Good afternoon, everyone, and welcome to Bruker's second quarter 2013 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, you may signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity for you to ask questions. To ask a question, you may press star and then one using a touch-tone telephone. To withdraw your question, you may press star and then two. Please also note today's event is being recorded. At this time, I would like to turn the conference call over to Mr. Joshua Young, Vice President of Investor Relations. Sir, please go ahead.
Thank you very much, Jamie. Good afternoon. I'd like to welcome everyone to Bruker's second quarter 2013 earnings conference call. My name is Joshua Young and I'm Vice President of Investor Relations for Bruker. Joining me on today's call are Frank Laukien, our President and CEO, and Charlie Wagner, Bruker's Executive Vice President and Chief Financial Officer. In addition to the earnings release we issued earlier today, we'll also be referencing a slide presentation as part of today's conference call. The PDF of this presentation can be downloaded by clicking on Bruker's investor relations website or by accessing the file through our audio webcast player. During today's call, we will be highlighting non-GAAP financial information. A reconciliation of our GAAP to our non-GAAP financial statements is included in our earnings release and in our webcast presentation.
Before we begin, I'd like to reference Bruker's safe harbor statement, which I show on slide number two. During the course of this conference call, we will make forward-looking statements regarding future events or the financial performance of the company that involve risks and uncertainties. The company's actual results may differ materially from the projections described in such statements. Factors that might cause such differences include, but are not limited to, those discussed in today's earnings release, and in our Form 10-K, as well as other subsequent SEC filings. Also note that the following information is related to current business conditions and our outlook as of today, July 31st, 2013. Consistent with our prior practice, we do not intend to update our projections based on new information, future events, or other reasons prior to the release of our third quarter 2013 financial results.
We'll begin today's call with Frank providing a business summary of our Q2 2013 and year-to-date performance. Charlie will then cover our financials for the second quarter in more detail. Now, I'd like to turn the call over to our CEO, Frank Laukien.
Thanks, Joshua. Good afternoon, everyone, and thank you for joining us on the call today. I am pleased to report that Bruker's business rebounded in Q2 2013 after a slow start to the year in Q1. We achieved good growth and year-over-year margin improvement in the second quarter, and we addressed many of the operational issues that held back our performance in Q1. While the second quarter 2013 numbers look improved on a standalone basis, it is important to look at our results on a year-to-date basis in order to average out some of the variability we saw in the first two quarters of this year. Despite some ups and downs, the good news is that after the first six months of 2013, we expect to deliver the full-year guidance that we shared with you on May 2nd, 2013. Now, I'd like to continue our presentation on slide number four.
Bruker's revenues grew 8% year-over-year to $455 million in the second quarter of 2013. Adjusting for currency and the net impact of acquisitions and divestitures, our year-over-year organic growth rate was 9.5% in Q2 of 2013. This is a good growth in a relatively tough environment and represents a sharp recovery from the 1% year-over-year organic revenue decline we experienced in Q1 of 2013. During the second quarter of 2013, both the BioSpin and CALID Groups posted materially higher revenues in Q2 than they did in Q1, and we addressed several of the operational issues that negatively affected our revenue performance in Q1. This enabled us to close the revenue gap we experienced after Q1 and get back on track for the year. From a market perspective, I would characterize the current environment as mixed.
Both the geographic and end market trends we are seeing vary throughout the Bruker business portfolio. For example, while demand from academic customers was strong in some businesses, it is weaker in others. Similarly, we see mixed signals from our European customer base. Industrial customers are the one market segment where the tone is more consistent, but unfortunately, that tone is negative. Across most Bruker businesses, industrial demand was weak in Q2 of 2013 and noticeably weaker sequentially compared to Q1 of 2013. A positive development in the second quarter was that our operating spending was down as both R&D and SG&A spending declined compared to Q2 of the previous year. This decrease is driven by decisions to reduce spending in certain divisions like CAM and BEST, but also as a result of lower discretionary spending in response to the uncertain demand outlook.
The rebound in our revenue growth, combined with lower spending, led to a non-GAAP operating margin in the second quarter of 2013 of 11.7%, well above the 7.8% we posted in Q2 of 2012. Keep in mind, however, that our results in this second quarter 2013 reflected a positive impact from $5.7 million of Rosatom license milestone revenue. As a result of these factors, our non-GAAP EPS of $0.18 in the second quarter of 2013 was up 50% compared to Q2 of last year. While we are pleased with our Q2 improvements, I would remind you that Q2 2012 was a weak quarter of profitability for Bruker, so the year-over-year comparison is somewhat favorable. Now, I'd like to spend a few minutes talking about our year-to-date half- year results, which we show on slide five.
After factoring in the big swings between Q1 and Q2, our reported revenues have grown by approximately 3% year-over-year in the first half of 2013. This includes organic revenue growth of 4.3%, which is slightly above our full year 2013 guidance of 3%. By looking at the year-to-date numbers, you get a more balanced picture of our performance at the midpoint of the year. From a profitability perspective, our non-GAAP first half 2013 operating margin was down 20 basis points compared to the first six months of last year. However, if you factor in the 100- basis- point headwind we experienced from a weaker Japanese yen, we have generated underlying improvements in our operating profitability. I now turn to slides six and seven to make a few comments on the three BSI segment groups and our BEST segment.
