Good morning. My name is Marcy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bruker fourth quarter and full year 2012 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you, Mr. Young, you may begin your conference.
Thank you, Marcy. Good morning. I would like to welcome everyone to Bruker's fourth quarter and full year 2012 earnings conference call. My name is Joshua Young, and I am Vice President of Investor Relations for Bruker. Joining me on today's call are Frank Laukien, 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 will 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 by clicking on the downloads hyperlink through our audio webcast player. Once you download this PDF, you will be able to follow along with management commentary. 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 would like to reference Bruker's Safe Harbor statement, which you can see 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, February 19th, 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 first quarter 2013 financial results. We will begin today's call with Frank providing an operational summary of our 2012 performance. Charlie will then cover our financials for the fourth quarter and full year 2012 before providing our guidance for 2013. Now I would like to turn the call over to Frank.
Thanks, Joshua. Good morning to everyone, and thank you for joining us on the call today. We are pleased to report solid financial results in the fourth quarter and another excellent year of top-line growth for Bruker. With our performance in 2012, we have generated three straight years with organic revenue growth between 9% and 12%. As I look back on our performance in 2012, there are three key takeaways that I would like to share with you to summarize our performance. First, Bruker's innovation engine is working. We remain very close to our customers, and we had a solid year of new product introductions. Bruker continues to win business with differentiated products and by entering adjacent markets.
This has enabled us to grow organically, significantly faster than many of our peers in the past few years, despite concerns about the end of stimulus spending, the European economic malaise, the uncertainty of NIH funding, and a slowdown from industrial customers. Second, our business in most of European academic and nonprofit markets has held up reasonably well, despite the fact that we saw some weakness in these segments. While uncertainty remains in the U.S., the funding for scientific research continues to grow in many European countries and in most of Asia, Latin America, and the India, Middle East, Africa regions. This has helped spur demand for many of our academic, nonprofit, clinical research, as well as biopharma and advanced materials research customers around the world. Our successful foray into clinical microbiology and our expansion in the applied markets also continues to support our revenue growth.
Third, we have begun the process of making significant changes at Bruker with a stronger leadership team and investments in operational excellence, management processes, and related systems. This is evidenced by the appointment of Charlie as CFO and of the new group presidents, as well as by the arrival or promotion of other important members of senior management. We recognize that we need to improve our operating leverage and generate higher and more consistent profitability and cash flow. In Q4 of 2012, we took some decisive steps towards this objective. While further optimization of the company is expected to be carried out over several years, the key message is that we are highly focused on building a solid foundation of leadership, processes, and systems that will help us drive sustainable profitable growth and increase shareholder value.
With the key takeaways covered, let me move into more detail about our full year 2012 results. I will begin my detailed comments on Slide four. For the full year 2012, we reported revenues of $1.79 billion, which represented 8.5% growth over 2011. Excluding a 4.6% unfavorable effect from changes in foreign exchange rates and a 1.2% net positive impact from acquisitions and divestitures, Bruker generated 11.9% organic revenue growth in 2012. This is exceptional top-line performance when you consider the fact that we were facing weakness in several European economies, softness in the U.S. academic market, and a slowdown in several industrial and applied markets. We generated double-digit organic revenue growth in all four quarters of 2012.
The key drivers of this performance were a strong uptake of new products, strong demand from academic customers outside of the U.S., and continued momentum in Asia Pacific, which represented nearly one-third of our revenues at the end of 2012. Another key highlight of the year were the organizational changes that we made. We organized the 10 operating divisions of our BSI segment into three groups. We have also elevated or appointed new heads for each of these groups. We believe that this structure will allow for greater managerial oversight and will make it possible for us to begin to implement common global processes in all groups and divisions. Each of the three BSI groups generated more than $500 million of revenue in 2012.
The final business highlight, which I will touch upon, is that we have initiated new outsourcing programs and other productivity improvement efforts in certain parts of the organization. We have divested certain loss-making or lower profitability businesses, and we have begun the process of outsourcing some of our non-core manufacturing activities. We expect that these actions will begin to create savings over the next two years by reducing our working capital ratio and by improving our margins. From a financial perspective, our healthy top-line growth enabled us to expand our non-GAAP operating margin by 30 basis points in the full year 2012. One of the drivers of this expansion was the BEST Rosatom license deal that we recorded in Q3 of 2012. Our profitability clearly improved in the second half of 2012 after a disappointing start to the year.
I would like to now turn to Slide five and make a few comments on the three groups and the BEST segment. I will not cover all of the points of the slide, but I want to elaborate on a few of the key drivers. Let's begin with the BMAD group. The two key drivers for our BMAD group in 2012 were the success of new product introductions and the strength of the group's business in Asia Pacific. A little over a year ago, we launched the Dimension FastScan, Atomic Force Microscope, or AFM, which dramatically increases the speed and throughput of AFM. This product launch came out of our Bruker Nano Surfaces division. The acceptance of the Dimension FastScan has been rapid and helped to drive sales growth in 2012.
BMAD's business in China, particularly with industrial customers, was strong during the year and also had a good start in January 2013. Turning to the Bruker BioSpin group, the demand for NMR was sluggish and the market did not grow in 2012. Despite the stagnation of the market, we were able to grow through market share gains in ultra-high field NMR and preclinical MRI. Additionally, new funding programs in Europe helped the BioSpin group to place several high-end instruments in the region. In our Preclinical Imaging division, the highlights of 2012 included the acquisition of SkyScan's micro CT imaging business and Carestream's preclinical in vivo molecular imaging portfolio. Bruker now has the broadest preclinical imaging product line in the industry. We are actively working to integrate these two companies, and we are excited about our ability to drive growth in this business from our broader offering.
