Bruker Corporation
Q1 2008 Earnings Call Transcript

Published: 5 May 2008

[Operator:]

Good day, Ladies and gentlemen. Welcome to the Bruker Corporation quarterly Earnings Call. My name is Madge, and I will be your coordinator for today. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Bill Knight, Chief Financial Officer. Please proceed, sir.

[Bill Knight:]

Thank you, Madge. Good morning and welcome to Bruker Corporation first quarter 2008 financial results conference call. With me on today's call are Frank Laukien, President and CEO and Brian Monahan, our Corporate Controller. On February 26, 2008, Bruker BioSciences Corporation closed its acquisition of the Bruker BioSpin Group and renamed itself Bruker Corporation. Under US GAAP, this transaction is accounted for as an acquisition of businesses under common control, and as a result all one-time transaction costs are expensed in a period in which they're incurred, rather than being added to goodwill. In addition, expenses incurred subsequent to the completion of the acquisition, such as interest expenses incurred on acquisition-related debt are not reflected in the financial results of periods prior to the date of the acquisition as they typically would be in pro forma financials in an acquisition of an unrelated party. Upon the closing of the transaction, all historical financial statements are now required to be restated by combining the historical consolidated financial statements of Bruker BioSciences Corporation with those of the Bruker BioSpin Group. During the call today, the discussion of financial results for the first full quarter of 2008 and of 2007, reflect the combined historical consolidated financial statements of Bruker BioSciences Corporation with those of the Bruker BioSpin Group. As many of you know, on April 21, 2008, we issued a press release pre-announcing selective preliminary financial results for the first quarter of 2008 due to an unexpected significant foreign exchange loss in the first quarter. Early this morning, we issued our normal first quarter 2008 earnings release. On today's call, Frank will provide an overview of the business and our first quarter financial results and I'll follow up with a more detailed discussion of our financial results. And then we will open up the line for questions. Before getting started, I would like to read our Safe Harbor statement. This discussion will include forward-looking statements. These statements are based on current expectations, but are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Including but not limited to risks and uncertainties relating to the integration of businesses we have acquired or may acquire in the future, changing technologies, product development and market acceptance of our products, the cost and pricing of our product, manufacturing, competition, dependences on collaborative partners and key suppliers, capital spending and government funding policies, changes in governmental regulations and intellectual property rights, litigation, exposure to foreign currency fluctuations and other risk factors discussed from time-to-time in the filings with the Securities and Exchange Commission. We expressly disclaim any intent or obligation to update any forward-looking statements other than as required by law. During this call, we may refer to certain financial measures that are not in accordance with US GAAP such as the charges incurred in connection with the acquisition of the Bruker BioSpin Group, interest expense associated with the acquisition-related debt and foreign exchange losses. Non-GAAP financial measures are not meant to be a better presentation or a substitute for results of operations prepared in accordance with US GAAP. We believe that discussing these measures helps investors to again a better understanding of our core operating results and future prospects consistent with how management measures and forecasts the company's performance. Especially when comparing such results to previous periods or forecasts. I will now turn the call over to our President and CEO, Frank Laukien.

[Frank Laukien:]

