Earnings Call Transcript - BRKR Q2 2025

Operator, Operator

Good day, and welcome to Bruker Corporation's Second Quarter 2025 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Joe Kostka, Director of Investor Relations. Please go ahead.

Joe Kostka, Director of Investor Relations

Good morning. I would like to welcome everyone to Bruker Corporation's Second Quarter '25 Earnings Conference Call. My name is Joe Kostka, and I'm the Director of Bruker Investor Relations. Joining me on today's call are our President and CEO, Frank Laukien; and our EVP and CFO, Gerald Herman. In addition to the earnings release we issued earlier today, during today's conference call, we will be referencing a slide presentation that can be downloaded from the Events and Presentations section of Bruker's Investor Relations website. During today's call, we will 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 is shown on Slide 2 of the presentation. During this conference call, we will make forward-looking statements regarding future events and the financial and operational performance of the company that involve risks and uncertainties, including those related to acquisitions, geopolitical risks, tariffs, foreign currency, market demand or supply chains. The company's actual results may differ materially from 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 for the period ending December 31, 2024, as updated by our other SEC filings, which are available on our website and on the SEC's website. Also, please note that the following information is based on current business conditions and on our outlook as of today, August 4, 2025. We do not intend to update our forward-looking statements based on new information, future events or for other reasons, except as may be required by law prior to the release of our third quarter 2025 financial results expected in early November 2025. You should not rely on these forward-looking statements as necessarily representing our views or outlook as of any date after today. We will begin today's call with Frank providing an overview of our business and updated thoughts and assumptions around the U.S. and global funding environment and tariffs. Gerald will then cover the financials for the second quarter of 2025 in more detail and share our updated fiscal year '25 financial outlook. Now I'd like to turn the call over to Bruker's CEO, Frank Laukien.

