Mar 3, 2009
Executives
Dr. Frank H.
Laukien - President and Chief Executive Officer William J. Knight - Chief Financial Officer Brian P.
Monahan - Corporate Controller Stacey Desrochers - Treasurer and Director of Investor Relations
Analysts
Isaac Ro - Leerink Swann Derik De Bruin - UBS
Operator
Good day ladies and gentlemen, and welcome to the Bruker Corporation quarterly earnings conference call. (Operator Instructions).
I would now like to turn the call over to your host for today, Ms. Stacey Desrochers, Treasurer and Director of Investor Relations.
Stacey Desrochers
Good morning and welcome to Bruker Corporation’s fourth quarter and fiscal year 2008 financial results conference call. I am Stacey Desrochers, Treasurer and Director of Investor Relations.
With me on today's call are Frank Laukien, President and Chief Executive Officer; Bill Knight, Chief Financial Officer; and Brian Monahan, Corporate Controller. As a reminder, on February 26, 2008, Bruker BioSciences Corporation closed its acquisition of Bruker BioSpin Group and renamed itself to 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 the period in which they are incurred rather than being added to goodwill. In addition, expenses incurred subsequent to the completion of the acquisition such as interest expense incurred on acquisition-related debt are not reflected in the financial results of periods prior to the date of the acquisition as they would typically be in a 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 Bruker BioSpin Group. During the call today, the discussion of financial results for all periods reflect the combined historical consolidated financial statements of Bruker BioSciences Corporation with those of Bruker BioSpin Group.
Before we begin, 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 adverse changes in conditions in the global economy and volatility in the capital markets, 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 products, manufacturing, competition, dependence on collaborative partners and key suppliers, capital spending and government funding policies, changes in governmental regulations, intellectual property rights, litigation, exposure to foreign currency fluctuations, and other risk factors discussed from time-to-time in our 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 refer to certain financial measures that are not in accordance with US GAAP such as non-GAAP operating income, non-GAAP net income, and non-GAAP EPS. Non-GAAP operating income, net income, and EPS excludes certain items such as restructuring charges, acquisition related charges, non-cash stock-based compensation and other special charges.
A reconciliation of non-GAAP measures to US GAAP has been provided this morning in our earnings press release. 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 gain 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. Today, Frank will provide an overview of the business and some financial highlights.
Bill will follow up with a more detailed discussion of our financial results for the fourth quarter and the fiscal year 2008 and our goals for 2009, and then we will open up our line for questions. I’ll now turn the call over to our President and CEO, Frank Laukien.
Dr. Frank H. Laukien
Good morning everyone. We appreciate you joining us today.
Starting with the financials, I believe most of you have read our earnings press release issued earlier this morning and you are now probably familiar with the key numbers in the earnings release. In the fourth quarter of 2008, our revenue was $315 million, a currency adjusted decline of 3% compared to the fourth quarter of 2007, but up 30% sequentially from the third quarter of 2008.
Moreover, in the fourth quarter of 2008, our non-GAAP EPS was $0.18 per diluted share which beats expectations significantly. For the full year 2008, our revenue was over $1.1 billion compared with $1.03 billion for the year 2007.
Considering the difficult economic conditions, we are pleased with our overall revenue growth of 7% in 2008 and our year-over-year 2008 currency adjusted revenue growth of 3%. For the full year 2008, GAAP revenue in our Bruker BioSpin reporting segment was essentially flat while our Bruker BioSciences reporting segment saw double digits in GAAP revenue growth with 2008 revenue in our Bruker AXS division growing in the low teens and revenue in our Bruker Daltonics and Bruker Optics divisions growing in the mid to high teens percentage wise.
As discussed previously, we were not satisfied with our operating margin trends in 2008, and with the onset of the global economic downturn, we took a close look at our operations. As a result, in the third quarter of 2008, we began and we continue to drive an ongoing cost cutting initiative which we expect to generate very significant annual savings.
Some of the steps include voluntary temporary top management salary decreases for 2009, selective staff reductions, salary freezes, and cuts in discretionary spending. Our focus in 2009 is on cost cutting and gross margin improvement, but we also intend to take advantage of new opportunities in the current market using our industry leading products to continue to gain market share.
In that wing, we will continue to invest more than the industry average in research and development and keep pushing into new market segments, some of which were mentioned in our earnings press release this morning where we see additional growth and margin opportunities for Bruker. While it is very difficult to predict how the global recession will affect our industry and specifically Bruker going forward, our bookings and backlog in the fourth quarter of 2008 were quite healthy.
