Good day, ladies and gentlemen. Once again, thank you for joining and for your continued patience. This conference will be starting at approximately 2:00. Sorry, approximately 9:00. While you are waiting, if you do require operator assistance, please key star and zero, and an operator will be pleased to assist you. In the meantime, we shall continue to play the music until the conference begins. Good day, ladies and gentlemen. Thank you for joining and for your continued patience. This conference will be starting at approximately 9:00. While you are waiting, if you do require operator assistance, please key star followed by zero on your telephone keypad, and an operator will be pleased to assist you. In the meantime, we shall continue to play the music until the conference begins. Good day, ladies and gentlemen, and welcome to the Bruker Corporation quarterly earnings call hosted by Stacey Desrochers.
Throughout the conference, you will remain on listen only. If you do require assistance during the call, please key star and zero on your telephone keypad, and an operator will be pleased to assist you. I would like to advise all participants this conference is being recorded for replay purposes. Without any further delay, I would like to hand the call over to Stacey to begin. Please go ahead.
Thank you. Good morning, and welcome to Bruker Corporation's first quarter 2012 financial results conference call. I am Stacey Desrochers, Treasurer and Director of Investor Relations. With me on today's call are Frank Laukien, Bruker's President and Chief Executive Officer; Bill Knight, Bruker's Chief Financial Officer; Mike Knell, Bruker's Chief Accounting Officer; and Tom Rosa, the Chief Financial Officer of our Bruker Energy & Supercon Technologies Inc., or BEST subsidiaries. Before we begin, let me briefly cover our safe harbor statement. Various remarks that we may make about the company's future expectations, plans, and prospects constitute forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those described in the company's filings with the Securities and Exchange Commission.
While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Therefore, you should not rely upon these forward-looking statements as representing our views as of any date subsequent to today. In addition to the financial measures prepared in accordance with generally accepted accounting principles, or GAAP, we will discuss certain non-GAAP financial measures, including adjusted EPS, adjusted operating income, and adjusted operating margin, which are non-GAAP measures that exclude certain items. We exclude these items because they are outside of our normal operations and/or, in certain cases, are difficult to forecast accurately for future periods.
We believe that the use of non-GAAP measures helps investors gain a better understanding of our core operating results and future prospects consistent with how we measure and forecast the company's performance, especially when comparing such results to previous periods or forecasts. A reconciliation of our GAAP to adjusted numbers can be found in our press release issued earlier today and is located in the investor relations section of our bruker.com website. Today, Frank will provide an update on the business and certain overall Bruker Corporation financial highlights. Tom will describe the financial results of our BEST segment, and then Bill will discuss the financial results of our Bruker Scientific Instruments, or BSI segment. I 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. Before I provide a business update and discuss the financial highlights for the first quarter of 2012, I would like to welcome our new sell-side analyst, Jon Groberg from Macquarie Capital. I also would like to introduce all of you to Bruker's new Chief Accounting Officer and Vice President of Finance, Mr. Michael Knell. Mike is a CPA and was a partner at Ernst & Young and joined Bruker here in Massachusetts just a few weeks ago. Starting now with the financial highlights of Bruker Corporation, which most of you may have read in our earnings press release issued earlier this morning. Bruker had a good start to the year 2012.
Bruker revenue in the first quarter of 2012 was $405.6 million, a GAAP increase of 13.6%, or a currency-adjusted increase of 15.0% when compared year-over-year to the first quarter of 2011, and a 13.7% year-over-year organic growth rate. GAAP operating income in the first quarter of 2012 was $34.4 million, compared to $25.7 million in the first quarter of 2011, an increase of 33.9%. Our adjusted Bruker operating income in 2012 was $43.6 million, compared to $35.8 million in the first quarter of 2011, an increase of 21.8%. In the first quarter of 2012, our GAAP net income was $15.1 million or $0.09 per diluted share, compared to our first quarter 2011 GAAP net income of $11.3 million or $0.07 per diluted share, a 33.6% increase in net income.
Adjusted net income in the first quarter of 2012 was $23.8 million or $0.14 per diluted share, compared to adjusted net income of $21.3 million or $0.13 per diluted share in the first quarter of 2011, an increase in adjusted income of 11.7%. Exceeding our own expectations, our backlog increased yet again in the first quarter of 2012 due to strong new order bookings. We feel that the tone in many of our end markets has improved since the fourth quarter of 2011. More importantly, most of our products have excellent competitive positioning, and we are benefiting from tailwinds due to major secular trends, new scientific frontiers, and technology transitions, which for Bruker just tend to be more significant than macroeconomic or geographic trends.
To try to put this into perspective quantitatively for you, please consider the following global life science R&D spend numbers, on which I just got an update yesterday at the semi-annual ALSSA meeting. ALSSA is the industry association and stands for Analytical and Life Science Systems Association. The global annual life science R&D spend, consisting of all pharma, biotech, CRO, hospital and medical school, and other academic and government R&D spend in the life sciences, is estimated at $250 billion per year in total overall, in all countries. This $250 billion life science annual R&D spend is growing at about a 4% CAGR, with a 3% CAGR estimated in the developed world and an 8% CAGR in the emerging countries. For perspective, Bruker's life science tools revenue are about $1 billion, with the remainder of our revenue in other applied materials research, homeland security, or industrial markets.
Therefore, Bruker accounts for less than 0.4% of the global life science R&D spend, i.e., a tiny fraction. Other numbers that you may wish to consider are that Bruker's total addressable markets are about $45 billion-$50 billion per annum and our presently served addressable markets are about $8 billion-$10 billion per annum. For Bruker, the crucial drivers for profitable growth are whether we have fresh and competitive products, and whether we are proactive in serving the life science research, pharma biotech CRO, and emerging diagnostic technology trends within this $250 billion annual life science R&D spend. Examples of the secular life science trends that are benefiting Bruker are post-genomics and systems biology, epigenetics, personalized healthcare and protein or metabolic biomarkers. More and more differentiated approaches to proteomics, from quantitative proteomics to post-translational modifications, top-down proteomics, intact protein analysis, proteomics imaging, et cetera.