Frank H. Laukien, CEO

Thank you, Joe. Good morning, everyone, and thank you for joining us on today's Second Quarter 2025 Earnings Call. Life Science research instruments markets are under pressure at the moment with expected U.S. academic funding headwinds and China stimulus delays for high-end research instrumentation. In addition, global tariffs, pharma pricing and economic uncertainty in the second quarter have delayed biopharma and industrial research instrumentation investments. This resulted in lower-than-anticipated bookings and revenues in the second quarter. Our Bruker Scientific Instruments, or BSI, segment book-to-bill ratio was in the mid 0.9 range in the quarter, which was not great, but also not too bad. We anticipate that the third quarter will bring additional visibility on U.S. NIH and NSF funding, both for the remainder of fiscal year '25 as well as for fiscal year '26 federal research budgets. We are encouraged by several recent settlements of disputes between major universities and the federal government, and we anticipate additional settlements to allow the resumption of grants for important scientific and medical research. On academic and disease biology research, we believe that our unique post-genomic tools will be in significant demand in all geographies and in particular, also when China releases its stimulus budgets for high-end medical research instrumentation. Moreover, as U.S. tariffs for many major countries and trade blocks get settled in early August, we believe that global biopharma, industrial and semiconductor companies will accelerate their investments in next-generation drug discovery and development systems as well as in research and quality control tools for advanced materials, clean tech and semiconductor research and production. We are observing where U.S. tariffs on Swiss imports will settle, and we anticipate that ultimately, it will not be at 39%, the rate communicated last week. In a worst-case scenario for Switzerland, we intend to leverage our other European Union and U.S. factories for products designated for the United States market. Bruker is poised to resume above market growth, particularly in the next-generation systems needed for disease research and drug discovery in view of the greater biological complexity revealed by the emerging post-genomic view. Similarly, the enormous investments in artificial intelligence are very beneficial for our advanced and often unique semiconductor metrology tools. Finally, we have strong positions in microbiology and infection diagnostics with an exciting road map of medically needed and differentiated capabilities. Back to our second quarter, the stronger-than-anticipated organic revenue decline, coupled with higher U.S. tariffs and stiff currency trade winds from a declining U.S. dollar caused margins and profitability to come in below our expectations. On our first quarter call, we discussed our mitigation measures regarding price, supply chain and cost, but these take 2 to 3 quarters before they fully benefit our operating results. Today, we are announcing a significantly expanded cost savings initiative that is expected to reduce our annual costs for fiscal year 2026 by $100 million to $120 million annualized. These major cost reductions affect all parts of our business from supply chain and manufacturing to our commercial strategies and investments. These are difficult but necessary decisions to rightsize our cost structure to match the trough demand levels currently seen in the market. As a result of our weaker second quarter performance, we are lowering our guidance expectations for fiscal year '25. We now expect approximately flat constant exchange rate revenue growth and organic revenue to decline by 2% to 4% for the year with a mid-teens percentage non-GAAP EPS decline year-over-year. Looking beyond 2025, even in a muted revenue growth scenario in fiscal year '26, it is our intention to deliver very significant margin improvements and double-digit EPS growth just based on our major cost reduction initiatives. If there also is a partial growth recovery in advanced life science research and drug discovery tools in fiscal year '26 then this could provide additional tailwinds. Beyond 2026, we expect to return to our stated goal of organic revenue growth, 200 to 300 basis points above market, which we delivered many years in a row, alongside rapid margin expansion and double-digit EPS growth once academic, trade and economic uncertainty abates. This is driven by our exceptional innovation in next-generation disease research and biopharma drug discovery tools for the post-genomic era. This is also driven by other Bruker-specific growth drivers from semiconductor metrology for the AI revolution to unique applied and diagnostic solutions. Turning to Slide 4 for our Q2 '25 performance. As I just detailed, in the second quarter of 2025, we faced delays in many end markets, most notably, biopharma and industrial, which drove both the top and bottom lines to come in below our expectations. Bruker's second quarter '25 reported revenues decreased by 0.4% year-over-year to $797.4 million, which included a foreign exchange tailwind of 2.9%. On an organic basis, revenues decreased by 7.0%, which included a 7.2% organic decline in BSI and a 4.8% organic decline at BEST, net of intercompany eliminations. Revenue growth from acquisitions added 3.7%, which implies a constant exchange rate revenue decline of 3.3% year-over-year. Book-to-bill in the quarter was in the mid 0.9 range. Our second quarter '25 non-GAAP operating margin was 9%, a decrease of 480 basis points year-over-year as lower revenue absorption, additional tariff costs and currency headwinds were only partially mitigated in Q2 by our earlier cost and pricing actions. In our second quarter '25, diluted non-GAAP EPS was at $0.32, down 39% from $0.52 in the second quarter of 2024 on organic revenue declines, the impact of tariffs and foreign exchange headwinds. Gerald will discuss the drivers for margins and EPS later in more detail. Moving to Slide 5. Our first half '25 revenues increased by 5.0% to $1.60 billion. First half organic revenue declined 2.3%, consisting of a 1.4% organic decline in Scientific Instruments, or BSI, and an 11.5% organic decline at BEST, net of intercompany eliminations. Our first half 2025 non-GAAP gross and operating margin and GAAP and non-GAAP EPS performance are all summarized on Slide 5. Please turn to Slide 6 and 7, where we highlight the first half 2025 performance of our three scientific instruments group and of our BEST segment, all on a constant currency and year-over-year basis. In the first half of '25, BioSpin Group revenue was $403 million and was roughly flat year-over-year. BioSpin saw contributions from NMR, preclinical imaging and lab automation, while the scientific software business was soft. BioSpin saw weakness in biopharma revenues and softness in orders both in academic and applied markets. For the first half of '25, CALID Group revenue of $566 million increased in the low teens percentage with strong growth in microbiology and infection diagnostics driven by the MALDI Biotyper and the Bruker ELITech Molecular Diagnostics business. Our Applied Mass Spectrometry business saw robust growth, which offset some softness in the Life Science Mass Spectrometry business. Turning to Slide 7 now. For the first half of '25, Bruker Nano revenue was $509 million and grew in the low single-digit percentage. Spatial Biology contributed growth in the first half of '25, while revenues from Advanced X-Ray were down year-over-year. Strength in biopharma was partially offset by weakness in industrial markets. Finally, first half '25 BEST revenues declined in the low teens percentage, net of intercompany eliminations, due to softness in the clinical MRI market as well as a strong prior year comparison for the research instruments business. Moving to Slide 8. We highlight some of our recent innovations in the second quarter at ASMS. Obviously, we've had an almost unprecedented lineup of new and market-changing instruments from our tims product line as well as in Nano LC. I won't go into these in detail today, but they significantly enhance our competitive position in traditional bottom-up proteomics, while also ushering in a new era of functional proteomics and proteoform analysis with the timsOmni. We have received very good orders since ASMS already. And finally, we have made a very serious play in Benchtop 4D-Metabolomics with the timsMetabo launch that offers very high sensitivity and unprecedented annotation content, which has been very well received in the market. Let me move to Slide 9, probably the key theme for today, how are we navigating through this macro and research instruments weakness? You are aware of the U.S. academic funding disruption for high-end research instrumentation for academic and medical research, China stimulus continues to be delayed, although our customers remain optimistic for release in the second half. In the second quarter, we saw that drug discovery and industrial research tools experienced CapEx delays and weakness in both segments. We're looking forward to more visibility on what timeframe recovery may occur once tariffs and other items settle in. We also had more tariff and FX cost headwinds, resulting in a lot of challenges in the second quarter. We continue to focus on our industry-leading innovation and our strategy to reaccelerate growth and enhance market share in the post-genomic era in both academic and medical research but also very much in biopharma drug discovery tools when they come back. Very importantly, we're broadly expanding our cost reductions, which we had begun previously, but we're now expanding those with a goal of $100 million to $120 million in annualized cost reductions to improve margins and profitability. We are also looking for a significant step-up in fiscal year '26 driven just by the cost reductions and hopefully some emerging recovery in the markets. Of course, we are seizing new opportunities in spatial biology and multiomics, which are very large growth drivers even if they're muted at the moment, alongside new growth drivers in lab automation, scientific software, improving semiconductor metrology for AI being an incredible opportunity, and emerging growth in European chemical and explosive detection, airport security, and airline security. Finally, our industrial research business in cleantech and batteries is also growing, and we are adding to our consumables business organically and inorganically. So, to wrap up, the second quarter was a challenging one for Bruker, and we are aggressively executing on our expanded cost reduction initiatives with the goal of delivering strong margin expansion and EPS growth in 2026, even in a flat to low growth scenario. We are, however, cautiously optimistic for fiscal year '26 regarding partial recovery and can point to Bruker's successful track record of rebounding very strongly from previous market disruptions in 2008, 2009 and in 2020, from which Bruker emerged with multiple years of double-digit organic revenue growth in each scenario. We remain confident that Bruker's innovation engine will continue to drive differentiated, high-value solutions in attractive markets. Our culture of disciplined entrepreneurialism and our Bruker management process will position us well for sustained financial success in the years to come. Let me now turn the call over to our CFO, Gerald Herman, who will review Bruker's Q2 financial performance and updated fiscal year '25 outlook in more detail.

