Bruker Corp Q1 FY2020 Earnings Call

Good afternoon, and welcome to the Bruker Corporation Q1 2020 earnings conference call. (Operator provided instructions.) Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Miroslava Minkova, director of investor relations and corporate development. Ma'am, please go ahead.

Good afternoon. I would like to welcome everyone to Bruker's first-quarter 2020 earnings conference call. My name is Miroslava Minkova, director of investor relations and corporate development. Joining me on today's call are Frank Laukien, our president and CEO; and Gerald Herman, our chief financial officer. In addition to the earnings release we issued earlier today, during today's conference call, we'll be referencing a slide presentation. The PDF of this presentation can be downloaded from the latest results section on Bruker's investor relations website. During today's call, we'll be highlighting non-GAAP financial information. Reconciliations of our non-GAAP to GAAP financial measures are included in our earnings release and are posted on our website at ir.bruker.com. Before we begin, I would like to reference Bruker's safe harbor statement, which we show on Slide 2. During the course of this conference call, we'll be making forward-looking statements regarding future events and the financial and operational performance of the company that involve risks and uncertainties, including new risks and uncertainties related to the COVID-19 pandemic. The company's actual results may differ materially from projections or scenario estimates 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, which are available on our website and on the SEC's website. Also note that the following information is related to current business conditions and to our outlook as of today, May 6, 2020. Consistent with our prior practice, we do not intend to update our forward-looking statements based on new information, future events or for other reasons prior to the release of our second quarter 2020 financial results expected in early August 2020. Therefore, you should not rely on these forward-looking statements as representing our views or outlook as of any date subsequent to today. We will begin today's call with Frank providing a business summary and reviewing how Bruker is responding to the challenges presented by the COVID-19 pandemic. Gerald will then cover the financials for the first quarter of 2020 in more detail. Now I'd like to turn the call over to Bruker's CEO, Frank Laukien.