Further examples of major life science technology trends benefiting Bruker are the dramatic shift of pharma biotech drug pipelines to biologics, which really plays to our unique capabilities in top-down and intact protein mass spectrometry. As well as the increasing role of preclinical imaging, or the paradigm shift in clinical microbiology identification to MALDI-TOF, et cetera. If Bruker can, for example, double its tiny 0.4% fraction of these very large life science R&D budgets over time, then we can more than double the size of Bruker over time. In comparison, at least for Bruker, it is just less important whether or not the overall $250 billion annual spend grows a little bit more slowly or faster overall.
While overall NIH budgets or European macroeconomic trends are of some importance, in general, they are of limited value in trying to predict the key market drivers and growth potential for Bruker. We are optimistic that Bruker will remain a fast-growing company in 2012 and beyond. Our strategy and goal remains to drive innovation, focus on products, fast, profitable, organic growth, and occasionally we may pursue some selected smaller or mid-sized high -ROIC acquisition opportunities where they complement one of our core focus areas. For example, in the first quarter of 2012, we acquired an excellent small company called SkyScan in Belgium. They develop, manufacture, and distribute advanced high-resolution micro-computed tomography or micro-CT systems for three-dimensional X-ray imaging. These micro -CT products fit nicely into our global materials research and preclinical imaging distribution channels and complement our other X-ray analysis and preclinical MRI or magnetic resonance imaging products.
During the first four months of 2012, we already launched 13 new high-performance analytical products, which address an expanding array of life science, pharma biotech, clinical research, food, petrochem, environmental, homeland security, materials and nanoscience, as well as academic research and educational markets. At Pittcon, our new SCION GC triple quad MS product, released in July of 2011, won two awards, the 2012 Laboratory Equipment Reader's Choice Award winner and the 2012 Pittcon Editor's Silver Award. The SCION triple quadrupole and the SCION single quadrupole mass spectrometers for gas chromatography detection were designed especially to enhance data quality and productivity for analysts working in routine testing and applied markets, and these systems combine performance and value like never before in GC-MS.
At the 53rd ENC, or Experimental NMR Conference in Miami in April, and at the Analytica 2012 conference in Munich, Bruker, also in April, both Bruker introduced and showcased more than a dozen new products or entire product lines, including our AVANCE III HD for high definition next generation NMR spectrometer platform. Our XFlash 6 next generation performance leading EDS detector product line, our SCION next generation standalone high-performance GC product line, which incidentally replaces the last of our legacy Varian, Inc. products, and our S1 TITAN next generation best-in-class handheld XRF or X-ray fluorescence product lines for elemental analysis in many applications and industries.
This is a good start to the year with a large number of important new product introductions already year to date, and very good first quarter organic revenue growth and solid double-digit increases in GAAP and adjusted operating income and net income year-over-year in the first quarter. With that, I'll turn the call over to Tom Rosa, the CFO of our BEST segment.
Thanks, Frank. During the first quarter of 2012, revenue for the BEST segment increased by 25% to $30 million, compared to $24 million in the first quarter of 2011. Excluding the effects of foreign currency translation, first quarter 2012 revenue increased organically by 30.4% year-over-year. The BEST adjusted operating income in the first quarter of 2012 was $0.3 million, compared to a BEST adjusted operating loss of $0.6 million in the first quarter of 2011. Adjusted EPS for the first quarter of 2012 for the BEST segment was a net loss of $0.01, the same as a net loss of $0.01 in the first quarter of 2011. During the first quarter of 2012, we continued to make progress on the commercialization efforts of our new products.
BEST announced the successful completion of a milestone in the development of a novel shielded inductive superconducting fault current limiter, which is to begin field test operations in Germany in 2013. During the test, the device functioned as predicted in more than 100 triggered short circuits. Fault current limiters are devices that can protect electrical equipment in the transmission or distribution infrastructure from damaging power surges caused by fault currents arising from short circuits, power generation disturbances, or lightning strikes. Backlog in the first quarter of 2012 was $219.4 million, as compared to $172.1 million in the first quarter of 2011, an increase of $47.3 million or 27.5%. The backlog increased as a result of demand for our low temperature superconductors, including new longer-term supply orders from major manufacturers of clinical MRI systems, along with orders for RF cavities, couplers, and other superconducting devices from customers across the globe.
BEST made excellent progress over the last three years, consistently beating its internal financial goals, but we decided to withdraw our S-1 registration statement in March 2012 as a result of current equity market conditions in our industry sectors and in order to save on legal, accounting, and other costs associated with keeping the S-1 filing current. BEST is still investing heavily in new product development and marketing for crystal growth magnets, inductive superconducting fault current limiters, and next -generation high -temperature superconductor scale-up, as well as in capacity expansion in order to be able to deliver on its already booked orders, which have caused a substantial increase in external backlog from under $10 million back in March 2009 to now approximately $219 million as of March 31st, 2012.
BEST revenues over the last three years have increased from $59.8 million in 2009 to $90.5 million in 2010 and to $113.4 million last year in 2011, almost doubling within just two years. If equity market conditions improve in BEST industry sectors of cleantech and advanced industrial technologies, then Bruker and BEST have not ruled out refiling the S-1 at some point in the future, but most likely not before 2014, 2015. As a result of withdrawing the S-1, we can now provide BEST segment guidance for 2012. BEST expects organic revenue growth of 15%, near break even adjusted operating income, and an adjusted loss per share of $0.04 for the full year 2012.