Gerald N. Herman, CFO

Thank you, Frank, and thank you, everyone, for joining us today. I'm going to go through more detail on Bruker's second quarter and first half 2025 financial performance, starting on Slide 11. In the second quarter of 2025, our results came in below our expectations on both the top and bottom lines. In Q2 2025, Bruker's reported revenue decreased 0.4% to $797.4 million, which reflects an organic revenue decrease of 7% year-over-year. Acquisitions contributed 3.7% to our top line, while foreign exchange was a 2.9% tailwind, resulting in a constant exchange rate revenue decline of 3.3% year-over-year. Geographically and on a year-over-year organic basis in Q2 2025, our Americas revenue declined in the low double-digit percentage. European revenue also declined in the low double-digit percentage while Asia Pacific revenue grew in the low single-digit percentage despite a low single-digit decline in China. For our EMEA region, revenue was up high single digits percentage. BSI organic revenue declined 7.2% in Q2 2025 with organic declines in all groups. The CSI Systems declined roughly 10%, and BSI aftermarket revenue was flat organically year-over-year. Our order book performance in the BSI segment was down organically in the high single-digit percentage year-over-year, with softer academic government research orders in most geographies and a significant decline in biopharma orders in the U.S. Non-GAAP gross margin decreased 270 basis points to 48.6%. Q2 2025 non-GAAP operating margin was 9.0%, impacted by weaker volume leverage, unfavorable mix, tariffs, and foreign currency. On a non-GAAP basis, Q2 '25 diluted EPS was $0.32, down 38.5% from the $0.52 we posted in Q2 2024. Our EPS performance was significantly impacted by the decline in the U.S. dollar in the quarter, which resulted in a $0.06 headwind. Our non-GAAP effective tax rate was 23.6% compared to 28.4% in Q2 2024, with the decrease driven mostly by favorable discrete items in the quarter. On a GAAP basis, we reported diluted EPS of $0.05 per share, flat compared to Q2 2024. Weighted average diluted shares outstanding in Q2 2025 were $151.7 million, an increase of 3.7 million shares from Q2 2024, resulting from our follow-on equity offering in May 2024. Slide 12 shows Bruker's performance for the first half of 2025, which has similar drivers to the second quarter. Turning to Slide 14 now. During the first half of 2025, we had a decrease in operating cash flow of $85 million, driven principally by the timing of tax payments and other items. We had a modest year-over-year increase in capital expenditures in the first half of '25, which resulted in a free cash outflow of $110 million in the first half of '25. Given the challenging market conditions, today, we announced the expansion of current cost-saving initiatives intended to take $100 million to $120 million of annualized costs out of the business. These actions span all business units, all geographies and all functions within Bruker. This expanded cost program is already underway, but the majority of savings is expected in fiscal year 2026. These cost actions are expected to contribute approximately 300 basis points of operating margin improvement in fiscal year '26, even under flat or muted market demand conditions. Turning now to Slide 15. We're updating our full year 2025 outlook to reflect Q2 results and current market tariff and foreign exchange headwinds. Our outlook for fiscal year '25 now assumes revenue in a range of $3.43 billion to $3.50 billion with an organic revenue decline of 2% to 4%. Contribution from acquisitions is expected to be approximately 3.5%, and we now expect a foreign currency tailwind of 2.5% on the revenue line. This leads to updated reported revenue growth guidance in a range of 2% to 4%, with approximately 0.5% constant exchange rate growth year-over-year. For operating margins in 2025, given softer market conditions, we now expect lower organic revenues, expected M&A dilution and tariff on foreign exchange headwinds to lead to an approximately 210 basis point decline in operating margins year-over-year. This anticipated full year 2025 operating margin decline consists of headwinds of 40 basis points from 2024 M&A activity, 60 basis points from tariffs, 90 basis points from foreign exchange as well as a 20 basis point decline in organic operating margin. On the bottom line, our updated fiscal year 2025 non-GAAP EPS is expected to be in the range of $1.95 to $2.05, which implies non-GAAP EPS down 15% to 19% compared to fiscal year '24. The midpoint of our updated EPS guidance is down $0.44 from our previous guidance, primarily driven by roughly $50 million decline in expected fiscal year '25 revenue associated with the present trough in global academic, biopharma drug discovery and industrial research instrument markets as well as a higher foreign exchange headwind than previously expected of an additional $0.05. We expect a very significant EPS rebound in fiscal year '26 based on our significant cost-cutting initiatives, with or without meaningful revenue growth. Other guidance assumptions are listed on the slide, and our fiscal year '25 ranges have been updated for foreign currency rates as of June 30, 2025. With respect to the third quarter of 2025, we expect relatively weak organic revenue performance again, mid- to high-single-digit percentage decline year-over-year in the third quarter of 2025. On EPS, we expect non-GAAP EPS for the third quarter of '25 to be similar to EPS in the second quarter of '25, with a reacceleration of EPS expected in the fourth quarter. To wrap up, market, tariff and foreign exchange headwinds impacted our second quarter of '25. We remain cautiously optimistic about the fiscal year '26 partial recovery in research instruments and are very committed to significant margin expansion and EPS growth in fiscal year '26 and beyond. And with that, I'd like to turn the call back over to Joe. Thank you very much.

Joe Kostka, Director of Investor Relations

Thanks, Gerald. We will now begin the Q&A portion of the call. As a reminder to allow everyone time for questions, we ask that you limit yourself to one question and one follow-up. Operator?

Operator, Operator

The first question comes from the line of Puneet Souda with Leerink Partners.

Puneet Souda, Analyst

First one on the guide. I understand the significance of the cut. Given the current market conditions, could you explain why the strong backlog is not contributing this year? Additionally, you've mentioned book-to-bill, but how should we perceive the recovery in the fourth quarter, which is crucial for instrumentation? Regarding fiscal '26, Gerald spoke about the recovery there; what are your thoughts on fiscal '26? I know it's a bit early, but I would appreciate your insights.

Frank H. Laukien, CEO

Thank you, Puneet. So backlog, we are using our backlog to some extent. Obviously, you can't accelerate it at will, as in delivery times, production and delivery times are very much planned and locked in by the customers also. Our backlog has come down slightly from 7 months to 6.5 months so we are leveraging that. Yes, we think Q4 is going to ramp up a bit, but we're actually feeling pretty comfortable with that with all of our financial planning. I think that looks doable. And as Gerald had cautioned, Q3, we think, will still be somewhat weak. A little too early to talk about '26. We just wanted to make sure that even in a no-growth scenario, we can deliver very significant margin expansion and EPS growth. Whether next year will be no growth or a partial recovery of a few percent growth, we don't have the visibility yet and we hope to gain that in the next 1 or 2 quarters. Obviously, a lot of factors are at play, especially when it comes to U.S. federal budgets.