We saw strong growth in 2008 in South America, China, and India, and we continue to expand our presence in these areas. Moreover, we have a strong technology, IP, and product portfolio, broad international diversification, and at over 60%, an unusually high percentage of revenue derived from universities, medical schools, other non-profit customers, and governmental customers who all tend to be less sensitive to current economic condition.
Some of our customers have already begun to benefit from contra-cyclical supplementary budget and various national stimulus packages. For example, in January 2009, we announced the contract for over $12 million to provide 51 state-of-the-art Electrospray Time-Of-Flight Mass Spectrometers, chromatography equipment to the Japanese National Police Agencies and forensic laboratories.
In 2008, we made some of the most significant new product introductions in the history of our company, and we expect many of these exciting new products to continue their ramp-up in 2009. Moreover, we plan to announce additional major new products at PITTCON and other conferences later this year, and we believe that the new products coming out of our R&D pipeline will further drive our growth and gross margins in 2009 and beyond.
Now, here’s our Chief Financial Officer, Bill Knight with a more in-depth look at our financial results for the fourth quarter and the fiscal year 2008.
William J. Knight
As a quick recap, during the fourth quarter of 2008, revenues were $315.2 million compared to $344.8 million in the fourth quarter of 2007. Sequentially, revenues in the fourth quarter of 2008 increased by 30% compared to revenue of $242.1 million in the third quarter of 2008.
For the year 2008, revenue increased by 7% to $1.1 billion compared to revenue of $1.03 billion for the year 2007. Excluding the effects of foreign currency translation, for the quarter revenue decreased by 3% but increased 3% year-over-year.
As Frank mentioned earlier, we believe in challenging economic times we will benefit from our broad international footprint and customer diversification. As for our 2008 revenues, approximately one-half came from Europe, approximately one-quarter came from the Americas, and approximately one-quarter came from Asia-Pacific, Australia, India, the Middle East, and Africa combined.
As for yen market, our revenues in 2008 approximately 57% came from academia, medical schools, and other non-profits; 12% from healthcare, biotech, pharma, or diagnostic companies; 11% from government; 11% from industrial research; 7% from industrial quality and assurance and quality control; and 3% from applied markets. In 2008, we derived approximately 77% of our revenue from system sales and 23% from after-market and other revenues.
Gross profit margins were 48.6% in the fourth quarter of 2008 compared to 49.3% in the fourth quarter of 2007. Our gross margins for the full year 2008 were 45.6% compared to 46.1% for 2007.
In 2008, amongst other factors, our gross margins were under pressure due to the high euro to US dollar exchange rates earlier in 2008. Frank already mentioned our upcoming product introductions, productivity improvement, and cost cutting initiatives which will help our gross margins and should gradually move us closer to our medium turn gross margin goal of 50%.
Non-GAAP operating profit for the fourth quarter of 2008 was $52.6 million compared to $74.0 million in the fourth quarter of 2007. For 2008, non-GAAP operating profit was $121.2 million or 10.9% of revenue compared with $147.3 million or 14.3% of revenue in 2007.
Our non-GAAP net income in the fourth quarter of 2008 was $30.4 million or $0.18 per diluted share corresponding to a non-GAAP net income margin of 9.6% of revenue compared to the fourth quarter 2007 with non-GAAP net income of $47.7 million or $0.29 per diluted share or 13.8% of revenue. For the full year 2008, non-GAAP net income was $77.9 million or $0.47 per diluted share corresponding to a non-GAAP net income margin of 7% of revenue compared to a fiscal year 2007 with non-GAAP net income of $107.9 million or $0.66 per diluted share or 10.5% of revenue.
During the fourth quarter of 2008, we had $5.3 million in net foreign exchange currency losses. The net foreign exchange losses in the fourth quarter of 2008 were primarily driven by the continued strengthening of the US dollar against the euro, Japanese yen, and British pound.
In 2009, we are implementing a transactional hedging program to minimize the effect of currency fluctuations on the P&L. In the fourth quarter of 2008, our effective tax rate was 37.3%.
For the full year 2008, our effective tax rate was 30.1% compared to 30.9% in 2007. Cash flow from operations in 2008 was $105.5 million compared to $120.9 million in 2007.
Free cash flow was $58.1 million in 2008 compared to $93.9 million in 2007. Capital expenditures for the year 2008 were $47.4 million which was approximately $20 million higher than last year due to the expansion of two manufacturing locations in France and Germany.
In 2009 we expect to return to our normal capital expenditures, spending of approximately $30 million. During 2008, we repaid $187 million of the $351 million of debt incurred in connection with the Bruker BioSpin Group acquisition in February of 2008.
As of December 31, 2008, Bruker Corporation had cash of $167.7 million and net debt of $56.1 million. Accounts receivable days sales outstanding improved again in the fourth quarter while our inventory turns remained constant.