I would like to now turn to slide number six to discuss Bruker CALID, which is home to the Daltonics, CAM, Optics, and Detection divisions. The Bruker CALID group had a mixed year with several bright spots, but also with some disappointing results. The division did well in the life sciences market, and demand from pharma and biopharma customers was solid. Our mass spec clinical microbiology product, the MALDI Biotyper, continues to perform well. The group saw good performance from its non-U.S. academic customers. However, the poor bottom-line performance of our CAM division, which still lost in excess of $25 million in 2012, has offset some of these good results. Charlie will talk in more detail about some of the restructuring actions we are taking in CAM to get the performance of this business heading in the right direction.
Finally, BEST had a good year of top-line growth and profitability with the improvement driven by the Rosatom license deal we closed in Q3. The incentives and the strategic emphasis for BEST have shifted from fast top-line growth to steady profitability improvement. We are implementing decisions to streamline our BEST research project, lower our expenses, and increase our BEST margins. I would like to close on slide number seven by talking about some of my key priorities for 2013. First, improving our operating leverage and kicking off initiatives that help us to lower our costs and working capital ratio is far and away my highest priority in 2013. While we have launched several initiatives to help us towards this endeavor, we intend to accelerate these efforts and decisions in 2013. Another key priority is to turn out the financial performance of our CAM division.
We have made considerable investments to upgrade the products and the portfolio, and in 2013, we expect to see a meaningful reduction in the CAM operating loss. At the same time, we need to lower our manufacturing and discretionary spending to put this business on a path toward profitability in the coming years. Finally, we need to successfully implement performance management systems that provide management with better visibility into the business. This does not just apply to our financial systems, but we will move Bruker toward global processes and global systems that provide us better information to optimize the performance of our businesses. I would conclude my comments by stating that one of Bruker's core strengths is innovation and launching new products, and we will continue to focus on cultivating these strengths.
We had a very good year of growth in 2012, but our profit and cash flow performance was not satisfactory for the full year. That being said, we ended the year on a positive note and generated both good top-line growth and margin expansion in Q4 of 2012. We continue to have a very healthy backlog. As we enter 2013, we will have a strong focus on ensuring that our growth is profitable and that we are generating attractive cash flow. With that, I will turn the call over to our CFO, Charlie Wagner.
Thanks, Frank. I will now provide some additional details on the Q4 and full year 2012 results before providing our financial outlook for 2013. On slide nine, I show a snapshot of our Q4 2012 non-GAAP performance. Total revenues increased 8.9% from the fourth quarter of 2011, totaling $517 million. Excluding a 2.1% unfavorable impact from changes in foreign exchange rates and a 0.8% net impact from acquisitions and divestitures, year-over-year organic revenue growth was 10.2% in the fourth quarter of 2012. This solid performance was primarily driven by our Bruker, MAT, and CALID groups. We were pleased that we generated operating leverage from this higher sales volume in Q4 of 2012, with non-GAAP operating income growing by 20% and non-GAAP operating margin expanding year-over-year by 130 basis points in the fourth quarter.
On the bottom of the slide, you can see that during the course of the year, we continued to make some progress on our working capital, lowering our working capital to revenue ratio from $0.48 to $0.46. However, considerable opportunity remains to bring this ratio lower in 2013 and beyond. Turning to slide 10, changes in foreign exchange rates continued to be a headwind on the top line for Q4 and reduced our year-over-year revenue growth by 2.1% in the quarter. This was primarily driven by a weaker Euro, Swiss franc, and Japanese yen versus the US dollar. You can also see on this slide the revenue impact from the two smaller acquisitions that we completed earlier this year, SkyScan and Carestream, which added $4 million of revenue in the quarter after adjusting for the effects from the divested thermal analysis instruments business in Japan.
On slide 11, we show our Q4 2012 non-GAAP operating results in more detail. Our Q4 2012 non-GAAP gross margin of 47.7% increased 120 basis points on a year-over-year basis, driven primarily by higher revenues and mix. Our SG&A as a percentage of revenue declined by 40 basis points due to tighter control on discretionary spending, b ut this SG&A leverage was offset by R&D increasing as a percent of revenue due to the timing of certain R&D projects. As a result, our non-GAAP operating margin expansion was driven entirely by our improvement in gross margins during the fourth quarter. Despite this margin expansion, we reported non-GAAP earnings per share of $0.28 in Q4 2012, which was a 7% year-over-year decline. Interest expense and foreign exchange losses were higher in Q4 2012 than in Q4 2011, and Q4 2011 also benefited from an unusually low tax rate.
On slide 12, you can see the difference in our year-over-year non-GAAP tax rate at the bottom of the slide. Our Q4 2012 non-GAAP tax rate was 30.9%, compared to 16% in Q4 2011. During the fourth quarter of 2011, we released a $6 million tax reserve, which led to the low tax rate. On the rest of this slide, we show a reconciliation of our GAAP to non-GAAP results. During the fourth quarter of 2012, we incurred $34 million of costs that we excluded from our non-GAAP results. The largest component of these costs was related to roughly $24 million of impairment and restructuring charges related to our CAM and BEST divisions. Included in that amount was a $16.4 million impairment charge for intangible assets and a $1.4 million write-down of goodwill, both of which were established in 2010 during purchase accounting for CAM.