Puneet Souda, Analyst

Got it. Regarding the UHF magnets, I apologize if I missed this. Can you share if you're expecting any in the third or fourth quarter? There was a recent acquisition involving the BD assets. That channel sells your MALDI Biotyper. Do you anticipate any impact on the MALDI and its sales from that acquisition, given that it's an LC-MS company that obtained those assets?

Frank H. Laukien, CEO

Currently, we do not anticipate revenue from ultra-high field in the third quarter, but we expect it in the fourth quarter. Regarding the BD microbiology business and its acquisition process, we will have to see what Waters intends if they close that in early '26. It's important to note that in our diagnostics businesses, the benchtop MALDI makes up only 10%, while 90% consists of assays, content, and regulatory approvals. When Danaher, which owns the SCIEX mass spec divisions, acquired Siemens Microbiology, they continued to collaborate with us on the Beckman Coulter Diagnostics business effectively and were not swayed by the idea of developing a mass spec, as building one is straightforward. The MALDI Biotyper franchise has performed exceptionally well with BD and we hope this continues, but we will have to wait until the acquisition closes in '26 to know for sure. Developing a comparable product would require a significant investment over five years, and by then, we will have moved on. While this remains speculative, we do not expect adverse effects but cannot predict the future. It's worth mentioning that we sell more than just our MALDI Biotypers directly, so if a channel were to become unavailable, we believe we could manage that situation effectively.

Operator, Operator

Next question comes from the line of Tycho Peterson with Jefferies.

Tycho W. Peterson, Analyst

Frank, I want to push on the cost outs. And really, the idea is earnings today are 30% below where they were 90 days ago. And then only $0.05 of that is FX. I know you're protecting the P&L now. But a couple of things. I guess, why didn't you initiate some of these cost-outs sooner? And are you committing to the $100 million to $120 million regardless even if the top line does start to come back?

Frank H. Laukien, CEO

Good questions, Tycho. We started earlier in the year with an initial savings program aimed at improving our margins beyond our initial guidance before any headwinds emerged. We had planned for an additional $25 million cost savings initiative, which we expanded to over $50 million when tariffs began to impact us. While most of these cost savings will become effective next year, approximately $30 million is expected to contribute to our guidance for fiscal year '25. The more significant impact will be in '26, but we will have about $30 million of cost savings reflected in our fiscal year '25 guidance. Regarding your last point, Tycho, we are fully committed to achieving $100 million to $120 million in cost savings, and we aim to reach the upper end of that range. We anticipate this will occur regardless of market conditions or recovery. Achieving even a flat scenario of 300 basis points of margin improvement next year would be beneficial. If growth returns, even partially, it would be excellent as it would allow us to enhance margin expansion and EPS growth. We are fully dedicated to this plan.

Tycho W. Peterson, Analyst

Okay. And then on the growth side, if I go back to our conference in June, you had effectively committed to 4% growth in '26. Now it seems like you're not wanting to go there. Maybe just talk about what has really changed in the past 2 months here on the growth side? And then maybe just before I jump off, one for Gerald on leverage, over 4 turns, but the covenant is 3.5 turns. Can you maybe comment on that dynamic as well?

Frank H. Laukien, CEO

Okay. I'll take the first part. So we were indicating at your conference that we didn't expect growth in '26 to come back to our more traditional levels of 6% to 8%. At that point, we were a little bit more optimistic that it might be and maybe it wasn't a commitment to that, but we speculated it could be 2% to 4% organic growth next year. What has happened is that somewhat as expected, the U.S. academic and Chinese academic stimulus money is not flowing yet. That was somewhat expected, and we expected, I think when we saw you at your conference, the additional U.S. biopharma weakness in orders for high-end drug discovery research instrumentation, I know it doesn't take all companies equally, but for research instrumentation, we saw a significant slowdown there. We'll see whether once tariffs settle and some of the other political settlements kick in, whether that additional headwind goes away or abates in the second half of this year. And that will, of course, in part, drive '26. We also observed general weakness in industrial research instruments investments across Europe, the U.S. and China due to economic and tariff uncertainty. That was also something that became clearer in the second half, which is why we're more muted in our projections. We don't have growth expectations for '26, but we do want to be realistic and ready for a no-growth scenario. That's not our expectation, but we can't make specific predictions right now.