Thank you, Miroslava. Good afternoon, everyone, and thank you for joining us on today's call. I hope you and your families are well. These are extraordinary times, and as such, it's not business as usual. We are presently focusing on four key priorities. As you can see on Slide No. 3, they are: first and foremost, the health and safety of our employees, customers and partners; second, maintaining business continuity and high service levels for our customers; third, executing prudent temporary cost reductions; and fourth, delivering and enabling research and diagnostics products to help fight the COVID-19 pandemic and to support other essential priorities of our society. Let me share a few highlights on each of these areas. First, preserving the health and safety of our valued employees, their families, our customers and collaboration partners. While Bruker's businesses are essential, we have implemented strict social distancing, enhanced cleaning protocols and other preventive measures throughout our major facilities. Many of our office colleagues are working remotely, and we are placing enhanced focus on our service organization and factory employees for whom work from home is not feasible. For example, at our Bremen, Germany campus, we implemented a pilot at-work COVID-19 testing program for our factory workforce in April. In Bremen, we are currently offering a pilot project with weekly company-paid voluntary COVID-19 PCR tests to employees in our factory. Where customer sites are accessible and open, our field service organization operates under strict social distancing protocols to ensure the safety of customer sites when our employees need to be on site. We are very grateful to all our employees for persevering and for everything they are doing. Second, maintaining business continuity and service levels for our customers. Ensuring our ability to supply our enabling technologies and solutions and maintain high service levels for our customers is a top priority. In late March and during parts of April, several of our manufacturing sites underwent temporary controlled shutdowns or operated at reduced capacity to implement new safety protocols, comply with local rules, and manage cost and inventory levels. These sites are now ramping back up. Our supply chain has generally held up well, and we do not anticipate being supply- or capacity-limited in the second half of 2020, provided that current gradual reopening trends continue without a second COVID-19 wave. Third, executing prudent, meaningful temporary cost reductions. Gerald will cover this point in more detail. We proceeded with a previously planned restructuring in the Bruker NANO Group and have taken meaningful temporary cost compensation and short-time work measures in Europe and globally. At the same time, we are seeking to minimize disruption for our employees and preserve our ability to ramp up again with our highly trained and loyal workforce. While pursuing cost savings throughout the business, we are maintaining important investments in key areas of Project Accelerate and in operational excellence. Fourth, Bruker is providing critical technologies and solutions to help combat the COVID-19 crisis. Most notably, our microbiology and infectious disease diagnostics portfolio, to which we have added a SARS-CoV-2 PCR test, and our NMR and mass spectrometry systems, which are used in critical disease, therapeutic and vaccine research. On Slide 4, let me give you highlights on Bruker's new SARS-CoV-2 test, or coronavirus test, as I'll simply call it. Bruker-Hain's automated sample prep tools and nucleic acid extraction kits are used in Europe, along with a recently introduced coronavirus PCR assay. We are starting from a small basis of about $1 million in the first five weeks since launch, but we are now gradually ramping up and have planned capacity increases by June and July. On Slide 5, I highlight the performance of Bruker's microbiology and infectious disease diagnostics portfolio, which continues to do very well as many of our products are needed to help address health issues related to the pandemic. As you may know, the MALDI Biotyper is not used for viral detection itself, but it is very important during the COVID-19 pandemic for ruling out or identifying bacterial, respiratory or other nonviral infections, which complement direct viral detection by other methods. For example, in Q1 we had an extra 25 MALDI Biotyper orders from China, including orders from Chinese CDC labs. One of the interesting pictures on Slide 5 shows one of our Chinese service engineers who flew into Wuhan in mid-February to install a MALDI Biotyper system in a new hospital. We are incredibly grateful for what borders on being heroic, but was done with the right attitude for our customers and their patients. Beyond China, we've seen strong systems growth for the MALDI Biotyper in Europe, especially in the U.K. but throughout Europe. Our microbiology business—MALDI Biotyper platform systems, consumables and services—grew in the double digits in Q1 2020 year over year. On Slide 6, we show our timsTOF Pro being used in COVID-19 proteomics research. At Peking University in Beijing, Dr. Catherine Wong has been using the new dia-PASEF methods on her timsTOF Pro systems to identify and quantify changes in proteins and protein pathways resulting from COVID-19 infection. Her quote on Slide 6 highlights the throughput and robustness needed for large-scale, large-cohort studies, which is exactly what is required during COVID-19 research. We thank her for working closely with us. Moving on to Slide 7, it shows Bruker partnering with the Australian National Phenome Center and other global phenomic sites using both NMR and mass spectrometry on frontline research efforts with COVID-19 patient body fluids. The Australian National Phenome Center recently launched a major research project to better understand and predict variation in the severity of COVID-19. It also plans to engage in clinical trials of antiviral agents and other therapeutic or clinical protocols and, when available, vaccine candidates. The Australian National Phenome Center uses numerous Bruker NMR and mass spec systems to conduct this important metabolomics research. These are just some examples of how Bruker is engaging to help combat COVID-19. I also invite you to take a closer look at the quote by Professor Jeremy Nicholson, the Pro Vice Chancellor for Health Sciences