The impairment charge reflects the view that after two and a half years of operating losses, the projected cash flows from the CAM division are not in line with projections made at the time of the purchase. In addition, we recently made the decision to close a CAM R&D and manufacturing facility in Europe and move those activities to our CAM location in Fremont, California. As a result of this decision, we recorded fixed asset impairment charges and other restructuring charges of approximately $3 million in the fourth quarter of 2012. Additional charges related to this decision will continue to be incurred during 2013. We remain committed to improving the financial performance of CAM and believe this factory consolidation is an important step towards improved operational efficiency.
Finally, in Q4 of 2012, we also made the decision to cease certain R&D activities and exit a manufacturing location in our BEST division. We remain committed to BEST superconducting materials and big science business, but we have decided to scale back investments in technical development programs that were not expected to yield meaningful commercial results for several years. We expect to retain some of the technology, IP, and know-how so that these programs could be restarted in the future if it is deemed attractive to do so. As a result of these decisions in BEST, we recorded $2 million of fixed asset impairment charges and other employee-related restructuring charges. Moving on to slide 13. I will briefly touch upon our full year 2012 non-GAAP results. Total revenues increased 8.5% compared to 2011, totaling $1.79 billion.
Excluding a 4.6% unfavorable impact from changes in foreign exchange rates and a 1.2% net contribution from acquisitions and divestitures, revenues grew 11.9% organically in 2012. This is exceptional performance, which is clearly ahead of the overall market growth. Our non-GAAP operating margin of 12.2% expanded 30 basis points compared to a non-GAAP operating margin of 11.9% in 2011. However, if we adjust for the Rosatom license impact, which contributed roughly $15.5 million to 2012 operating income, our non-GAAP operating margins would have declined by roughly 50 basis points year-over-year. Our 2012 non-GAAP EPS of $0.83 was nearly unchanged from 2011. Moving to slide 14, I show you our GAAP to non-GAAP reconciliation for the full year 2012. We excluded approximately $63 million of costs from our non-GAAP results in 2012.
In addition to the $24 million of Q4 charges related to CAM and BEST that I just mentioned, the reconciliation also includes meaningful costs related to our investigation and review of our past business practices in China. These costs are reflected in the other category that you see on the schedule. Since 2011, the company has been reviewing business practices at its subsidiaries in China. In our 2011 Form 10-K, we reported that we identified certain issues at our Bruker Optics subsidiary and took actions to terminate certain employees and implement enhanced financial controls and oversight. Further investigation during 2012 has revealed additional issues in other Bruker subsidiaries in China. As a result, in early 2013, we took further personnel actions, including termination of certain individuals. The review of our China operations is still ongoing and no final conclusions can be drawn at this time as to its final outcome.
At this time, we cannot reasonably assess the timing or outcome of these matters or their effect, if any, on the company's business. Turning to slide 15. Our balance sheet continued to strengthen during 2012. Despite two acquisitions during the year, our net debt was reduced by 53%, due entirely to higher cash balances, as our cash and cash equivalents increased by 26% during 2012. The only other thing I'd point out on this slide is that our pension liability increased by 55% during 2012, and this increase is almost entirely due to a lowering of the discount rate. On slide 16, I show our cash flow statement for 2012. We increased our free cash flow by $34 million year-over-year, with all of our free cash flow generation coming in the fourth quarter of 2012.
We made modest improvements in our working capital ratio due to improved DSOs and lower in-transit inventories. While we made progress in 2012, we have a significant opportunity to improve our cash flow over the next two to three years by improving our profitability and lowering our working capital. Now turning to our financial guidance for 2013 on slide 18. We enter the year with a mix of caution and optimism. While industrial markets appear to be stabilizing and improving, we still see continued weakness in markets such as the semiconductor and data storage industries, and continued uncertainty in U.S. academic markets. Additionally, we anticipate that a meaningful portion of our growth and profitability will be skewed towards the back half of the year, so we're taking a somewhat cautious start to what is sure to be a very busy year.
For the full year 2013, we expect to generate reported revenue growth of approximately 4%-5%. Our currency assumptions are that exchange rates are roughly in line with today's rates. On the bottom line, we expect to generate approximately 6%-10% growth in non-GAAP earnings per share in 2013 when compared to the year 2012. In addition, in 2013, we expect to incur $20 million-$25 million of restructuring charges related to the facility exits in CAM and BEST, and the ramp-up of our outsourcing initiatives in other divisions. We expect that these programs will lead to more than 150 employees leaving the company or being transferred to a contract manufacturer or other strategic partner over the next 15 months. We will continue to evaluate additional optimization programs that could impact 2014 and future years as well.
Finally, please keep in mind that Q1 2012 was a very strong quarter for Bruker, with revenue growth of nearly 14%. We're not entering 2013 with as much momentum as we entered 2012, so we're expecting modest revenue growth in the first quarter of 2013, and non-GAAP EPS could even slightly decline from Q1 2012 levels. In contrast, Q2 2012 was a very weak quarter for Bruker, and we're looking to do better in the second quarter of 2013. This commentary further highlights that Bruker's business remains lumpy when viewed in three-month intervals, and we believe that a 12-month view is the most appropriate way to evaluate the performance of our business. With that, I'll turn the call over to Joshua to begin the Q&A session.