Gerald N. Herman, CFO

And Tycho, on your question regarding the leverage ratio, we don't comment specifically on ratio dynamics quarter-by-quarter. I mean I can tell you that we have satisfied our debt covenants for the first and second quarters of '25. And we have a target, as I think we've discussed directly, in around that 2.7 range, and that's what we're working towards.

Frank H. Laukien, CEO

Over several years right now.

Operator, Operator

Next question comes from the line of Brandon Couillard with Wells Fargo.

Brandon Couillard, Analyst

Gerald, just a follow-up there. Could you unpack the free cash flow burn in the second quarter? How much was one-time? And what are you expecting for operating cash flow in the second half? And why is CapEx coming down by a larger degree?

Gerald N. Herman, CFO

Sorry, I wasn't sure I caught the last part of your question.

Frank H. Laukien, CEO

How is the CapEx coming down? Why is the CapEx coming down?

Gerald N. Herman, CFO

Yes, our capital expenditures are set to decrease. We have reduced them for the third and fourth quarters. Typically, we have certain programs already initiated for the first and second quarters, which is why the capital expenditure levels appear as they do. Regarding cash flow, we did experience some unusual cash outflows in the second quarter due to specific tax payments that we mentioned, but we do not anticipate those to happen again. Therefore, we expect to return to a normal cash flow.

Frank H. Laukien, CEO

And Brandon, those amounts were substantial, between $50 million and $60 million, which included some tax prepayments that we anticipate will be recovered. Indeed, there were significant tax payments in the second quarter.

Brandon Couillard, Analyst

Okay. That's helpful. And then Frank, I think Gerald said BSI aftermarket was flat in the quarter. Can you kind of unpack what you saw between Diagnostics and maybe some A&G customers and just a surprise to see the aftermarket utilization kind of flat in the quarter?

Frank H. Laukien, CEO

That granularity, we do not have. Obviously, the Diagnostics business has been growing very nicely, sort of according to plan, although placements for the ELITech molecular diagnostics business, which you don't see in revenue, placements, new platforms going out there generate future revenues but placements there. That's one of the highlights of the quarter or for the first half of the year are way ahead of our plan. So the ELITech business in placements is doing great. And in terms of growth and margin expansion, it's according to plan. So that gives an indirect partial answer to what you're saying, namely there, of course, 80% or 90% of the consumable space, and they are as well as the multi-biotyper consumables are doing well. Therefore, aftermarket in other segments was also down partially, but we don't have granular percentages on that. Hope that helps.

Operator, Operator

Mr. Couillard, are you done with the question?

Brandon Couillard, Analyst

Yes.

Operator, Operator

Next question comes from the line of Luke Sergott with Barclays.

Luke England Sergott, Analyst

I wanted to discuss the underlying dynamics regarding the slower growth expected in 2026, especially concerning China, as we've heard from peers that they are beginning to see some impact from the stimulus measures. Have you noticed any of that? Additionally, when considering the 2026 growth dynamics and the more subdued growth forecast, does that simply reflect the expectation that the current market conditions will persist? I'm trying to understand what might worsen in a scenario where China improves.

Frank H. Laukien, CEO

A muted growth scenario is still a growth scenario. Currently, we are observing a decline in our scientific, industrial, and biopharma research markets. Even a no-growth scenario next year would be preferable to the current headwinds we are facing. We are not expecting a decline next year, as that is not our current anticipation. Additionally, we do not foresee market growth of 6% to 8% organic growth recovery next year; we hope to achieve that by 2027 but will refrain from further comments on that for now. There has been no release of stimulus in China for high-end research instrumentation yet. We have seen reasonable tender activity in China recently, including into July, but that was not necessarily related to high-end stimulus funding; it was more typical activity, which may be improving a bit. Our Chinese clients looking for shovel-ready large projects, including NMR, mass spectrometry, and high-end microscopes, are optimistic that it is only a matter of time before the provinces release these funds, especially with the hope that a China-U.S. trade war is not imminent. It seems the provinces are holding back to determine if they need a reserve fund. Although no China stimulus has been released for our high-end research instrumentation, there is strong customer optimism that it will come, though we do not know when exactly. Furthermore, as tariffs stabilize and a new economic trade order develops, CFOs in major industrial and biopharma companies should become more willing to invest in CapEx due to their need for research capabilities, whether in industrial materials, semiconductors, or drug discovery. We expect an improvement in 2026 compared to 2025, although we cannot quantify it at this time. That said, we do not want to depend solely on that improvement. Even without growth, we anticipate achieving a margin improvement of 300 basis points or more.