at Murdoch University and the leader of the Australian National Phenome Center. Our research tools play an important role in pharmaceutical and biopharma development, in structural biology on the SARS-CoV virus itself—its RNA, genes and proteins—in drug screening against these targets, and more. Let me continue with our business update and financial overview. Turning to our first-quarter performance, starting on Slide 9. Amid a challenging operating environment due to COVID-19, Bruker's Q1 2020 revenues declined 8.1% to $424 million. Our 2019 acquisitions added 0.9% to revenue growth, while foreign currency translation was a headwind of 1.1%. On an organic basis, Bruker's revenues declined 7.9% year over year. The reported inorganic revenue declines were due to COVID-19-related disruptions to our customers and certain of our operations; they included an approximately 30% revenue drop in China. As COVID-19 spread across the globe, toward the end of the quarter we saw weaker results in our major European and North American geographies outside China as well. Our Q1 2020 non-GAAP gross margin decreased 220 basis points year over year, while our non-GAAP operating margin declined 590 basis points year over year. The drop in margins primarily reflects the revenue shortfall, certain operational challenges and unfavorable mix resulting from COVID-19 disruptions. In Q1 2020, Bruker reported GAAP diluted EPS of $0.07 compared to $0.20 in Q1 2019. On a non-GAAP basis, Q1 2020 EPS of $0.14 decreased 50% compared to $0.28 in Q1 2019. Our Q1 2020 order bookings for Bruker's three scientific instrument groups were healthier than the revenue decline would suggest, with orders roughly flat compared to Q1 2019. However, we anticipate that bookings could weaken in Q2 2020 as COVID-19 disruptions spread globally while China appears to be improving gradually. Please turn to Slides 10 and 11 for further highlights on the Q1 2020 performance of our three scientific instrument groups and our BEST segment, all on a constant currency, year-over-year basis. BioSpin Group revenue declined in the mid-single digits to $120.9 million as certain deliveries and installations were delayed due to customer closures and COVID-19 disruptions. BioSpin's Q1 results included a significant revenue drop in China. NMR systems revenue declined because of delivery and installation delays. Preclinical imaging revenue was higher year over year, helped by the timing of deliveries early in the quarter. BioSpin's aftermarket and software revenues were modestly above Q1 2019. CALID Group revenues declined in the low single digits to $140.5 million. The decline was due to a revenue drop in molecular spectroscopy, which more than offset continued growth in microbiology and diagnostics and in Life Science Mass Spectrometry. CALID's microbiology and infectious disease products posted solid growth, as noted earlier, and these products are needed to help address important health issues related to COVID-19. CALID's Life Science Mass Spectrometry business also performed well with continued good uptake of our timsTOF proteomics solutions. Revenues in our FTIR, Near IR and Raman molecular spectroscopy products declined, in part due to COVID-19-related temporary disruptions at our Bruker Optics factory late in the first quarter. Bruker NANO revenues declined in the mid-teens to $120.1 million in Q1 2020 on COVID-19-related disruptions globally and weakened industrial market demand. NANO's x-ray and NANO surface tools revenue declined, while our NANO analysis tools held up well. NANO's semiconductor metrology revenue remained weak in Q1 2020 as expected and also included pushouts of deliveries to a major customer in Wuhan, China. However, we see signs of recovering demand in semiconductor metrology markets, which could partially offset weakened industrial demand elsewhere. Finally, BEST revenue in Q1 2020 declined in the mid-single digits as superconductor demand softened toward the end of the quarter. As a reminder, BEST revenue can fluctuate from quarter to quarter. On Slide 12, we are pleased to announce that the installation of the world's first 1.2 gigahertz NMR system was successfully completed at the CERM of the University of Florence in Italy in April 2020. This was a second-quarter item, but it is worth mentioning today. We have received customer acceptance on that system, the first customer system of this type accepted. This new class of stable homogeneous magnets enables novel research in functional structural biology of proteins and their functional complexes. Two courageous Bruker engineers executed this installation in Italy between February and April 2020 while complying with social distancing and lockdown guidelines. We anticipate only partial revenue recognition on the NMR console and probe of this system in Q2, while revenue for the more expensive part of the system, the 1.2 gigahertz magnet, is subject to a multiyear lease contract. I again invite you to take a look at the customer quote; they are doing functional structural biology and work on the COVID-19 virus, its proteins and protein interactions. Despite the challenging environment, Bruker continues to invest in operational excellence, including our multiyear Project 2020. Project 2020 at Bruker BioSpin will consolidate two major historically grown BioSpin sites in Germany into a single, modern, lean and customer-oriented site. The goals are higher productivity and capacity for growth, in addition to an improved customer interface. The project is expected to be completed in 2021 and is part of our elevated planned capital spending budget in 2020. In conclusion, Bruker is a fundamentally healthy, essential company with a strong balance sheet and a very solid liquidity position. Our life science tools and diagnostic markets are resilient. Our Q1 2020 results reflect the initial impact of COVID-19, and Q2 2020 is likely to be more challenging given customer and demand disruptions around the world. However, we believe long-term funding trends in life science, biopharma, basic medical research and infectious disease diagnostics will be strong as a result of the COVID-19 pandemic. We believe Bruker is well positioned for a gradually improving business environment in the second half of 2020 and hopefully a recovery in 2021. With that, let me turn the call over to our CFO, Gerald Herman, who will review our Q1 2020 financial performance in detail. Gerald?

