Bruker Corporation (BRKR) Q3 2014 Earnings Report, Transcript and Summary

Good afternoon, everyone, and welcome to Bruker's Third Quarter 2014 Earnings Conference Call. [Operator Instructions] Please also note, today's event is being recorded. This time, I'd like to turn the conference over to Mr. Joshua Young. Sir, please go ahead.

Thank you very much, Jamie. Good afternoon. I'd like to welcome everyone to Bruker's Third Quarter 2014 Earnings Conference Call. My name is Joshua Young, I'm the Vice President of Investor Relations for Bruker. Joining me on today's call are Frank Laukien, our President and CEO; and Charlie Wagner, Bruker's Executive Vice President and Chief Financial Officer. In addition to the earnings release which we issued earlier today, we'll be referencing a slide presentation as part of today's conference call. The PDF of this presentation can be downloaded by clicking on the earnings release hyperlink on Bruker's Investor Relations website. During today's call, we will be highlighting non-GAAP financial information. A reconciliation of our GAAP to our non-GAAP financial statements is included in our earnings release and in our webcast presentation. Before we begin, I'd like to reference Bruker's Safe Harbor statement, which is shown on Slide #2 of the presentation. During today's call, we will make forward-looking statements regarding future events or the financial performance of the company that involve risks and uncertainties. The company's actual results may differ materially from the projections described in such statements. Factors that might cause such differences include, but are not limited to, those discussed in today's earnings release and in our Form 10-K as well as other subsequent SEC filings. Also note that the following information is related to current business conditions and our outlook as of today, November 6, 2014. Consistent with our prior practice, we do not intend to update our projections based on new information, future events or other reasons prior to the release of our fourth quarter 2014 financial results in February 2015. We will begin today's call with Frank providing a business summary of our third quarter performance. Charlie will then cover our financials for the third quarter in more detail. Now I'd like to turn the call over to Bruker's CEO, Frank Laukien.