Thank you, Bill. Good morning, everyone. We appreciate you joining us for the review of the first quarter of 2008. Overall, I believe we can be very pleased with the fundamental business developments in the first quarter, which included the addition of Bruker BioSpin to the Bruker Group of companies, which effectively double the size of the company, and represents a significant step-up in our financial performance, profitability and cash flows. As well as the introduction of several very important and truly innovative product and solutions, which we expect will further strengthen our leadership position in high performance scientific instrumentation. Our first quarter financial performance was not fully satisfactory in terms of revenue growth and operating margin expansion. Although both were within the typical ranges and fluctuations that we expect to see for the combined company. As we have stated a number of times before, our company sees significant quarterly fluctuations, and just recently, we had an outstanding fourth quarter 2007 followed by a weaker first quarter 2008. We encourage everyone to always take a look at the last 12 months trends rather than reading too much into any given quarter. For example, in the last 12 months, specifically in the period including the second quarter '07 to the first quarter 2008, our combined revenue was $1.042 billion in revenue, growing approximately 20% compared to the combined revenue of the previous 12 months period. Also, in these last 12 months, our operating margin was 12.9% excluding acquisition charges. And for the same last 12 months period, our EPS was $0.61 per share, excluding acquisition charges and FX losses. Turning to the first quarter now, in the first quarter of 2008, our GAAP bottom line was negatively impacted by expected acquisition-related charges and by mostly unexpected foreign exchange losses. And Bill will provide details later on to help better understand this. Starting with the financial highlights, in the first quarter of 2008, our combined revenue increased 15% to just over 238 million, compared to combined revenue of $207 million in the first quarter of 2007 with foreign currency translation contributing about 10% to this revenue growth rate. Our GAAP earnings per diluted share were zero pennies per share in the first quarter of 2008, compared to $0.09 pennies per share in the first quarter of 2007. Included in our GAAP earnings per share for the first quarter of 2008, were foreign exchange losses of $0.06 per diluted share, Bruker BioSpin acquisition-related expenses of four pennies per diluted share and interest expense on acquisition-related debt of $0.01 per diluted share with a cumulative effect of $0.10 per diluted share. Without these acquisition charges and FX losses, we would have been at first quarter 2008 EPS of about $0.09 per share, which I believe was the street consensus prior to our preannouncement. Nonetheless, we were not fully satisfied with our operational performance in the first quarter, and we will be taking further steps to streamline our operations in order to accelerate our growth and our margin expansion. We ended the first quarter 2008 with a strong cash position, which enabled us in mid-April to pay down approximately $55 million of the debt we incurred to acquire the Bruker BioSpin Group. We expect to also repay an additional $80 million in acquisition debt this week, probably as early as tomorrow. As I briefly mentioned earlier, the addition of the Bruker BioSpin Group to the Bruker Group of Companies was a significant event in the first quarter. This combination continues to be very well received by our customers, employees, partners and shareholders, and has created an unmatched portfolio of technologies and product for scientific and clinical research and development. As well as for industrial analysis, safety testing, homeland defense and quality control. Our relentless pursuit of innovation and quality, and our significant ongoing investments in research and development, enables us to continue to expand our product portfolio. I won't discuss all of our recent product developments and introductions, but I did want to highlight a few that have been particularly well-received. We recently announced our breakthrough benchtop SMART X2S Crystal-to-Structure, small molecule X-ray diffraction system, which for the first time allows chemists without crystallography training to obtain routine small molecule three-dimensional structures under full automation. This SMART X2S product earned the Pittcon Editors' 2008 gold award. We also introduced our novel and unique benchtop S2 PICOFOX TXRF, or total reflection XRF system for easy-to-use and robust ultra-trace elemental analysis with very simple and cost-effective sample preparation. This transportable S2 PICOFOX system is expected to compliment or replace atomic absorption and ICP in many pharma, geological, mining, environmental and food testing applications. This product won the Pittcon Editors' bronze award. Bruker Daltonics, our mass spec our mass spec group just announced that it received ISO 13485 certification for development, manufacturing and distribution of mass spectrometry systems for in vitro diagnostics, or IVD. This ISO certification is an important milestone in the development of our IVD business particularly in the fields of clinical proteomics, clinical microbiology and molecular imaging in pathology. Finally, we recently announced our new Complete Molecular Confidence, our CMC solution, which is a comprehensive integrated toolkit for the on-the-fly molecular formula determination and automated or interactive structure verification for small molecules, combining accurate mass Electrospray TOF mass spectrometry with NMR. Now I wanted to talk briefly about our new Advanced Supercon business, which most of you probably are not yet familiar with but for which we have very high expectations. Just last week we announced the hiring of Tom Rosa, a superconductivity industry veteran who is now the CFO and Senior VP of our advanced Supercon business. Our Advanced Supercon business includes superconducting wire and device technologies and products that are comprised of advanced low temperatures, superconducting wires for clinical MRI magnets, NMR magnets, FTMS magnets as well as for magnets used in major accelerator or international research facilities such as the ITER nuclear fusion project and high-temperature superconductors, or HTS with applications in next-generation magnetic technologies, energy storage, and power grid stabilization as well as advanced HTS industrial motors and generators. We believe the growth potential of the Advanced Supercon business outside of Bruker's traditional scientific instrumentation markets is significant, which is why we are developing a management team focused exclusively on developing and unlocking this value. As I said earlier, there were a lot of positive fundamental developments in the first quarter, which positioned us well for the future. Now here is our CFO Bill Knight again with a more in-depth look at our financial results for the first quarter.