Here, I will focus my comments on the trends we saw in Q2 of 2013. Our Bruker CALID Group posted solid overall growth in the second quarter and improved its operating performance compared to the first quarter. Leading this performance was our Optics division, which posted robust double-digit revenue growth. Bruker Optics substantially improved its production and order execution in the second quarter, and this resulted in better revenue and margin performance. While it is a smaller division of the CALID Group, our Bruker Detection division delivered a good quarter with attractive margins. As you may know, the quarterly results of the Bruker Detection division can be rather lumpy. Our Chemical and Applied Markets division delivered results that were still somewhat below our expectations for the second quarter but showed nice double-digit bookings growth.
We have strengthened the senior management team of our Bruker CAM division considerably, and the new team is making changes that we believe will help CAM to improve its revenues and reduce its losses further in the second half of the year. Finally, our Life Science and Clinical division saw robust growth for the MALDI Biotyper product line, offset by relatively weak revenue in its other product lines. That being said, we are excited about the new product launches that we unveiled at industry conferences such as Pittcon, ECCMID, and ASMS so far this year, and our life science order rates and momentum in this division have improved in Q2. I'd like to now turn to our Bruker BioSpin Group. BioSpin generated good revenue growth in Q2 2013 on both a sequential and year-over-year basis. The group reported another quarter of strong bookings, particularly also from North American academic customers.
We are also seeing bookings strength in the U.K. as well as in Japan, where customers are investing supplementary budget funds in higher-end NMR and MRI products, which plays to Bruker BioSpin's strengths. Our preclinical imaging division, which represents approximately 25% of the Bruker BioSpin Group's revenues, continues to post strong growth and is benefiting from new products launched or acquired in 2012. We have a broad product offering in these preclinical imaging markets, and customers have been pleased with the breadth of our capabilities. Despite the strong growth in BioSpin, we remain focused on improving the profitability and working capital statistics in this group. In the second half of 2013, the most important milestones for BioSpin will be the continued implementation of our previously announced outsourcing and other operational excellence activities.
On slide seven, you will see that our Bruker MAT group, or BMAT, experienced a weak second quarter of 2013 as we see weaker demand from industrial customers in Asia and Europe and no significant pickup yet from semiconductor or microelectronics customers. Each of the divisions within the BMAT group reported flat or declining revenues in Q2 of 2013. On a positive note, the new Dimension FastScan AFM product that we launched last year are performing well, particularly in the data storage and life science markets. These products provide customers with a faster time to result while providing greater flexibility around the sample size that they can scan with atomic force microscopy. While we do not expect the BMAT performance to weaken from what we saw in Q2, we are also not expecting a quick rebound in its performance during the second half of 2013.
We believe that revenues and bookings will sequentially grow from Q2, but that revenues will decline for BMAT for the full year compared to 2012. Now, I would like to turn to our Bruker Energy & Supercon Technologies, or BEST segment. The highlight for the second quarter 2013 for BEST was the $5.7 million license milestone revenue that we recognized in connection with the Rosatom contract, which we had announced last year. As a reminder, we previously had generated $16.4 million in license milestone revenue from this contract in the third quarter of 2012. These licenses flow through to our operating income at nearly 100%. As a result, Rosatom added nearly 110 basis points to our non-GAAP operating margin in Q2 2013. While nearly all of the license revenues from the Rosatom contract have now been recognized, we expect further revenue in 2014 associated with a final contract milestone.
If we adjust for the impact of the Rosatom license in Q2 2013, BEST's operating profitability would have still been up on a year-over-year basis due to lower OpEx or operational spending. This is a clear improvement from the break-even or slight operating losses at which BEST had operated over the past several years. With slide number eight, I want to summarize for you how important continued product and business innovation remains for our profitable growth strategy. Bruker already had strong product introductions in Q1 2013 at Pittcon, but Q2 was particularly significant this year for new product introductions, which are likely to be important drivers of our growth and margin improvement in 2014.
While I will not speak to every point on this slide eight, I believe you will see overall that we continue to invest into the further differentiation of our fast-growing MALDI Biotyper platform, which in April 2013 had reached more than 800 paid installations worldwide. Particularly exciting at this year's ECCMID conference in April, were several work-in-progress presentations on using this MALDI Biotyper platform also for selected high-value antibiotic resistance testing assays, which are presently still for research use only. Our NMR business introduced a major magnet innovation at ENC in April, offering optional magnets that obviate the need for liquid nitrogen or helium refills while still achieving good NMR performance.
Moreover, our unique DNP NMR product line, with significant academic placements, particularly in Europe in recent years, has now been expanded even further to an ultra-high field 527 GHz version, which opens up exciting research fields in biosolids such as membrane proteins or protein aggregates implicated in neurodegenerative diseases, et cetera. Finally, our Life Science and Clinical and chem mass spectrometry divisions had a very strong showing at ASMS in June, setting new standards for ultra-high resolution QTOF performance, unprecedented bottom-up protein ID capabilities, extreme resolution of greater than 10 million for complex mixture analysis, and adding very robust and sensitive quantitative LC triple quad mass specs, now also for large molecule quantitation. Finally, I'd like to conclude my comments on slide nine. Through the first six months of the year, Bruker has seen a combination of both positive and negative trends in our markets.
As we look ahead, we expect that some of the strengths that we saw in our BioSpin and CALID Groups will continue into Q3 and Q4. This strength will help to offset the present weakness in our BMAT group due to softness in global industrial markets. Our priorities will continue to be on delivering product and business innovations, on carefully managing expenses, on driving organizational changes, and on continuously executing our operational excellence initiatives. If we deliver on these objectives, I believe we will be well- positioned for profitable growth in 2014 and beyond. Finally, although our strong second quarter helped to smooth out our trajectory for the full year, we continue to believe that 2013 will be back-end loaded with most of our EPS and operating profitability expected in the fourth quarter.