Thanks, Joshua. Good afternoon, and thank you for joining us on the call today. I'll begin my presentation on Slide 4. We had previously communicated our reduced outlook for the second half of 2014 and a very weak third quarter. As a result of a number of factors outlined in our second quarter earnings call, Q3 '14 revenues came in below our reduced outlook. In the third quarter of 2014, we reported $420 million in revenues, a 4% decline from Q3 2013. On the bottom line, we reported $0.14 in non-GAAP EPS during the quarter, a 30% decline from the previous year's third quarter. All 3 of our BSI operating groups reported revenue declines, with different drivers in each of the groups. There were 4 key developments that led to our performance. First, within our BioSpin Group, our NMR revenue decline in the quarter year-over-year as a result of weaker first half 2014 orders. Second, our BMAT group -- our BMAT business continues to suffer from a cyclical downturn in the semiconductor and data storage markets, which led to meaningful year-over-year revenue decline for our AXS and Nano Surfaces divisions. We are also seeing weakness in others selected industrial markets such as minerals and mining and metals. Third, our to divest and restructure significant portions of the CAM division led to a $10 million year-over-year decline in revenue in Q3 2014. And finally, our revenue performance in Asia was particularly weak for all 3 groups. Revenues in nearly every region of Asia declined in the quarter and we experienced a decline in revenues from China for the first time in several quarters. The year-over-year revenue decline in our BSI groups was partially offset by strong revenue growth from our BEST division as a result of strong demand from MRI vendors and big science customers. I will provide further details on these points in a few minutes when I talk in more detail about our performance in each of the groups. On Slide 5, I show Bruker's performance through the first 9 months of 2014. Revenues grew by 1% led by 2% growth from BioSpin. All of the growth in BioSpin was generated by our Preclinical Imaging division, which grew in the high single digits and offsets a year-to-date revenue decline in our MRS division. Our CALID and BMAT groups both declined by 1% in the first 9 months of 2014. BMAT's performance was the result of weakness in demand from semiconductor and data storage customers. On a year-to-date basis, our CALID group was impacted by a $15 million year-over-year revenue decline in our CAM division. Geographically, low single-digit growth in Europe and mid-single-digit growth in the Americas was offset by a mid-single-digit decline in Asia, with most of that year-to-date decline coming in the third quarter. Our year-to-date non-GAAP EPS were $0.46, which was flat with the previous year. Changes in foreign exchange rates reduced our EPS by $0.04 on a year-to-date basis. Finally, our free cash flow improved by $46 million through the first 9 months year-over-year, which reflects good improvements in our working capital. Please turn to Slide 6 and 7 now, where I will provide additional details about the Q3 2014 performance of our 3 BSI segment groups and our BEST segment, and I will also comment on their outlook for the remainder of this year. So far in 2014, our Bruker BioSpin Group is facing weaker demand in NMR and -- nuclear magnetic resonance, and we did not yet see the pickup in NMR bookings that we had expected in the third quarter of 2014. I would like to emphasize that the lower NMR orders are not due to competitive losses, but rather the result of the slowing NMR markets demand in 2014 after 2 robust years of growth in 2012 and 2013. For the first 9 months of 2014, the bookings in our Magnetic Resonance Spectroscopy, or MRS division, which includes our large NMR business, are down in the high single digits. And our MRS division revenue for the full year 2014 is now likely to decrease in the low single digits year-over-year. A positive development for the BioSpin Group is the performance of our Preclinical Imaging division, or PCI division, which has very healthy bookings growth and is expected to achieve double-digit revenue growth for the full year 2014. However, keep in mind that our PCI division revenue constitutes less than 20% of the BioSpin Group revenue, so the PCI division is not yet big enough to compensate for weaker demand in the NMR spectroscopy market. Coming back to our NMR business. So far in 2014, we are seeing lower demand from academic and research customers than we had seen in the previous 2 years. Geographically, NMR demand is still growing in Europe and North America, but we have seen a significant drop in NMR bookings in Asia Pacific so far in 2014. This decline is led by Japan, wherein 2013, NMR bookings benefited from a special supplementary budget, which is not available in 2014. Our NMR bookings in China have also declined in the double digits on a year-to-date basis. Some of the NMR slowdown in China has to do with prior year orders for some large NMR structural biology centers in Shanghai and Beijing, whereas this year, it is a more steady-state NMR business. By now, I'm sure that you all have read Agilent's announcement that they will -- or have exited their NMR business. This will not yet have any revenue impact on Bruker in Q4 of 2014 and probably not much in early 2015 yet, either. We expect that Bruker may see some incremental NMR revenue in mid-2015 and beyond as a result of Agilent's departure. But the magnitude of that effect is yet to be determined. Given this changing demand background, our BioSpin Group is taking action to address their organization and cost structure. The BioSpin Group president, Thomas Bachmann, has already begun to implement organizational changes in the business and has carved out 2 new BioSpin divisions with new leadership. First of all, a new BioSpin division called Applied, Industrial and Clinical, or AIC, is now headed by Dr. Iris Mangelschots, who had been a senior manager at the Danaher business. We expect medium-term growth in NMR applied markets, particularly in pharmaceutical, food and beverage quality control, as well as in clinical metabolomics research and, eventually, in IVD, or in vitro diagnostics by NMR. Second, our service in aftermarket business has a lot of opportunity for growth in the BioSpin Group and it recently has been put into its own service and life cycle support, or SLS division, which is now headed by Ibervindch Merler [ph] who joined us from the Swiss company, Tecan. Our BioSpin Group President, Thomas Bachmann, is also developing plans to rightsize the cost structure of the BioSpin Magnetic Resonance Spectroscopy division in early 2015. The costs and benefits of the rightsizing program are not yet finalized, but we expect actions to phase in during the first half of 2015 and be fully effective as of Q3 of 2015. Turning now to our CALID group. Our Life Science and Clinical division grew in the mid-single digits in Q3 as good growth in our QTOF products combined with double-digit revenue growth from our MALDI BioTyper drove the performance. Our Optics division continue to deliver growth and good margin expansion and is now generating some of the highest margins in the Bruker portfolio. As many of you may have seen from the press release we issued earlier this week, we have made excellent progress in our CAM restructuring over the past 3 months. We completed the sale of our ICP-MS business to Analytik Jena AG in September and we sold our Gas Chromatography product the Techcomp in late October. Additionally, Techcomp also has a deferred option to buy our GC service business over the next 12 months. In the meantime, Bruker will continue to run the GC service business, which is profitable. These 2 divestitures will generate approximately $28 million in proceeds, most of which has already been received. With these divestitures completed, we can now turn our full attention to the product transfers and restructuring activities that still need to be completed within CAM. First, we are relocating the manufacturing of our GC triple quadruple and LC triple quadruple mass spectrometers from Fremont, California to our factory in Bremen, Germany. And second, our related product research and development is being transferred from California to our major mass spectrometry sites in Bremen and in Billerica, Massachusetts. Finally, we need to finish rightsizing the CAM employee and cost structure once statutory notice period has lapsed. Although we feel good about the announced divestitures, we still need to execute the programs in order to get CAM's financial profile to an acceptable level, which we expect to do prior to the end of Q2 in 2015. Please turn to Slide 7, where I will discuss our performance of our Bruker Materials group, or BMAT, and BEST segment. BMAT's Q3 2014 revenues declined year-over-year in the high single digits due to continued sluggish industrial demand and pronounced weakness in demand from metrology tools in the semiconductor and data storage industries. Nearly all of this revenue decline came from customers in Asia. This weakness has existed throughout 2014, and we don't see any evidence of a cyclical upturn yet as this reflected in softer bookings performance for the group. BMAT's AXS and elemental divisions have experienced year-to-date order and revenue declines. AXS bookings and revenue growth have been negatively impacted by the continued weakness in semiconductor fab line orders, but has also suffered competition primarily due to Japanese competitors that benefit from the much weaker yen. Both the AXS and elemental divisions have also experienced sluggish demand in minerals and mining, as well as in metals foundries, processing and metals fabricator markets. As a result, our AXS division is implementing additional cost saving initiatives and, most importantly, is implementing modifications to its product strategy and operations in order to drive higher levels of profitability in the future. On a year-to-date basis, our BNS division's revenue is flat as a result of the decline in revenues from semiconductor and data storage customers. The BNS division saw encouraging growth in other core businesses and positive contributions from our new fluorescence microscopy business unit, which is the result of the Prairie and Vutara acquisitions we completed over the past 13 months. Fortunately, we are now finally seeing strong overall bookings momentum in this BNS division in the second half of 2014. Altogether, for the full year 2014, BNS division revenues are expected to grow revenue year-over-year in the mid-single-digits. Our BEST segment continues to be a bright spot for Bruker in 2014. BEST reported revenue growth of 23% and reported a non-GAAP operating margin of 10% in Q3. This revenue growth was driven by solid superconducting wire demand from large MRI vendors. As we had expected, we could not export our Rosatom pilot line in the third quarter and we do not expect to complete the installation before the end of 2014. Over the past 18 months, we have transformed BEST from a loss-generating business into a segment that now has mid- to high single-digit profit margins. While considerable work remains within BEST, we are encouraged by our progress. Now I'd like to make a few closing remarks before turning the call over to Charlie. I want to stress that we remain committed to transforming Bruker and driving better operational performance in the future. While we are being affected by some short-term dynamics in our markets, we remain focused on improving our profit margins. The opportunity to drive higher margins and cash flow remains very much intact. The recent actions we have taken reinforce our commitment to running the business for sustainable, profitable growth. We are continuing to execute our previously announced strategy initiatives and restructuring programs. This includes initiatives such as outsourcing certain manufacturing activities, our procurement initiatives, which will drive cost savings in the future. We are also continuing to fund innovation and expand into faster growing adjacent markets. Bruker will remain a company that is known for developing high-performing and high-quality analytical instruments. We have made great progress already with our CAM restructuring plan and we will ensure that we will deliver all of the key milestones associated with the plan through the middle of next year. Our swift action to sell 2 of the CAM's product lines demonstrates how restructuring CAM has been a top priority for our management team. Finally, we are initiating a cost reduction program within Bruker BioSpin to better align our cost with the expected level of revenues in our NMR business. We believe that lowering the cost of the BioSpin Group will benefit us when the NMR market recovers. While it is too early to share the specifics of our rightsizing plan, I would expect that these programs, in aggregate, will generate material cost savings when they are completed. The key message that I would like to leave you with is that we are taking action based on the lower levels of revenue that we now expect. And we are making the necessary decisions to build a stronger foundation for Bruker's future. With that, I will now turn the call over to our CFO, Charlie.

