Good day, ladies and gentlemen, and welcome to the Bruker Corporation's quarterly earnings conference call. My name is Darcelle, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. If at any time you require operator assistance, please press star followed by zero, and we will be happy to assist you. I would now like to turn the conference over to your host for today, Miss Stacey Desrochers. Please proceed.
Thank you. Good morning and welcome to Bruker Corporation's third quarter 2012 financial results conference call. I'm Stacey Desrochers, treasurer and director of investor relations. With me on today's call are Frank Laukien, Bruker's President and chief executive officer, and Charlie Wagner, Bruker's executive vice president and chief financial officer. Before we begin today, let me briefly cover our safe harbor statement. Various remarks that we may make about the company's future expectations, plans, and prospects constitute forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those described in the company's filings with the Securities and Exchange Commission.
While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Therefore, you should not rely upon these forward-looking statements as representing our views as of any date subsequent to today. In addition to the financial measures prepared in accordance with generally accepted accounting principles or GAAP, we will discuss certain non-GAAP financial measures, including adjusted EPS, adjusted operating income, and adjusted operating margin, which are non-GAAP measures that exclude certain items. We exclude these items because they are outside of our normal operations and/or in certain cases are difficult to forecast accurately for future periods.
We believe that the use of non-GAAP measures helps investors gain a better understanding of our core operating results and future prospects, consistent with how we measure and forecast the company's performance, especially when comparing such results to previous periods or forecasts. A reconciliation of our GAAP to adjusted numbers and segment level detail can be found in our press release issued earlier today and is located in the investor relations section of our bruker.com website. Today, Frank will provide an update on the business, and Charlie will discuss the financial results. I will now turn the call over to our president and CEO, Frank Laukien.
Thank you, Stacey, and good morning, everyone. We appreciate you joining us today. Overall, we are pleased with our third quarter 2012 financial results, including reported revenue growth of 7%, organic revenue growth of 13.8%, an adjusted operating margin of 15.5%, and adjusted earnings per share of $0.28. Revenue growth in Q3 was driven mostly by significant contributions from BioSpin and BEST. BioSpin got off to a slow start in the first half in 2012, but had stronger backlog conversion in the third quarter. BEST revenues in Q3 of 2012 included $16.4 million from our previously announced contract with a Russian agency, Rosatom. Despite the continued strong organic growth in Q3, we saw a decline in our Q3 new order bookings compared to the third quarter of 2011.
Our year-to-date bookings and backlog remain healthy, but we face some of the same macroeconomic headwinds reported by other companies, including slow demand in Europe, weakness in the U.S. research markets, and amongst Asia-Pacific industrial customers, along with a slowdown in the global semiconductor and data storage markets. In our quest to sustain our good organic growth rate in spite of economic conditions, during the third quarter, we continued to expand our product portfolio by introducing 10 new products across our divisions. One important launch included our high-performance LC triple quadrupole mass spectrometer platform called EVOQ. The new EVOQ series is targeted at LC triple quad mass spec performance leadership and major advances in robustness, ease of methods development, and productivity. Further adding to our product portfolio, subsequent to the end of the third quarter, on October 1st, 2012, we completed the acquisition of Carestream's preclinical in vivo imaging business.
We believe that these newly acquired optical molecular imaging product lines, as well as the continuation of the global OEM distribution of the Albira preclinical PET/SPECT/CT product line by Bruker, will complement our other preclinical imaging solutions consisting of magnetic resonance imaging or MRI, magnetic particle imaging or MPI, and X-ray micro-computed tomography or CT. The acquisition of the SkyScan Micro-CT business in the first quarter of 2012 and now of the Carestream in vivo optical and PET/SPECT molecular imaging business provides Bruker with a broad range of high-performance preclinical imaging modalities. As we continue to review our product portfolio, on August 30th, 2012, we sold our low-margin, non-strategic thermal analysis business in Japan to a strategic buyer with a stronger position in thermal analysis. This is one of the many steps we have taken and are taking this year to improve our cost and margin structure.
As we continue our 2013 business planning, we will review our products, supply chain, cost structure, and systems for additional areas of improvement and optimization. I will now turn the call over to our CFO, Charlie Wagner, for additional commentary and analysis on our third quarter results.