While we are pleased that our business rebounded in the second quarter, we are cognizant of the risks posed by the uncertain market environment, and we recognize that significant work remains in the second half of the year to deliver on our guidance and operational objectives. With that, I'd like to turn the call over to our CFO, Charlie Wagner.
Thanks, Frank. I'll now provide some additional details on Q2 and our 2013 year-to-date performance before providing our financial outlook for 2013. On slide 11, I show a snapshot of our Q2 2013 non-GAAP performance. Total revenues grew 8% from the second quarter of 2012, totaling $454.9 million. Our non-GAAP operating income grew 62% in the quarter as non-GAAP operating margin expanded to 11.7% in the second quarter of 2013, compared to 7.8% in the second quarter of 2012. Our non-GAAP EPS was $0.18 in Q2 2013, representing a 50% growth from our EPS in the year ago quarter. Finally, we had negative free cash flow of $23 million, compared to positive free cash flow of $18 million in Q2 2012. Turning to slide 12, I show the revenue bridge for the second quarter. We generated organic revenue growth of 9.5% in the second quarter.
Excluding the Rosatom license revenues, organic revenue growth would have been approximately 8.1% in Q2 2013. The negative impact from changes in foreign exchange rates was 0.8% in the quarter, with the largest driver being the weaker Japanese yen. On slide 13, we show our Q2 2013 non-GAAP operating results in more detail. Our Q2 2013 non-GAAP gross margin of 45.4% is a decrease of 90 basis points on a year-over-year basis. Approximately 60 basis points of this decline is related to the impact of the Japanese yen. Our SG&A and R&D spending were well- controlled in Q2 and declined substantially compared to Q2 of 2012. The lower spending is the result of decisions to reduce spending in certain divisions like CAM, BEST, and even BioSpin. In addition, all BMAT businesses have begun to cut spending in response to the weaker demand outlook in that group.
Also, keep in mind that operating expenses in Q2 2012 were particularly high, so the year-over-year comparison is relatively easier. Though not shown on the slide, non-GAAP interest and other expense was $9 million in the quarter. This amount is substantially higher than the $3 million recorded in Q2 2012, primarily as a result of higher foreign exchange losses in the current quarter. These losses primarily related to currencies such as the Australian dollar and the Brazilian real, which moved down significantly at the end of the quarter. Our non-GAAP earnings per share in Q2 2013 were $0.18, a 50% increase over EPS of $0.12 in Q2 2012. The Q2 2013 earnings reflect a non-GAAP tax rate of 31%, which is above our Q1 2013 tax rate due to a higher percentage of our pre-tax profits coming from higher tax rate jurisdictions.
On slide 14, we show a reconciliation of our GAAP to our non-GAAP financial results. In Q2 2013, we excluded $9.8 million of operating costs from our non-GAAP results, compared to $10.9 million in Q2 2012. We recorded $1.8 million of restructuring costs in Q2 2013 related to our previously announced outsourcing and facility streamlining programs. On slide 15, I show our results for the first six months of 2013. Frank's already commented on our year-to-date revenue growth, so I won't add any further comments on that. Our year-to-date gross margin of 45.5% is a decline of 170 basis points compared to the prior year. Approximately 70 basis points of this decline comes from the lower Japanese yen. Aside from the yen impact, gross margins have been hurt by gross margin declines in BMAT due to lower revenue volumes and in BioSpin due to mix and pricing.
Over the balance of the year, we will remain focused on executing programs to improve our manufacturing and supply chain productivity. Our year-to-date operating spending is lower than the first six months of 2012, both on an absolute basis and as a percentage of revenue. SG&A is down 70 basis points as a percent of revenue, and R&D has fallen by 80 basis points as a percent of revenues. This reduction reflects stronger cost controls that we've implemented in the business over the past 12 months, as well as the decision to reduce, delay, or eliminate spending on select projects. Our non-GAAP operating margin is down 20 basis points on a year-to-date basis. However, if we factor in a 100- basis- point impact from the weaker yen, we've made underlying improvements in our operating profitability through the first six months of 2013.
On slide 16, I show a non-GAAP reconciliation for our results through the first six months of 2013. We have recorded $5 million of restructuring costs, primarily related to outsourcing and facility programs in our BioSpin, CALID, and BEST businesses. We expect to incur more significant restructuring costs in the second half of the year as we complete additional facility closures in our CAM and BEST divisions and additional outsourcing programs in our BioSpin business. The other point I would make on this page is that our year-to-date non-GAAP tax rate of 29.9% represents a decline of 340 basis points compared to the prior year, primarily due to a change in our geographic mix of profits. On slide 17, I show our balance sheet as of June 30th, 2012.
Our cash balances of $251 million are down about $60 million compared to year-end, but up about $10 million compared to June of 2012. Inventory declined slightly compared to year-end, and our days of inventory outstanding total 228 days at the end of Q2 2013, an improvement compared to 244 days in Q2 of 2012. Accounts receivable were up in the second quarter, and our days sales outstanding, or DSO, was 60 days in the quarter compared to 52 days in Q2 2012. Overall, we still have significant room for improvement in working capital efficiency, and this will remain a focus throughout the second half of the year. On slide 18, I show our free cash flow in the second quarter of 2013. We recorded negative free cash flow of $23 million in Q2 2013, a roughly $42 million decline from the second quarter of 2012.