Thanks, Frank. I'll now provide some additional details on our Q3 2014 financial performance. On Slide 10, I show a snapshot of our Q3 2014 non-GAAP results. Total revenues were $420 million, a decrease of 4.4% from the third quarter of 2013, reflecting the impacts that Frank described earlier. Our non-GAAP operating margin of 8.6% was 220 basis points below last year, including a 40 basis point headwind from foreign exchange rates. But it was the decline in revenue that was the biggest driver of lower profitability. Non-GAAP EPS of $0.14 declined by $0.06 compared to Q3 2013. We continue to make good progress managing our working capital, with net working capital and our working capital to revenue ratio both improving approximately 10% compared to Q3 2013. A little less than half the overall improvement is the result -- or excuse me, a little more than half is the result of our various operational initiatives, while the remaining benefit comes from changes in foreign exchange rates. Turning to Slide 11, I show the revenue bridge for the third quarter of 2014. Our reported revenue decline of 4.4% reflected an organic revenue decline of 4.8%. We had a 0.8% positive effect from acquisitions, and changes in foreign exchange rates decreased our revenues by 0.4% in the quarter, primarily as a result of a stronger dollar versus the Japanese yen. From a profitability perspective, currency had a negligible effect on our EPS during the quarter. On Slide 12, I show our Q3 2014 non-GAAP operating results in more detail, our Q3 2014 non-GAAP gross margin of 44.2% and a decrease of 90 basis points on a year-over-year basis. Foreign exchange rates decreased gross margins by 20 basis points, and the remainder of the gross margin decline is primarily related to lower revenue volume. Our Q3 2014 operating expenses were flat on a year-over-year basis despite the fact that we continue to invest in new capabilities. Over the course of the year, we've continued to strengthen our management team and we built new capabilities and functions such as finance procurement, regulatory affairs and sales and marketing, all while trying to maintain tight control of our overall spending. We've also been making investments to upgrade the IT infrastructure of the company. In October, we went live on a new corporate financial consolidation system. We worked hard on this implementation over the last year, and I'm pleased that the go-live went off without issue. While we have additional work to do to achieve full benefits from the new financial system, we've taken an important first step toward improving Bruker's global financial reporting and analysis capabilities. Furthermore, over the last few months, we've upgraded some of our ERP systems in parts of Asia, specifically, we implemented SAP in Singapore, Taiwan and Korea sales subsidiaries, replacing legacy systems with much less functionality. We're still developing elements of a more comprehensive, multi-year ERP strategy, but in the meantime, we're rolling out SAP in locations with the greatest need. I'm pleased that we're able to make these long-term investments while still keeping our operating expenses in check. Turning back to the P&L. Our non-GAAP EPS declined by 30% compared with Q3 2013 and reflected a tax rate of approximately 27% in Q3 2014 compared to a rate of 20% in Q3 2013. Our tax rate in the third quarter of last year was unusually low due to the jurisdictional mix of profits and certain discrete items in the quarter, including tax benefits associated with the Prairie acquisition and our reversal of tax reserves. On Slide 13, I show a reconciliation of our non-GAAP -- our GAAP to our non-GAAP financial results for the third quarter. In Q3 2014, we excluded $31 million of costs from our non-GAAP results, up considerably compared to the previous year. The biggest components of the reconciliation are $16 million of restructuring costs recognized during the quarter, primarily related to CAM, and $6.9 million of asset impairments, also related to CAM. I would also note that we excluded $6.3 million of net gains in our net interest income other line. This net gain results from the $8.7 million gain on the sale of our ICP-MS business, which is partially offset by a $2.4 million accrual for the estimated costs of settling our ongoing discussions with the SEC about Bruker's past business practices in China. While our discussions are not yet complete, the $2.4 million accrual represents our best current estimate of the probable loss associated with this matter. The company will continue to evaluate the accrual pending final resolution of the investigation and the related discussions with the SEC. On Slide 14, I show our revenue bridge for the first 9 months of 2014. Reported revenues grew 1.1% and we reported an organic revenue decline of 0.4% year-over-year. Changes in foreign exchange rates added about 0.7% to our revenue growth, and the net impact from acquisitions and divestitures added 0.8% to our revenue growth. While a stronger euro versus the dollar drove most of the year-to-date benefit, we expect to see this trend reverse in Q4 due to the recent weakening of the euro versus the dollar. On Slide 15, I show our operating performance through the first 9 months of 2014. Non-GAAP gross margins declined year-over-year by 50 basis points to 44.9% and this decline was essentially entirely driven by changes in foreign exchange rates, which lowered our gross margin by 70 basis points through the first 9 months of the year. Currency also had a significant impact on our operating income and lowered our operating margin by approximately 90 basis points on a year-to-date basis. Our year-to-date 2014 non-GAAP EPS was flat compared to the first 9 months of 2013. On Slide 16, I show our non-GAAP reconciliation through the first 9 months of 2014, we've excluded $60 million of costs from our non-GAAP results, which is up $23 million from the first 9 months of last year and reflects the higher amount of restructuring activity we have ongoing in the business. Additionally, our other costs are up primarily due to asset impairments we incurred as part of our CAM restructuring. On Slide 17, I show our cash flow performance through the first 9 months of 2014. We recorded free cash flow of $18 million in the first 9 months of 2014, an increase of roughly $46 million compared to the first 9 months of 2013. Despite lower income, we were able to drive higher free cash flow through improved working capital and lower CapEx spending. Our cash conversion cycle improved by 29 days compared to the previous year, which is comprised of the following: days in inventory outstanding were 230 days compared to 234 in Q3 2013; day sales outstanding were 60 days compared to 62 days last year; and, finally, days payable totaled 48 days compared to 26 days in the previous year. Now I'll turn to our financial guidance for 2014, which I show on Slide 19. We're reducing our guidance for the remainder of the year due to the incremental weakness we've seen in our NMR and AXS businesses. We also expect currency to reduce our revenue by as much as 4 percentage points year-over-year in the fourth quarter. As a result, we now expect revenues to be in the range of $1.81 billion and $1.84 billion for the full year. We expect to report non-GAAP EPS in the range between $0.72 and $0.78. The wider range of guidance reflects the potential for significant variability in our fourth quarter results. Historically, the fourth quarters have significant impact on Bruker's full year results. As is often the case, we have several large transactions in BioSpin and Detection, for example, that could fall in Q4 and change the complexion of the quarter. Furthermore, we have the potential for variability in our Q4 tax rate depending on the timing of certain items. While we expect to see a favorable EPS benefit from the weaker euro in the fourth quarter, nearly all of this benefit will be offset by the yen and several other currencies that have weakened versus the dollar. Finally, we expect to incur restructuring charges of approximately $10 million in the fourth quarter, bringing the full year total to nearly $40 million. That figure would increase once we finalized our rightsizing plans for BioSpin. So I'll close by stating that we remain committed to continuing the transformation initiatives that we have launched and executing new programs to lower our cost in response to lower market demand. We're confident that the Bruker portfolio will return to growth and that we'll be successful in driving higher levels of profitability and cash flow at the company. With that, I'd like to turn the call over to Joshua to start the Q&A session.