Thanks, Frank. Here is some additional color on the financial results for Bruker Corporation during the quarter. Third quarter 2012 revenue of $447.8 million represented a 7% increase over Q3 2011. The increase was 15%, excluding the effects of foreign currency translation, and our organic year-over-year growth rate was 13.8%, excluding the effects of foreign currency translation and acquisitions. Year-to-date revenue of $1.274 billion represents a reported increase of 8.3% over the first nine months of 2011, and a year-to-date organic growth rate of 12.6%, or 14%, excluding the effects of foreign currency translation. Our Q3 2012 adjusted gross margin of 48.3% and adjusted operating margin of 15.5% benefited from the impact of the high-margin Rosatom revenue. Operating margins also benefited from a slowdown in the rate of operating expense growth, as our Q3 2012 operating expenses were only slightly higher than in the third quarter of 2011.
For our reporting segments, BSI adjusted operating margin improved by 110 basis points from 12.8% in the third quarter of 2011 to 13.9% in the third quarter of 2012, and BEST adjusted operating margin improved from 0.7% in the third quarter of 2011 to 34.7% in the third quarter of 2012, largely because of the Rosatom revenue. For the nine months ended September 30th, 2012, our adjusted operating margin of 11.5% was basically flat to the nine months ended September 30th, 2011 of 11.6%. As Frank mentioned, we are not satisfied with our margin development and are in the process of evaluating margin expansion opportunities as part of our planning for 2013.
Interest expense was $3.6 million in the third quarter of 2012 and $10.7 million for the first nine months of 2012, compared to $1.7 million in the third quarter of 2011 and $4.8 million for the first nine months of 2011. As a reminder, in January 2012, we replaced our short-term revolver borrowings with longer-term debt at attractive but higher average interest rates. Also, in the third quarter of 2012, we had a foreign currency loss of approximately $2 million compared to a gain of approximately $3 million in the third quarter of 2011. Our third quarter 2012 tax rate on adjusted pre-tax income was 26.7% compared to 33.3% for the same quarter a year ago. The change was driven by a mix of earnings in different tax jurisdictions.
The Q3 decline in the tax rate drove the Q3 year-to-date adjusted tax rate of 29.8% compared to 30.3% year-to-date Q3 2011. GAAP net income for the third quarter of 2012 was $39.7 million, or $0.24 per diluted share, compared to GAAP net income of $19.8 million, or $0.12 per diluted share in the third quarter of 2011. Adjusted net income, which excludes acquisition-related restructuring and other charges, was $47.1 million in the third quarter of 2012, or $0.28 per diluted share, compared to adjusted net income of $34.4 million, or $0.21 per diluted share in the third quarter of 2011. GAAP net income for the nine months ended September 30, 2012 was $64.7 million, or $0.39 per diluted share, compared to GAAP net income of $53.2 million or $0.32 per diluted share during the nine months ended September 30th, 2011.
Adjusted net income for the nine months ended September 30th, 2012, was $91.6 million or $0.54 per diluted share, compared to adjusted net income of $87.7 million or $0.53 per diluted share during the nine months ended September 30th, 2011. For the third quarter of 2012, our working capital ratio per dollar of revenue improved to $0.47, compared to $0.50 for the third quarter of 2011. Operating cash flow for the third quarter of 2012 was $0.4 million, compared to $21.3 million in the comparable period of 2011. Capital expenditures were $19.5 million in the third quarter of 2012. As a result, we had negative free cash flow of approximately $18 million in the third quarter of 2012, compared to positive free cash flow of $14 million during the third quarter of 2011.
Operating cash flow for the nine months ended September 30th, 2012, was $42.2 million compared to a $4 million use of cash in operating activities in the comparable period in 2011. We continue to see an opportunity to significantly improve working capital efficiency and free cash flow. This will also be reviewed during our 2013 planning process. We ended the third quarter of 2012 with cash and cash equivalents of $242.1 million and net debt of $94.8 million. Now let me turn to our revised guidance for the year. Given our third quarter performance, we are updating our full year 2012 revenue outlook to a range of $1.73 billion-$1.76 billion, corresponding to a year-over-year reported revenue growth of 5%-7%. We are raising our full-year adjusted EPS guidance to a range of $0.75-$0.79 per fully diluted share.
With that, let me turn the call back over to the operator for Q&A.
Ladies and gentlemen, if you have a question, please press star followed by one on your phone. If your question has been answered or you would like to withdraw your question, press star followed by two. Questions will be taken in the order received. Please press star one to begin. Your first question comes from the line of Jon Wood with Jefferies. Please proceed.
Hey, thanks a lot. Frank, you mentioned new orders down organically in the third quarter. Can you give some context around that in terms of magnitude and how that broke out between BEST and BSI?