Higher net income was offset by higher working capital, but the major driver of the year-over-year difference was that we received a large customer advance in Q2 of last year due to the signing of the Rosatom contract. We incurred $16.5 million in capital expenditures during the second quarter of 2013 and $31.1 million in the first six months of 2013. We expect capital spending in the second half of 2013 will be well below our spending through the first six months due to the completion of certain special projects. Now, I will turn to our financial guidance for 2013, which I show on slide 20. We are maintaining the guidance that we shared with you last quarter, and we expect reported revenue growth to total 2%-3% with organic revenue growth of approximately 3%.
On the bottom line, we expect to generate non-GAAP earnings per share of $0.80-$0.83 in 2013. This guidance assumes a non-GAAP tax rate of 27%-30%. We continue to expect that we will incur $20 million-$25 million of restructuring charges, with the majority of those charges occurring in the second half of the year. Our currency assumptions are relatively unchanged from last quarter. Our guidance assumes a U.S. dollar to yen rate of JPY 0.99 and a U.S. dollar to euro rate of EUR 1.3. This compares to our assumptions of a U.S. dollar to yen rate of JPY 0.98 and a U.S. dollar to euro rate of EUR 1.3 last quarter. The quarterly variability and a challenging year-over-year comparability of our quarterly financial results is likely to continue to occur in the second half of 2013, much as it did in the first half.
Remember that our Q3 2012 results included over $16 million of licensed milestone revenue and $15.7 million of associated profits from the Rosatom contract. Furthermore, the $5.7 million in Rosatom licensed milestone revenue that we just recognized in Q2 2013 was originally expected to occur in the third quarter of 2013. Accordingly, the comparison for Q3 2013 year-over-year is very difficult, and you should expect that Q3 non-GAAP operating margins and EPS will decline year-over-year. As is often the case with Bruker, we expect our strongest revenues and profitability in the fourth quarter of this year. With that, I will turn the call over to Joshua to begin the Q&A session.
Jamie, please assemble the Q&A roster.
We will now begin the question- and- answer session. To ask a question, you may press star and then one using your telephone keypad. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys to ensure good sound quality. To withdraw your question, you may press star and then two. We do ask that you please limit yourselves to one question and a single follow-up. Our first question comes from Jon Groberg from Macquarie. Please go ahead with your question.
Great. Thanks a million . Congratulations on a slightly better quarter, though I get the caution going forward. Just two questions for me. One, Frank, for you, s ounds like, if I read you correctly, in the CALID division that the MALDI Biotyper was going well, but that some of the other areas like mass spec maybe were not as strong. It sounds like from those who have reported mass spec for most has continued to be a pretty strong segment so far. So, maybe, just kind of discuss what is going on there for you, if you could. Then, the second question is for Charlie. You elaborated a little bit on free cash flow, but maybe what you expect for the year and what some of the initiatives you have in place are in order to improve the free cash flow generation of the company. Thanks.
Okay, Jon, this is Frank. Indeed, the MALDI Biotyper continues to do well, did well in Q1, continued to do well in Q2. That is all correct. In our other mass spectrometry products, we had weaker bookings amongst other places, particularly in Europe in Q1, and we caught up substantially and did quite well in Q2. Some of that is literally, I think, just fluctuations without any real rhyme or reason. But I do think there is an additional, at least, trend that we are seeing emerging ever since we, w e have had very strong product introductions this year in the life science mass spec business, excluding the MALDI Biotyper for the moment.
So, I think in addition to the quarterly fluctuations that we do acknowledge, I think we're really building momentum and our competitive position after ASMS, I think, is stronger than, quite a bit stronger than at the beginning of the year in life science mass spectrometry. I'll pass the free cash flow question over to Charlie.
Yeah, Jon, obviously, the free cash flow performance in the quarter is pretty disappointing. There are a few discrete things I would point to. We made some exceptionally large tax payments in the quarter and things like that. There are a couple of items that are explainable, but I would say, the receivables performance in the quarter was a bit disappointing. It's not a receivables quality issue. I would say we took the eye off the ball a little bit there. That's something that's relatively easy to recover on. A lot of the supply chain and operational improvement initiatives we have going on that we think, that we are confident will yield an inventory benefit, don't really yield that benefit in a meaningful way till the latter part of the year.
So, as I look at free cash flow generation in the second half, we're not guiding to that specifically, but obviously, the majority of our profits occur in the second half. I believe we can get DSO back in line to a level that we're comfortable with, and I expect to see our operational initiatives starting to have more of an impact on inventory. All of that would point to a much better second half around free cash flow.
Okay, thanks. Just to clarify, Frank, on the mass spec, so you would say that orders, although the revenues were a little weak in some of those other life science mass spec categories, your orders were pretty good, and you would expect that to be a positive contributor to revenues in the second half?
Yes, that is correct. Our Q2 orders were good. Q1 was a little weaker. I neglected to mention that our CAM orders for the first half of the year really had good growth year-over-year. So, I think that CAM will also see some revenue growth based on that order momentum that we have seen this year-to-date.
Okay. Thanks a million.
Our next question comes from Brandon Couillard from Jefferies. Please go ahead with your question.
Good afternoon. Frank, could you elaborate on what you are seeing in the BioSpin unit from a demand perspective and perhaps give us an update on the pricing dynamics that you are experiencing in that market?