Marcy, please assemble the Q&A roster.
At this time, if you would like to ask a question, please press star then number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Tycho Peterson from JP Morgan.
You guys have started to show some nice SG&A leverage. Just wondering if you can talk a little bit more about what the drivers there have been and the sustainability of some of those trends, in particular on the SG&A line.
Sure. Yeah, Tycho. We obviously, after Q2, put tighter controls in place in the second half of the year. Some of the improvement you see in the quarter is related to that, b ut as we head into 2013, I would say in all of our businesses, we are pushing for a greater level of discipline around SG&A spend. We've had some pretty significant increases in some businesses over the last couple of years, and in 2013, we're looking for those businesses to earn a better return on those investments. That said, we are also continue to make investments, particularly in G&A, around strengthening the finance function and starting to invest in some IT capabilities, s o that will offset some of the savings that we're generating in the businesses as well.
Then if we think about your guidance, you are assuming the environment is unchanged. Obviously, sequestration could change a lot. Can you just talk about maybe the sensitivities in your own assumptions around sequestration if that goes through?
Well, Tycho, this is Frank. As you know, our U.S. revenue overall is less than 20% of our revenue, and we generally figure that directly or indirectly related to NIH funding is maybe 3%-4% of our revenue, s o if that gets all sorted out, we would be happy to see an uptick in that 3%-4%, perhaps in the second half of the year, b ut right now, we are not modeling that. We are modeling the present uncertainty, which leads to very restrained academic spending in the United States.
Last one on backlog conversion times. This has obviously been a focus for people over the past year. Can you just talk a little bit about some of the initiatives to improve backlog conversion, and then maybe how we should be thinking about cash flow expectations for 2013?
Do you want to take the first half?
We're making some progress on backlog conversion, and there's more progress to be made in 2013. In fact, quite a bit of our business planning for 2013 in a number of the divisions is really also focusing on that. A nice example in 2012 where we've really accelerated backlog conversion, maybe the Bruker Daltonics Life Science division, where we really now have a higher speed through the entire quote to cash process. I think there are other divisions like Bruker AXS, which is now part of the BMAC group, where progress has been slow, and we're looking forward to accelerating that quite a bit in 2013. Steady progress, further to go.
Tycho, on cash flow, I think we're not going to give guidance today on cash flow. We'll probably update that later in the year. What I can tell you is that obviously we're expecting some improvements from profitability and better management of inventory for sure. I guess a headwind, though, that's going to offset that somewhat is we've got somewhere in the neighborhood of $20 million worth of tax payments to make in the first quarter related to tax audit settlements that are already fully accrued. I would say that alone is a pretty substantial item that is not something you expect to occur year-over-year. Once we get through the first quarter, we'll have a better sense on that.
Okay. Thank you very much.
Your next question comes from Jon Wood with Jefferies.
Hey, thanks a lot. Good morning.
Jon.
Hey, Frank or Charlie, you guys normally give the backlog, I think, once a year in the Form 10-K. Are you in a position to do that on the call today?
Our backlog is in the neighborhood of $1 billion. This remains rather high. I cannot comment on the Form 10-K right now.
Yeah. I mean, the backlog's still healthy, Jon. We are actively looking to draw it down with better conversion in some of our businesses. At this point, I think it's healthy entering 2013, is the best we would say.
Okay. Just directionally, how are the order trends in the fourth quarter? I think you talked about orders being down modestly in the third quarter. Can you give us a sense, at least qualitatively, of the order trend in the fourth?
Yeah. Orders were soft in the fourth quarter. There are some comparability issues in the fourth quarter of last year. Fourth quarter of 2011, excuse me. We had very large multi-year orders from some BEST customers, and those orders tend to be placed once every three years or so. T he comparison is skewed a little bit. If you strip that out, the order growth rate in Q4 was still kind of flat to slightly negative, b ut again, Q4 2011 was very strong.
Okay, great. At least on the CapEx side, Charlie, can you share a budget for 2013 on the CapEx side?
We are not going to guide to that specifically, Jon. I expect it to be lower than 2012, b ut we are still in an investment period. If you look at Bruker over a five-year view, certainly the last couple of years have been higher CapEx, but the three years preceding that were actually quite low, s o we are in the midst of some building projects and likely to start to take on some IT projects that contribute to CapEx. I guess to ballpark it, in 2013, it is probably in the $55 million to $60 million range.
Okay, great. Last one. Have you guys thought about new intermediate term goals, at least when you've got your arms around enough to initiate revised, let's call it, three to five-year goals? Any thoughts on that would be great.
Yep, s o again, understand the desire to have that information. At this point, we don't have any plans to provide midterm goals. As Frank has pointed out, we've got several new or newly promoted members of management who are getting their hands around their business and the full potential of those businesses. We'd like to go through a full planning cycle this year with that management team, so that we can commit to a plan that we feel good about, s o it's unlikely that we will be providing midterm guidance during this year.
All right. Thanks a lot.
Your next question comes from the line of Ross Muken from ISI Group.
Hi, this is Vijay in for Ross, and thank you for taking my question. Maybe a quick housekeeping question. Can you guys share what the organic growth for the segment was, BSI versus BEST, and what is implied in the 4%-5% guidance for 2013? What are the puts and takes?
In 2012, the BEST organic growth rate was higher than the BSI growth rate, but the BSI organic growth rate, I don't have an exact number right now.
Yeah, we don't.