Hello, Jon. Our orders year-over-year in the third quarter are down in the single digits. Our Q3 2012 book-to-bill ratio is still around one. As you know, BEST is very lumpy. BEST orders were actually relatively low in Q3 of 2012, but I don't recall the ratios on that one in particular.
Is this something that you see as an ongoing effect? Just talk about the comparisons over the next several quarters versus the prior year and just how you see the macro-related weakness playing out vis-a-vis the comparisons.
Yeah. I think for a little bit of color on that, our orders in the second half of 2011 were very strong. Book-to-bill ratios were much higher than one. Our orders were still quite strong, also with book-to-bill ratios greater than one in the first half of 2012, although not as strong in terms of growth rates as in late 2011. As I just said, our orders compared to Q3 of 2011, which was very strong, are down in the single digits. Book-to-bill ratio is still solid and backlog is still very solid. We're clearly seeing there are some pockets of strength geographically or in certain areas, but more selected countries, selected programs. Overall, the market conditions are relatively weak in Europe, in the U.S. for all the well-known reasons, also in Asian industrial demand. It's certainly a period of weaker demand.
We're still satisfied with our orders, but they're clearly not as strong as they were in the first half or particularly in the second half of last year.
Jon, this is Charlie. Just adding to Frank's comments. You can see a little bit in the revenue performance in the quarter, BioSpin had a very strong third quarter. Bookings for BioSpin in the second half of last year were very strong. It takes more than a couple of quarters to convert that into revenue. One phenomenon we've seen in 2012 is that BioSpin had a kind of a soft first half from a revenue standpoint, but those strong bookings from the last half of last year are now converting into revenue in the second half of this year.
Okay, got it. Good color. Charlie, just for you on the operating expenses of the company, obviously a very significant step down sequentially. Is there any structural actions reflected in that number, or is that mostly FX and what I would call temporary slowing in the expense trajectory? I guess what I'm looking for is that kind of that SG&A level a good level to use prospectively, obviously adjusted for seasonality, but any color you can give around SG&A levels would be great.
Yeah, I would say, Jon, that it was more tactical. Obviously, we were very disappointed with the Q2 results and put the brakes on pretty hard in the quarter in terms of headcount additions and carefully looking at programs, some to cancel, but some to postpone, s o the operating expense performance, we're happy with it in the quarter. The organization responded well, I think, to the constraints we put on them, b ut I wouldn't call it structural changes at this point.
Okay, great. Thanks a lot, Charlie.
Your next question comes from the line of Isaac Ro with Goldman Sachs. Please proceed.
Good morning, guys. Thank you for taking the question. First off, I want to ask about market share trends in the quarter. Could you maybe touch on how you guys think you did qualitatively across the major areas, specifically BioSpin and then maybe across the other businesses?
Hello, Isaac. Frank taking this question. I think in most businesses we're quite pleased with our market share performance, so I think we, in relative terms, are doing quite well. I think in BioSpin, I think we were doing very well in terms of market share and competitive performance.
Great, t hanks so much. If I could ask just a follow-up on just qualitatively how you feel about the pricing environment heading into the end of the year. There's obviously a lot of consternation about budgets and overall economic demand for all products in your book. How do you feel about pricing power into the end of the year? Then maybe for next year, is there any view there that you think could change or evolve? Thanks.
Yeah. All the things you're saying are, of course, correct. There is some pricing pressure in some markets. You particularly see it in some of the industrial markets relatively quickly, s o that's a concern, b ut not untypical for in an economic and demand environment like the one that we have right now. For 2013, obviously, when we give guidance for next year, and we tend to do that when we report Q4, we'll try to give you, obviously, a better outlook at that point. Right now, we're still very much focused on this year and, of course, getting ready for next year, s o not a lot of color right now for on next year.
Okay. For this year, could you maybe comment on what you think price realization will be for the overall business? Just trying to ballpark what it is this year, and we'll certainly wait for next year when you're ready. Thanks.
Well, I'm-
Your next
I am not sure I will be answering the question properly, Isaac, but I think it will not have that much of an effect this year. There are some areas that have been competitive, not so much for macro trends, have been quite competitive in the last 18 months, a nd those tend to be in our backlog. I think what we see in pricing in so far year to date, we will see in Q4 because it is pretty much in our backlog. And I am not sure that answered your question, but at least I tried.
That is okay. Thanks so much.
Yep.
Your next question comes from the line of Amanda Murphy with William Blair. Please proceed.