[Bill Knight:]

Okay. Thanks Mike. During the first quarter of 2008, revenues grew by 15% to $238 million or by approximately 5% when we exclude foreign exchange tailwinds. Gross profit margins were 47.4% in the first quarter of 2008, versus 45.6% in the first quarter of 2007. Despite the gross margin headwind that we faced due to the weak dollar, and the fact that we manufacture a majority of our products in European countries, we delivered improved gross margins year-over-year. This is in part due to volume leverage and a favorable product mix in the quarter, but it is also the result of hard work over the past several years to improve our gross margins. Improving our gross margins continues to be a key initiative for us and we see additional opportunities for improvement. Our operating profit in the first quarter of 2008 was $15.9 million or 6% of revenue, down from $19.7 million or 9.5% in the first quarter of 2007. Included in the operating results for the first quarter of 2008 were $5.8 million of Bruker BioSpin acquisition-related expenses, including approximately $2 million of German real estate transfer taxes. Excluding these acquisition-related charges, our operating income increased 10% year-over-year. Sales and marketing expenses as a percentage of revenue increased year-over-year due to continued investments and direct sales, inside sales, product specialists and application resources, as well as higher sales commissions on usually strong revenues generated through third-party distributors during the quarter. G&A expenses also increased as a percentage of revenue year-over-year, primarily due to incremental expenses incurred by the Bruker BioSpin Group, associated with headcount now that they must meet the new reporting deadlines of a public company. R&D also increased as a percentage of revenue year-over-year. While our revenues are geographically diverse, our R&D activities are primarily performed in Europe. So this increase is largely due to foreign exchange rate changes. Typically, we don't spend a lot of time discussing the components of other income and expense, but this quarter we had some unusual items that wanted discussions. In the first quarter of 2008, we incurred approximately $12 million pre-tax of foreign exchange losses, which after-tax resulted in a reduction of our earnings per share of $0.06. These foreign exchange losses were primarily driven by the continued weakening of the US dollar, as well as by an unexpected strengthening of the Swiss franc relative to both the US dollar and the euro by approximately 11% and 3% respectively during the five weeks between the closing of the acquisition of the Bruker BioSpin Group on February 26, 2008 and the end of the first quarter of 2008. The foreign exchange losses in the first quarter of 2008 relate primarily to the reevaluation of intercompany receivables and loans within the Bruker Group, and to large cash balances held by Swiss Bruker BioSpin subsidiary in various non-Swiss franc currencies. We intend to reduce the future effects of currency fluctuations by enhancing our treasury activities and capabilities, which included the hiring of a Treasurer in March 2008 with global oversight and responsibilities. Specific activities we are targeting to reduce the effects of currency fluctuations on our financial results include programs to more effectively hedge or settle intercompany balances, and to reduce non-functional currency holdings. In addition, we are aggressively paying down some of the debt incurred to acquire the Bruker BioSpin Group as Frank mentioned earlier, which will minimize our interest expense going forward. Regarding the debt under our new credit facility, in an effort to balance our fixed floating-rate mix, we've recently fixed 60% of our $150 million amortizing five-year term loan. We locked in at an attractive all-in rate of just under 4%. Swapping a portion of our debt-to-fixed provides us with low long-term rates and interest rate expense uncertainty while still allowing us to take advantage of the low current LIBOR rates. As for our effective tax rate during the first quarter of 2008, we incurred $4.3 million of income tax expense on pre-tax income of $3.7 million resulting in an effective tax rate of 114%. This unusually high tax rate is a direct result of the acquisition-related charges, which we cannot tax benefit in the foreign exchange losses, as they were predominantly incurred in locations where we have very low tax rates, so the tax benefit was very modest. Excluding these two items, our effective tax rate would have been in the 30% range in the first quarter of 2008. Frank already discussed the bottom-line results earlier, so I won't repeat those again. So with that, I will turn the call back over to the operator for Q&A.

