Good day, ladies and gentlemen, and welcome to the Bruker Corporation quarterly earnings conference call. My name is Cassie, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If at any time during this call you require operator assistance, please press star followed by zero, and an operator will be more than happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today's call, to Ms. Stacey Desrochers, Treasurer and Director of Investor Relations. Please proceed, ma'am.
Thank you. Good morning, and welcome to Bruker Corporation's third quarter 2011 financial results conference call. With me on today's call are Frank Laukien, Bruker's President and Chief Executive Officer, Bill Knight, Bruker's Chief Financial Officer and Interim Chief Operating Officer, Brian Monahan, Bruker's Vice President of Strategic and Financial Planning, and Tom Rosa, the Chief Financial Officer of our Bruker Energy & Supercon Technologies, Inc subsidiary, or BEST. 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 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 segment in more detail. 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 digital highlights for the third quarter and the first nine months of 2011, I would like to welcome our new sell-side analysts, Amanda Murphy from William Blair and Derik de Bruin from Bank of America Merrill Lynch. Welcome. I believe most of you have read our earnings press release issued at 7:00 A.M. this morning, and you are now familiar with the key numbers in the earnings release. In the third quarter of 2011, we continued to deliver excellent top-line growth. Specifically, in the third quarter of 2011, our revenue increased year-over-year by 35% to $418.4 million. Revenue in the third quarter 2011 increased by 11% organically when we exclude the effects of foreign currency translation and acquisitions.
GAAP net income for the third quarter 2011 was $19.8 million, or $0.12 per diluted share, compared to GAAP net income of $27.4 million, or $0.17 per diluted share in the third quarter of 2010. Adjusted net income, which excludes acquisition-related restructuring and other charges, was $36.2 million in the third quarter of 2011, or $0.22 per diluted share, compared to adjusted net income of $35.2 million, or $0.21 per diluted share in the third quarter of 2010. For the nine months ended September 30th, 2011, our revenue was $1,176,600,000 , an increase of 32% over the first nine months of 2010, or 8% organic growth year-over-year.
GAAP net income for the nine months ended September 30th, 2011 was $53.2 million or $0.32 per diluted share, compared to GAAP net income of $66.1 million or $0.40 per diluted share during the nine months ended September 30th, 2010. Adjusted net income for the nine months ended September 30, 2011 was $92.7 million or $0.56 per diluted share, compared to adjusted net income of $79.9 million or $0.48 per diluted share during the nine months ended September 30th, 2010. As a result of our competitive portfolio of high-performance systems and solutions, our new order bookings continued to grow strongly in the third quarter, both year-over-year and sequentially, and our already high contractual backlog has grown even further. We believe that Bruker can continue to grow considerably faster than our markets, even in a slowing macro environment.
We continue to monitor the academic and government research budgets in Europe. The EU Commission scientific research budget is expected to increase by approximately EUR 1.2 billion or 13% in 2012. The German scientific research budget is expected to increase approximately EUR 1.6 billion or 10%, which will more than offset the anticipated declines in France of 1% and Spain of 3.5%, and the continued flat budget in the U.K. The German budget proposal has a high chance of being adopted because research is deemed a key investment in the country's future growth. Also, research and infrastructure budgets in many newer European Union member states in Central Europe, as well as in Russia and Turkey, have grown dramatically.
Moving on to our new Chemical and Applied Markets division or CAM, which was established on May 19, 2010, when we purchased the three former Varian Inc product lines, laboratory GC mass spectrometry, GC triple quad mass spectrometry, and ICP mass spectrometry for $32.5 million at the time. As a reminder, during the first half of 2011, we moved all the manufacturing locations out of the old Varian locations to new Bruker facilities, and the ICP-MS factory was moved from Australia to Fremont, California. Additionally, during the year, we have made significant investments in revamping and developing new products, specifically the aurora M90, a new ICP-MS system with new levels of sensitivity, dynamic range, and productivity.