Hi. Thanks. I had a question on some of the things you talked about last quarter, specifically just the decentralized nature of the business. Obviously, Charlie, you've been there a few months now, but I'm curious, are you able to talk to just how you might change that? Not change the structure, but how you might improve the decentralization side of it and communication between the groups? I know that's probably a longer-term fix, but I'm curious if you have any more color there, that would be helpful. Thanks.
Sure. Well, I can report that the company is still decentralized. We are making progress. Over the course of the quarter, we've started to put in place some, I'd say, more comprehensive management practices. I've been on board about 100 days or so now, maybe a little bit longer, and working with the finance team to really get a better handle on the nature and the quality of the information that needs to flow up. Of course, we're doing a lot of that manually right now, but again, the organization, I think, is responding very well. We have kicked off a project right now to define what Bruker's kind of financial system of the future will look like. We're working with an outside firm on that. That project will, once we kind of get past this initial planning phase, will kick into high gear throughout 2013.
At this point, I think a stretch goal would be to get it in late in the year. I think it's more likely that we would go live sometime in early 2014, with the expectation at that point we'd have a more automated set of financial systems that are appropriate for the company, b ut we're working through a variety of changes from organizational to just management process, the way we do things. We'll be backing that up with systems on the financial side over the course of the next year. ERP and other adjustments are going to take longer than that.
Right. Okay. In terms of the backlog conversion, obviously that went a little better for you this quarter. Is there anything specific there that you can call out in terms of improvements in the conversion and how to think about that going forward?
Yeah. We made some progress, obviously, in backlog conversion. We did not make enough progress yet in my opinion, but we made some progress. Without going through the individual divisions right now, I think our backlog conversion is gradually getting stronger with further room for improvement. Our backlog is still very high. It is still up year to date, b ut there is room for improvement there as well, b ut on the other hand, it is of course not a bad situation to continue to have strong year-to-date bookings and strong backlog.
Okay. Then just last one from me on CAM. Any updates there? So that business has been performing fairly well on the top line. Obviously, there has been integration issues, but it has taken a little bit longer. Where do we stand now with CAM?
It is still taking us some time. It is still financially not satisfactory. On the other hand, we did have some major product introductions for CAM that came out in Q3, and of course, they are not really contributing to revenue and margins at this point yet, b ut we still have a lot of work to do at CAM. We are not satisfied with our financial performance there at all yet, but we still think it is a tremendous opportunity, so we will diligently keep working on it.
Have you been able to look at some of the, I think you talked about pricing strategies within CAM relative to the rest of the business. Is that something that you have been able to address at this point?
Yeah, we think so. We think we'll have a better approach to pricing and margins there worldwide, where perhaps we did not always have the right regional management in place, b ut I think that's something we've very much tried to address.
Okay, thanks.
Which may slow down its growth a little bit, but would contribute to margins.
Got it. Okay, thanks.
Your next question comes from the line of Tycho Peterson with JP Morgan. Please proceed.
Hey, thanks for taking the question. I want to go back to the earlier question on SG&A. Charlie, can you just give us a sense of how much of the delta there from the second quarter was cash versus non-cash? In other words, what amount of the decrease came from stock-based comp around the stock price versus actual expenses that you either deferred or took out?
The impact from stock-based compensation is minimal. I do not have the number off the top of my head, but it is pretty minimal in terms of the delta. It is almost entirely cash-based.
Okay. On the gross margins, can you just give us a sense of some of the gives and takes there? How much was from currency versus it sounded like you called out the Russian order as being a driver of some of the margin improvement.
Yeah, the Russian order obviously is significant at north of $16 million of revenue, and it's a technology license, so it's basically pure profit. If you think about the impact of that on the margins, that's probably worth 200 basis points on corporate gross margins, s o that's a pretty significant driver. Aside from that, I think we saw a mixed bag overall in the quarter.
Okay. Then maybe just last one for Frank. Can you just give us a rundown of how you're thinking about the major geographies in the fourth quarter, U.S., Europe, and Asia, and just maybe preliminary thoughts on each of those markets as you think about 2013?
Yeah. Gladly, Tycho. It might be a bit of a recap what I said earlier. I think, we do see weaker European demand, not a surprise. Already in Q3, we had stated that this was no longer a Mediterranean symptom, but really affected much or all of Europe. The United States research markets, until we sort out our fiscal cliff over here, I think are going to be very constrained and conservative in spending. Again, not exactly headline news. You probably hear that in every call that you're attending. We did see also with China's growth slowing down and other Asian economies, of course, also selling to China quite a bit. We did see also overall in Asia, a slower growth and slower demand, particularly in the industrial side.