But still quite high. In 2013, it's going to be much more similar in terms of growth rates.
And we can do that housekeeping offline.
Okay. Charlie, now that you've sort of been in the CFO role for a while, can you share with us what has surprised you on the positive or the negative side, and what has been the feedback from the employee base?
Sure. Yeah. I don't have much new to report on that front. I've known the company for some time, so I know the strengths here, and I know the things that we need to work on. I think in terms of opportunities for improvement, Frank and I have commented on that at length in the past. We really need to work on tightening up our management practices and systems related to that so that we have better insight and better control over the businesses. We also need to get better at operational practices, specifically in our factories and in our supply chain, to drive down our consumption of inventory, s o those are consistent themes that we've certainly been pounding over the last six months and prior to that. I think the response that I've seen has been quite positive.
Part of this is making sure that we're getting the message to folks, and making sure that they have the incentives and the tools to do what we want them to do. At this point, I feel like we have made some important early steps and that the employee base is quite receptive.
Yeah, I think the employee and staff response to the changes in the CFO and financial organization, the group reorganizations, the promoted or newly hired group presidents, I think is really excellent. I think everybody sees this as a very positive.
We certainly agree with that. Thank you.
Your next question comes from Isaac Ro with Goldman Sachs.
Good morning. Thanks for taking the question. Frank, just wondering if in general, you could talk a little bit about emerging markets. How did it do in the fourth quarter, and what are you guys seeing in China in particular as we move into 2013?
Isaac, I know we had a good start in January that may be in part due to the timing of the Chinese New Year, where a lot of orders were placed in January. Except for our Bruker Optics division, which was a bit slower in China in 2012, I think, overall, China was solid, not exceptional. Emerging markets, we have seen continued strength, more than we had expected in 2012 in Latin America, with particularly Brazil being quite a bit stronger in the second half of the year than we would have expected. Russia was solid in 2012, though not as strong as in 2011, but remaining at quite a high level. Our business in India was solid, actually quite good. I think our NMR division had a record year in India in 2012.
We've seen some ongoing evolving strength in Middle East and Africa, particularly Saudi Arabia, but also a number of other, even countries like Egypt investing a little bit, but Saudi Arabia really being the driver in some of the Gulf states there. That perhaps gives you an overview.
Great, t hanks. Then maybe just to follow up on the NMR comments you made. Can you give us a sense of where you think you are in that business in terms of the pricing environment? Is it healthy? Then maybe from a product cycle standpoint, do you see anything in the works in the next 12, 18 months that could be material in expanding the market, or advancing the technology specifically?
Not to frustrate you, but on the latter, of course, we always have new product and R&D plans, and those we don't tend to discuss ahead of time. We've had strong product introductions in the last few years. We've done quite well in NMR, particular strength in ultra-high field NMR and DNP NMR, which is sort of a new flavor, b ut for that new flavor, because it's a true new scientific capability, there were a lot of special funding projects in the last couple of years. For instance, first in France and then in Germany, a nd I think there is an opportunity to gradually expand NMR into new applications, into applied markets, food composition, food authenticity. Same for wine and beverages, fruit juices, and I think we're leading the way in that.
Great. If I could just squeeze in one more for Charlie. Charlie, you went through a lot of detail on the working capital potential, but was wondering if you could maybe break it down for us thematically over the next couple of years, what you think the two or three biggest opportunities are to improve the free cash profile of the business. Thanks.
Sure. The opportunity one, two and three is around inventory, really. We've got to really improve, I think our strategic procurement practices as a key driver. Shortening the length of our supply chain and our in-transit cycle is another, and then finally, outsourcing. We are pretty vertically integrated in most of our businesses. Have done some outsourcing already, but really need to step that up quite a bit in some of our European locations. As we push on outsourcing, that should take some inventory off the balance sheet as well. I think it's really about inventory.
Perfect. Thanks so much.
Once again, if you would like to ask a question, please press star zero number one on your telephone keypad. Our next question will be taken from Amanda Murphy with William Blair.
Hi, thanks. I had a question on 2013 expectations. You talked to the sort of back half skew, if you will, for EBIT margin expansion. I am curious, you have mentioned a number of different sort of cost improvement initiatives you have in place, and I know it is still early, but can you just help us get a perspective on which ones might benefit you in 2013 and what specific initiative could maybe drive you to the higher end of your guidance range versus the lower end?
Sure. Yeah. I only mentioned a selected list of things that we are working on. It turns out that list is definitely skewed towards the back half. If you look at the manufacturing facility exits in CAM and BEST, both are European facilities, and so we are working with works councils through the appropriate process, and those exits really do not occur until about the Q3 timeframe. So, little benefit in the current year.
Similarly, with the larger outsourcing programs that I have mentioned, again, those are well underway in terms of planning, but do not occur until the Q3, Q4 timeframe, s o those activities will be a lot of work this year and not a lot of benefit this year, b ut obviously, they have benefit that accrues into the future. Aside from that, there is a whole portfolio of other things that we are working on to improve margin expansion.
What could drive us to the higher end? Obviously, growth at the higher end of our range is going to help. As we look at programs in sales and marketing and in our manufacturing environment to lean out a little bit, those are things that do not have quite as long a lead time associated with them and things that we are kicking off early this year.
Amanda, this is Frank. I would maybe add to that some of the outsourcing initiatives probably will have an impact on working capital first and on margins with about half a year to a year delay. As some of the working capital comes off our books, you may see that earlier, but of course, that is built into our 2013 guidance.