Jamie, please assemble the Q&A roster.

[Operator Instructions] And our first question comes from Tim Evans from Wells Fargo Securities.

So Frank, I guess the thing that was most surprising to me was the comment about the slowdown in the NMR market as a whole. I guess I'm curious what you see as the long-term structural growth rate in this market at this point.

Yes, Tim. I think the experience with the NMR markets over long time periods, over a decade and more, is that it sometimes has some of its own timing. We sometimes see 2 or 3 years of growth, sometimes we then have a year of settling or even a slight reduction as we're experiencing so far, at least year-to-date. And long-term growth rates, while the previous couple of years we had the high single-digit growth rate, the long-term growth rate for the NMR market, at least for the next few years, I would expect to be in the low- to mid-single digits.

Our next question comes from Isaac Ro from Goldman Sachs.

I did want to ask a follow-up on the NMR question. Maybe if you could spend a few moments on what's going on in Asia, specifically China. And we've seen, obviously, a lot of pressure in China across the sector in this quarter. But it seems like the pullback here was more than you guys would've otherwise expected. At the same time, you have your biggest competitor, obviously, pulling out. Just maybe revisit, number one, your expectations in the short term for the NMR business in China. And then secondly, just given that you had your biggest competitor pullout, just to remind us why you feel like the structural growth trend here should rebound. It's certainly unusual to see a company -- an industry this consolidated have a second player just bow out completely.

Yes, Isaac. So yes, indeed. We had even 3 months ago predicted slightly stronger orders in NMR, and they just have not or not yet materialized. Some of them has materialized, but not to the extent that we had expected even 3 months ago. And clearly, Asia, Japan -- Japan as expected and China, and the rest of Asia Pacific, not necessarily expected, have been slower. We have -- we don't necessarily have complete explanations for that. And some of it may just be you deal with bigger orders, with big-ticket items, sometimes there's just some variability that doesn't necessarily have an underlying reason. As I have observed in the past, over many years, the NMR market sometimes has its own little S-curve, 2 or 3 years of good growth, a year or 2 where it settles and go sideways or maybe goes down a little bit. And we think that's what we're seeing right now. But it is not strictly related to China overall or the macroeconomic trends. And that is something that we had observed in the past as well. So some NMR idiosyncrasies, if you like. The Agilent effect, of course, didn't affect Q3, the announcement was made in early -- or in the middle of October. Clearly, it won't affect our Q4 revenue. We do expect and have already experienced, anecdotally at least, some orders that have come to us now rather quickly or -- that were perhaps not coming to us to begin with and are now coming to us after all. But so far, this is anecdotal and not quantitative. So basically we said, look, as we really just have to deal with this new set of circumstances since the middle of October and then probably, by the end of Q4, we'll have a much better feeling for what is the effect on Bruker of Agilent exiting the NMR business. And I think when we report Q4 early next year and then give guidance for 2015, we will have a more satisfying answer and could put some quantitative brackets around what we might expect. Right now, because we did not even have exact figures of what Agilent's NMR systems and upgrade revenue was, if you recall, they're keeping their service business, and obviously we'll not pick up all of that anyway, we hesitate to make estimates because we still have a pretty broad range even internally. So anecdotally, we're getting more business, but that's very recent. And when I say business, it's really just initial orders that we otherwise would not have received. But they won't be up till sometime middle of next year until they going into revenue and the magnitude is difficult to estimate for us right now.

That's helpful. Maybe just one quick follow-up for Charlie. I think one of the bright spots this year has been the continued improvement in free cash performance. And the company, obviously, tends to have very back-end loaded free cash flow. So would you be able to give us a range or some sense of expectations for how full year free cash will look?

Yes. It's been -- obviously, performance so far this year has been pretty good. If you recall, last year's fourth quarter was enormous. I think we generated something like $120 million of free cash flow in the fourth quarter last year. And so there is some variability in that number. Obviously, a lot will depend on what makes it into revenue versus what ends up not making it into revenue and remaining on the balance sheet from an inventory standpoint. So I'm not going to give an estimate at this point. But certainly, we're expecting for the full year to have very, very healthy growth in free cash flow.

Our next question comes from Doug Schenkel from Cowen.

So revenue's clearly not played out as expected this year. Over the first 9 months of the year, revenue increased, I think it's about $14 million year-over-year. OpEx has increased $4 million. So as we kind of think about expense control here, on one hand, it's commendable, but the other hand might suggest that there could be some link between the level of operating spend and the revenue performance. So yes, the questions here are: First, is there any concern that you may be underspending and that may be you've cut too much too quickly? And second, keeping in mind that many of the revenue challenges you've described has really is really been timing-related? And my last question about operating spend, assuming revenue growth picks up as you capture some of these delayed revenues presumably next year, are you going to have to turbo boost operating investment to keep that going?