I'd say European research and academic investment, except for the Mediterranean countries, is actually still okay, and I would say the same for Asia Pacific as well as Latin America. Overall, it's not a strong demand picture at this point in time.
Okay. Thank you.
Your next question comes from the line of Dan Leonard with Leerink Swann. Please proceed.
Thanks. I am going to take a run at the operating expense question again. Charlie, by your communication that the sequential decline in OpEx wasn't anything structural, should we interpret that to be then that putting your foot on the brakes is more of a temporary phenomenon and there are going to be some catch-up costs going forward?
Yeah, there would be. Again, keep in mind that with R&D in particular, a significant element of R&D costs is materials related to various projects. Q2 saw a significant chunk of that in R&D. We had some ability to defer some of that in Q3, but that means those expenses will come through in Q4 and Q1 of next year. Some of it is clearly timing. Some of it is permanent in the sense that we're putting more controls in place around headcount additions, and certainly as we head into the budget season, I am going to have the ability to control that as well, b ut definitely some of it is timing.
Okay. My follow-up, how should we think about modeling the Rosatom contract going forward?
Order of magnitude, you could expect no more revenue this year. If the contract goes as planned, we're probably looking at $6 million or $7 million next year, and somewhere in the neighborhood of $8 million to $10 million the year after that.
Okay. Thank you.
It's all dependent on milestones.
Okay, thanks.
Your next question comes from the line of Peter Lawson with Mizuho Securities. Please proceed.
Frank, I just wonder if you could talk through the trends you're seeing in the first month of Q4. What's got better? What's got worse?
You were chopped up a little bit. Could you repeat the question, please, Peter?
Oh, just on the trends in the first month of Q4, which markets have got better or worse, or is it a steady state?
Yes. I don't have any particularly remarkable insights on October, compared to the Q3 trends.
Okay. With the businesses that you're reassessing or restructuring, what's the scale of that reassessment? Has there been any change in the outlook on potential M&A, and the stance on the BEST business?
So those are several questions. In terms of M&A, I would not say that M&A is a high priority for us right now. We have a lot of foundation-building in terms of processes, IT, organization, talent, and we have a lot of organic growth opportunities in all of the divisions. That's clearly our focus. Although from time to time, we will do some typically smaller acquisitions, like the acquisition of the two preclinical imaging product lines that we just closed on October 1st. We're actually quite excited about. We think that's a really excellent complement to our other preclinical product lines. Remind me of the other elements of your question, please.
Well, just for the stance on the BEST business.
The BEST business. The BEST business obviously has had a tremendous benefit from that contract in Q3, and Charlie just gave the further outlook on that. That's a one-time occurrence for BEST, if you like. A very nice contract. I think BEST continues to have a lot of backlog. It's just a lumpy business. Even if it doesn't have a lot of bookings in Q3, it still has a very strong backlog. Its core businesses continue to be reasonable. There's really not a lot of other perspective on the BEST business. Charlie, you'd like to add something?
Yeah. Peter, if I could add. Perhaps you're keying off Frank's earlier comment about our divestiture of the thermal analysis business, which is a pretty small, non-strategic business for us. As we're entering the planning season, we're looking at all our businesses, all our investments. I think in terms of divestitures, it's mostly fine-tuning. I mean, it's things like the thermal analysis business. We're not looking at large-scale divestitures at this point.
Oh, yeah. No, very good point.
And just finally, on the R&D tax credit, is that included in guidance?
I would say essentially it is, yes.
Okay. Thank you so much.
Your next question comes from the line of Tim Evans with Wells Fargo Securities. Please proceed.
Hi. Thanks. Frank, if we are looking at a bit of a slowdown in BioSpin orders, I was wondering if you could parse apart how you are thinking about that coming from a macro slowdown versus what might be just having picked a lot of the low-hanging fruit as far as share gains are concerned and that getting a little bit more difficult going forward.
Actually, BioSpin orders have continued to be quite reasonable, quite strong, actually, in the first nine months of this year.
What would you say would be the outlook for that then going forward? In other words, is that sustainable, I guess, is what I am trying to get at.
That remains to be seen. It has not been sustainable in the U.S., where presently the academic spending is just weaker, b ut how that will evolve into 2013, I think we may see some changes in that perspective in the next three months, but who knows? I mean, we are speculating like everyone else, b ut certainly in the second half of the year in the U.S., it has been a slowdown. Now the U.S. is about 20% or less of our overall demand, and there is enough pockets of strength elsewhere.