Got it. I think you started your systems infrastructure review in January, it may be too early, but I think you also mentioned some expected spend on the IT side. Do you have any update there in terms of what you're looking at from a systems perspective, near term and long term?
Yeah. Not much new to report. I will segment it. We've got a financial systems project which is well underway. That's a relatively modest investment in the $3 million- $5 million range. I think the study that you're referencing is, obviously we want to take a look at our ERP infrastructure and lay out a roadmap for that for the future. That study has not commenced at this point, but it is something we will undertake this year.
Okay. Then just last one, in terms of R&D, I know you've talked to the opportunity in the long term to get leverage there, b ut it seems like from a quarter-to-quarter standpoint, there may be some lumpiness just around project timing, s o I'm curious if you have any perspective on how to think about that over the next quarter or the next few quarters here.
Yeah, Amanda, there will be some lumpiness. I think that's really quite inherent. It's very difficult to predict that. We cannot predict in which quarter some of this lumpiness may fall, quite honestly. From time to time, there will be some lumpiness built, particularly part of the BioSpin group, b ut there also are some larger systems orders occasionally invest around the BMAC group. We will highlight those from time to time if a quarter is particularly affected, b ut, I think it's difficult. We cannot predict which quarter this may fall in, given our conservative revenue recognition upon full written acceptance.
Okay. Thanks very much.
Your next question comes from Derik de Bruin with Bank of America.
Hello?
Hi, Derik.
Hi. A lot of the questions have been answered, but I am just wondering, could you give a little bit more color on the CAM business and what organic revenue growth were in that business? I am just curious to see how it has been tracking over the last year.
Yeah. So, Derik, I will take that one. It is Frank. We had decent but not great CAM growth. We had hoped for more growth, but there has definitely been a retrenching in 2012 in the applied markets. We think even some of the applied markets have shrunk in 2012, perhaps with a recovery late in the year. It is too early to tell. Accordingly, our CAM growth rate was lower than we expected internally. Nevertheless, it was above the corporate average still. Our CAM business, which was sort of at a $60 million-ish revenue run rate when we took it over, has now recovered and exceeded its historical highs at about a run rate of $100 million.
Okay, great. That is very helpful. You mentioned some toughness in the semiconductor and data storage industries. Can you just elaborate on that and just sort of how you see that sort of pacing out through here?
Yeah, no, that has been pretty pronounced. We did have some good orders, actually, in the first half of the year. Those had to do more with technology transformations or, I am sorry, technology transitions, s o rather big companies like Intel or IBM or Samsung continuing to invest for the next node with smaller feature sizes or going to 450-millimeter fabs, s o we had some good orders for that, and we continue to have some of that in our backlog, b ut the more cyclical part of the industry, I think, may have reached its low in the second half of this business cycle, in the second half, with more recent orders in data storage and semiconductor being very low.
Now I am not talking about our own data, but if I look at some of the larger companies in that space, their more recent announcement have been a little bit more positive, s o maybe we are through the bottom of the cycle there, b ut we have a non-cyclical part of the business, which is doing well, and a somewhat cyclical part of the business, which for us is less than 2% or 3% of our revenue, b ut a division like BNS will see it to a greater extent, of course, than Bruker overall.
Great. Charlie, the non-GAAP gross margin was up about 60 basis points year-over-year, some of that clearly was due to the Rosatom license that is there. I guess, just qualitatively for 2013, do you expect the gross margin on an absolute basis to be up year-over-year?
Yeah, Derik, the Rosatom impact is pretty meaningful in 2012, then it has a follow-on impact in 2013 as well. Obviously, it was about $16 million of revenue in 2012 at essentially 100% gross margin, s o that is a big uptick from 2011 to 2012. Then from 2012 to 2013, it goes from 16 down to six, s o you get $10 million of margin siphoned off. At this point, I would say, absent that, we are absolutely looking for gross margin expansion. With that included, again, we are not guiding to that, so we will take that up later in the year.
Okay, great. Thank you very much.
Your next question comes from Tim Evans with Wells Fargo.
Hi. A couple product-related questions here. Can you comment on your expectation at this point for the MALDI Biotyper FDA approval? The other question I had was related to your outlook for the NMR business. Do you anticipate increased competition there going forward?
Okay, Tim, this is Frank. I will take that. We are working on FDA clinical trials in the United States. The MALDI Biotyper last year had continued to have double-digit organic growth above the corporate average, with quite a bit of uptake also in non-clinical applications in regulatory agencies, including in the United States, that, of course, do not need FDA approval. FDA approval, we are hoping for it in the second half of the year, and we are working very diligently with the FDA on that. Of course, there can be no guarantees on timing or whether or not we can achieve that, but we are hopeful. On the NMR side of the business, I am sorry, what was your specific question there, Tim?
I am just wondering what your outlook there is, if you could comment just qualitatively, for 2013. Also, are you expecting an increasingly competitive environment?
Well, it has always been competitive, but we are doing really very well competitively in NMR. I think we expect weakness in NMR in the United States because of well-known funding problems or at least funding uncertainty. The rest of the world, it is a reasonable market and academic markets there, particularly in non-Mediterranean Europe, have held up quite nicely. Same is true for much of Asia, where it goes along with all academic funding investments. The commitment to academic research and funding that has to do something with the long-term competitiveness of nations, and most countries in Asia-Pacific and most countries in Europe are investing in that, plus many developing regions, if you want to call them developing, including major economies like Russia or India or Brazil, s o I think in NMR, there is, of course, the competitive angle.