BEST plans to spend between $3 million and $4 million in 2012 on relocating its LTS and device businesses to new, larger facilities designed to provide us with enough additional capacity to be able to deliver on our existing and planned orders. We are committed to the success of BEST as it continues to execute on its growth and emerging profitability strategy. I will now turn the call over to the CFO of Bruker Corporation, Bill Knight.
Thanks, Tom. I would now like to give you further details on our Bruker Scientific Instruments, or BSI, segment. On the top line, during the first quarter of 2012, BSI revenue increased by 12.6% to $378.1 million, compared to $335.8 million in the first quarter of 2011. Excluding the effects of foreign currency translation, BSI revenue increased by 13.7% year-over-year, and BSI organic revenue growth was 12.4% year-over-year. Moving further down the income statement, adjusted BSI gross profit margin expanded by 80 basis points in the first quarter of 2012 to 50.1%, compared to 49.3% in the first quarter of 2011. Please keep in mind that Bruker, as of the year 2012, and for all prior year comparison made in 2012, is including all non-cash compensation expenses and adjusted operating income and adjusted EPS.
Whereas in 2011, we had excluded these non-cash comp expenses from adjusted operating income and adjusted EPS. With that in mind, BSI adjusted operating income was $43.7 million, or 11.6% of revenue in the first quarter of 2012, compared to adjusted operating income of $37.7 million, or 11.2% of revenue in the first quarter of 2011, a 40 basis point increase. BSI operating margins for the first quarter of 2012 without our Chemical and Applied Markets, or CAM division, were 13.9%, as compared to 13.3% in the first quarter of 2011, a 60 basis point increase. During the quarter, we invested 12% of revenue on R&D for developing new products, which drives our above-average organic revenue growth rates and our continued gross profit margin improvement initiatives.
Below the operating income line, adjusted for first quarter 2012 net income for the BSI segment was $25.2 million, or $0.15 per diluted share, beating guidance and consensus, compared to adjusted net income of $24.0 million or $0.15 per diluted share in the first quarter of 2011. During the first quarter of 2012, we had $3.0 million of foreign currency losses, which came primarily from our Swiss manufacturing and distribution entities. Also, in the first quarter of 2012, we had $3.5 million of interest expense, an increase of $2.0 million from the first quarter of 2011, and was a result of refinancing our debt. Our GAAP effective tax rate was 43.9% during the first quarter of 2012, which was in line with our tax rate of 43.5% during the first quarter of 2011.
Our tax rate was negatively influenced by the unbenefited losses in CAM in the U.S., and legal and compliance costs. Our adjusted tax rate was approximately 34% during the quarter, which is included in the reconciling tables in our press release issued earlier this morning. Before we open up the call for questions, I wanted to comment on some balance sheet and cash flow metrics. Cash flow provided by operations was $4.8 million, compared to cash used in operations of $29.4 million in the first quarter of 2011. In the quarter, our inventory level increased, partially due to seasonality and partially due to our strong bookings performance during the first quarter of 2012. In the first quarter of 2012, our BSI working capital to support $1 revenue remained flat at $0.47 as compared to the end of 2011.
Working capital, and particularly inventory turns, is an area of opportunity, and we expect improvements this year, which will positively benefit our operating and free cash flows. As of March 31, 2012, Bruker had cash equivalents, and restricted cash of $233.1 million and net debt of $86.5 million. Overall, a good and very encouraging start to the year. Given our strong revenue and adjusted operating income momentum, we continue to feel very positive about 2012. With that, I will turn the call back over to the operator for any questions you may have.
Thank you. Ladies and gentlemen, for any questions, please key star one on your telephone keypad. All questions will be answered in the order received, and you will be advised when to ask your question. For any questions, simply key star one on your keypad. The first question comes from Jon Groberg. Please go ahead.
Hi. Thanks a million for taking the question. I may have missed this. I probably missed the very beginning of the call, I was on another call, but what were the revenues for CAM? I know you gave the BSI margin ex-CAM. Just curious what the revenues and the drag was from CAM.
Hi, this is Mike. Total revenue for CAM for the quarter was $22.2 million.
Okay. And for the year, you thought that would be around a $10 million loss on the operating income line. Are you tracking that?
Jon, this is Frank Laukien. We believe we're approximately tracking that.
Okay. So it looks to me like in the first quarter here, you had pretty good. You were higher than I was expecting there on the ex-CAM margins, quite a bit so. Frank, obviously, this is the key crux to the story that our investors are focused on. Can you maybe qualitatively talk about, as you kick off the year here, how you're thinking about your progress and kind of how you expect that to continue to play out through the year?
Yes, I think it looks as if we are on track to reach our annual goals. At this point, I think it's too early to consider looking at changing our overall guidance. Plus, we generally don't do that during the year unless something changes dramatically. But I think we had a good start, and I think we're generally on track or even a little bit ahead of schedule.
So there was nothing kind of pulled forward or anything about this particular quarter that is not likely to repeat as you move throughout the year?
No, especially in view of the strong bookings that indeed, we were optimistic, but this has exceeded even our somewhat optimistic assumptions. So our bookings were really very good for the Bruker Scientific Instruments segment. And our bookings for the Bruker Scientific Instruments segment also grew in the teens year-over-year. So our backlog grew even further, even though we had originally anticipated in our business plan, and I think we had communicated that to the street, that we might use up some of our backlog. And quite honestly, we still hope to reduce our backlog overall. But I guess we have not succeeded in that in Q1 because the orders were stronger than we had anticipated. So we are very pleased with that, and that sets us up on a solid footing for going forward in the year.