Luke England Sergott, Analyst

That's the takeaway. Okay, great. For a follow-up, we previously discussed the NIH and U.S. academic funding issues. How do you envision this evolving? Will it be more democratized from coastal areas or Ivy League institutions to high-end users in state systems? Are you starting to see any developments or do you have an update on how you foresee the funding releases over the next few years?

Frank H. Laukien, CEO

We can observe some early indications. I don't believe NIH budgets will remain flat or increase, nor do I think a decrease of 40% will happen. A reduction of around 20% seems realistic based on our expectations, but it could be as little as a 10% drop; we will find out. This is part of a larger trend. The shift you mentioned won't just be temporary; it suggests a more equitable distribution of resources beyond coastal areas and investments that aren't concentrated mainly in Massachusetts and Northern California. I see this political shift continuing. As a result, some excellent universities in other regions may secure a larger share of funding. This potential change is happening even after recent and upcoming settlements involving well-known universities. The NSF is planning for significant NMR projects for 2025, though I am uncertain about their exact plans and whether there will still be funding in 2025 while we focus on the 2026 budgets. However, there are some positive signs. Recently, a couple of items regarding NIH budgeting went through, and our customers placed orders just two days later. While these developments are not game-changers, they suggest we may be nearing the end of the academic funding crisis. However, we do not anticipate a rapid return to the previous high growth rates.

Operator, Operator

Next question comes from the line of Subbu Nambi with Guggenheim.

Subhalaxmi T. Nambi, Analyst

I had a question on the 2025 guide itself. If the cost savings aren't hitting until 2026 and the headwind to EPS is getting worse with FX, how are you thinking about the second half, just given the soft orders in the quarter?

Frank H. Laukien, CEO

Subbu, good question. So we do think that of our cost savings for the full year '25, about $30 million of cost savings will kick in and will benefit us this year. They are being overwhelmed by the headwinds from the previous M&A, from the organic decline of 2% to 4% we're now projecting, as well as currency and tariffs, but they are meaningful. They're just too big; they’re kicking in to a much greater extent in 2026. Of course, we've only recently within the last several weeks expanded our cost-cutting initiative very significantly and more than doubled it from what we had previously already planned to counteract tariffs. Did that answer your question, or did I miss something, Subbu?

Subhalaxmi T. Nambi, Analyst

No, that did, Frank. I was just hoping for some more granularity in terms of the bridging between revenue and EPS to hit the 4Q ramp, but partially, that definitely answered the question.

Gerald N. Herman, CFO

Gerald here. To add to Frank's mention of the $30 million, most of that will be recognized in the fourth quarter of fiscal year '25, with a significant portion expected in fiscal year '26. We're observing some improvement in our guidance expectations for the fourth quarter compared to the third, which should provide clarity on that.

Operator, Operator

Next question comes from the line of Dan Brennan with TD Cowen.

Daniel Gregory Brennan, Analyst

Maybe just on NIH, Frank and Gerald. Frank, you're obviously the largest U.S. academic government player amongst the large tools. So you should have, I think, more skin in the game in a view here. So kind of you're thinking about down 10% to 20%. We'll see where things land in 2026. But I think there's been more optimism, I think, has been raised here given the Senate appropriation, saying up 1%, and folks think that CR could be likely. So I'm just wondering when you think down 10% to 20%, kind of, a, what's the mechanism to get there? And b, if things were better, would you expect your customers would spend that money? Or what does your commercial team think about? Would they be reticent just given recessions and things like that?

Frank H. Laukien, CEO

I want to clarify that I do not have specific expectations regarding the 10% to 20% figure because there have been too many unexpected developments affecting the fiscal year '26 budgets. While the Senate Committee approved a minor increase and the administration initially anticipated a 40% decrease, I am preparing for a potential 20% reduction in NIH budgets for '26 while working on margin expansion. For fiscal year '25, we already indicated that we expect a decline of 20% to 25% in U.S. academic government funding. So far, we've seen about a 15% decrease in the first half of the year. Therefore, a 20% to 25% drop in U.S. academia funding for the entire calendar year '25 appears to be reasonable. I don’t expect it to be worse than that, and funding is still coming in. For the following year, I have stopped making predictions, but I'm preparing for a potential 20% reduction in the NIH budget for fiscal year '26. If the situation improves, that would be great, as it would positively impact our revenue and profits in '26. I believe customers will readily spend if they receive grants, especially when those grants are tied to financially struggling universities. When they secure specific grants, I believe they will place orders quickly.