Thanks very much, Frank. Pleased to join you today and review Bruker's first-quarter 2020 financial highlights, starting on Slide 15. Bruker's reported revenue decreased 8.1% to $424 million in the first quarter of 2020, which reflects an organic revenue decline of 7.9%. We reported GAAP EPS of $0.07 per share compared to $0.20 in the first quarter of 2019. On a non-GAAP basis, Q1 2020 EPS was $0.14 per share, a decrease of 50% from $0.28 in Q1 2019. Our Q1 2020 non-GAAP operating income decreased 48%, while non-GAAP operating margin of 7.6% declined 590 basis points year over year. This reflects primarily lower revenues, unfavorable mix and related operating inefficiencies due to COVID-19 disruptions to Bruker's customers and some of our own operations, initially in China and in North America and Europe later in the quarter. We also experienced weakening industrial markets during the quarter. At the end of Q1 2020, our balance sheet and overall liquidity position remains strong. We ended the quarter with $851.7 million in cash, cash equivalents and short-term investments after substantially strengthening our cash position following our December 2019 debt financing. Net debt was slightly higher in Q1 2020 than a year ago after our debt refinancing and the drawdown of an additional $200 million on our revolver. We are well within our debt covenant requirements with plenty of borrowing capacity headroom. During the quarter, we used cash to fund strategic capital investments and our dividend. At the end of Q1 2020, our working capital to revenue ratio was essentially unchanged from a year ago. Slide 16 shows the revenue bridge for Q1 2020. As noted earlier, organic revenue in the quarter declined 7.9%. We had a positive revenue contribution from acquisitions of 0.9%, which was partially offset by a foreign currency headwind of 1.1%. From an organic BSI revenue perspective, BioSpin revenues declined mid-single digits, CALID revenues declined low single digits and NANO revenues were down in the mid-teens. As Frank mentioned, Life Science Mass Spectrometry and Microbiology & Diagnostic revenues grew in the first quarter. But most of our other businesses declined due to the challenging COVID-19 operating conditions. BEST revenues also declined mid-single digits net of intercompany eliminations. For our three BSI groups, systems revenue declined in the low teens, while aftermarket revenue grew low single digits. Geographically and on an organic basis in Q1 2020, Europe and North America revenues declined mid-single digits year over year. Asia Pacific organic revenue declined in the low double digits with approximately a 30% drop in China due to its lockdown for much of the quarter. Rest of the world revenues outside Latin America were up modestly compared to the prior year Q1. Slide 17 shows that our Q1 2020 non-GAAP gross profit margin of 46.7% decreased 220 basis points from 48.9% in Q1 2019, driven principally by lower revenues, factory inefficiencies and unfavorable mix from COVID-19 disruptions as well as due to weak industrial markets. Q1 2020 non-GAAP operating expenses increased 1.7% compared to Q1 2019, including expenses from our recent acquisitions as cost savings kicked in near the end of the quarter. As I'll discuss shortly, in Q2, we took further cost reduction actions across the globe. In Q1 2020, our non-GAAP operating margin declined 590 basis points compared to Q1 2019, driven primarily by our revenue decline and unfavorable mix. For the first quarter of 2020, our non-GAAP effective tax rate was 23.9% compared to 24.5% in Q1 2019. Weighted average diluted shares outstanding in the first quarter of 2020 were 155.4 million, a reduction of approximately 2.5 million shares from Q1 2019 following our 2019 share repurchases. Finally, Q1 2020 non-GAAP EPS of $0.14 decreased 50% year over year, driven by lower revenue and margins. Next, I'd like to comment briefly on cost reduction actions we've taken to support the profitability and cash flow of the company. During Q1, we implemented certain previously planned restructuring actions primarily within the BSI NANO segment and initiated additional temporary cost measures related to COVID-19. Temporary measures, which will mostly be effective in Q2 included short-time work for many of our European operations, temporary tiered salary reductions for our global leadership team and workforce, 1-2 week closures of select manufacturing locations, a hiring freeze and curtailment of nonstrategic discretionary spending. Due to the timing of the BSI NANO restructuring actions and these additional temporary measures, we did not see a major impact in Q1, but we expect to see cost reductions in the range of $10 million to $15 million in the second quarter of 2020. Turning to Slide 18. Our free cash flow in Q1 2020 was essentially flat compared to Q1 2019. Q1 2020 free cash flow does, however, include an increase of approximately $20 million in capital expenditures related to production facilities for productivity gains and expansion as described earlier. Our cash conversion cycle at the end of Q1 2020 was 276 days, representing an increase of 41 days compared to Q1 2019. The step-up was primarily driven by an increase in DIO of approximately 40 days as we carried higher inventory balances due to revenue declines and to prevent supply chain disruptions. Turning to Slide 20. You may recall that on March 27, we suspended our guidance for 2020 due to the uncertain business conditions created by COVID-19. Since then, business disruptions related to the pandemic have eased in some parts of the world but remain significant in others. And visibility, particularly as it relates to our customers' operations in certain markets remains low. Therefore, our 2020 guidance remains suspended. It's our intention to resume annual financial guidance once visibility improves. Although we're not providing any guidance, I would like to give you some directional color on how we see business unfolding in Q2 and over the course of the year. As Frank stated, we expect Q2 to be more challenging than Q1 due to continued closures among many of our academic customers in the U.S. and Europe and uncertainties related to our industrial customers. We, therefore, believe it's better to think about a range of possible scenarios for the second quarter of 2020 with the potential for 15% to 25% year-over-year revenue declines. Revenue declines of this magnitude, combined with our cost reduction actions, are expected to keep Bruker breakeven or possibly profitable in the second quarter of 2020. Please note that actual results could be outside of these scenario ranges, but this gives you our good faith estimates at this time based on the information currently available to us. We currently anticipate business conditions to improve in the second half of 2020, although a recovery is not anticipated until 2021. In conclusion, we're continuing to navigate a challenging environment with unprecedented uncertainties created by COVID-19. But with our strong liquidity position, and agility in responding to changing market conditions, we're confident that Bruker will emerge from this pandemic a stronger and healthier company with an attractive product portfolio and a promising long-term outlook. We look forward to updating you again on our quarterly progress with our Q2 2020 conference call anticipated in early August. And with that, I'd like to turn the call over to Miroslava to start the Q&A session. Thank you very much.