Certainly, Brandon. The demand in the BioSpin unit, and really in both the first two quarters of the year, has been stronger than what we had expected. That is the case for both our NMR business as well as our preclinical MRI business. So, we are pleased with that. In particular, I think some of the supplementary budget or whatever in Japan or the U.K. reinvestment in much of their academic research infrastructure, tends to benefit high-end instrumentation in particular. As we have seen years ago with U.S. stimulus and so on, these types of large funds tend to be preferentially spent, according to our observation, on high-performance instrumentation that a university or department may not otherwise be able to afford. So, we have done well with that. We have also done surprisingly well in North America, and yes, in the U.S., despite sequestration, beat our own expectations.
It turns out there is just other endowment and private funding and other funding sources that U.S. universities have been able to tap into to make high-priority research infrastructure investments, and we have benefited from that. In terms of pricing in the BioSpin segment, I think we had commented previously, including the Q1 call, I think in general, I think it has become a little bit more rational, but I also do not see any enormous departures, but I think it has become more rational in the industry.
Thanks. Just to follow up, Frank or Charlie, any chance you could give us the overall order growth experience in the quarter and perhaps a comment around the backlog position, whether it is up either sequentially or year-over-year? Just to clarify, the Japanese stimulus orders, that was more of an order phenomenon and not so much revenue in the second quarter. Is that correct?
That is absolutely correct. Most of that will turn into revenue in Q1 and Q2 2014, maybe a little bit coming into Q4 of this year, as you have guessed correctly.
Yeah. Again, we do not disclose specifically orders, but generally speaking, order growth was roughly in line with revenue growth, with similar drivers, strength in the same places, weakness in the same places. So, backlog continues to be pretty healthy.
Thanks.
Last year, we had this one large BEST order on the Rosatom deal, which came in in Q2. If you take that out of the equation, then certainly for the major BSI segment, very much order and revenue trends were aligned.
Great. Thank you.
Our next question comes from Tim Evans from Wells Fargo Securities. Please go ahead with your question.
Hi. Thanks. Could you give us an update on your conversations with the FDA on the Biotyper?
Yeah, we have good constructive back and forth. We are not done. We have a Submitted for a request for a first claim, and we have additional follow-on questions that seem to be constructive. It is very difficult in a process like this to make any predictions on timing. We are somewhat hopeful that we may be able to get a FDA clearance before the end of the year or in early 2014, but it is very difficult to predict.
Okay. And maybe a quick update on the longer-term operational items that you're implementing, specifically the ones geared toward helping you get more visibility into the business. Is there any progress you would call out here in the second quarter?
Yeah. Listen, we're making continuous improvement, is the way I've described it. We've made some changes to the way we manage the company in the last year. Obviously, the group structure and the leadership of the groups, we feel is helping quite a bit. On the finance side, we've upgraded talent in the finance organization and put new business review and forecasting processes in place. Again, we still continue to experience quite a bit of quarterly variability in our results. But I would say that we are getting better gradually at managing the business and getting some forward visibility. I don't think it's a situation where you can expect a step-change improvement from us overnight. But each quarter, I'd say, we're making progress on the various initiatives to help us control and improve the business consistently over time.
Maybe it's not in your question, but a quick update. Earlier in the year, we commented on some of the restructuring and outsourcing activities we were doing. We completed a couple in the first quarter. We've got a few more that we expect to complete later in the year. They are basically on track. We didn't report any this quarter. But you would expect that in Q3 and Q4, we should be able to talk about other programs we've completed.
Great. Thank you very much.
Our next question comes from Isaac Ro from Goldman Sachs. Please go ahead with your question.
Oh, hi. Thanks, guys. Just a follow-up question on Biotyper. Is it fair to say, given the uncertainty on FDA, that there's nothing necessarily baked into your guidance for the back half of the year in terms of an acceleration in that business? Anything else you could offer with regards to how you look at the ex-U.S. opportunity and how that's doing?
No, we did not bake anything explicitly, assuming some FDA approval in an earlier time period. The answer is no. There's nothing baked into our forecast that assumes somehow an FDA approval at a certain time period. Can you repeat the second part of your question, Isaac?
Oh, I'm sorry. Yeah, just curious if you could put a little more color around how the international part of that business is doing, where you see the most traction, where you see the most opportunity to deploy some resources and accelerate growth for Biotyper. Thanks.
Yeah, it's doing quite well in Europe, even though there we had started and obviously have a much larger installed base. As we develop new capabilities from automation to accessories to additional libraries to new research use-only capabilities right now, I think it's only getting more interesting. Demand has held up well in Europe as well, including growth. We are also seeing growth emerging in Asia Pacific, where we do not have that much of an installed base yet. Clearly the largest opportunities are in the Americas and Asia Pacific, because there we started much later than in Europe. So there we expect the largest growth from a smaller base in the next 2 to 3 years. We also see continued growth in Europe.
Got it. If I could just ask one last one on BioSpin. Could you comment on sort of the market share dynamic there? Obviously, your main competitor at the high end is stepping away. So are you seeing good opportunities to pick up share quickly and maybe grow faster than the market? Thank you.
We think so. It's only the ultra-high field niche market, if you like, and some selected specialty MRI cases perhaps. The main stream remains quite competitive. But in certain niche areas, I think we have done well in securing orders, and I think that has also helped us in the first half of the year. The first half good bookings in BioSpin, I do not think are primarily due to competitive trends. They may have played a minor role as well. But I think, it's just reasonably good funding for academic spending, in particular in most of Europe and in Asia Pacific, particularly Japan and the U.K., as I highlighted earlier, and really better strength in high-end academic spending in the Americas than we had anticipated.