Okay. And Frank, I know you get this a lot, but are there any comments you could make around either geographically or the industry in terms of weakness? You have heard varying comments from other players in the space, particularly on the instrumentation side, but it sounds like you are able to be a little bit more nimble, I know, as you have talked about, but any broad comments you would make about what you are seeing there?
I think we definitely do see a relatively weak or flattish U.S. academic demand. That is not a surprise. We do not expect that to change very much in the next two or three years, quite honestly. So not a surprise. Mediterranean Europe is not particularly strong, although Turkey, as part of Europe, is very strong. There are plenty of other strengths in Europe. India has been strong for us. Whether China is growing at 8% or 10%, we could not tell the difference. For us, it is strong. Japan has been all right for us. Actually, I would say strong. So other than U.S. academic funding and Southern Europe or Mediterranean Europe, I think basically everything has been quite solid with many pockets of strength.
I think we're a little bit surprised on the positive side that data storage and semicon has turned around much more quickly than what we had anticipated, and other industry players seem to confirm that as well. We do not sell a lot into solar and PV, but that's obviously an area of downturn and weakness. We sell very little into that, but we sell more into semicon and data storage of the order of $100 million per year altogether. Not all of this is fab line stuff. A lot of it is also semiconductor and data storage research equipment. The big secular trend there is to go to 450 mm fabs and to go to smaller and smaller feature sizes, 28 nanometers to 20 nanometers. All of that, again, plays to our strength.
Here, in addition to these secular 10-year trends, we definitely see a faster turnaround than what we had anticipated. So that's been maybe another area, a less than 10% area for us, but nevertheless, an area of greater orders than what was anticipated. Other than that, it's pretty much been solid. I would just say there's an incremental improvement in tone just about anywhere. I think the concern about a significant downturn or slowdown, which was around in October, November of last year, it's greatly reduced, and there's more optimism in the markets in general.
Great. Thanks for all the color, and congratulations.
Thank you, Jon.
Thank you. The next question in the queue comes from Derik De Bruin. Please go ahead.
Hi, good morning.
Hi, Derik.
Hey, now that we are able to talk about the BEST business a little bit more, can we just talk about how you see that business progressing over the next couple of years? You are talking about 15% organic growth in the business this year. Is that a relative run rate for it? Before you talked about spinning out, you talked about doing some R&D collaborations maybe to absorb up some of that cost of the business. Can you talk a little bit about that, and is the business profitable next year if you are about break even this year? Just a little bit more color on how you are seeing that kind of unfolding.
I will start, actually, and then I will turn things over for Tom. The sort of big picture, the last three years at BEST, we had asked them to be at or near break even and to grow as rapidly as possible to take advantage of the growth opportunities and the many uncharted markets that they are getting into. I think they have succeeded with that really very nicely with doubling in two years, essentially doubling in two years, and then tenfold improvement in backlog or multi-year backlog. If the last three years were sort of near break even and a 40% CAGR, the next three years, we will not likely see 40% CAGRs, but maybe 15%-20% CAGRs. So reduced, but still very fast, both with emerging profitability. That is sort of the highlight direction.
Tom, you could maybe give some preliminary color what you might expect for next year, if this year is an operating break-even year.
Yeah. Hi, Derik. This is Tom Rosa. I will address that in a couple of ways. The 15% organic growth rate this year is actually just about equal to last year's growth rate on a currency-adjusted basis. We are facing some FX headwinds this year, so on a currency-adjusted basis, we expect about 20% growth this year, just as we had 20% currency-adjusted growth last year. For 2013, we are still in the planning stages, but we believe that kind of growth rate will again be achieved. We are continuing to see good growth across our materials and devices platforms. As far as the bottom line outlook, we do have a number of R&D efforts underway, collaborations, et cetera. This year, as an example, we expect R&D to be up about $3 million over last year.
As we continue to invest in R&D, for instance, we just set up a new R&D center to promote the development of our FCL product in Fremont, California, late last year, which will add to our R&D cost this year. Our goal is to be break even on an adjusted basis this year. As we complete our relocations in 2012, our goal certainly would be to become profitable in 2013.
Great. That's very helpful. Some of the commentary around the end markets has been rather mixed, and there's been some talk about order delays at some of the pharma companies. Frank Laukien, your NMRs are certainly big-ticket items that could potentially be subject to those types of delays. Did you see anything unusual in the pharma markets in Q1?
I think it all depends what one calls the pharma market these days. If one is focused on the top 20 pharma companies, they haven't been growing. They've been consolidating. That's not been a fantastic market. I think that's just the wrong definition these days. I would call it the pharma biotech CRO/academic environment. So much of pharma basic drug discovery these days gets outsourced to medical schools and universities. So much of development goes to CROs, whether they're here or in India or China or elsewhere. A lot of the pharma R&D really occurs in biotech companies. The successful ones get purchased. It's just a completely changing industry. So yeah, the top 20 pharma companies, that's not a great market, and the trends haven't been good. But if you look at the pharma biotech CRO academic continuum, which is really relevant, it's a very healthy market.
Great. I'll get back in the queue. Thank you.
Thank you. The next question in the queue comes from Amanda Murphy. Please go ahead.
Hi. Good morning. Thanks. I had a follow-up on the margin question. It sounds like, if you look at CAM, the margins might have come in a bit better than you expected in the quarter. I am curious, is that a fair characterization? Also, can you just remind us again where you stand with the various initiatives that you have in place to drive margins through the year?