I think it's more the expansion into new markets and applications that may drive that. Plus, of course, the expansion of our preclinical imaging product lines beyond preclinical MRI into other optical PET/SPECT, micro CT, and then magnetic particle imaging modalities.
Great. Thank you.
Your next question comes from Jon Groberg.
Hi, thanks. Good morning. Hey, Charlie, you obviously talked about a number of cost initiatives, a number of things taken in the fourth quarter. Obviously, you're planning some more in 2013. I just wonder, could you put some specific numbers around what the cost savings ultimately is expected to be from the initiatives that you've put in place or that you know about? Also, on the revenue line, it sounds like you're taking some initiatives to actually rationalize that line a little bit and maybe what the impact is on the top line from some of these initiatives.
Sure, yeah. On the top line, I wouldn't say that we're rationalizing that other than we're looking for greater discipline in some of our businesses, like CAM, around pricing, which could mean that we walk away from some business that we otherwise might have chased in the past. Similarly, in BEST, there are some revenues, again, that we won't be pursuing, none of which was high margin. I wouldn't say we're rationalizing that per se, but we are definitely being more disciplined in some of our businesses on the top line. On the bottom line, the basket of programs that I referred to in CAM, BEST, and then outsourcing. This year, the timing gets a little difficult to predict at the end of the year. That's why I said 15 months in the script.
But say between now and 15 months out, that basket of programs will be more than 150 employees, maybe even upwards of 200 employees, would leave the company during that timeframe. Many of them would get picked up by our contract manufacturing partners and other strategic partners, so we're doing it in a responsible way. That could yield run rate benefits north of $10 million, perhaps better, in 2014. We've not guided to the working capital benefits, but they're pretty meaningful as well. As I've stated, think of this as kind of step one or wave one. Again, there's been plenty of good things happening, but we're going to put a circle around this group of initiatives and call it wave one. As we go through planning this year, we're going to be thinking about what's in wave two, what's in wave three.
Okay. For 2013, given currency and given, I don't know how you want to look at some of the revenue initiatives you just mentioned, and I don't know if you have any other divestitures planned or anything, but what's your organic growth outlook for 2013? I don't know if I missed that.
Yeah. We guided 4% to 5%. I think the net impact of acquisitions less the impact of divestitures is something like 50 basis points.
Okay. Lastly, were there any one-time items in the Q4 gross margin? I think that whole $16 million was in Q3 for the Russia deal, if I am not mistaken.
The Russia deal was the third quarter. Yeah. In the fourth quarter charges, some of that would have been through cost of goods sold because it was in the GAAP results. It would have been through cost of goods sold because it was impairment of factory assets, basically, that were written down as a result of the exit decisions that we made.
In terms of that non-GAAP, the 47.7%, there is no kind of one-time benefit there?
No. There is nothing funky in there.
Okay, thanks.
Your next question comes from Dan Leonard with Leerink Swann.
Thanks. I have a follow-up to Derik's question on CAM. It looks to me that the operating loss in CAM in 2012 was well higher than 2011, even though sales were higher. My question is, one, is that true? Then two, how much of your expectation that you're going to move closer to breakeven in CAM in 2013, how much of that comes from top-line growth in CAM as opposed to some of those margin improvements you talked about, some of the cost reductions in Europe?
Yeah, Dan, I'll take that. This is Frank. First of all, it is true that our operating loss was higher than in the prior year in 2012. Second of all, we're budgeting some, but modest, CAM revenue increase in 2013. That's another way of saying that the primary drivers for reducing that operating loss are in OpEx savings and in, as Charlie had mentioned, in going from two factories, one in Europe, one in the U.S., plus of course a lot of outsourcing, down to one factory through the course of the year. Charlie, you wanted to-
Yeah, I just-
Elaborate on that?
Yes, so that's correct. In addition to the benefits from the factory consolidation, we're also making some changes in the field as well, b ut to Frank's point, we're still targeting growth for CAM as well. If I had to kind of pin down the improvement, I'd say it's half from growth, half from kind of other actions that we're taking.
Great. That's helpful. Thank you.
Your next question comes from Sung Ji Nam with Cantor Fitzgerald.
Hi. Just two quick questions. Maybe could you talk about the competitive dynamics for your, I guess, BSI in general and how that might be impacting pricing in the current environment?
Okay. This is Frank. I'll take that, Sung Ji. I think the competitive environment, I think there was some pricing pressure, certainly middle of the year, perhaps it continuing, b ut I think there was a little bit of more of an economic pickup towards the end of the year, b ut when the markets were particularly weak, and it had that feeling in the middle and into the third quarter, early fourth quarter, we saw some pricing pressure, I would say, in the applied and industrial markets. I think other than that, there is no unusual competitive pricing margins right now. I think generally pricing tends to be rational or perhaps more rational in general as I look over the BSI portfolio.
Okay, great. Then one quick question for Charlie. Maybe talk about your tax rate for next year is slightly higher than what I'm calculating this year. I was wondering, things like R&D tax credit. I know there was a one-time benefit this year in 2012 as well, but how would this be R&D tax credit benefit-
Yeah.
Even that was recognized last year.