Okay. Maybe just one quick one for Charlie on the tax rate. Longer term, do you feel like there's room to really bring this down in a meaningful way?
Yes, I do. We'll be kicking off some tax planning work in the next few months, to look at our global tax strategy and our positions around the world. As you know, when we would get some insights from that and start to implement some programs, it wouldn't necessarily flow through the rate right away, b ut over a few year period of time, I do feel like we can impact the tax rate meaningfully.
Great. Okay. Thank you.
Your next question comes from the line of Steve Unger with Lazard Capital Markets. Please proceed.
Thanks. Good morning. Frank, I was wondering if you could give us just maybe a little more color on the year-to-date growth of bookings and backlog. Is it low single digits, mid-single digits, double digits?
Yeah. Hello, Steve. I understood the question, and I think it's all in the single digits. That is correct.
Okay.
Backlog is, bookings are up in the low single digits. There's also some, as we face quite a bit of currency headwind year-to-date. If you were thinking of an organic component, it's probably above 5% if you thought about an organic growth rate year-to-date.
Good. Okay. I was wondering if you could characterize, by division, who is growing the revenue year-to-date in excess of the company average, and which divisions are exceeding the company average from a profitability perspective.
All right. Year-to-date, I think, we actually saw our mass spec business, both the life science clinical and the CAM business, as well as the related Bruker Detection business, which uses some aspects, some other technologies, grow at fairly high rates. Our Bruker Nano Analytics division, all of those divisions have been growing in the double digits year-to-date. Yes, of course, BEST, particularly due to the Rosatom contract, has been the fastest-growing or just about the fastest-growing of our divisions. That was a somewhat unusual occurrence in Q3 with that large chunk of Rosatom licensing revenue coming through.
Great. Then, just from a profitability perspective, which divisions are sort of exceeding the company average at the moment?
Well, BEST by far, again, due to the aforementioned reasons, and I think we're reasonably pleased in the third quarter, certainly with the BioSpin division. Our Bruker Nano Surfaces, ex Veeco business has continued to do quite well. Year-to-date, our mass spec business has done well, with some lumpiness. I think those are perhaps the highlights.
Great. Okay. Then, I was wondering if you could give us an update on the U.S. approval process for the MALDI Biotyper.
Yes. We continue to work on that. We are in clinical trials. We do not expect FDA approval this year for sure. We are working on it diligently towards hopefully obtaining that next year. Very difficult to predict quarters or exact timing.
Okay. Sometime next year is sort of the-
We certainly hope so, unless there was something more fundamental in our approach or our clinical data, that the FDA was not happy with. We have no indication of that at this point in time.
Got it.
Hopefully sometime next year.
Could you just talk about how that product has been selling in a capital-constrained European environment at the moment, and are you generating any pre-orders for the instrument in the U.S.?
The instrument is also being used in some microbiology, food safety, or pharmaceutical testing. It is used by some state and local regulatory agencies and as a research use-only system. There clearly are some U.S. orders for this system that do not go into typical routine clinical environments, which may be awaiting FDA clearance. As far as the growth for that product line has been particularly fast in Asia-Pacific because we also started in Europe, and so in Asia-Pacific, our growth rates are from a lower base. In Europe, the business has continued to grow, though at a slower rate because of capital constraints, and also simply because we started from a much higher basis. I mean, that business initially was driven primarily in Europe. Maybe that gives you some overall global color on the MALDI Biotyper.
Yep. Good, s o that's continuing to grow in Europe.
I couldn't quote it for every country, but probably, yeah, I think overall there is growth, although it's slower growth, of course.
Excellent
Again, slower growth from a much higher basis because we grew so fast in the last few years.
Got it. Great. Thank you.
Your next question comes from the line of Sung Ji Nam with Cantor. Please proceed.
Hi. Thanks for the questions. Frank, if you could comment on the trends you're seeing in the end markets that you haven't commented on yet, such as the applied markets, maybe pharma, biotech, and also the clinical market. I know you have small exposure there, but if you could provide any color, that would be great.