Thank you, Gerald. I'd now like to turn the call over to the operator to begin the Q&A portion. Just a reminder, in order to allow everyone time for questions, we ask that you limit yourself to one question and a follow-up. Thank you.

(Operator provided instructions.) Our first question today comes from Tycho Peterson from JPMorgan. Please go ahead with your question.

Thanks Frank. I'll start with the COVID test you highlighted on Slide 4. I'm just curious about the thought process. It's a competitive market. We see competitors scaling up to 10 million tests a week, if not more. Why do you think this is the right move to push into what's already a crowded market for PCR-based COVID testing? And then a follow-up on China. Can you comment on the order book and expectations for China for the remainder of the year? And are you seeing a reprioritization of government funding at this point?

Well, we are in PCR-based testing anyway with our Bruker-Hain acquisition, of which we took the full 100% a few months ago; we initially had owned 80%. So we have pretty good customer access—maybe not to the very large labs that tend to use large automated systems. But as you know, the diagnostics market has many different customer types. And we don't have global strength there, but we have strength in certain European countries and some other geographies. So we have good market access. We have complementary technologies. When we acquired that business, that was about a $40 million business that does molecular diagnostics. And this is a good opportunity from a smaller base than a Roche or an Abbott, for sure, for us to expand in that space. And so far, that's going very well. There's plenty of demand, and our tests are finding good traction. Now like many others, we are in the process of ramping up our capacity there. On China, I'm not sure I can answer all of those questions precisely. Anecdotally, the order booking patterns probably started to improve perhaps in late March but certainly in April. For instance, BioSpin and NANO both have reported that orders in China and order patterns are recovering. So the gradual ramp-up in China is not only something we read about, but we're seeing it in terms of order patterns in the last six weeks or so. Obviously, that's not a full quarter yet. We're not going to comment on Q3 or Q4 or longer-term patterns this year because we have suspended our guidance. There's so much uncertainty. But China seems to be coming back according to at least anecdotal Bruker data in the last six weeks or so.

(Operator provided instructions.) Our next question comes from Doug Schenkel from Cowen. Please go ahead with your question.

Hey, this is Chris on for Doug today. Thanks for taking my questions. Could you compare and contrast the differences between the China and ex-China businesses that result in the outlook for a 15% to 25% decline in Q2 versus the 30% decline you experienced in China in Q1? Is the ex-China business a bit more durable given perhaps less semiconductor and industrial exposure? Or is there anything else you would point to, such as the 1.2 gigahertz system? And maybe a quick follow-up: Do you expect to be breakeven or profitable at the low end of the revenue decline range?