Sure. Yeah. I mean, our estimate around tax rate for 2013 is in the ballpark of where we were in 2012. Remember, we're not really a taxpayer in the U.S., so some of the benefits you're talking to don't necessarily accrue to us in this year, s o we've got to work on. Our tax rate is more impacted by the geographic mix of profits and losses and whether those losses are tax benefited or not, s o that's a big part of some strategy work that we're doing this year, to look at our tax rate.
Thank you.
Your next question comes from Ben Harries with EBS.
Ben, are you there?
We cannot hear you, Ben.
I am sorry, Ben. We are not able to hear you. Are you able to come closer to the phone?
Can you guys hear me?
Yes, we can hear you now.
Yep.
Sorry about that. The scale back that you referenced for some of the BEST projects, is that related to the fault current limiter or the growth magnet work that you've talked about as being drivers in the out years?
Both correct, Ben. This is Frank. Yes, indeed. The fault current limiters project ran into protracted technical problems. Given the uncertain go-to-market strategy and the long-term nature of that opportunity, we reduced that and stopped that project, certainly for the time being. As Charlie pointed out, we could conceivably resume that at some point in the future, but that's certainly not planned for 2013 or 2014 for that matter. We're also cutting back on some of the magnet opportunities from the BEST business. This has nothing to do with our BioSpin NMR or FTMS or MRI magnets, where our projects did not yield promising gross margins, I would say, and therefore, we decided not to try to scale that up. That relates to some of the restructuring charges we took and the plan to exit one European factory in Germany in 2013 at best.
Okay, thanks.
Then just on some of the operational exercises you guys have underway. With the changes that you've made so far, can you give us a sense of how much or maybe what percentage you think you have left, just in terms of headcount changes in order to put the right people in charge of the realigned businesses?
I think we've made a lot of progress in putting in the right leadership. Separately, there's the issue of, will some of the outsourcing and working capital, will that lead to transfer of employees to other partner companies? That is really in the early stages still, if you were referring to that.
Got it. Thanks.
Your next question comes from Peter Lawson with Mizuho Securities USA.
I just wondered if you could talk through the SG&A uptick in Q4, and how should we think about that in 2013?
Yeah, there were some investments in Q4 driven by me, candidly, that we're working on to strengthen some of our finance organization and some of our systems. That will continue into 2013. Offsetting that are productivity gains we're gaining in the field and other places. I'm not going to guide to specific line items for 2013 other than to say that we remain very conscious of the fact that we need to extract some operating leverage better than we have in the past.
Frank, were there any changes in the environment for U.S. academic spending in the quarter versus last quarter?
None that I can see. I think the tax deal that averted the fiscal cliff or whatever the wording is in Washington, did absolutely nothing to give more confidence to the academic decision makers. I think the U.S. academic funding situation and especially the uncertainty, I think, is really bad. At this point, we're simply perhaps conservatively assuming that that's not going to change soon. If it changes by second or third quarter, then quite honestly, until that results in additional orders and in additional revenue, which orders to revenue for us tends to be sometimes a two-quarter lag. We think if this gets sorted out politically, I don't think it's really going to help us very much until 2014. We have assumed the somewhat dire state of affairs in U.S. academic spending throughout 2013 that we saw in the last few quarters of 2012.
Sorry, that's not a very upbeat message, but that's basically how we modeled it.
Now, is that the main thing that's kind of pulled you back from that 9%-12% organic that you've done historically for when you guided in 2013?
No, I think there's a number of factors of why there is a slowdown, perhaps a shrinkage in the applied markets in the middle and second half of 2012. There is weakness in semiconductor and data storage. There is, of course, continued concern over Europe, although, the commitment to academic spending and research appears to be generally strong. There's just many areas that make us somewhat cautious on 2013, b ut, as Charlie Wagner said, it's not all caution. It's a mix of caution and optimism, but it certainly is a mixed picture. It's not all economic strength.
And just finally on the CAM business, do you think that the performance and profitability actually improved in Q4?
I think, just even more so for a division, I think one has to look at over the last 12 months to get a good assessment. There's been some good orders at the end of Q4, so a number of our divisions, including CAM, that may be a little bit more cyclical, suggested that maybe towards the end of the year, the economies are beginning to turn a little bit, b ut I think those are early telltale signs, and maybe they're not telltale signs at all. Maybe they're just statistical fluctuations. We will see. I think it's too early to tell, and I think for CAM, 2012, with some growth and some excellent new products, but none of them really with an effect yet until 2013. In fact, a further product introduction just last week that's rather important for CAM of that new aurora Elite ICP-MS.
W e're excited about the product portfolio. We think we're fixing the field issues. We're restructuring the factories b ut there's quite a bit of work to be done. I wouldn't take any particular quarter as a telltale sign, b ut we're very much driving towards making a lot of progress this year towards breakeven. Obviously not with breakeven yet this year.
Great. Thank you so much.
Your next question comes from Kenneth Hirschberg with Hirschberg Capital.
Congratulations on your improvements. My question has been answered. Thank you.
Thanks, Ken.
Thanks.
That is all the time allotted for today's conference call. I would now like to turn the call back over to Joshua Young for closing remarks.
Thank you. I'd like to thank everybody for joining us this morning. We hope to see many of you at the Cowen and Barclays Healthcare Conferences in March. We'll also be featuring many of our new products at the Pittcon Conference for those investors that will be attending the conference in Philadelphia. Thank you for your attention, and have a good day.
This concludes today's conference call. You may now disconnect.