Okay. Just taking some notes here. Clinical. So, in reverse order. Clinical, which for us essentially is all the MALDI Biotyper. I think I basically just gave the comments overall. Still good growth, still double-digit growth for us, with particularly fast growth in Asia, because that's where we also had a smaller base so far for the MALDI Biotyper. Pharma, biotech is Pharma biotech, I think, is very much tools dependent. I think the money is there, the demand is there, but it is very selective, s o if pharma biotech finds that they have compelling tools that really add to their capabilities, they're willing to make investments. I would note that we generally are quite pleased with the progress there for demand, particularly from the biologic side, from some of our very unique mass spec products for biopharma.
In the applied markets, I think some pockets of that are also, I think, seeing the economic macro slowdown. I think they're still overall healthy, but also feeling a slowdown in growth rates.
Great. That's helpful. For the Japanese thermal analysis business, with the divesture of that, are you guys exiting that business, thermal analysis business, altogether?
Yes.
Okay.
Yes, we are. The only place in the world, really, where we were in thermal analysis, somewhat for historical reasons, was in Japan, with very few exports to a few other APAC countries, s o really, about the 10 million or so of thermal analysis revenue that we had in Japan was our only involvement in that market. That was not a global business for us, hence it wasn't strategic and scalable, and hence the decision that actually this business, I think, is, quite honestly, in better hands with the Netzsch Group, which is one of the global leaders in thermal analysis. They wanted to make a big push in Japan, and I think this enables them to do that, s o I think that was very sensible for our customers and employees.
Great. Then one quick one for Charlie. Any trends on kind of the material costs for you guys? Thanks.
No, nothing to add on material costs at this point.
Your next question comes from the line of Dan Arias with UBS Equity. Please proceed.
Hi. Good morning, guys. Charlie, just one on CAM. One of the things you had talked about was the need to sort of change the business mix there in terms of accepting higher-margin sales. Is that something you've started turning around or making progress on?
Frank commented, I think we've identified the problem and started to address it. We did not see the results of that effort in the quarter for sure. There's still work to do there in terms of resetting and reorganizing the sales force in terms of how they go to market. I think we know where the problems are. The CAM management team is working to address that through better sales leadership and through better control over the sales force. That certainly did not show up in third quarter results.
Okay. Apologies if I missed it, but can you just comment on the BNS business growth during the quarter? I guess, where might we be in terms of looking for new targets for CAM and BNS specifically, just relative to the targets that you had earlier in the year?
Yep. BNS saw some slowdown in the quarter, but certainly has had good growth year to date. We're not going to break that out at that level, b ut it's certainly a continuation of very strong growth in that business. They are seeing some slowdown in semiconductor and data storage markets, and that's definitely affecting revenues in the second half. Overall, the year-to-date growth is quite attractive. I think Frank's point around acquisitions, we're not totally out of the M&A market, but we also have a lot of work to do inside the existing walls of Bruker, s o we're not pushing hard on M&A right now as a lever for the company.
Okay. Then I guess, just lastly, are you maybe getting to a point where you feel like you can sort of give a guess as to where you think R&D as a percentage of revenue comes in or tracks in the longer term? What the right level might be going forward there?
Dan, we probably would prefer to take that when we give or discuss that, give some color on that when we finish our long-term planning or three-year planning as part of our 2013 budgeting process. Then we'll give some color on that when we give 2013 guidance in February.
Very good. Thanks, Frank.
Your next question comes from the line of Jon Groberg with Macquarie. Please proceed.
Hey, guys. Sorry for getting in here at the end, but first of all, I do not think anyone has congratulated you on a pretty remarkable quarter from second quarter here, s o congratulations. I wanted to just, kind of on that note, I guess, Charlie or Frank, as you did the forensics from 2Q. Even if I adjust for the $0.06 beat from BEST and the margin impact, it looks like one of the significant improvements was pulling back on the SG&A, as you said, some of the tactical maneuvers that you took, b ut I am curious, as you have done the forensics and you think about going forward, I think a big concern last quarter was that a lot of the bookings and the backlog that you had may have been mispriced. I know you have gone back and evaluated that.
How are you thinking. I guess just a little bit more insight in terms of looking at 2Q, getting into more detail, seeing what you reported in 3Q, just kind of what you found as to what happened and how you are thinking about this going forward.
Yeah. Jon, thank you. If you look back at Q2, we still are experiencing price declines in certain product lines, and that is evident in the backlog. If you take out the impact of Rosatom on gross margins in the quarter, you do not see too much of an improvement year-over-year or sequentially, s o, to the extent that we have had some discounting priced into the backlog, that is still in there and will continue to roll out over future quarters. Again, whether it is CAM or BioSpin or other businesses, we are going back and looking at our pricing strategies to make sure that we are taking the right approach there. I think that there is opportunity there going forward. On the OpEx, some of it is control, obviously. Some of it is timing. We just had some significant expenses hit in Q2 that are more timing than anything.