Yes, the 1.2 gigahertz system is an accomplishment but because we'll only have partial revenue recognition, it's not going to be needle-moving in Q2. We in Q2 do not expect the decline to be as China-dominated as the decline in Q1 was. We saw declines in Europe and the Americas in Q1 as well, but those were in the single or mid-single digits, whereas China had an even larger drop. So Q1 was very China-specific. We expect Q2 to be more even globally, without giving precise proportions. Overall, we do not expect a greater than 30% revenue decline in Q2; that is not one of the scenarios we think has meaningful probability. China is picking up a little bit again. Our pharma business, at least on orders, is doing well. Life Science Mass Spectrometry and Microbiology & Diagnostic businesses are reasonably healthy. So we're expecting a meaningful decline in Q2 but not the extreme 30%–40% levels some feared. Globally, the picture should be much more even. There will be exceptions—probably Japan and India could be very weak in Q2—but major geographies should perform more evenly than in Q1 when China dominated.

We do expect to be breakeven or possibly profitable at the low end of the 15% to 25% revenue decline range. Generally speaking, that range assumes China will gradually reopen, which is our expectation and consistent with signals we're seeing. It also assumes some stabilization and reopening activity in the U.S. and Europe. So we think that scenario range is a reasonable set of assumptions at this stage.

(Operator provided instructions.) Our next question comes from Puneet Souda from SVB Leerink. Please go ahead with your question.

Hi, Frank. Thanks. First question on funding expectation: there is some discussion of increased funding in the U.S. in 2021, though magnitude is unclear. Based on conversations with European customers as a result of this epidemic, what's your expectation in Europe for academic funding and overall government funding given your stronger position there and being closer to the customers for 2021? Also on the NMR side: the lower gigahertz NMR demand might be impacted near term. For the 1.2 orders and earlier 1.1 and other orders you expect to ship, can you give us a status of where you stand and expectations with the pushouts you're seeing in Q2? When do you expect to deliver the rest of them? Are there any questions on those contracts that have already been signed where customers have committed to a magnet? What's your sense of those commitments and funding? Last, on timsTOF: you saw a good uptick in the quarter. What's your expectation into the second half and into 2021, regarding competitive positioning and order book visibility?

Puneet, academic funding in much of the world is largely a question of timing. In Europe and many other parts of the world, academic spending is government-driven. They're certainly not pulling back, and if anything, there's a lot of noise about increasing budgets for life science research, particularly virology and COVID-19 related work. Life science funding, including academia and pharmaceutical research, I think will be quite strong. In Europe and the U.S., there are a few exceptions—some southern European countries and maybe India—where universities are more impacted. But elsewhere, professors are writing grant proposals and papers even if lab work is slowed. When that chatter turns into grant approvals and funding, we believe there could be not only a return to previous funding levels but potentially a multiyear bolus of increased life science and fundamental research funding, which would benefit our NMR, mass spec and microscopy businesses. On the NMR gigahertz systems: there is no question about the contractual commitments; these contracts are solid and funding appears to be there. Demand for lower-than-gigahertz NMR is not obviously down significantly—maybe mid-single digits or flat—especially with China picking up and pharma NMR demand strong in bookings. For gigahertz-plus systems, at one point we thought we might deliver three or four systems this year. We're not factory-limited in that sense, and we're pleased we completed the installation in Italy under difficult circumstances. Deliveries will be gated by customer site accessibility and installation windows. It is possible that acceptances for some systems could slide into next year if installations cannot proceed on schedule, but the backlog and demand remain. On timsTOF, the competitive positioning hasn't changed; it's an attractive technology in the proteomics market and many customers will want timsTOF in their proteomics labs, often alongside other vendors' systems. Its throughput and robustness are valuable for large sample studies, including COVID-19 research. We don't have precise visibility into the second half of the year, so I won't set specific targets, but in Q1 both revenue and orders for timsTOF Pro continued to grow year over year.

(Operator provided instructions.) Our next question comes from Derik De Bruin from Bank of America. Please go ahead with your question.