We will continue to push for improvements in inventory turns, balance sheet management, and cash flow generation in 2009. Now moving on to our financial goals for 2009, the current volatility and uncertainty in the global economy makes forecasting very difficult for the second half of 2009.
Assuming that economic conditions do not deteriorate further in 2009, we intend to drive our company towards the following financial goals for the year 2009 when compared to 2008, a currency adjusted low single digit percentage decline in revenue or even flat revenue, an improvement in non-GAAP operating margin and EPS, and a positive net cash position before the end of 2009. So, with that, I’ll turn the call back over to the operator for any questions you may have.
Operator
(Operator Instructions). You have a question from the line of Isaac Ro - Leerink Swann.
Isaac Ro - Leerink Swann
First, on the pacing of how you’re seeing some of the stimulus dispersing itself into the marketplace, you gave an example of one that was overseas, and I’m wondering what’s specifically in the US, are you seeing any early impact from the stimulus package and resulting dollars into the NIH among your customers and this actually translating into demand for your products?
Dr. Frank H. Laukien
It’s too early for that, Isaac. I think there’s a lot of activity in terms of quotations and customer proposals, but it does not relate into any purchase orders yet, but we’re somewhat optimistic, especially for the bigger ticket items that could have a positive effect for us here in the US.
Isaac Ro - Leerink Swann
And then, in terms of maybe looking into the past as a comparison, do you have a sense of how that process can take place or if you had a customer that was maybe on the fence in the prior year and then got funding in their grant for new equipment purchase, do you have a sense of how long it takes to translate that grant approval into orders and the resulting revenues?
Dr. Frank H. Laukien
Perhaps very roughly, once someone is granted, on an average perhaps may tend to make a decision within 3 months and then maybe that turns into revenue another 3 to 6 months later depending on what type of equipments they buy. So, I guess from a date of a grant, on average perhaps 6 months or a little bit more; for bigger ticket items it could be a year or more; for a smaller instrument it could be much much fast that the whole process could take 60 days, but on average 5 to 7 months is not a bad estimate.
Isaac Ro - Leerink Swann
On the yen markets, you got a nice little break down here on your yen market exposure, and I think I might have been a little bit confused on how the government exposure is spread out, because I think you said 57% was academic, government, and medical school and non-profit side labs, and then you also mentioned the 11% government, so is that…
Dr. Frank H. Laukien
Let me correct that, the 11% government was correct and 50% was academia, universities, medical schools, other non-profit foundations or similar, here and abroad, but the 57% did not include government; the 11% includes federal, state, and local government; so, together it’s 57% plus 11%. Government may have been unusually high in 2008, usually it’s a little less than other years, probably just below 10%.
Isaac Ro - Leerink Swann
On the NMR marketplace specifically, could you give us a sense of what you’re seeing there, given that these are higher-end bigger ticket products, how do you feel about your competitive position there right now; I know you had a high field placement back in the summertime I think, that was in the news, and just wondering how that’s progressed and whether you see following orders on that type of system with a higher stand, and competitively you feel like you might be in a better market share position now than you were 90 days ago?
Dr. Frank H. Laukien
I think the high-end market or the market for big ticket items have not really changed materially nor have been negatively impacted really even in the last 6 months or so. Most of those are not funded by industry or virtually none of those are funded by industry; some high-end items come in from pharmaceutical companies, they’re very selective in their spending, but they still have the wherewithal to make selective investments.
Most of the high-ticket NMRs that came and SMRI systems are purchased by universities, medical schools, governmental or quasi-governmental entities, and their funding has not been affected that much by the economy. So, we may even see a bit of a pickup on those, in particular from some of the big stimulus packages in the US, Japan, Germany, but so many other countries have stimulus packages as well.
In terms of market share, we have a strong position there and that has not really changed dramatically in the last 90 or 180 days. Those are longer-term trends.
Isaac Ro - Leerink Swann
Lastly, PITTCON is around the corner here; should we expect any major new product introductions out of you guys this year or maybe expansions to your technology range that are meaningful?
Dr. Frank H. Laukien
We expect significant new product introductions at PITTCON.
Operator
You have a question from the line of Derik De Bruin - UBS.
Derik De Bruin - UBS
What’s your assumption for the euro in 2009, I guess when you look at your fiscal ’09 assumptions, what do you think of the overall negative FX hit?
Brian P. Monahan
Right now if you use the euro-dollar exchange rate, really for the first 72 days of this year and that’s all we can go on right now; to our revenues, that would have a negative impact, a headwind of 6%.