That's quite a range of questions and let me try to answer them, and maybe Charlie will chime in. I don't think we've cut too much too quickly. I really don't detect anything where, oh my God, we've cut back or cut to the bone in a sense that, that has an impact on our bookings generation or our revenue execution for that matter. So I think that's not the case. I think we're doing it judiciously and I think we're coming in about right with the cost cuts that we have taken so far. Obviously, we're planning further cost adjustments. In terms of timing, yes, there were a couple of these timing issues that we had pointed out for Q3. They have gotten pushed out further, so we're now not assuming that we will get these export permits for some of these Detection contracts, which we've had under our belt and in backlog for a while. We assume they're going into next year. It won't require us any additional -- significant additional capacity to execute that when they come in. They've largely been built already and we're waiting. And the same is true completely for that Rosatom pilot line that we were not able to export in Q3. And it's -- we may be able to export it in Q4, but it will not make it into revenue until next year. If it makes it into revenue at all, a little bit of uncertainty on that one. Those are the specific timing guides. I think the bigger picture of semiconductor data storage and NMR and AXS weakness to a great extent related to the semiconductor space, those are more external demand factors that we had not -- where we had been -- that had been worse than what we expected when we started the year and even a little less than what we expected 3 months ago. So I hope that -- I don't think that we will need -- I think we'll be fine without any turbo capacity boosts. We clearly have some ability to adjust capacity. We have some flexible work arrangements in some of our factories where we can either go 15% less or 15% more, and then we have the ability to go to short work or we have the ability to go to overtime. But I think that's all very manageable within the ranges that we're looking at. I don't think there's anything there. And in fact, in some areas, and particularly in BioSpin, Thomas Bachmann has determined that there is an opportunity to bring down the cost structure more permanently and he's trying to execute that plan or will try to -- will execute that plan in the first half of next year. And again, when we get together on report Q4, we'll be able to give you some outline, what's the restructuring costs, what's the expected benefit. The timing is approximately -- it's going to happen between now and the end of the second quarter of next year. So by the third quarter of next year, we think we'll have those rightsizing benefits available to us.

All right. So to be clear, as we think about the outlook for operating leverage heading into the year, where hopefully, the revenue trajectory picks up a little bit, even though research and development is down, it looks like it's going to be down $10 million to $15 million year-over-year this year, SG&A is going to be up, but not much more than $10 million. You still feel like with this level of investment, you can generate growth and operating leverage not years down the road, but in the near term, meaning next year?

Yes. I mean, we're still spending about 10% of revenue on R&D. And if anything, in some areas, we've expanded marketing and sales capabilities where we were, perhaps historically, underinvested in those areas of little bit. So I think absolutely, we can drive growth with that. But we're sourcing some -- in some of our bigger businesses. Unfortunately, we have seen some slowdown in demand in addition to some of the discrete timing issues and, of course, currency having an effect. And so we're also pushing into quite a number of adjacent, faster-growing markets. Some of that is taking off, like pre-clinical imaging. Some of that is in the very early innings, like fluorescence microscopy and isn't moving the needle that much. MALDI BioTyper is very much moving the needle. Some other moves into explosives trace detection. We're still at the very early stage. But I think we're spending the right amount of investment.

Our next question comes from Dan Arias from Citigroup.

Frank, as you think about the way that the business shapes up over time, how important is it at this point to sort of find a way to increase your recurring revenue streams? And I guess to the extent that, that's something you're looking to do, what avenues do you think you might go down there?

Yes, I think that is important and I think in some businesses, we've made decent progress there, but in just about every business. And especially some -- even some of the large ones, the Bruker BioSpin, but also other businesses. I think we -- by really focusing that on a discrete business unit within the larger division, I think we have opportunity also as I look at some of our peers that are in comparable instrumentation business to drive recurring service, upgrade, software, training, services and some consumables business. The push into diagnostics, particularly in microbiology, but eventually also in other fields, will have a higher percentage recurring revenue. We see that in the MALDI BioTyper business already. So I think that's -- while we won't become a razor, razor blade model, or even like some other half instrumentation, half consumables companies, we think we can grow this part of the business quite a bit. And I think we're taking -- and we are taking the organizational steps, for instance in Bruker BioSpin, for putting this on the very experienced dedicated management, something that in the past, we hadn't really done as -- throughout our business.

Okay. And maybe just 2 quick follow-ups for Charlie. Charlie, on the BioSpin business, does the scope of outsourcing and what you're looking to do there change NMR with the restructuring? And I guess secondary to that is, given everything that we're seeing externally and internally, how far do you think we are away from getting some longer-term financial targets?

So BioSpin has been busy over the last 18 months with a range of programs aimed at improving their supply chain practices. They were one of the first Bruker businesses last year to start outsourcing in a meaningful way. They're pretty far along with procurement programs, and they keep layering on new programs. So that will continue. The rightsizing that is going to occur as a result of this new demand outlook is certainly going to add to that. I think that it doesn't affect the scope of the supply chain programs that they have ongoing. In general, all our businesses are trying to look carefully at their manufacturing footprint and their supply chain practices to move our cost structure to be less fixed and more variable over time. So I think you'll continue to hear supply chain program announcements coming out of BioSpin and I don't think the rightsizing has any particular impact on that. In terms of your question about long-term targets, clearly, we are seeing a lot of variability in our results right now and we're also having some visibility challenges, and that's resulted in some guidance reductions and adjustments recently. We need -- we clearly need more time to get a better handle on the business and get a better feel on the business. So at this point, I'm not making any commitments about when we'll have midterm targets.

Our next question comes from Derik De Bruin from Bank of America.

A couple of questions. I guess, on the NMR orders, are you seeing -- is it weakness in high field that you're mostly seeing? Or is it low field? And the reason why I'm going there is I know the high field orders often have a longer delivery time, so I'm just -- so thinking about order as they go into 2015, what happens? Just give us a little bit more color on where it is? Or is this across-the-board?

No. It was clearly in the high field area. Particularly, in the high field, we didn't get the orders from China and Japan, and Europe's steady and U.S. is not bad, but it's been particularly at the high fields.

And these are instruments you would not have thought -- were these ones that you would have delivered revenues on in 2014? Or these were the things you would have delivered on in 2015?

Some. Mostly, into '15, but some 700 or 800 for structural biology, we can also deliver still -- have we gotten them in the Q1 of this year, we would've been able to still deliver this year, some of them at least. Most of them have longer delivery times, as you've correctly pointed out.

Okay. So on the -- Charlie, if you sort of looked at the -- where the currency rates are right now, can you just give us just what you would think the initial impact would be on the '15 top line number as we sort of think about adjusting our models?

Yes. If you look at -- so if you just look at Q4, for example, there should be pretty much neutral, no impact year-over-year from currency. And I think if you project forward into '15, I haven't done the full analysis yet, but I think...