Along with the game-changing SCION triple quadrupole and single quadrupole mass spectrometer for GC or gas chromatography detection, designed to enhance data quality and productivity in routine testing for food safety, forensics, doping, environmental, industrial, and other applied markets. We are also continuing to invest in our CAM direct and indirect distribution channels to be able to better address the greater than $2 billion of additional market potential for our new CAM products. Due to this very significant investment, our BSI segment's first nine months adjusted operating margin declined from 14.9% in 2010 to 12.9% in 2011. Excluding the CAM division for a moment, the adjusted operating margin of the remainder of our BSI segment improved slightly to 15.1% for the first nine months of 2011.
For CAM, our financial goal is to leverage these start-up investments and reduce the CAM division loss by more than half in 2012 and to be above breakeven in 2013. With significant addressable markets and a considerably strengthened portfolio of products and solutions, we expect continued rapid CAM top-line growth during these periods. Subsequent to the end of the third quarter, on October 12, 2011, we completed the acquisition of Center for Tribology Inc, or CETR, a highly regarded tribology, mechanical testing, and nano-indenting company with projected fiscal year 2011 revenue greater than $10 million and EBITDA greater than $2 million. With these additional industry-leading systems, Bruker is continuing its commitment to provide the world's most innovative selection of high-performance applications enabling instrumentation. With that, I will now turn the call over to Tom Rosa, the CFO of our BEST subsidiary and segment.
Thanks, Frank, and good morning. Revenue for the BEST segment during the third quarter of 2011 increased by 24% to $27.7 million, compared to $22.4 million in the third quarter of 2010. Excluding the effects of foreign currency translation, third quarter 2011 revenue increased by 13% year over year. The BEST adjusted operating income in the third quarter of 2011 was $0.4 million, compared to a BEST adjusted operating loss of $0.6 million in the third quarter of 2010. The adjusted loss per share for the third quarter of 2011 for the BEST segment was $0.01, consistent with the BEST loss per share of $0.01 in the third quarter of 2010. Revenue for the BEST segment during the first nine months of 2011 increased by 30% to $79.8 million, compared to $61.2 million in the first nine months of 2010.
Excluding the effects of foreign currency translation, BEST revenue for the first nine months of 2011 increased by 22% compared to prior year. BEST adjusted operating income during the first nine months of 2011 was $0.5 million, compared to an adjusted operating loss of $2.4 million in the first nine months of 2010. Adjusted loss per share for the first nine months of 2011 for the BEST segment was $0.02, consistent with BEST adjusted loss per share of $0.02 in the first nine months of 2010.
The BEST external backlog as of September 30, 2011, increased by approximately $20 million or by 13% to $172.2 million from $152.1 million as of September 30th, 2010. Included in BEST backlog was a follow-on order received in the third quarter for two crystal growth magnet, or CGM systems, for semiconductor applications from a Korean electronic materials company. This order, valued at approximately $1.5 million, followed the successful factory acceptance testing of the first CGM system, which was shipped in the first quarter of 2011. During the third quarter 2011, $3.4 million of deferred offering costs related to the proposed initial public offering of BEST were expensed. Although BEST remains in registration, we believe this approach is appropriate at this time as the timing of the BEST IPO is uncertain, particularly under the current financial market conditions.
I will now turn the call over to the CFO of Bruker Corporation, Bill Knight.
Thanks, Tom, and good morning, everyone. Since Frank has already commented on the overall Bruker financial highlights and Tom provided a summary of our BEST segment, I will focus on the third quarter and first nine months year-to-date results for our Bruker Scientific Instruments, or BSI segment. On the top line for the BSI segment, during the third quarter of 2011, revenue increased by 36% to $394.6 million, compared to $290.5 million in the third quarter of 2010. Excluding the effects of foreign currency translation and acquisitions, BSI revenue in the third quarter increased organically by 11% year-over-year. For the first nine months of 2011, BSI revenues increased by 33% to $1,108.3 million, compared to $835.7 million in the first nine months of 2010. Excluding the effects of foreign currency translation and acquisitions, BSI revenue in the first nine months of 2011.
Margins for BSI in the third quarter of 2011 was 48.2% and 14.9% for the third and first nine months of 2010, respectively. As Frank already stated, our BSI adjusted operating margins without CAM were 15.1% for the first nine months of 2011. Excluding CAM, our adjusted BSI operating margins have remained relatively unchanged year to date. As we had stated in our Q2 2011 earnings call, this is partly due to FX and the commission expenses being due in part when orders are received. Our bookings have grown considerably faster than revenue in the first nine months of 2011. Some of the steps we are taking to reduce SG&A spending include our hiring moratorium, selected staff reductions, and reductions in discretionary spending.