Hey, guys. This is Mike Ryskin on for Derik. I want to follow up on earlier comments about order placing; you mentioned many deliveries were delayed due to customer disruptions, but you didn't necessarily call out cancellations. Once quarantines lift and conditions improve, how quickly do you think you could clear some of this backlog? Is there any bottleneck in terms of how quickly you can move it through, or is it as simple as some things are waiting on the loading dock? Within a week or two after people come back to labs, should you be able to recognize a lot of this revenue? What's your expected pacing to clear deliveries once the near-term bottleneck is resolved?

We'll be backlogged in some installations and in some deliveries. There were customer sites and some countries where we simply could not deliver at all, for example deliveries to India in late March. So there's backlog on deliveries, and perhaps more backlog on field service and installations. We're not paralyzed; we are doing field service and installations in many locations, but in some countries it's nearly impossible and we'll be backlogged there. Even with a gradual reopening during Q2, we expect to be catching up throughout the year as we clear the reduced site accessibility from late Q1 and early Q2 while also handling new installations and service cases. Our field service capacity and training should be adequate, but the pacing will depend on customer site access and local rules.

On decremental margins and cost actions, we introduced restructuring actions during Q1 and additional temporary measures intended to be effective in Q2. We expect to see $10 million to $15 million of cost reductions in Q2 related to those temporary measures. We're comfortable with our overall cost structure and continue to make targeted investments, including elevated capital expenditures for productivity and expansion that we announced. We are maintaining investments in Project Accelerate initiatives and R&D. If things reopen, we can move back toward our traditional cost structure as we progress into Q3. That said, if Q2 revenue declines in the 15% to 25% range, there will clearly be margin impact as we saw in Q1, but our expectation is that the second-quarter decremental margin will be improved compared to Q1 because the cost measures will take effect and reduce the leakage from lower volumes.

Overall, we're trying to avoid layoffs and furloughs and to retain our workforce. In Europe, short-time work measures where governments support reduced working hours are helpful for enabling a quick restart. That was effective in 2009, enabling a fast ramp up afterwards, and it's the same strategy now: retain the workforce so we can start quickly when demand returns.

(Operator provided instructions.) Our next question comes from Dan Arias from Stifel. Please go ahead with your question.

Hi. Thank you for the question. This is Carolina Ibanez-Ventoso on for Dan. Frank, you mentioned continued investments in Project Accelerate, but also some shutdowns and reduced activities in some of your sites. Can you speak to Project Accelerate launches and ramp, separating activities that are still on track versus those that may be slowed or delayed by COVID?

Good question. Our Project Accelerate initiatives are all on track. One area that had been lagging and was weak last year was semiconductor metrology; however, we believe semiconductor demand is becoming healthier, supported by increased demand for memory, logic and IT infrastructure as work-from-home trends drive those needs. That gives us optimism that semiconductor metrology demand, which had been weak, could recover. So Project Accelerate remains directionally on track with no disruptions there.

Okay. And what are your expectations for imaging demand going forward given where hospital spending priorities seem to be at the moment?

If by imaging you mean hospital radiology magnetic resonance imaging, Bruker is not a medtech company in routine radiology. We indirectly support hospital MRI via superconducting materials we supply to major medtech radiology companies. That demand has been dampened a little bit but more in the low single digits and looks solid overall. We do not provide routine radiology or pathology imaging systems ourselves; our exposure there is limited.

(Operator provided instructions.) Our next question comes from Steve Willoughby from Cleveland Research. Please go ahead with your question.

Hi. Good evening and thanks for taking my question. Hope everyone is doing well. First, Frank, if you could provide some color on funding and revenue from academic customers: how much of academic revenue comes from federal agencies versus universities themselves? And what are you hearing about expectations from these customers in the back half of the year and possibly into 2021 given uncertainty about the fall semester? And a follow-up for Gerald on cash flow: how should we think about cash flow for the remainder of the year given what you're seeing today?

Outside the United States, academic funding is generally government-funded rather than via endowments or philanthropy. Roughly 80% of our academic customers are not in the U.S., and their funding tends to be stable. In the U.S., major life-science research customers tend to receive federal grants; if they have a grant, they'll spend it for the grant purpose, for example on mass spec or NMR, and not on other university budget holes. There may be some indirect impacts on philanthropic spending, but that is a second-order effect. We expect life science, academic and government funding to be fundamentally healthy and possibly to increase in the next five to ten years given priorities around infectious disease research. Timing is uncertain, but we are optimistic about the long-term outlook.