Revenue and bottom.

I think on the bottom line, at this point, I wouldn't expect much of an impact in '15 from where we are today. Obviously, on the revenue side, it would be a pretty significant headwind. And -- so looking at Q4 might be a reasonable proxy for 2015.

Great. And I guess, you -- could you talk about a little bit about the mass spec competitive landscape? I mean, it sounds like you're having some -- you're seeing some issues there as well. Could you just talk about pricing, people with new products, just a little about the dynamics in the market, and then I'll get off?

Okay, Derik. I think we're doing well with the Q-TOF products. We've obviously really refreshed that product line and -- throughout the year and have seen decent growth year-to-date in that one. I mean, by all means -- it definitely remains the competitive space and a sought-after space, and essentially all major competitors with one product or the other going after that. But I think we're doing well there. The MALDI Biotyper continues to see very good growth throughout the year and we think that will actually continue for quite a while. We had acknowledged in the past that the other applications of MALDI-TOF are flat or down so far year-to-date. And also, to some extent last year, as MALDI-TOF is getting into new applied markets, like MALDI -- like clinical microbiology and plays a role in MALDI imaging, it's rolled in proteomics. It's clearly the secondary tool and it is still needed, but it is not the primary tool for proteomics anymore. So even though in the last few years, we became a pretty clear #1 in MALDI-TOF for the research applications, its growth had been sluggish, whereas the ramp-up has been in QTOF technology and in the MALDI BioTyper clinical microbiology.

Our next question comes from Tycho Peterson from JPMorgan. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: Just a question on kind of going back to some of the leverage discussion on the pacing of some of the initiatives, in particular for SG&A. As Doug mentioned earlier, that was up $1.00 amount year-over-year. Charlie, you highlighted some of the ERP initiatives. You highlighted senior hires. I guess, as we think about next year, will SG&A be down an absolute dollar amount? I mean, obviously getting rid of CAM and the ICP-MS business helps. So how -- I mean, how should we think about the absolute level of SG&A spending going forward, baking in, obviously, the BioSpin cost-reduction program, too?

Yes. Tycho, again, I'm not going to model out the '15 P&L just yet. You're absolutely correct that rightsizing in BioSpin and CAM going away are going to have a pretty significant effect on OpEx next year. Obviously, we have investments in other growing businesses. As Frank commented earlier, there's not going to be any need for us to have some sort of surge in spending to make up for any of the cuts or controls that we've had in place in the past. So I'm going to hold off on guiding to that, though, until we've looked at the whole P&L. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: Maybe put another way. Have you incurred the bulk of the ERP costs this year in the senior management hires?

Okay. So good question. From a senior management hire, yes. I would say that obviously that, obviously, there's always puts and takes, but I think that's done. ERP, importantly, the spending on the financial systems is going to tail into next year a little bit, but it's not a significant number and therefore, should represent a year-over-year decrease. On the ERP, importantly, we have -- that's in the line item called IT transformation cost, and it's part of our non-GAAP reconciliation. So that number -- the investments there in ERP are actually not hitting the non-GAAP OpEx number, and you can see that in the reconciliation. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: Okay. And then how about R&D leverage? I mean, if we think about NMR going into a monopoly, are there other opportunities to potentially get a little bit more leverage on R&D?

Well, I think we've been pushing for R&D leverage in bringing down R&D in almost all of our businesses without really sacrificing our investments into either new and improved products or solutions on -- based on those technologies for adjacent or other markets. And that has to do with PLC processes and efficiency, and I think we're really making a lot of progress there. So if R&D spending has come down from 11%, 12%, maybe 13% historically towards the 10% range, I'm very satisfied with that. But I don't think we're shortchanging our ability to drive -- to be competitive and to rekindle growth. In terms of leverage, I think there'll be some ongoing leverage in R&D as well. So I think this -- there might be further slight leveraging in the next 2 or 3 years. I think that's to be expected, but I don't expect it to be a big drop or something like that again with reserving to give you better -- a better feel for that in February when we announce Q4 and give you 2015 guidance. But some incremental R&D leveraging is to be expected. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: And then last one. You mentioned Techcomp has the opportunity on the GC service business. Can you maybe just quantify that for us? And what are the implications in -- you said it was profitable if they do acquire that?

It is approximately -- revenues are in the range of $10 million to $15 million, yes. And if we divest it to them, one could model it that we might divest it by the middle of the year, but that's hard to say. Of course, it's actually they're driving the timing. It could be earlier. It could be as late as in the fall. And of course, they have an option. So strictly speaking, if they were not to exercise that option, then we would continue to run with that service business.

[Operator Instructions] And our next question comes from Dan Leonard from Leerink.

How quickly could any benefit from the Agilent, NMR exit impact your P&L given that the lead times in that business vary quite a bit by product?

Yes, most -- it could begin to phase in a little bit of Q2 of next year and then really more so in Q3 and Q4. For once -- and Derik was hinting at that earlier with his question. It's not they would be any ultra-high field orders that we would be getting from Agilent because they had exited that part of the business a year earlier, if you recall. So the types of products, the types of bookings that we might begin to pick up from them in the fourth quarter and into next year, they might, on average, have something like a 6-month lead time to revenue.

Got it. And Frank, how are you thinking about the pricing opportunity in NMR?

Well, I mean, I think even before this announcement, there has been a big push by us and, in most cases, not always, but in most cases, we think even by Agilent to have more rational pricing and -- or discount. So in NMR, it's not so much the price list or prices going up. But historically, there had been, in some cases, just very aggressive discounting and I think that may abate quite a bit.

Our next question comes from Steve Willoughby from Cleveland Research.

Two things. One, I guess, first, on the guidance, Charlie. You made a comment that there's a wider range for the fourth quarter and then you made a comment regarding some larger BioSpin projects that could fall in the fourth quarter. I was just wondering, those larger BioSpin projects, are those assumed within your guidance? Or would you need those to come in, in order to get to the high end of your guidance?

Yes. If you -- obviously, the guidance is roughly plus-or-minus $15 million and at the high end of that would -- the implication would be that a couple of orders would ship or would revenue in the fourth quarter. If they slip out, obviously, we push this towards the lower end.