[Operator:]

[Operator Instructions] And your first question comes from the line of Derik De Bruin from UBS. Please proceed sir.

[Derik De Bruin:]

Good morning.

[Bill Knight:]

Good morning, Derik.

[Frank Laukien:]

Good morning, Derik.

[Derik De Bruin:]

So you didn't talk about the financial targets for the year, are you still looking at the operating margin expansion somewhere in the 14, typically that's a 14% range in the net margins, picking up [plus 5% range] as well on a pro forma basis?

[Frank Laukien:]

Yes Derik, as you know, we don't give quarterly guidance and we don't update these things. We only give those once at the beginning of the year. And at this point, we see no reason to change our targets.

[Derik De Bruin:]

Okay. That's great. I guess when you look at the end markets; Frank is there anything unusual, any [top lines] or any slowing down in any of your industrial accounts that causes you alarm for the rest of the year?

[Frank Laukien:]

Clearly some of the end markets, some of the industrial markets are slowing down compared to last year, but we have taken that into account to a great extent in obviously reducing our growth targets for this year 2008 compared to our growth targets and our actual growth rate, which was much higher than our targets in 2007. So there's a lot of economic uncertainty, but I wouldn't say that there has been anything that has surprised us in the first quarter or in the weeks since then, but the economic picture going forward, I would say there is a lot of economic uncertainty. I think it's far from clear beginning of a recession, how this will evolve. At this point, we're not surprised about what we are seeing. It's more or less what we had expected i.e., a bit of a slowdown in our growth rate but that had been anticipated when we communicated our full year goals.

[Derik De Bruin:]

And have you seen any hesitation on the part of pharma?

[Frank Laukien:]

I have seen that in other press releases and discussions, it's not so clear from our data. Within our life science business, we had a bit of a regional effect and that Japan was slow and it already had been slowest in the second half certainly of last year. So, no great surprise there. From our data, I would not have come out and said, yes, there is a clear slowdown in pharma, but sometimes our data is not the best statistical indicator for things like that.

[Derik De Bruin:]

Right. Yeah, you mix is quite a bit different than any other companies. I guess Bill, when you look at the currency translation impact. Do you expect there to be some linger on effect on that into 2Q and 3Q?

[Bill Knight:]

I certainly do. I think we are in the midst of getting these settlement programs in place. The impacts occurred substantially in the BBIO organization, which is new to the public environment, so we are working very diligently there to get these hedging programs in place and settlement programs. And also not knowing, we were somewhat surprised that how quickly the Swiss franc had strengthened against the euro and the dollar, so however where that results end up, it's a bit of an unknown. But we are trying to reduce the base exposure to absorb whatever fluctuations may be.

[Derik De Bruin:]

You're going to pay down an additional $80 million of debt soon. What do you see the net interest percent coming in for the year?

[Bill Knight:]

Our overall rate is about 4% on average. We have $150 million in term, and we have probably a revolver component that we hope to reduce as close to zero as possible by yearend, so it really just depends upon when we can get these payments made. But we started out with a $150 million term and 201 in revolver. Of the revolver, we will have paid 130 off by certainly the end of this week or mid-week and the balance we hope to get over the rest of the year.

[Frank Laukien:]

An overall estimate for the year might be about $10 million in interest expense, so that’s a rough estimate.

[Derik De Bruin:]

Okay. That's helpful. Thank you. And I guess your reporting GAAP results. I think some of those are looking at relative to the first four numbers in some of the pro forma results. Is it safe to say the pro forma numbers are about $0.04 if you exclude the acquisition-related cost from that?

[Bill Knight:]

Yes.

[Derik De Bruin:]

I think that does address.

[Operator:]

And your next question comes from the line of John Sullivan from Leerink Swann. Please proceed, sir.

[John Sullivan:]

Hi, guys. Good morning.

[Bill Knight:]

Hi, John.