Derik De Bruin - UBS
That’s about what I was thinking. I guess what are your assumptions for the tax rate in ’09, and you have a high percentage of sales outside the US, is the profitability distributed similarly?
William J. Knight
Yes. I think we would be looking at a tax rate in the 30% range for ’09.
Derik De Bruin - UBS
But the bulk of your profits are from oversees operations right?
Brian P. Monahan
The profits are certainly driven by the manufacturing facilities in Europe.
Derik De Bruin - UBS
So, I would assume that 2009 is going to be a lot like the other years and the fact that your 1Q is going to be substantially lower than your 4Q numbers due to typical seasonality, will you expect to be abnormally weak in 1Q this year?
Dr. Frank H. Laukien
No, we don’t expect Q1 to be abnormally weak. It’s not the same exactly every year; generally Q1 and Q3 tend to be a little bit weaker than Q2 and Q4 results which tend to be our strongest.
In 2008 those effects were particularly strong. We will endeavor to reduce that effect a little bit if we can, and no, Q1 we do not expect an unusually weak Q1.
Derik De Bruin - UBS
What do you have for assumptions in terms of free cash flow for 2009?
Brian P. Monahan
Looking at the forecasting, it is a bit difficult just because of what’s going on; we certainly would not be looking with profit improvement but with a potential revenue decline, nothing significantly similar than what we’re seeing this year; it would be in the range up or down.
Dr. Frank H. Laukien
Maybe I could qualify that, that would be for the operating cash flow that we expect approximately $20 million less in CapEx, which would be more of our historical level. In 2008 we had to do two factory expansions which kind of led to an additional incremental $20 million or so in CapEx in 2008 which we do not expect to have to repeat in 2009.
So, CapEx may be about $20 million lower, and hence perhaps the $20 million pickup or so in free cash flow, whereas operating cash flow may not change dramatically. We’re obviously trying to push it up, but we don’t expect dramatic changes compared to 2008.
Derik De Bruin - UBS
That’s kind of my model, so that’s good; and I guess you were talking about profitability, you were talking about a mid-term target of 50% gross margin, could you just kind of walk us through how you get there and also when do you kind of see delivering a mid-teens type of operating margin on a full year basis?
Dr. Frank H. Laukien
We’re looking really sort of at a 3-year plan, and ideally we would love to deliver something like 150 to 200 pickups every year for operating margin or for non-GAAP operating margin; however, realistically, it will be difficult to deliver that in 2009; so, our 3-year plan, we’re sticking to it, but it may be less of the improvement that we normally would like in 2009 and hopefully more of it in 2010, 2011, assuming that at some point the economy does at least stage a moderate improvement again.
Brian P. Monahan
I think I could add there, certainly, the last couple of years in product design, we not only have focused on creating stronger technologies, stronger features, additional new features, but we have focused on pulling cost out of our products, pulling cost out of our processes; we certainly have had successes there, how that translates, and we are going to have new product introductions in this year and 2010; over time we do have products that are entering the marketplace that are able to generate more margin; how much impact that’s going to be in a current market situation versus a more robust situation remains to be seen, but while there is uncertainty as to where the top-line could exactly be, there’s certainty of focus on continuing to pull costs out of our products and our operations.
Derik De Bruin - UBS
And just one final question, Frank, when the BioSpin deal was done, certainly you made a comment that you weren’t expecting to see the family sell shares anytime soon, are you looking to potentially sell shares in 2010 or is the current price prohibitive?
Dr. Frank H. Laukien
There are no current plans to sell any shares, and there are no current plans for any given day to sell shares, and clearly at the present level, I think it would be extremely unlikely.
Derik De Bruin - UBS
Okay, that’s what I kind of thought. And finally, could you just talk about a little bit, do you still see doing some tuck-in M&As, are there still technologies, like the x-ray platform or the platforms that you bought recently?
William J. Knight
Absolutely, that’s perhaps one of the normal part of our business, we always keep our eyes open for those, probably on the smallest scale, smaller technology, additional product lines, additional technology are and could very well be of interest to us and we always keep our eyes open for that. It’s difficult to predict any deal flow.
You would think that with the current valuations there would be more, but that hasn’t really occurred yet because probably people would need to get used to those present valuations for a while before they would be willing to do transactions, but we’re always looking at that at any given time.
Operator
At this time, there are no further audio questions.
William J. Knight
Thank you very much operator and thanks to all of you for joining us today. I would like to invite you again to our PITTCON Booth Tour for investors and analysts on Tuesday, March 10th, starting promptly at 10:00 am.
Please contact Stacey Desrochers if you are interested in attending. This concludes our earnings call.
Operator
Thank you for your participation in today's conference. This concludes the presentation.
You may now disconnect.