Adjusted GAAP net income for the BSI segment in the third quarter of 2011 was $38.7 million, or $0.24 per diluted share, compared to adjusted net income of $36.9 million or $0.22 per diluted share in the third quarter of 2010. Adjusted GAAP net income for the BSI segment during the first nine months of 2011 was $97.9 million or $0.59 per diluted share, compared to net income of $84.9 million or $0.51 per diluted share in a similar period for 2010. Included in GAAP net income for the BSI segment were various charges we do not consider part of normal recurring operational results.
These charges are described in the press release issued earlier today and include charges for acquisitions, charges for the amortization of acquisition-related intangible assets, fees related to the Bruker Optics China investigation, and expensing of a previously capitalized BEST IPO fee, and settlement of a Swiss multi-year tax audit. Operating cash flow for the third quarter of 2011 was $21.2 million, compared to $9.6 million in the comparable period of 2010. Free cash flow was $14.0 million during the third quarter of 2011, compared to the use of cash of $0.2 million during the comparable period of 2010. We ended the third quarter of 2011 with cash and cash equivalents and restricted cash of $198.8 million and a net debt of $112.6 million. With that, I'll turn the call back over to the operator for any questions you may have.
Thank you, sir. 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 two. Questions will be taken in the order received. As a reminder, please press star one to begin. Our first question comes from the line of Tycho Peterson of JP Morgan. Please proceed.
Hey, good morning. First question maybe for Frank. You commented on some of the dynamics in Europe. I think in general, you've been a little bit more positive than some of your peers on Europe, and some of them have commented on particular softness in Europe this quarter. Can you just talk about the dynamics in the market today and what gives you a little bit more confidence that the trends you're seeing will continue?
Good morning, Tycho. Yes, as we have stated, some of the dynamics we've given you, we see Europe continues to be strong, and it's obviously patchy. There are some countries that are very strong, there are some regions that are absolutely surprisingly strong and will be next year as well, and others, and usually those are well-known, are weaker. But the macro events really, the headlines really don't reflect the situation on the ground. It's not a lot of business, but ironically, we're getting higher business out of Greece this year than in any previous year. There is money out there if you can find it and if you have the right products. The real drivers are Germany, the European research budgets. France has continued to be quite strong. Eastern Europe is astoundingly strong. Eastern and Central Europe, Turkey and Russia are extremely strong.
If you know your way around Europe and you're local in enough places, our business is strong. Period.
As we think about the CAM business specifically, you've obviously touched on some of the investments you're making there and the business seems to be progressing quite well. Should we be thinking about a phase of complete portfolio overhaul or expansion here? You talked about the SCION and the aurora products, but are we going to enter a phase here where you're going to rapidly expand the portfolio for that business?
Yes, Tycho. I would concede, first of all, that now that we really understand the CAM business, 18 months or so after the acquisition, we have to concede that it will require more investment than what we had initially assumed when we acquired it in May 2010. The path to break even is taking us about a year longer than what we had initially estimated in May 2010. I think that's simply fair to state. On the other hand, yes, I can confirm that we're looking at a substantial or nearly substantial, not complete, but substantial overhaul of the product line and also a significant expansion of the product line. We're obviously going to move eventually into LC triple quads as well, a very large market. So there'll be additions and other additions on our product roadmap that have not been even qualitatively in the acquired Varian Inc portfolio.
For the systems that we did get from Varian Inc, there is very substantial investment to make them to bring out very significant improvements in capabilities and performance, as evidenced already by the ICP-MS and the SCION GC triple quad introductions that have occurred already and where the full rollout is underway. As we get to know CAM better, while we face the reality that we didn't buy a division but three businesses and three factories that we have to merge into a division and that requires longer and more investment, as we have explained in more detail this time. I think we're becoming even more excited about the total size of the opportunity and where this business could go in terms of revenue and margins. Although it is taking us somewhat longer than what we had initially predicted.
Okay. Then two other just quick ones. Can you talk on backlog conversion times? Are you happy with where they are today? If not, where do you think they can go? Then the second one, any update on the China probe? Thanks.