Hi, Amanda. It is Bill Knight. The initiatives are ongoing, certainly, and evolve around the standard, as we have described before, that every new product that Frank mentioned, I think 13 new products that have come out, every new product we introduce has a lower cost structure than its predecessor, along with improved capabilities and solutions for our customers. That obviously helps with gross profit margins. We continue to work on optimizing our factories, whether it is taking some of the non-core activities, whether it is some machining or cabling, whatever, and outsourcing that, relaying out our factory floor to improve production flows, certainly working with vendors near the factories and throughout the globe to improve both quality and pricing and delivery. It is a whole series of events that we are working on or processes that we are working on.
I think, quarter -to -quarter, there will be a little bit of variability. But I think we have started these initiatives, really focused on them about three years ago, and I think that the total product line that we have in the marketplace now is really starting to deliver the gross profit margin targets that we had focused on for quite a while. We certainly expect improved margins, operating margins, gross profit margins, as we move out through 2013 and 2014.
Maybe a couple of additional comments on that. Actually, subsequent to the quarter, we divested a small Bruker Optics machining operations in Texas. It is incremental change, but it is all good steps that are part of our operational excellence program. One thing that I am really pleased, sort of by midway through this first quarter and hopefully very visible in the second quarter, our CAM centralized factory in Fremont, California, is really beginning to click and provide the output that we had hoped for. I am sure that is going to have a good impact on growth margins and operating margins on CAM. I am very pleased with the CAM progress. It is not fully visible in Q1 yet, but I know we have really made a lot of progress, and I think it will really show in Q2, Q3, and beyond.
If you were just to look at it on a high level, is there a way for us to think about how far you are through these initiatives, the 10%, 50%? How much more room do you have there? It sounds like quite a bit, but just trying to think about it conceptually.
I mean, gross profit margins we have started a long time ago, and that will never stop. We just raise the bar by another 2% or 3% every three years or so. I really think that is a continuous process. We are sort of approaching at BSI over around 50%, which at some point, a long time ago was our goal, but I am sure we will move those targets up. This is not for a specific year, but we will move those targets up 50, higher. I do not see why over time, and I am not going to specify the timeframe right now, but over time, our gross margins should be in the mid-50s. That will never end, and I do not know what inning we are in. That is just an ongoing investment. The outsourcing to low-cost countries, the further divestiture of certain context, machining, cabling, electronics. I think we are not at halftime yet.
We started with some things that have taken place, some things are ongoing. It is still early innings. I do not know what the percentage is. Maybe we are at 30%.
Okay, that's helpful. Just last one for me, switching topics. I'm curious if you can provide some more color on the applied markets, what you're seeing there. You had talked in the past about leveraging CAM's sales force in that market. Is that something that's progressing well for you guys?
The applied markets are doing well, and CAM is growing particularly fast. I think, at CAM, not surprisingly, where we have new products on the market already, the ICP-MS, the aurora, and the SCION GC-MS and GC triple quad that we brought out last year, they're really growing very nicely. Our GC standalone products, which were still the older Varian products with the Bruker logo, were not growing until recently. But now that we have also a next-generation redeveloped Bruker standalone GC product line, we think that will also begin to move in the right direction. Yes, we are, to some extent, using CAM or life science products and selling them into the applied markets via CAM. It's not a huge factor. It's sort of an incremental less than 10%.
Of course, some CAM product, if you like, are ultimately also going into traditional life science or clinical markets. Those are just the 5% or 7% cross-selling synergies. They're not the big drivers. But they're nice, they're incremental, and they're easy to get.
Got it. Thank you.
Thank you. The next question in the queue comes from Tycho Peterson. Please go ahead.
Hey, good morning. Thanks for taking the question. First one, I know you don't like to give a lot of color on backlog, but could you just give us a sense of how much of the growth you're seeing in backlog is kind of old legacy business versus maybe some of the acquisitions? Then can you also maybe just address the backlog conversion? I know you talked about it in your comments, Frank, about you haven't been able to work down the conversion times, but how big a priority is that and how should we think about your ability to work down backlog conversion over time?
Yeah. So our backlog grew overall. We thought we would begin to chisel away at it a little bit in Q1, but the orders were just very, very good. The BSI backlog also increased, compared year-over-year, for sure, and also compared to the fourth quarter, which is unusual, actually, but we really had very good bookings in Q1. We actually already have to slightly modify our own business planning. We had planned for somewhat less new orders, so we actually need to increase our output in some of our divisions. I don't want to go into too many details there for competitive reasons, even further.
Yes, backlog conversion and shortening the length of the time we have from our backlog actually remains very much a priority to operational excellence, order execution, and production logistics that goes with that is a very high priority for Stefan Westermann, our Executive Vice President, who's running that part of BSI. Things are in very high gear to accomplish that. We're making good progress. I think you'll see a lot of that. If we fall back a little due to high orders, we're not too unhappy, obviously.
Some of the things I mentioned earlier as far as some process change and a little bit of outsourcing, it is not only to pull some cost out, but as Frank just alluded to, we really are looking to increase the output on our existing brick and mortar, and we have opportunities to do that. That will help, I think, bring down some of the delivery times and get our backlog, we feel, at a more acceptable level. But it was certainly a strong quarter for orders, and it is a nice problem to have.
In your comments earlier, Frank, you talked about some of the strength in international markets, and I think you said Japan was fairly strong. Can you just talk about specifically where we are in the process of rebuilding infrastructure? You had previously called out, I think, $200 million in the Japanese budget to rebuild infrastructure. So just wondering if there is a bolus of demand here that you are seeing.
Okay. Good question, Tycho. I am not sure I have all the details at my fingertips. I know we did already last calendar year, receive some of these orders, rather large orders for the Sendai province and Tohoku University in particular, for a lot of our product lines. And some of that has been delivered. I cannot tell you right now whether all. I suspect some of it has been delivered and some of it still will come through. I think, however, my impression is not that this is the bolus of rebuilding after the tsunami. I think the demand just generally has been healthier in Japan. For instance, also, Japanese semicon customers or whether it is research or fab lines, orders have been coming through. I do not think they are all in revenue yet, but it generally seems like a healthier picture.
