment in the quarter, how much did you spend on acquisitions? And it looks like you bought back some stock.

We did not buy back any stock, and I think we'll have the SkyScan acquisition accounting I think will be in our 10Q.

Yeah. We had about -- property plant and equipment about $10.8 million and the acquisition was $21.7 million.

Got it. Great. Thank you.

Thank you. There are two further questions in the queue. The next question comes from Peter Lawson. Please, go ahead.

Frank.

We did not hear the name. I'm sorry, could you repeat please?

Hi, Frank, it's Peter Lawson. Just on the product lines and product classes, which ones do you think surprise you the most year-to-date?

Very good question. I think probably maybe without getting into product lines for competitive reasons, I think probably high-end life science tools and any products going into semiconductor or data storage, either research or fab were probably the biggest positive surprise in the first quarter.

Thank you. And then which areas do you think you had increased visibility or have increased visibility and decreased visibility for the year?

Don't mean to repeat, but feel the increased visibility in semiconductor and data storage, LED. I'm not sure. I mean areas that are unclear or nebulous are photovoltaic and solar, but that's a very small part of what we're doing, so we have little visibility of how this shakeout will occur. But luckily it doesn't matter that much for us. I don't think we have any improving clarity on NIH budgets.

Again, they're, there's plenty of other spending, there's pharma spending going more to the academia side, the outsourcing partnerships, there's many other sources of US academic funding, but that's not one of the areas where we have -- know more today than we knew three or four months ago. I think the general industrial mood is that there be a global, maybe also Asian recession or slow down, maybe a little bit of a slow down but not a major slow down. I think generally the mood in Asia, and they've been watching Europe, is really quite a bit more positive than perhaps in the middle of the fourth quarter of last year is my impression from multiple qualitative data points that I get from our field operations.

Thank you, Frank. Just two very quick follow-ups with around P&L. So interest and other was higher than expected, what was that due to? And then the same question for the tax rate, that seemed higher than expected. What should we expect for the rest of the year.

Hi, this is Mike. Interest and other, really, as Stacey mentioned before, $3.5 million is interest expense, which is up about $2 million from Q1 last year and also our exchange losses were higher than last year. That's really driving that interest and other expense number.

And on the tax rate, really the largest driver is US losses that were not able to benefit for income taxes, as we have a full valuation allowance on our US losses, so that's driving that up. It's pretty consistent to what the rate was in Q1 of last year.

Right. Thank you so much.

Thank you. There's one further question in the queue. This question comes from Derek DeBruin. Please go ahead.

Hi, I was actually going to ask on the interest rate and the tax, but just on the taxes, the full rate then 32% for the year, is that what you're still kind of where you're looking for?

That's probably materially correct, yes, right around there.

Okay. Thank you.

Thank you. There are no further questions in the queue.

Okay, great. Thank you very much for joining us today and we look forward to speaking to some of you at our ASMS press conference and others we'll probably see on our next earnings call. Thank you very much for joining us today. Bye-bye.

Thank you, ladies and gentlemen. This concludes your call for today. Thank you for joining us and have a great day.