The backlog conversion is improving. I'm not happy with it yet, but it has improved in Q3. I think it will continue to improve in Q4. But with the very significant step up in orders in many of our divisions, it has taken us a couple of quarters at least to begin to adjust to the very significant order rates which, if you recall, for the first half, orders were up by about 50%. In the third quarter, recall that CAM was with us the full third quarter of 2010. So in the third quarter, orders were up about 40%, but that's not comparable really to the first half of the year because CAM, again, as I said, was with us for the full quarter, third quarter of 2010. So there is further room for improvement, but we're pretty rapidly moving in the right direction there.
The Bruker Optics China investigation by the Audit Committee is continuing. Since that is driven by the Audit Committee, it is not my place to make any comments here at this time.
Our next question comes from the line of Amanda Murphy of William Blair. Please proceed.
Hi. Thanks. Just a question on the bookings growth. Did you give us a perspective on the organic bookings growth? Then just if you could talk to, across all of your product lines, where you are seeing the key strength at this point in terms of orders.
We have not quantified the organic bookings growth, but it is higher than our organic revenue growth. So it is higher than what you have seen in the organic revenue growth and our books to bill ratio continues to be above 1.
Okay. What about the various product lines that you have? Is there any area that's particularly strong at this point in terms of bookings?
It's really been pretty broad-based. Clearly, in the third quarter, the trends for the full year have continued, Amanda, which means bookings in the applied markets, industrial markets, homeland security, clinical markets have the stronger growth compared to bookings in the academic markets.
Okay. You mentioned, in relation to CAM, that perhaps you're seeing potential for a bigger opportunity there. Are you able to provide any more color on what you meant by that?
Not at this time. We will do so when we give our goals for the full year 2012 in February. But longer term, and without being able to give you a year when we would get there, we see that the CAM division over several years, not next year and not in 2013 yet, for sure, can grow to a $250 million - $300 million division for us, and eventually even larger. But I think that's a multi-year plan, and we'll try to give more color on that when we give our goals for 2012 in February.
Okay. Then just last one on the margin side. You talked previously about your offshoring initiatives and some of your procurement initiatives as well. How far along are you in those efforts at this point, and did they have a meaningful impact this year?
Bill, would you take that one?
Sure. It's Bill Knight. Those efforts certainly continue. We continue to focus quite a bit on gross profit margin improvement, which is coming from, as we've stated a number of times, improved product designs, lower costs. Then the offshoring procurement efforts remain significant to bring in higher quality, lower cost components for those products. So I think 2011 versus 2010, we have made significant improvements in bringing in those lower cost components. I think these efforts will be for sure ongoing in the coming years.
Okay. So still room to go, in other words.
Absolutely.
Got it. Thanks.
Amanda, this is Frank. I think it's still early days on the offshoring. I think we're further along in redesign to cost, which has been going on for some years. There is further room to go there as well. There is further room in factory efficiencies, especially the CAM factories, which we've just moved all together into one very efficient new factory. There's more room on the outsourcing and offshoring. There it's really still relatively early innings, if you like.
Okay. Very helpful. Thanks.
Our next question comes from the line of Isaac Ro for Goldman Sachs. Please proceed.
Hi. Good morning. Thanks for taking the question. I wanted to spend a minute on the profitability of the business. You guys have obviously brought in a lot of great assets over the last year plus, and the business is on a good trajectory for the long term. But I think the one thing investors have brought to me over the last couple of years has been the hope that margins would improve. Appreciating some of the initiatives you have here, could you maybe walk us through what you expect the CAM gross profit to sort of look like on the other end of this consolidation you just touched on? Then secondarily, if we think longer term on the operating margins of the business, where could they ultimately go?
Because I think you started the beginning of the year about $350 million in revenue, with a 12% margin, 12.5% operating margin. I'm sorry, 10% operating margin, and you're up to 12%, but I think in the past years, you talk about closer to 75 basis points a year. Just trying to look at what that progression will look like over the next few years.