But there was an element, and I cannot quantitate it and time it for you properly right now, also of some sort of a rebuilding in the Sendai and other provinces. I think most of the orders we have had probably, and some of the revenues has come through and some of it has not, but I do not have it quantitatively.
Okay. Then just last one on capital deployment. It sounds like we should expect maybe some continued bolt-ons on a go-forward basis. Has the M&A pipeline changed dramatically for you guys in the past six months or so? Are you seeing more deals come your way?
Well, certainly, since I think there was a bit of a maybe in Q2 of last year, Q1, Q2 of last year, in some deals that we did look at, M&A valuations were a little too rich in our opinion, and we did not proceed with those. The M&A pipeline for us and what we're looking at, which are smaller to mid-sized acquisitions, I don't see it so much dependent on economic factors or on seasonality or anything like that. I think it's more of a continuum of smaller to mid-size companies that have very nice products, but don't have the global reach and for whom Bruker might be an interesting partner.
Okay. Thank you.
Thank you. The next question in the queue comes from Dan Leonard. Please go ahead.
Thank you. Just two questions. First off, on CAM for the quarter, if it was about a 200 basis points delta on your operating margin, I am coming up with a $6 million loss for CAM. Does that sound about right? If it does, can you walk me through the pacing of how you get to the $10 million loss for the full year?
That is approximately correct. We believe if you multiply that by four, it is higher. I think the trends that we are seeing, we believe that the $10 million is still a reasonable number. It is obviously an estimate, but I think it is a reasonable number for the year.
Okay. My follow-up, Frank, could you quantify the boost to margins that would occur if your bookings growth did in fact slow and you were able to draw down some of your backlog?
I understand the question. I do not think I can do that piece of analytics ad hoc. I apologize. It is a very good question. I do not think I have a quantitative answer for you here.
Okay. But presumably there should be some boost because there has been a catch-up issue from the compensation standpoint, correct?
Oh, okay. Generally that is correct. Yeah. Indeed. Yeah.
Okay. Thank you.
Yeah.
Thank you. The next question comes from Dan Arias. Please go ahead.
Hi. Thanks very much for the questions. Frank, I appreciate the notion that technology and the secular trends you're seeing are the key factors for you guys. I guess just on the bigger picture, what are your assumptions for growth this year, including in terms of the macro climate for Europe? Do you assume that the EU sort of stays where it is or declines modestly? What's the implied move forward overseas there?
Well, for European Union research budgets, we don't assume a decline. Even if there is a small contraction in the European Union, and most European Union countries seem to be shrinking their economies slightly. I think the dynamics for research and development at universities and R&D also among the industrial customers, excluding some Mediterranean countries, I think are really quite healthy because everybody understands that there's the enlightened element, that that's a good thing to invest in on a political and societal reason. I think it's also a competitiveness of nations. I think people see what investment occurs elsewhere in the so-called emerging markets, which really aren't emerging. They're just huge, rapidly growing markets. The R&D spending in most of Europe is healthy. For the European Union, it's very healthy. Central Europe, Eastern Europe, Russia, it's dramatically growing. Within China, it's dramatically growing.
Whether China grows 10% or 8% really doesn't matter this much for our industry. When China says they want to go from GDP of 1.7% spent on R&D to 2.2%, that's the big news. Those are the big trends for Bruker, not whether they grow at 8% or 10% and build more or less roads or apartment buildings. Same for Russia. They have declared pre-election, though be it, but I think generally the trend is there that they want to bring their R&D spending to over 2%, I think to 2.5%, which is an ambitious goal. Nonetheless, that means in certain R&D zones in Moscow, St. Petersburg, and a few other areas, there is very dramatic improvement and increase in R&D spending. Those are the important trends, not the macro trends. The headlines don't matter that much. These trends are much more important.
Got it. Okay. Thanks for that color. I guess within mass spec, there's been some speculation on changing dynamics in the QTOF market. Can you just comment on the uptake of maXis and whether or not you're seeing anything different in terms of customer preference or maybe overall share gains on your part?
Yes. The maXis. ASMS is not far from now, and we will have a press release and product announcements. I am sure there will be other companies with product announcements. Most of the mass spec comments I would perhaps defer by a few weeks until we have our press conference in Vancouver. But yes, our maXis had excellent uptake and gains in market share, for sure.
Okay. How about on NMR? Most people tend to focus on competition with Agilent there, but I am just wondering if you can comment on your experiences in Japan or China. Is there anything you would say about the regional competition that you see there with JEOL or maybe an opportunity for share gain there?
JEOL's NMR business, JEOL Resonance, as they are called, have done some interesting innovative things in a few niche markets in solid-state NMR and so on. At the recent ENC conference, they had a couple of nice new product introductions. I think, it is not only Bruker and Agilent, for sure. That is a third viable competitor, and they are stronger in Japan and parts of Asia -Pacific, and they are present elsewhere as well. I would never underestimate them.
Thanks, Frank.
Thank you. The next question in the queue comes from Isaac Ro. Please go ahead.
Good morning. Thank you for taking the question. If I could just ask the first question on BSI and then second one on BEST. On BSI, obviously, if I look at your organic growth compared to peers, I think as the last question pointed out, pretty solid, and it would imply that you guys are doing pretty well in market share. Could you offer some color as to where you think you're doing the best in terms of incremental share gains across the portfolio?