Got it. Thank you very much.
Our next question comes from Derik de Bruin from Bank of America. Please go ahead with your question.
Hi. Good afternoon. Hey, could you talk a little bit more about the BMAT and the industrial outlook? I guess, could you just talk around also you're expecting it to be down year-over-year. I guess, could you talk about what sort of the margin impact is from the business being down?
Well, as we have less orders and also less revenue in the four divisions that make up the Bruker MAT group. We do obviously lose. There is some pricing pressure out there, not as strong as what we've seen in 2009, but with a declining industrial demand, there's also a little bit more pricing pressure, which we have to acknowledge. In addition, we just lose some of the volume benefits by not having growth, but rather, a modest decline in revenue in the BMID division, and we anticipate that for the full year. Yes, the industrial part has an industrial demand outside of semiconductor and data storage, which we had commented on previously, in our opinion and from our observations from, you name it, automobile to metals and mining to cement to minerals and mining to metals processing, all seems to be relatively sluggish right now.
I guess the reason why I am asking is, if you back out the Rosatom order out of the gross margin, the gross margin was sub 45% from that impact. I am just trying to see if it was just, was it more mix in the gross margin? I know you had some currency headwinds. I am just trying to get a little bit more color on what are the factors on the gross margin decline?
The BMID reduced demand and weaker markets are a headwind for our gross profit margins. As Charlie Wagner explained earlier, with reasonable expense discipline and potential additional expense reduction steps ahead of us. We have held the line or in Q2, of course, done reasonably well year-over-year on operating profit. But the BMID and industrial weakness is a headwind to our gross profit margins.
Okay.
It is, of course, holding back to some extent, operating margin improvements that we might have otherwise had. But, again, it is also balanced by the relatively stronger performance of the BioSpin and CALID Groups. There have been quarters and years when all three groups, and then it was the divisions, were performing similarly. Right now, we really have significant differences depending on end markets. It is not so much geography, but it is more industrial versus academic, non-profit, life science.
Great. Just one quick question, Charlie Wagner and Frank Laukien. I guess you are coming up on your year anniversary here pretty soon, Charlie Wagner, and I guess, are you going to be able to give better visibility in terms of longer-term guidance? At what point next year? Is this something you are going to be able to do in January on the Q4 call? I am just looking at when do you think you are going to have a better handle on the longer-term outlook?
Sure. Yeah. In fact, I just passed my year anniversary, so thank you for recognizing that. Obviously, again, we've got a lot going on right now internally with our strategic planning efforts and those things carry through the fall and budget season, late fall. I think we've commented that we intend to try to give some more midterm visibility, next year. I'm not going to get more specific than that at this point. We understand completely that people would like more visibility, and we would love to give that. We'll certainly do it when we feel a little bit more confident that we can give something that we can stand behind.
Okay. Great. Thanks.
Once again, if you would like to ask a question, please press star and then one using a telephone keypad. To withdraw your question, you may press star and then two. Our next question comes from Ross Muken from ISI Group. Please go ahead with your question.
Yeah. Maybe, can you just talk a bit about how the organization responded to the challenging Q1 and the fact that you're trying to undertake some structural changes in the business and the way operations and other big picture, complex things are run, in the face of that, and how they were able to overcome it in this queue? I realize some of it's end market demand, but the organization also still has to execute. How you were able to manage all those moving parts in what's been a pretty volatile environment to still focus on this longer term restructuring plan?
Yeah, Ross, this is Frank. We're very much focused on that, and I think the organization is actually responding really well. Clearly, we wanted to make this a decent quarter, given that our Q1 was weaker. That didn't distract from the management teams and the people that are really dedicated, as dedicated resources to driving a lot of these operational excellence initiatives, from making good progress in implementing and planning and analyzing. Yes, they have to do that, too, in addition to make the quarter and the year. But I think everybody is fully aligned on the new management processes, the goals, and the new incentivization has largely been implemented. So I think I'm actually quite pleased on how the teams in the divisions and the groups are driving this. I think it bodes well for making steady progress.
Great. Thanks, guys.
Thanks, Ross.
Our next question comes from Tycho Peterson from J.P. Morgan. Please go ahead with your question.
Hey, I just want to follow up with Charlie on the free cash flow topic from earlier. Can you just maybe help us tease out how much of this was the tax payment issue versus kind of a receivable issue? Maybe just talk about what's going on with payment terms, whether those are kind of continuing to be extended?
Yeah, I'd say tax payments in the quarter were $10 or $15 million, that neighborhood. Again, year-over-year, we have the absence of the Rosatom deposit, which was probably $20, $25 million last year in the comparable quarter. So you got a couple of big swingers right there. On receivables, I'm not aware of any meaningful change in payment terms. There's no meaningful deterioration in our age receivables or reserves or anything like that. So it's really more blocking and tackling around collections than anything else. So it gives me confidence that that's something that's manageable.
Yeah, I don't think there's any story here. One thing that we acknowledge is that a lot of our revenue in Q2 came relatively late in the quarter and was very third month weighted. Accordingly, your DSOs look a little different than if you had a steady revenue flow throughout the three months of the quarter. But I think this is just temporary rather than some trends or something that it doesn't mean anything about the underlying markets or economy. I think this is just short term fluctuations.
In terms of kind of some of the issues that cropped up in the first quarter, it sounds like you've resolved the production constraints and optics. The magnet installations and some of the other issues, have those kind of been resolved now or are there kind of lingering issues from the first quarter that still need to be addressed?