Yeah. Isaac, this is Frank. You're right. This year, even without CAM, we're moving sideways or have some very modest improvements in operating margin. We have good growth in, or a reasonable growth in the adjusted EPS overall, which ultimately is even more important. But we're committed to both, and we're committed to resume our margin growth for the company overall. But I think the first part of your question was the CAM business, and yeah, we're investing in all that. Where is that going? I don't see a reason why the CAM business, once we really are in fourth gear and have all the new products and they ramp up to volume, and this will take several years, why that business should not be able to reach 15%-18% adjusted operating margins.
I don't think that CAM inherently in the medium term will be a drag on margins, but it's clearly going to be an investment and ramp to volume with new products that haven't even launched yet, that will launch in the next couple of years and then ramp to volume over the following one or two years. Over a multi-year period, CAM, I think, will have similar margins, or can have similar margins to the rest of our Scientific Instruments business. For the Scientific Instruments business, we remain committed to an adjusted operating margin goal of 18% by 2014. We had a much faster than 75- 100 basis points improvement in 2010 and 2009. This year, we're moving sideways without CAM, and with CAM, obviously, we're going backwards.
We're aware of that, and we endeavor to get back into the trend of improving margin percentages with a continued focus also on fast top-line growth and fast adjusted EPS.
Yeah, I think for the remainder of the year, we expect to continue to be at that 32%, which is what generally our goal was for the full year 2011. I expect that would continue to decrease. As CAM becomes more profitable or loses less money next year, some of the other tax initiatives we've put in place, I think we'd expect to be below 32% next year. But we'll be more specific when we come out with goals for 2012.
Okay. And share count? Or the share count relative to other uses of cash?
We do not anticipate any share buybacks. I wouldn't rule that out categorically. But as you have seen, with two larger acquisitions last year, although they were very capital efficient.
Yeah
and a couple of smaller acquisitions so far announced this year, I think we have excellent uses for our cash, with much higher return on invested capital. That is what we are focused on. I believe we can generate a lot of shareholder value with disciplined acquisitions, with multiples that are fair for the sellers, but also fair for our shareholders. I think that is a good additional driver of our, if you like, currency-adjusted growth, because we are obviously very efficient in deploying our capital and acquisitions.
Yep, absolutely. Okay, thanks very much. Appreciate it.
Our next question comes from the line of Peter Lawson of Mizuho Securities. Please proceed.
Frank, just wondering if you could just again, about this weakness that peers are seeing in academia. Is there anything on the peripheral that you are worried about? Any deterioration in conversations around higher priced products, or is there any delay in that process?
Good morning, Peter. Not everything is aligned perfectly. Clearly, there is weakness in U.S. academic spending. NIH slightly down, although not as much as many had feared, and probably not going to grow rapidly. So we're taking that into account. The academic spending being the slower growing part of our business is our assumption for the next 15 months or so, and beyond that, we just don't have a crystal ball. So nothing surprising, and in some ways, the healthy academic R&D increases in certain parts of Europe and Asia are a part of this surprise in the last three months. I guess in the U.S., it could have been worse. For us, at the end of the day, the macro trends play a role, but far and more important is our relative product positioning.
For us, the NIH budget is still infinitely large, and the question is how do they allocate it, rather than whether it's going up or down 1%. In terms of allocation, in terms of secular trends towards epigenetics and proteomics and more applied research, I think we're extremely well-positioned with many of our products. So, we're not just a ship that's going up and down with the tides. We're not immune to that completely, but far more important are our relative product trends, and I feel very good about those.
To follow up on that, the commentary about growing faster than the markets, is that more of a mixture of new products, or is it more share gains, and where do you think you're gaining share?
These two are very much related. Obviously, new products with unique or advanced capabilities very often help you with gross profit margins and profitability. They often also help you expand your market share. We feel that pretty broadly in many of our divisions and product lines, we are actually gaining market share and really, it's a pretty broad phenomenon. I think, it's not isolated to one or two product lines or divisions. But pretty broadly, I think we're on an excellent track and are growing faster than the markets because we are gaining market share, mostly with new products or relatively new. Last year's product introductions and headlines are making a difference in the market this year, and this year's product introductions and headlines are likely to have a positive impact next year.
Sort of a delay until these products ramp to volume, as we say, after you see the initial product press release.
Thank you. Just one for Bill, just around the benefit in that interest or other income line. Is that FX gains, and how should we think about Q4?