Isaac, we think it's actually pretty broad. I couldn't isolate one product or even one division. It's pretty broad-based. I think we're really gaining market share from EDS, EBSD, to X-ray tools, to atomic force microscopy. We certainly haven't seen any market share erosion in NMR, mass spec in the QTOF area. In microbiology, we've been gaining. This is not the complete list, so it's not whatever I didn't mention we're losing. I think it's really pretty broad-based. I'm not aware of any area right now where, let's say, we're in trouble or backpedaling and losing. So it's pretty broad. It's really quite healthy. In life science mass spec, it's been good, but in many other areas, it's been solid to growing in terms of market share.
Great. That's very helpful. Then secondly, on BEST, if we look at sort of the move forward planning from here, clearly from a gross margin perspective, a little below the corporate average. Just wondering, as you look at ways to improve or maintain the growth rate on top line as well as improve profitability, how would you kind of break out the opportunities at gross margin versus the OpEx side?
Yeah. Hi, Isaac. This is Tom Rosa. The gross margins this quarter were about 22%, and absolutely, we are well below the Bruker standard. I do want to point out that three or four years ago, we were at 8%. We have made tremendous strides on improving gross margin. It is still a material-intensive business. I think over 84% of our sales in Q1 were wire and other material-type product related. That is abnormally high. We expect the second half of the year to be more device-oriented, but still on a 70/30 type ratio in favor of materials. We do have opportunities, we think, down the road, to improve our gross margin as we transition into more device-oriented products. But for now, the gross margin number you saw in Q1 is probably pretty representative of what we will see for the full year.
Isaac, if I may add, I think the P&L appearance of BEST, even in five or 10 years, even if it succeeds wildly, it will always be very different from a scientific instrument's P&L appearance. On the material side, your SG&A is much, much lower than the high SG&A that we generally face in the scientific instruments or life science tools space. Gross margins are lower, but much lower SG&A. Even for the device business, a lot of the device business will be via OEM partners in the future. The P&L appearance, even long term, is at the operating margin, I do not see why this BEST business, over quite some time, cannot go into the mid to high teens eventually. But the way to get to these operating margins, I think, will always be very different, generally with lower gross profit margins and lower expenses.
That makes a ton of sense. Okay, thanks a bunch.
Sure.
Thank you. The next question comes from Jon Wood. Please go ahead.
Hey, thanks. Can you hear me?
Yes, Jon.
Hey, good morning. Can you guys comment on the Veeco Metrology business in the quarter? Anything you are willing to offer on kind of revenue and the bookings trajectory would be great.
Yeah, that was actually another positive surprise. They had a very strong year last year, and because of some of the weakness in semiconductor and data storage, had been pretty conservative in budgeting bookings and revenue for the year. I think on revenue, they were a little bit above their plan. Nothing that remarkable. But in terms of bookings, they were quite a bit better than their essentially flat plan compared to last year. That was a positive surprise on the bookings side.
Frank, I know you are cycling up against a backlog flush there in terms of revenue. Was that business flat, up or down off of that comp last year when you actually flushed the backlog from the fourth quarter of 2010?
The BNS business, ex -Veeco as you call it, but the Bruker Nano Surfaces division, they had a very unusual first quarter last year. It was very strong, very high on margins, but that basically had a lot to do with them settling into that new revenue recognition model. They had a very weak Q4 2010 because a lot of their revenue got deferred according to our more conservative revenue recognition rules. Then Q1 was unusual for them last year. Having said that, I am not sure. How can we provide some additional color on that, Jon?
Just the revenue level in the first quarter.
Mike, do you have it?
Yeah. Revenue was $44.4 million for BNS.
Okay.
The GAAP gross margin of 45%, which was up from last quarter's 2011 38% margin.
All right. That's wonderful. Thanks.
The adjusted gross margins on BNS are in the mid-50s.
Okay. All right, great. Bill, last one for you. You guys have talked about $80 million- $120 million of free cash flow as of last call. Can you just give us an update of how you are tracking to that plan currently? Are you still within the range or the top end, tracking lower end? Any qualitative commentary around that would be great.
I think we are still with the financial goals that we talked about in our call on February 22nd. I think we are still very comfortable with those targets.
Okay. Thank you very much.
Thank you. The next question in the queue comes from Robert Colesen. Please go ahead.
Hey, congratulations on the quarter. Just a real quick question. Could you comment a little on that ITER fusion project? It seems like, well, I sort of perceive it as a sleeping giant, but if you don't know too much about it.
Yeah. Hi, this is Tom Rosa again. Yeah, for the benefit of others that are listening, the ITER nuclear fusion project is something on which we booked a $36 million order for LTS wire back in late 2009. We began shipping on that in a very small amount last year, coupled $2 million-$3 million USD. We had approximately 4 million of shipments in Q1 on that same project and with very good margins for us. The second half of the year, we expect to be stronger. We don't expect any significant shipments in the next quarter. But it is progressing well. It's a major nuclear fusion project that's going up in France, and very pleased to be part of it.
Thanks, Tom.
You're welcome.
Thank you. The next question in the queue comes from Steve Unger. Please go ahead.
Hi. Good morning. Just a couple of quick questions. Frank, as far as capacity in your internal infrastructure, last year, you were controlling expenses, you had a hiring freeze. Are you running sort of a tight model as far as having service personnel and installation personnel to get the products in?
Well, good question, Steve. We're trying to get it right, of course. In terms of capacity, we had quite a bit of capacity investment last year, including at BEST and, of course, ongoing this year. Last year, we hired a little too front-loaded early in the year, which hit our expenses. In hindsight last year, if I could do it over again, we would do it more gradually through the year. We try to plan that very well this year, and if we grow at 10%, we hope that our headcount grows by 5% or less this year. I think we're very good this year at pacing it throughout the quarters from what I can see. We're trying to get it right, which we didn't do optimally last year. I think we're neither too tight nor too generous.