I think the way I would characterize it is that there are always issues, and we have them in kind of a normal range at this point. Obviously, we have a large complex business, so there is always some things going right, some things going wrong. We are also driving a lot of change. So there is always the potential for things to go wrong. I think as we pointed out in Q1, it was pretty exceptional. It was rare to have that many things go against us in one quarter with no offsets. As you point out, we did get Bruker Optics back on a much better footing, and we have corrected some other things. We have new issues, but in total, things are kind of where they should be at a manageable level, unlike where in Q1 everything was against us.
I think at this point, we feel like we are largely caught up, and we are going to continue to manage issues as they pop up throughout the year.
I just want to offer supply chains. You guys are looking to kind of outsource more components of that. Can you maybe just talk about how you maintain the quality aspect? We have had a few people mention just given your reputation in the industry as a high quality vendor, how you are kind of managing the outsourcing side and maintaining quality within that process.
Not to be facetious, but we are managing it very carefully for that reason. That is why sometimes, we take our time, we do careful testing before we go all in. So we are doing this in a very responsible manner to make sure that we do not have delivery or revenue acceptance or customer quality issues. So it is very important for us. I think sometimes we are not necessarily picking the lowest offer on a contract manufacturer, but we want competitive offers and better procurement, and we are getting that, but we also go in with pretty high quality contract manufacturers.
Okay. Thank you.
Our next question comes from Dan Arias from UBS. Please go with your question.
Yeah. Thanks, guys. Maybe on BioSpin. Frank, how much of the install work that didn't make it into one queue were you able to capture in the quarter?
I'm not sure I have all that information by system, and Charlie's kicking me under the table. We also don't want to disclose that in that level of detail. But some of it we made up, some of it's still coming in Q3, Q4, I think as we had predicted.
Okay.
I can't really quantify it for you.
Some of that will still come out in the back half of the year?
I believe so. Yeah.
Okay.
I believe so. Some of it we did catch up on with some magnet exchanges and things like that. Cryogenics is still a challenge. We had some of that in Q1. We still had some of that in Q2. I think that's simply going to be with us. That requires much more effort and tighter management, but it is manageable, and it occurs every quarter, so it's maybe not such a standout item.
Okay. Then maybe following up or clarifying on BMAT. I think last time around you said that you thought we were approaching a trough on semi and data storage. I guess just given Q2 dynamics, are you still thinking that maybe within a quarter or two of that, or has the outlook there gotten a little cloudier?
No. The orders haven't dropped yet in Q2 in that sense, at least not in a significant way. But we're still guardedly optimistic that that will pick up in the second half. Also from our own data and pipeline, we're guardedly optimistic in that there will be a pickup in semiconductor in Q3 and Q4 in orders. Some of that will not benefit us till 2014 in terms of revenue.
Got it. Okay. Thank you.
We've had some very important acceptances of key systems with very key suppliers, where they have tested next generation nodes or 450 millimeter fab products that we had delivered for the first time. We had some very satisfactory acceptances of these. So I think we're performing well technically. That along with the pickup, I think, makes us really somewhat upbeat here that things will improve in that semiconductor and microelectronics area in terms of orders first, and then revenue to follow.
Thanks, Frank.
Our next question comes from Amanda Murphy from William Blair. Please go ahead with your question.
Hi. I had another question on the Q1 dynamics that I do not think we talked about, which is, you had made some changes in the sales force in China. I am curious, I know it is going to be a bit early, but can you talk to that region specifically, just given the changes made last quarter?
Amanda, this is Frank. It is still work in progress. In some areas, I think Bruker Optics, Bruker AXS, Bruker BioSpin, I would say it has stabilized. In some other areas, we are still working on the organization, improving it further, also very much on the order execution. I think it is not only about getting the orders, but executing the orders where improvement is still needed. We had somewhat highlighted it as, it has not been too bad. It could have had more of an impact, and sometimes these things are delayed. I am sequentially more optimistic that we will do okay in China this year.
Got it. Just one other question. I am not sure if you are able to quantify the license milestone payment that will come in next year.
Yeah, just to clarify, Amanda, it is an important distinction. It is not a license payment next year. The last remaining major milestone is essentially a production line that we are working on. It is in the neighborhood of $6 million-$8 million, but it does not carry nearly the same margins as the license revenue that has been coming through the P&L.
Yeah, sorry about that. Do you have any idea in terms of timing, first half, second half?
Probably first half, but not 100% sure on that.
Since it will be a smaller amount and not have any unusual margin implications, it may not be much of a story next year. Even though we don't know exactly in which quarter it will come in, it probably will be a non-event whenever it comes, in terms of materiality.
Got it. Okay. Thanks, guys.
Our next question comes from Doug Schenkel from Cowen and Company. Please go ahead with your question.
Good afternoon, guys, and thanks for taking the questions. The first question, I guess, is really a guidance question. Revenue for the quarter came in a lot stronger than most on the Street expected, even excluding Rosatom. Recognizing that you don't set those expectations, could you comment on how this quarter came together relative to your internal expectations? It seemed like a really solid revenue quarter, especially given that you didn't point to a reversal of Q1 headwind as a key driver to Q2 upside. Assuming the quarter actually was better than what you expected internally, why did you not bump up guidance accordingly? Do you think you actually pulled forward some revenue beyond Rosatom in Q2? Or should we view your guidance reiteration as simply a function of really just low visibility at this point in the environment?