Yes. I think we look at any FX effects that we can moderate, and we don't consciously try and make money. We don't do active hedges. We look at any quarter to quarter as getting it near breakeven as best we can.
That shift from - 5%-6% last quarter to, was it + 2%? That was really just FX. There was nothing else going on.
Primarily, yeah.
Yes. That was primarily FX. There's certainly some interest, income, and expense in that line, but that sequentially was not materially different. So the primary driver in that delta, Peter, is absolutely FX gains this quarter versus losses, both last quarter and for the first half of the year.
Great. Thank you so much.
Our next question comes from the line of Dan Arias of UBS. Please proceed.
Yeah. Hi, thank you very much. Frank or Bill, I was just wondering if you could separate FX from M&A contributions during the quarter.
I think, Dan. Hi, this is Frank. Our FX-adjusted revenue growth in the quarter was 26%, and our year-to-date FX-adjusted revenue growth was 24%.
Okay, thanks. Frank, not to harp too heavily on the academic markets, but can you just make a comment on the continuity or pacing of the business you are seeing in terms of ordering patterns relative to previous periods or historical levels?
Orders in the third quarter in some of the divisions that have more of an academic exposure, which we prefer to call opportunity, like the BioSpin NMR, MRI division, or the Daltonics division, orders in the third quarter have been excellent.
Okay, thanks. I guess, Bill, just wondering if you can, with everything going on with CAM, give an expectation for CapEx for the year.
I think year to date, we have spent a little over $40 million, versus Q3 year to date 2010 was about $22 million. We have made some, and are making some investments in brick and mortar expansion and obviously increased activity with some of the new acquisitions. So, fourth quarter will add to that, not significantly, but I think on a linear basis, you would see that the year would be probably in the $50 million range.
$50 million. Okay, thanks very much.
Our next question comes from the line of Ross Muken of Deutsche Bank. Please proceed.
Yeah. Hi, this is Vitan for Ross. Thank you for taking my question. Just had one question. Can you comment on your orders? Did you see anything geographically that the U.S. versus EU., when it comes to orders for large instrumentation, particularly from the academic segment?
Yes. Our U.S. academic orders in Q3 have been excellent.
Perfect. Thank you.
I know it's not the answer everybody's looking for, but those are the facts.
Thank you.
Thank you very much.
Our next question comes on the line of Dan Leonard of Leerink . Please proceed.
Hi. Thank you. First one, just a housekeeping question. Can you give us the revenue contribution of currency and acquisition in the BSI segment?
Can you repeat the question one more time, Dan, please?
Yeah. For the quarter, BSI grew organically 11%, but what was the currency and the acquisition component of the BSI growth?
This is Brian. The currency impact was a little over 9%, so almost 10% for the quarter. As you said, we grew 11%, so the delta is the benefit from the acquisitions. BEST did not have any acquisition-related revenues this quarter or for the first nine months of this year.
Okay, thank you. Also, we've been talking a lot about academic markets. Frank, can you give us some commentary on what you're seeing in the applied and industrial markets you serve?
They are generally strong with some weaknesses emerging in semiconductor and data storage, which is a very small part of our business. Interestingly, since we tend to have more of the high-end research, well, or it's not research tools. Even for fab line systems, we tend to get orders, for instance, now from consortia or companies that are going to invest right through the cycle for next-generation 16-in, 450-mm semicon metrology tool. We've gotten some excellent orders there, even as I look at the pure semicon metrology tool companies, as their orders are sequentially declining. But even for the 2% or 3% exposure that we have to those cyclical semicon data storage, LED, solar markets, we see a little bit of softness there. But again, it's a small part for us, and we more than make up for that with strength elsewhere.
Okay, thank you. My final question, can you give us an update on the COO search in terms of what type of background you're looking for, whether you're looking internally, externally, anything you could offer?
We're looking for an Executive Vice President of Operations very much focused on production and logistics. We're searching externally.
Okay, thank you.
Our next question comes from the line of Jon Wood of Jefferies. Please proceed.
Hello. Good morning.
Hi, Jon.
Hey, so on CAM, is CAM going from, I think last quarter you said $5 million operating loss or so, and based on that $0.11 number you quote in your press release, is that number $25 million now in terms of an operating loss for this year?