Okay. And then just secondly regarding restructurings. I know you guys did restructuring programs in 2013. How much restructuring has there been in 2014 outside of the CAM restructuring? Because I'm just trying to think about a go-forward impact. It had some restructuring benefit from the restructuring you did in 2013, the restructuring that you're going to do with CAM. This new restructuring with the BioSpin, it sounds like maybe a little bit in BMAT as well. Are there other restructuring going on in 2014 that could possibly impact 2015?

Yes. If you -- last year, I think the restructuring number in the reconciliation was about $26 million, $27 million for the year. The biggest pieces of that last year would have been associated with BioSpin supply chain initiatives, so outsourcing and machine shop divestitures, that sort of thing, and then a very significant third and fourth quarter rightsizing in the BMAT business. So most of last year's restructuring charges were BioSpin and BMAT. This year's number is mostly CAM with a little bit of the tail end of some of those BioSpin and BMAT initiatives from last year. And then based on the comments that we've made tonight, you'd expect that the next significant restructuring charge would be around BioSpin rightsizing. It could be as early as Q4, but more likely, it's Q1 of 2015. And so aside from those, I mean, there's always a little bit -- even in some of the other businesses and elemental and other places we've smaller restructuring initiatives, they just don't rise to the level of materiality of the programs that I've outlined there.

Okay. When you think about the benefit from those restructurings, I know you talked about you've quantified the CAM restructuring, I believe you quantified the 2013 restructuring, is there any other ways to quantify the benefit, the run rate benefit you should expect to receive?

When we commented on last year, the restructuring activity resulted in about 300 employees leaving, either it's rightsizing or joining some of our partners and we talked about benefits of $15 million to $20 million this year. If you look at our year-to-date operating margins there, they're down 30 basis points or so, but that's with the 90-basis-point headwind from currencies. So net of that, up about 60%. So I think you're seeing some benefit there. The -- this year's restructuring charges mostly are CAM, and we've commented on the kind of the run rate or the annualized benefit from that phasing in, in the first half of next year. And then obviously, if we're going to announce a new restructuring or rightsizing effort around BioSpin, we'll absolutely quantify the expected benefits from that.

Our next question comes from Scott Weber from Evercore ISI.

This is actually Vijay, in for Ross. Now Frank, I guess a lot of questions in NMR and I just want to maybe shift to -- towards BMAT. And again, pretty weak results out there. But can you tell us what's happening in those markets? And AFM has been weak and sort of -- if you had to look at some of those macro data points and try to correlate what happens to growth in that segment, how should we be thinking about it on a go-forward basis?

Yes. So starting with the second part of your question, actually, the BNS division. AFM and their other product lines have really done quite reasonably and they've seen some decent growth and they've seen some building order momentum, especially in Q3 and we think into Q4, but they clearly have a lot less semiconductor and data storage, call it, microelectronics revenue so far this year overall. It's going to change a little bit in Q4, but I think they've seen some reasonably healthy trends in everything other than microelectronics at BNS. So AFM is healthy. Bio AFM is growing. Their fast scan products of -- are working. Their fluorescence microscopy ramp-up is happening. But also some of the tribology and other white light interferometry and other industrial products are picking up, except for data storage and -- data storage in semiconductor is not insignificant for them in terms of revenue. But it also has, when it comes through, it has some of the best margins in that business. So it's -- that's why so far, this year, they've been 2 different trends unfortunately, more or less, offsetting each other with, I think, good bookings momentum building to where BNS, I think, will do better in next year. AXS and elemental, the first part of your question, they are seeing also AXS only. The semiconductor, they've been a lot of R&D in the last couple of years, had some fantastic x-ray semiconductor tools now that we think will -- eventually, that investment will pay off, but we're bringing them now to market at a time when not a lot of people are buying. But fundamentally, we actually don't regret having made that decision. We think there will be the time when we will benefit from these rather unique tools that hit the -- that are coming in at a point where the semiconductor technology trends and roadmaps will really need them. The other industrial market, there are some strength in -- cement and so on is strong, but metals prices are down worldwide, and that's affecting any metals analysis business, but it also is affecting minerals and mining. So there is a second industrial trend that these 2 businesses, also elemental in AXS. It is weakness in metals pricing, and that has a number of repercussions in it in various analysis markets.

That was very helpful, Frank. And maybe one quick one for Charlie, if I may. I know that you guys mentioned about sort of the ERP investments and the restructuring. And I'm not asking for what the benefit is, but I guess if you had to sort of look at how some of these actions could help you sort of predict the business very right. We've had these up periods where you experienced volatility. Charlie, do you feel like any of the actions that you've been taking, like this might help you better predict the business on a go-forward basis?

Well, we certainly are -- feel like we've made improvements in our management process and are continuing to make improvements on the commercial side of the business. That said, we clearly are having a harder time with visibility right now. So I do believe that cumulatively, over time, these process improvements are going to yield benefits in terms of visibility. But at the moment, that doesn't show.

I'll give you a historical perspective. We did predict 3 months ago that we would have a weak Q3. Okay, there were some trends that we couldn't -- that we didn't capture. But 2 or 3 years ago, it would've been difficult for us to predict that at that time.

Our next question comes from Amanda Murphy from William Blair. Amanda Murphy - William Blair & Company L.L.C., Research Division: Just a couple more on NMR, sorry, but -- so with Agilent, I guess, a question on kind of the benefits from the fact that they exited the high field market previously. Is that something that maybe was impacting you to the positive and now is rolling off? And then just second on Agilent. I know it's sort of early days, but have you had a chance to maybe reach out to any of your customers and see what the view is there? Just -- obviously, they're keeping services, but maybe there's a potential opportunity for you to capture some of their current installed base as well?