Some of that could have happened in Q3. Some things that were intended to happen in Q3, we are pushing out to Q4 and beyond. I think, given the slowdown on the top line, and I think just given overall uncertainty, we are marching forward at a more cautious pace and keeping control over headcount, looking more carefully at the timing of projects, b ut then we are also, through the planning process, we are looking at whether we should continue certain projects altogether. That is not going to affect the third quarter or the fourth quarter, but it certainly could have an impact on 2013.
Okay. I guess one concern also is as you made some of these tactical spending decisions, I guess how much of what are you seeing on the top line do you think is just macro? Is there any impact as you think about the next quarter, next year on the top line, that is maybe due towards pulling back or reining in on the spending? Are you able to parse those two out?
No, I don't think you'll see, except for the TA divestiture that we just mentioned, which isn't particularly material. I don't think you'll see anything on us. I think our investments in marketing and sales or R&D are fully adequate to continue. Certainly, the trends this year that we have predicted, which would still, for the full year, lead to very good organic growth. As I said, we still have a very strong backlog. Year to date, our orders are up, s o we just want to be cautious because we realize we had a good Q3, but we also had a bad Q2, and so we want to be somewhat cautious in seeing whether some of this develops into trends, and it's a little too early to tell.
Sorry. One last one, just to be clear. Because if you do the math, it looks like you're guiding to mid-single-digit organic growth in Q4. You said double-digit next year, s o I don't know if you assume mid-single digit for 2013 organic growth, like in the fourth quarter. Given what you're seeing in these, stripping out the Russia deal, would gross margins, given the backlog that comes through, would that be down year-over-year, that core gross margin? I'm just curious if it's nothing you can do about it, or are there different drivers, depending where currency ends up? Or is there anything you can do to offset what may have been priced in in the backlog?
I don't think we want to get to that level of granularity. Often in the Q4, we have decent gross margin because Q4 tends to be a reasonable volume quarter in any Q4. I think maybe the only additional comment that may shed some light on our guidance is that we roughly expect still about a 2.5% currency headwind in Q4, s o obviously, our guidance is on reported revenue. On top of that, we expect about a 2.5% currency headwind.
Okay. Thanks for the color.
Okay.
As a reminder, ladies and gentlemen, if you have a question, please press star followed by one. Your next question comes from the line of Derik de Bruin with Bank of America. Please proceed.
Hi, good morning.
Hi, Derik.
Hi, Derik.
Hi. Charlie, what's the M&A impact for the full year, particularly with this deal you just closed?
For the full year, it is around a percentage point to a percentage and a half, depending on. This acquisition that we just announced, we're making some changes to the revenue recognition policy, so it's really unclear actually what the Q4 revenue will be. For the full year, all acquisitions would be a point to a point and a half.
Great.
In Q4, you'll have roughly the TA, the divestiture, and the new acquisition very roughly offsetting each other. As Charlie has pointed out, the preclinical imaging business, the two product lines we added, will have very little systems revenue in Q4 because we tend to experience a six-to-eight-week revenue recognition delay when we acquire companies or businesses such as this one, where they previously did the systems revenue recognition upon shipment, and we do it upon acceptance. You'll see that business for the first time really show up in 2013 guidance.
Great. Okay, and how big was the overall business?
Their overall business revenue was between $10 million and $20 million.
Right. Okay. That's helpful. I guess, you've launched the new triple quadrupole and what's your type of target for the go to market on that? How are you going to take on, obviously, there's a number of well-established players in the triple quadrupole space. What's your thoughts on that process?
Right. The way to launch this product, I think, will be to have, maybe not the largest number of customers in Q1, sorry, in the first year in 2013, but to roll it out and get it to those customers that we think we can fully support and make sure that they're very satisfied. I think in terms of technology and what's fundamentally built in in terms of performance and robustness and ease of methods development and ease of use, I think it's going to be a very strong high-end product that I think will be competing at the high end and top tier of that market, b ut our ramp up in terms of units and volume, I think it will take several years to really ramp up to an appreciable market share position.
Okay. A lot of my other questions have been answered, so I will take off the line.
Thank you, Derik.
There are no further questions at this time.
All right. Thank you very much to all of you for joining us today. This concludes our Q3 earnings call, and goodbye, and talk to you next year. Thank you very much. Bye-bye.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.