[John Sullivan:]

A couple of quick questions, can you just comment on how your business, how your product mix has changed with the acquisition of Bruker BioSpin? And specifically, do you feel like you are more levered to higher dollar price, capital equipment and do you feel like that had an impact in the quarter's results?

[Bill Knight:]

Well, certainly our average selling price across the entire Bruker Corporation has gone up quite a bit. And in terms of, -- as we had alerted the Street too when we even made our annual forecast or set our annual goals for 2008. The Bruker BioSpin business if anything has more quarterly fluctuations than the old BRKR without Bruker BioSpin products at the February acquisition. There is many more high-ticket items in the million sometimes up to $5 million sales price for a particular system. And the exact revenue recognition and acceptance of these systems, sometimes it's difficult to predict, and it will fluctuate from quarter-to-quarter. So as a result, obviously, we are a much bigger company with better operating margin and cash flow characteristics. But we expect more fluctuations from quarter-to-quarter. And it is exactly correct, that these fluctuations or less accepted systems and revenue recognition at Bruker BioSpin has contributed to the slightly weaker than expected first quarter.

[John Sullivan:]

Is a BioSpin business one that's weighted towards the fourth calendar quarter in terms of delivery? And should we have expected a fourth quarter deliveries to have been accepted in revenue books in the first calendar quarter, since the business was that way generally?

[Bill Knight:]

All four of them do, all four sub-businesses are weighted towards the fourth quarter. When we reported the fourth quarter of 2007, we also gave combined results, and you could see that the Bruker BioSpin was very, very strong in that fourth quarter, as were the other Daltonics, AXS, and optics components of our business, that we previously reported on. So I think there is perhaps no great difference compared to the make up of the previous Bruker BioSciences Corporation. In that all of our businesses tend to have strong fourth quarters in revenue recognition and, therefore, an overall reported.

[John Sullivan:]

Okay. And then specifically, regarding some of the highest price products and BioSpin, the NMR systems, is there any comment you can make regarding backlog or interest or customer interest. Can you give us some specific color on that new business for Bruker BioSciences shareholders?

[Bill Knight:]

Somewhat generally, the NMR business in the year's 2005 and 2006 had slowed down a little bit, and in 2007, we saw a nice recovery of that business more on the historical mid-single digit growth trends. And also, highlighting perhaps the MRI, the research and animal MRI business, which is now a sizeable component of our Bruker BioSpin business, so that has seen very nice growth trends, obviously, with strong quarterly fluctuations. But overall, very nice growth trends in recent years.

[John Sullivan:]

Are some of these higher-dollar priced items or products, where you might have some insight into whether an order book is building for this year, can you comment at all on that?

[Bill Knight:]

In fact for that business, the order book is building over years. Some of the systems we sell, we don't expect to have revenue until 18 months from now or some revenue that we recognized now we got the order more than a year ago. So, I think the trends that we can see there so far in the order book are not surprising and steady.

[John Sullivan:]

Okay. Thanks very much.

[Operator:]

[Operator Instructions] Your next question comes from the line of David Shaw from Lehman Brothers. Please proceed sir.

[David Shaw:]

Thanks very much. I was just wondering within mass that, we've heard competitors, really more talk about delays rather than actual cancellations with some evidence of rebound in April. I was just wondering if you would be willing to make a comment on this.

[Bill Knight:]

Well, we can't comment on what other people are seeing our mass spec new order bookings in the first quarter, which then tends to translate into revenue in the second and third quarter have been quite healthy. So we have not seen in our data any evidence of any delays with the exception of Japan, which had a first weak first quarter. But really, US or the Americas more generally Europe and Asia Pacific outside of Japan have all been healthy and up in the first quarter. We're seeing good growth in the business, as well as in the CBRN detection part of that business.

[David Shaw:]

Thanks very much.

[Bill Knight:]

You're very welcome.

[Operator:]

You have no question at this time sir.

[Bill Knight:]

Are there no further questions at this time, operator, is that what you are saying.

[Operator:]

Yes, sir. No questions at this time.

[Bill Knight:]

Okay. Then thank you very much to everyone once again. And we look forward to speaking to you during our second quarter earnings call. Thank you and goodbye.

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.