Doug, it's a little bit of all the above. Clearly, some of the miss in Q1 was made up in Q2, so you had some spillover there. As you point out, Rosatom occurred earlier than expected. There were probably one or two other meaningful pieces of revenue that came in a little bit earlier than expected as well and pulled from Q3. I'm not going to quantify that because, as you've seen, we have revenue slip out and revenue pull in all the time. But nonetheless, the Q2 performance there probably exceeded even our expectations a little bit. But it's why we're encouraging folks to look at the six-month results, and certainly it's where we're focused right now. Then if you look into the second half, obviously we're feeling uncertain about the BMID business.
We're counting on a strong start from BioSpin to pick up some slack there and CALID trending positively as well. So, for a variety of reasons, I think Q2 alone isn't indicative of the trend line. Therefore, I think we feel good with the second half. I guess the only other point, too, is that we've got tough comps. Certainly Q3 is a tough comp again, as I pointed out in the guidance, because of the timing of last year's Rosatom revenue. Q4 is always a big quarter, and we need it to be a big quarter this year as well.
Okay. That's helpful, and I guess a slightly more detailed question or I guess a bit more specific question. In vivo, I believe, was one of the areas you highlighted as a growth driver within BioSpin. Do you think you're growing with the market or at this point, is it fair to say that your growth is likely driven by a combination of both market growth as well as share gains?
What product line are you referring to with in vivo? All preclinical imaging or any particular subset product line, or?
I guess I was thinking about preclinical, but anything you are willing to comment on there would be helpful.
Okay. Preclinical MRI orders had been reasonable, a little bit better than what we had expected in the first half of the year, although I wouldn't call it a booming market. But there had been some special programs in France, for instance, last year. Some of those orders were a spillover from special programs last year on the FLI program, France Life Imaging, which generated a fair number of MRI orders for us, including some that came into this year. And the in vivo optical molecular imaging, which we entered when we acquired the Carestream in vivo business, and that's what you may be referring to, which we now call the Bruker Molecular Imaging business that's here in New England.
Yep.
That continues to see pretty tough market conditions. That was not an area of strength in Q2 yet.
Okay. When you talk about strength, it's really on the MRI side, relatively speaking.
Our micro-CT business that we acquired last year did reasonably well also. I think that has to do with their product lineup and new products that they brought out and that are very competitive and well regarded. It is too small of a business, perhaps, to really reflect on market dynamics.
Okay. That is really helpful. Thank you, guys.
Our next question comes from Peter Lawson, from Mizuho. Please go ahead with your question. Mr. Lawson, please go ahead with your question.
Jamie, you can go to the next question in the queue.
Our next question comes from Ken Hirshberg, from Hirshberg Capital. Please go ahead with your question.
Good afternoon, and congratulations on the progress you've made in improving your profit margins. Could you roughly characterize what is involved in the scale of the clinical trial you must do for the MALDI Biotyper? How do new features such as the micro bacterial library fit into the approval process? Thank you.
Yeah. There are many features that we're now adding that are still research use only, and that are not included, therefore, in the regulatory approvals that we seek, including from the FDA. You have sort of a constant stream of, and then in the future, quite likely a very constant process of features and capabilities where we have gone and will continue to go to the FDA in the future for clearance and new things that we first introduced outside of the U.S. and initially for research use only, and then begin to get regulatory clearance, often overseas first and then over time, also from the FDA as we begin to offer this in the U.S. So don't think of it as MALDI Biotyper and all of its libraries and all of its accessories as a one-time.
It's really a broad product line by now with early exciting results that are clearly still in the publication and validation stage, and things that are really very well characterized and validated where we're seeking FDA clearance.
Our next question comes from Eric Criscuolo from Mizuho. Please go ahead with your question.
Hi. Thank you for taking my question. Just what kind of impact are you expecting, if any, from the next round of sequestration in the U.S. ?
I do not know that I can answer about the next round. So far, sequestration, it seems to be not as bad as we had feared. It appears to maybe have more of an effect on routine, lower average selling price instruments, where some of our businesses have said, "Look, sequestration plays a role in weaker demand in the U.S." Whereas some of our higher-end systems, in particular NMR and MRI, or NMR I should say, have not really seen that. It is not a crisp, clear picture for us. But overall, in our overall planning, we continue to be relatively cautious about U.S. academic demand, even though it was better than expected in some businesses in the first half of the year.
Okay. Thank you. That is helpful. Then just in the industrial segment overall, what businesses or business types, customer counts, are having the most drag on that business? I guess I am talking outside of the semiconductor area.
Well, I think the metals industry and minerals and mining, cement, all the industries that are supported by that, from automobile to aerospace. What I'm not including in industrial is pharma and biotech, because that's an industry, clearly, but it is so different from the other industries. So the aforementioned industries, we all seem to be going slow on CapEx spending, on investments. So we see demand weakness essentially across the board in those industries.
Thank you.
Ladies and gentlemen, that is all the time that we have allotted for today's conference call. We'd now like to turn the conference call over to Mr. Young for any closing remarks.
Thank you, Jamie. I'd like to thank everybody for joining us this afternoon. We invite you to visit us at our offices in Billerica, Massachusetts. I'd also like to point out that about two weeks from now, we'll be hosting a bus tour with Juergen Srega, the head of our CALID Group. For those investors that haven't had a chance to meet Juergen, that's a unique opportunity to do so. Thank you for your attention, and have a good afternoon. Good night.
The conference call has now concluded. We do thank you for attending today's presentation. You may now disconnect your telephone line.