No idea, though.
No, Jon , we are talking operating losses. I think the $5 million you referred to is correct. The net loss is when we are talking about the $0.11 for the full year. You have some other below the line items. The $0.11 is for the full year, and it is a net loss contribution, not the operating loss contribution.
Okay. What was that number before this update? That $0.11 number was what as of last quarter? I am just trying to figure out how much you are accurately increasing that loss estimate from prior guidance.
Yeah. Basically the way the CAM business has been developing is that our original goals were that the losses during the year would steadily decline as we were integrating factories, moving factories, a number of those things. As Frank talked about, it is a challenge we are happy to take on, but just taking a little bit more time than originally planned. Essentially in Q4, we do not expect increasing losses over Q3. We expect those to be modestly lower, and to continue that trend through 2012. It is not that we suddenly had to make a bunch of investments to increase the losses. They are expected to sequentially go down from what they were for both Q3 and the first nine months of this year.
Okay. Got it. Thanks. Just based on you guys' commentary during the call, did the Veeco business do like $43 million? It seems like that's a very big number given what's going on in the semiconductor market. Is that math right that it's gone over $40 million in revenue in the third quarter, the Veeco business?
That's about right, although we don't break out the exact numbers, but you're basically very close. But keep in mind, their exposure to Even though Veeco had a misnomer for that division by calling it a metrology division, it's far from a metrology division. Its metrology exposure might be 15% or something like that. And again, even its metrology business, with some weakness in data storage, which is always the early indicator, has had some very good orders from, as I said, sort of next generation tools for 450 mm fab lines, where some very major players and consortia are investing throughout the cycle because they want to get that ready for the future. I think the key part of the answer is, the ex Veeco business, our Bruker Nano Surfaces division, 80% + is not dependent on data storage or semicon cycle.
Okay, great. That was good color. Thanks, Frank. Do you expect that business to be up sequentially? It's seasonally stronger in the fourth quarter, I know, but, do you still expect a sequential uptick there?
For that business in particular?
Yeah. Yes. Sorry.
I don't have all the numbers at my fingertips. I don't expect any unusual trends. They tend to, like everyone else at Bruker, tend to have a decent fourth quarter, although this year we have obviously tried to not become so fourth quarter dependent. Nothing unusual in that division, BNS division, ex Veeco, compared to the others that I can think of right now, compared to the other Scientific Instruments business, which has some seasonality, of course.
Okay, great. Thank you. Last one on cash flow. It looks like the working capital metrics actually got quite a bit better in the quarter. But the cash flow is still very weak. Was that just an FX dynamic on the working capital? I wonder if Bill can kind of give us an update on what do you expect in the fourth quarter in terms of cash conversion? If you want to state it in terms of dollars or kind of the working capital commitment, relative to your goals, that would be great.
Sure. We did have improvements in both DSO, and modest improvements again in inventory turns. That continues to be an area that we aggressively work. I would expect to see continued improvements in DSOs. We've given good attention to that because that is typically a very quick conversion to cash. Our working capital to revenue ratio, also had improvements in Q3. We would expect that trend to continue again in Q4.
Okay. Specifically on the cash flow, just looking at the fourth quarter, is that number expected to be up year-over-year, down year-over-year, about the same? Can you give us some direction there?
Very difficult to forecast, Jon. We expect reasonable cash flow in Q4, but honestly, it's not just that we're hedging on the answer. Cash flow, because of our lumpy payment, is difficult to predict on a quarterly basis.
Okay, fair enough. Thank you.
Our next caller is from the line of Derik de Bruin of [Bank]. Please proceed.
Hi, good morning.
Derik, welcome back.
Thank you. A lot of my questions have been answered. I won't try to beat the academic horse here. When you look at some of the science projects that are beyond biomedical research, like some of the ones that are your BEST business services and some of the higher geophysics and that type of stuff, are those projects receiving the same amount of attention as biomedical research? Or are those projects potentially more in the gun sight from some of the bean counters?