So Amanda, 2 parts. I think they coincidentally perhaps dropped out when the -- in fact, the high field demand the following year or so wasn't that strong. So we have not benefited as much from them dropping out of high field a year ago and capturing the orders because that segment of the market was a little bit weaker. There still are some high field orders, and that's been good. But as you know, high field is less than 10%. And maybe with associated orders, associated systems that go through, less than 15%. Now we're talking about the entire market. That's a bigger deal. And we have been talking to a lot of their customers, and they've been talking to us, of course, and we have a lot of customers that actually have both Bruker and Agilent vary in equipment, and a lot of them had been contacting us because they're obviously concerned. And so anecdotally, I can tell you that a number of -- we've picked up some business already from some of those customers. And some of them are longer-term looking, how can they get funding to upgrade to some newer capabilities? And NMR system, it's usually not good enough to just keep it serviced and running. You almost buy these systems with an implication that you will need software and probe upgrades, and you probably keep the magnet the longest, that you need console upgrades, as we call them, during the life time of the magnet. So a lot of customers are taking a pretty systematic look at that now, but it's early days for them. And it certainly haven't been able to raise the funding yet to do something about it. We think that will happen, but we really cannot estimate and put even pretty good brackets around what the amount will be. We think we'll have a much better read on that when we report Q4. But there's a lot of activity. Amanda Murphy - William Blair & Company L.L.C., Research Division: Got it. And then just a higher-level question on some of the comments you've made about a resurgence of demand. And obviously, the market is cyclical to some degree. But in terms of what drives incremental demand or growth, I mean, presumably, there's the adjacent market piece of it, but also server replacement cycle, if you will, in NMR. So I guess I'm just curious. If you think about the entire installed base, and obviously, you have a big chunk of that already, but is there a way to think about just aging across the installed base in terms of how that might be impacting the growth now and maybe how that might drive growth in the future? Just thinking about replacement cycles.

Absolutely. There's a way to think about it and we're trying to model all of that right now. Obviously, without perfect information on their installed base, we can make some -- we have to make some assumptions there. And we -- there clearly will be replacement cycles, often not so much driven by the systems breakdown because the engine just can't do any more miles, but very often driven by the need for improved capabilities and upgrades that are now no longer available as we understand it from Agilent. I think it is going strictly to repair and replacements for broken parts. So I think there will be some healthy trends for us. It's difficult to quantify them right now. We have, of course, theories internally, but we need to really get some real evidence in the next 3 months and before we report and give you some ranges in early 2015.

Our next question comes from Bryan Brokmeier from Maxim Group.

In your prepared remarks, you mentioned that you're seeing one of the highlights continues to be strong growth from the MALDI Biotyper. Is that growth coming in the U.S. for the most part? Or are you continuing to see growth in Europe and Japan, and if you're starting to see growth in China?

Yes. No, we've seen -- we've continued to see good growth worldwide. Certainly, and I don't know by looking in the year-to-date to the first 9 months, which has always means more than any given quarter. I think we had a bit of a bolus in China in Q2 and that was weaker in Q3. But I think you have to average these things out. So there's been good growth in the United States, there's been good growth in Asia and there's continued moderate growth in Europe as well. And of course, also the consumables and aftermarket business, it's -- including service, is growing very, very nicely and much faster than the systems business, in fact. But the strongest growth have been in North America.

Okay. And the BioTyper, that still requires blood culturing, right? What could be done in order to take the culturing out of the workflow?

I don't know that anybody really wants to take the culture out of the workflow because it's such an important biological viability filter. When you just go to PCR without any culture, you don't know what you're amplifying, whether it's a viable mechanism, whether it's junk DNA or other DNA floating around. A lot of people think that really going away from cultures altogether will be a big mistake and as a results might be very unreliable.

Our next question comes from Eric Criscuolo from Mizuho.

Just filling in for Peter tonight. I guess, it sounds like you're going to have a couple of headwinds in the fourth quarter, be they FX or weaker Asia or NMR. So I was just kind of wondering if you can maybe quantify or at least rank kind of how they're going to -- or the biggest to the smallest impacts in the fourth quarter that you see right now?

Well, currency year-over-year could take 4 percentage points off. So that alone is a pretty significant driver on the revenue line, of course. As we've pointed out, it should be neutral to EPS but significant at the revenue line.

Okay. And will bring down -- come down by about $10 million.

That's right. Yes.

So those are the 2 biggest.

And then continued softness in...

Spend and demand.

Got you. Okay. And then just on the restructuring, the additional restructuring that you're likely to do in BioSpin. I was wondering if you could maybe compare not necessarily the big dollar amounts that are involved, but maybe just kind of the efforts that you'll need to maybe get this done or what you expect to get done versus what you've done last year and up to this point this year. I mean, is it easier programs that are -- that you're going to tackle? Or are these things kind of harder to implement? I just kind of want to see how -- what type of effort you might have to make going forward for this?

I mean, the effort is nowhere close to what we're doing in CAM. Of course, BioSpin being, by and large, a beautiful business, doesn't require the major restructuring that we did in CAM. I mean, that's not even close. What we did in AXS a year ago and in elemental in OpEx rightsizing, it's work. And it's quite a bit of work. It takes a couple of 2 to 3 quarters, but I think that may be comparable.

And our final question today comes from Paul Knight from Janney Capital Markets.

It's Brian Kipp in behalf of Paul. Just 2 quick follow-up on Tycho's service question for the GC business. If Techcomp doesn't exercise that and it goes through -- you guys still have to hold the business, do you roll it down to discontinued operations at some point? And in addition to that, how long do some of the service agreement last for?

So definitely not going to discontinued operations. We would continue to offer that for a long period of time. And I mean, that's the ballpark figure. Typically, equipment like this one tends to offer service for about 7 years or so after it's been purchased. But in some cases, longer.

And then another follow-up, one right here. I think you cite during the PowerPoint a focus on new entry into new growth markets. I think there was some conversation earlier about potential consumable offerings. I just wanted to get some color there if it's new products that you guys are looking to emerge into or to build up? Is it new geographies you're looking to penetrate? Just some color there would be helpful.

Yes, I think geographically, we're in all the markets more or less that we want to be in with some incremental changes, but it's -- geography is not driver here. It's really adjacent markets. It's more diagnostics and clinical research. It's more applied markets, both for NMR and mass spec, for instance. In some other fields, they are actually -- we're expanding some of what we expect to do in microelectronics in the future. We think there's some very nice opportunities. We just need the cycle to come back a little bit. There are things to -- all the way to explosives trace detection. So it's really adjacent markets and adjacent fields that so far -- that we think we can leverage our products into. It's not really a geographical component that's significant.

And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over for any closing remarks.

Thank you, Jamie. I want to thank everybody for joining us this evening. And we encourage you to visit us at our headquarters in Billerica, Massachusetts. Thank you for your attention, and have a nice night.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.