Regarding cash flow, we don't have great visibility into the latter half of the year, so we're not providing firm guidance on profitability and cash flow for the full year. From what we saw in Q1, our cash flow position has been solid and we're not overly concerned at this stage. Even if revenue declines further in Q2, we remain confident in our liquidity and ability to manage cash flow.

(Operator provided instructions.) Our next question comes from Vijay Kumar from Evercore ISI. Please go ahead with your question.

Hey, thanks for taking my question. Frank, you commented that recovery might be in 2021. Some peers expect normalization in the back half of 2020, perhaps by Q4. Are you seeing anything different, or is this more conservatism in your view that recovery is a 2021 event? Also, in a post-COVID world, with more research funding into pandemics, will that change the demand curve for Bruker's solutions in structural genomics and proteomics?

We may see sequential improvement in the second half of 2020, but the question is whether year-over-year comparisons will look positive; we currently lack the visibility to comment on that. So sequentially, yes, I'd expect Q3 to improve and Q4 to improve compared to Q2, but about year-over-year normalization, it's too early to tell, which is why we've been cautious. Regarding structural biology and proteomics, it's reasonable to expect increased interest in functional structural biology, proteomics and glycomics, which are important for studying proteins and their interactions, including virus spike proteins and therapeutics. NMR and mass spec are strong tools for such research, so I would expect increased demand in those areas over time.

(Operator provided instructions.) Our next question comes from Dan Brennan from UBS. Please go ahead with your question.

Thanks. This is John Sourbeer on for Dan. Maybe digging into your industrial segments: any more color on what happened in Q1 and your Q2 outlook? Is there any timeframe or past predicate you could point to that compares to what you're seeing now?

It's qualitative. In industrial, semiconductor metrology may recover sooner because of demand for memory and logic and IT infrastructure; we had indications of that even before the pandemic started. Other industrial demand is weakening as expected. We have limited exposure to energy, automotive and aerospace, which is helpful given the stress in those sectors. Some industrial markets may be hesitant to invest and could see prolonged weaker demand, but from 2008–2009, industrial weak periods lasted a few quarters and then rebounded strongly with stimulus. That analogy is imperfect, but it provides some perspective. We're cautiously optimistic but can't promise exact timelines.

Got it. And if I could ask a follow-up: in areas of the U.S. and EU that are beginning to open up, are you seeing any changes that are impacting your business?

It's mostly talk about opening up; geographic patterns haven't yet had a meaningful impact for us in the U.S. In Europe, outside of Southern Europe and France, business has been limping along. We've been able to make deliveries and installations in many places, sometimes with delays or needing to hold back, but purchasing departments are working from home and people are submitting purchase orders and grant applications. It's slow going, but activity continues.

(Operator provided instructions.) Our next question comes from Steve Unger from Needham. Please go ahead with your question.

Great. Thanks for fitting me in. Frank, curious if you could comment on the MALDI Biotyper's performance in the COVID-19 environment, specifically consumables utilization perhaps in April? And does COVID-19 impact your new product introduction plans for this year?

I don't have April-specific data here, but in Q1 we had very strong performance: instruments grew and consumables were growing at a high pace year over year. On Slide 5 we show that consumables were about 30% growth in Q1. So consumables utilization was healthy. The MALDI Biotyper has been a net beneficiary as it helps identify bacterial or fungal co-infections or ventilator-associated pneumonias that accompany COVID-19 cases, which has increased demand beyond what we might have anticipated. Regarding new product introductions, conferences have been canceled or moved to virtual formats, but our product launches will proceed; we'll use virtual channels if necessary. So COVID-19 hasn't materially affected our new product plans.

Ladies and gentlemen, at this point showing no additional questions, I'd like to turn the conference call back over to management for any closing remarks.

Thank you for joining us today. During the second quarter, Bruker will participate in the Bank of America, UBS and Jefferies virtual healthcare conferences. We hope you stay healthy and well, and we invite you to reach out to us for a virtual meeting during the quarter. Thank you, and have a good evening.

Ladies and gentlemen, with that we'll conclude today's presentation. We do thank you for joining. You may now disconnect your lines.