That's sort of a multi-year trend, really. This is not something you don't know. For a number of years with the genomics revolution and sequencing, I think a lot of money has gone into genomics and sequencing, and that has made enormous progress. I think people have also realized that good old or straight genomic sequencing, while it gives us a lot more data, has not really given us as many medically relevant insights as we had hoped, because we probably all overestimated the role of the genome as some sort of blueprint. It turns out that epigenetics and systems biology and protein and metabolite analysis, and the macromolecular switches, basically, on the genome, what people call epigenetics, are more important.
Which is good for Bruker, because we are not a genomic sequencing company, and we think a lot of the funding trends and because of the scientific trends and the therapeutic diagnostic trends in molecular medicine are coming our way very much. That is an excellent trend. To really the first part of your question is fundamental research outside of molecular biology. In recent years, that has had a bit of a renaissance, if you like. I think for a few years, anything medically oriented or life science oriented soaked up all the budgets, and that trend has at least normalized in the last few years. Which, again, is good for our materials research or for our big science projects that you have mentioned, for which BEST is providing some of the infrastructure.
That has been a normalization to where I think people are not only investing in life sciences, but also in non-life science, fundamental and academic, and energy research. I think that trend has also been healthier, I should say, in the last two or three years than perhaps in the seven years before that. That is all relatively long-term perspective. I do not detect any change in priorities that affect the last quarter or even the last year, except perhaps that I think that people, in my opinion, are realizing that just doing more genetic sequencing does not give us enough biological and medically relevant information, and one has to look at other tools as well. Which, again, we very much welcome.
You actually kind of jump-started my memory this morning. When we go back and we look at what happened back in the 2000, 2001 timeframe, after the initial sequencing orgy, there was a focus more on proteomics and biomarker research. There were companies that instead of setting up farms of DNA sequencers, they were talking about setting up farms of mass spectrometers. You had all the TOF/TOF wars in terms of doing that type of project. I guess, when you look at some of the stuff that is going on in the sequencing market is people potentially having too much data. Are you starting to have conversations with people that maybe mass spectrometry, which has been a good market for many, many years, much more than people expected. Have you seen more interest in that?
Are you talking with people, perhaps outside the U.S. and Asia, who are thinking about setting up larger proteomics efforts to go after the translational research projects in that sense?
There are some places like this, but I think proteomics and systems biology research mostly will not necessarily be done in these large-scale facilities or some factories like what GProX set up in early the last decade, and some other examples. In some ways, it's probably healthier in that you see many, many centers that use that for fundamental and applied and diagnostic and therapeutic research. They don't have 50 mass specs, but they may have three or five or seven, depending. I think with a range of different mass spectrometers that can do the traditional bottom-up to the functional to the top-down to perhaps looking at the proteins and peptides and distribution, i.e., imaging.
I think it's a much more differentiated picture today that you need multiple tools, and you need to go really deep and also look at the functional aspects rather than just getting sheer sequencing or number of IV and proteins. The picture is becoming more differentiated, and the strength that I'm seeing is not towards ultra-high automation or factories, but really the right set of scientific tools in many, many different fundamental applied diagnostic and therapeutic groups.
Yep.
It's not necessarily the big sequencing farms or sequencing outfits that you see in genomics. I don't see that trend in our business.
Great. Thank you very much.
We have a follow-up question from the line of Tycho Peterson from JPMorgan. Please proceed.
Hey, thanks. You had mentioned some of the spending controls on the call. Is there any way you can kind of quantify and put some parameters around some of the cost containment initiatives?
Well, we certainly, Tycho, still are looking at headcount. As we said, there will be some reductions there. We are looking at discretionary spending. There has already been some reduction there, and that will be ongoing. We are obviously, as we have talked, we have done a pretty good job on growing the top line. We work continuously on margin improvement, but there is much more focus on how we spend our operating expenses. I think the R&D budgets will remain intact. Product development is key to Bruker, but we are taking a very hard look at reducing the SG&A expense. As far as quantifying it, I do not necessarily want to put numbers to it yet, but if we move into the fourth quarter and into 2012, operating expenses are under a pretty tight review and control.
Okay, and then just one follow-up.
Maybe a follow-on to that, Tycho, just to give you the smaller effect, if you like, is absolute expense cutting that will be less than $10 million in the aggregate. But as far as we can see right now, the bigger effect for us is that we do not ramp up our number of people