I hope we're at about the right level.
Great. Could you comment on the progress of the MALDI Biotyper and as far as your development plan? I know that bioMérieux is planning to at least file the VITEK MS, is what they call it, by the end of the June quarter. Do you have similar plans?
Well, for the MALDI Biotyper, a key conference for that was in London in early April, the so-called ECCMID conference. We were delighted. We have now over 500 installations, all paid for, either by lease or by payment worldwide, which makes it the clear market leader. We also brought out some very important new products. The products were not a new box or a piece of hardware, but a very crucial fungi library and methods, as well as a separate mycobacteria, including tuberculosis product, and a number of other further innovations. I think those were the only MALDI-TOF innovations at this particular conference. We have a large number of partners, including some very major partners, Siemens Healthcare and BD, plus a number of other integrators that all use the MALDI Biotyper. So very good progress, a lot of enthusiasm, continued innovation, more assays going onto that platform.
Other things that are work in progress that may come out next year as additional assays and products for that platform. So it is quite strategic for us. We are working with the FDA. I would like to think that we may, in the second half of the year, have FDA clearance, but as you know, that is always very difficult to predict, and it is obviously up to the FDA.
Got it. Then, just lastly, on the Varian transition of those products, those legacy products, could you point to, I guess, what would be the key enhancement to the legacy products that have done specifically in the SCION platform?
The GC-MS platform, SCION, that we brought out last year, that has been a substantial redesign, and you are probably familiar with that already. It is faster, it is more sensitive, smaller footprint, incredible convenience for doing MS-MS, making MS-MS basically as easy for relatively untrained operators as running just GC-MS, which has not been the case previously. The GC SCION, the SCION standalone, really is a new electronics platform with much better electronics platform with also a lot of other, I am sorry, let us call them plumbing improvements in various parts of the GCs, the valves, the injectors and so on, where we, in some cases, I would say, drew even with other market leaders, where previously Varian had some disadvantages, and in some cases where we can now comfortably exceed the specifications of other products on the market.
Got it. You feel like you have got a product now that is directly comparable to the Agilent platform?
Yes, I think it has a number of unique selling points, and some of the, I do not know how analytically important they were, but if you want to go into specsmanship and so on, which some customers like to do that, I think we are, let us call it roughly comparable with some nice advantages in certain areas.
Got it.
Very good platform also. It's not only what can it do for us in 2012, I think it's a very new, good platform for the next seven.
If I could just sneak one quick financial question. As far as capital deployment in the quarter, how much did you spend on acquisitions? It looks like you bought back some stock.
We did not buy back any stock. I think we'll have the SkyScan acquisition accounting, I think, and the Ekos I think will be in our Form 10-Q.
Yeah. We had about property plant equipment, about $10.8 million, and the acquisition was $21.7 million.
Got it. Great. Thank you.
Thank you. There are two further questions in the queue. The next question comes from Peter Lawson. Please go ahead.
Hey, Frank.
We could not hear the name. I am sorry. Could you repeat, please?
Hi, Frank. It's Peter Lawson.
Oh, hi.
Just on the product lines and product classes, which ones do you think surprised you the most year to date?
A very good question. I think probably, maybe without getting into product lines for competitive reasons, I think probably high-end life science tools and any products going into semiconductor or data storage, either research or fab, were probably the biggest positive surprise in the first quarter.
Thank you. Which areas do you think you had increased visibility or have increased visibility and decreased visibility for the year?
Yeah. I do not mean to repeat, but clearly increased visibility in semiconductor data storage, LED. I am not sure. Areas that are unclear or nebulous are photovoltaic and solar, but that is a very small part of what we are doing. So there we have little visibility of how this shakeout will occur. Luckily, it does not matter that much for us. I do not think we have any improving clarity on NIH budgets. Again, there is plenty of other spending. There is pharma spending going more to the academia side, via outsourcing partnerships. There are many other sources of U.S. academic funding, but that is not one of the areas where we know more today than we knew three or four months ago. I think the general industrial mood, could there be a global, maybe also Asian recession or slowdown? Maybe a little bit of a slowdown, but not a major slowdown.
I think that generally the mood in Asia, and they have been watching Europe, I think, is really quite a bit more positive than perhaps in the middle of the fourth quarter of last year, is my impression from multiple qualitative data points that I get from our field operations.
Thank you, Frank. Just two very quick follow-ups for Bill around the P&L. So interest and other was higher than expected. What was that due to? The same question for the tax rate. That seemed higher than expected. What should we expect for the rest of the year?
Yeah. Hi, this is Mike. Interest and other, really, as Stacey mentioned before, $3.5 million is interest expense, which is up about $2 million from Q1 last year. Also, our exchange losses were higher than last year. That is really driving that interest and other expense number. On the tax rate, really, the largest driver is U.S. losses that we are not able to benefit for income taxes, as we have a full valuation allowance on our U.S. losses. So that is driving that up. It is pretty consistent to what the rate was in Q1 of last year.
Right. Thank you so much.
Okay.
Thank you. There is one further question in the queue. This question comes from Derik DeBruin. Please go ahead.
Hi. I actually was going to ask on the interest rate and the tax, but just on the tax, is the full rate then 32% for the year? Is that still kind of where you are looking for?
That is probably materially correct. Yeah. Right around there.
Okay. Thank you.
Thank you. There are no further questions in the queue.
Okay, great. Thank you very much for joining us today, and we look forward to speaking to some of you at our ASMS press conference, and others we will probably see on our next earnings call. Thank you very much for joining us today. Bye-bye.
Thank you, ladies and gentlemen. This concludes your call for today. Thank you for joining us, and have a great day.