Gerald N. Herman, CFO

And, Dan, just to follow up on your point regarding backlog and bookings; I think we would say that we're seeing a decent amount of new activity in our overall pipeline as we continue to work through the backlog. On that point, I think we do want to be prudent about overall expectations around that and balance it against where we are today with some of these headwinds. And I would say that the backlog has become an important component of our overall revenue mix as a result.

Frank H. Laukien, CEO

Yes, we now have aftermarket consumable service and software of more than $1 billion. So it's become a significant part of Bruker. The backlog is still elevated at 6.5 months. We expect that backlog to eventually level out to about 5 months as a new normalized level. So we still have some cushion from backlog for the second half and for next year, but we also need the bookings and to replenish that backlog.

Operator, Operator

Next question comes from the line of Patrick Donnelly from Citi.

Patrick Bernard Donnelly, Analyst

Frank or Gerald, I wanted to touch a little more on the second half cadence. The Q4 step-up still seems pretty steep. I mean, I think if you're talking about Q3 looking at similar earnings, call it, $0.32, it implies around $0.90 in Q4. And again, the revenue kind of step up with that. So I just want to talk through the visibility into that Q4 number. It did sound like things are maybe getting a little more challenging at the end of the quarter. So can you just talk about the visibility and confidence in that Q4 ramp?

Gerald N. Herman, CFO

Yes. Patrick, it's Gerald. I'll take this, and Frank may want to add some more color. So just generally, in terms of the scaling or graduating this into the fourth quarter, as you already know, our fourth quarter tends to be more significant, accounting for around 30% of the annualized numbers. Historically, we have seen a more significant ramp in the fourth quarter. We have no reason to believe that this will not happen for 2025. And fundamentally, I would also say, as I mentioned earlier in my comments to Subbu, we do have some cost savings that are going to get kicked into the fourth quarter that are already planned and scheduled. So we're fairly confident that you'll observe a significant lift in operating margin and EPS performance for Q4. I think your math, as usual, Patrick, is not terribly far off from what our estimates are for the fourth quarter. So that's kind of at a high level our expectations.

Frank H. Laukien, CEO

And this is just typical for us. We tend to have very strong fourth quarters, and every year we do. Oftentimes, it's even better than what we had anticipated for our fourth quarter pattern, so we feel comfortable with the cadence.

Operator, Operator

Next question comes from the line of Josh Waldman with Cleveland Research.

Joshua Paul Waldman, Analyst

I have two questions for you. First, Frank, Gerald mentioned a decline in academic orders in most regions. Could you provide some insights on the situation in Europe? Is the academic market there deteriorating? Additionally, are there other regions that have unexpectedly experienced a decline? Secondly, regarding the U.S. academic market, could you discuss when we might expect a recovery in revenue? How long will it take to address the weaker order book and reflect that in revenue? When do you expect to see an improvement in orders that would impact revenue positively?

Frank H. Laukien, CEO

Yes. Clearly, the two main areas contributing to the decline in academic orders are the U.S. and China. We have noticed significant reductions in orders from the academic and academic medical research markets during the first half of the year. Europe and the rest of Asia-Pacific have shown fluctuations without a clear trend. The second quarter was weak, but I do not believe that reflects a long-term issue. Over several quarters, it's the U.S. and China that are crucial for the academic market. With less backlog, we can now achieve faster deliveries. Certain products, such as ultra-high field NMR or very large STEM microscopes, may still take 1 to 2 years to deliver. However, even if orders come in August or September, it will be more of a story for 2026. I do not anticipate a significant increase in 2025.

Josh Waldman, Analyst

Got it. And then, Frank, on tariffs, I'm curious if you think you're seeing tariffs negatively impact your competitive position and new opportunities at all. I'm thinking about the price or surcharge front. Does it seem like customers are either holding off on placing orders because of price increases or surcharges or maybe even looking to other suppliers?

Frank H. Laukien, CEO

Yes. When I analyze our market segments in spatial biology, our main competitor is the U.S., where U.S. NMR largely comes from Japan. In mass spectrometry, many of our competitors manufacture in Europe, including Germany and Singapore, among others. This applies similarly to other areas like X-Ray. So far, we haven't seen any significant competitive distortions due to the new tariff situation. We continue to monitor developments in Switzerland, which currently reflects some unusual figures. We anticipate that this could align more closely with conditions in Europe or Malaysia soon. For NMR and MRI, we have the ability to quickly shift production to Germany or France to target the U.S. market if necessary. We are confident in our capacity to respond swiftly if the high Swiss figures persist beyond August 7. In summary, we do not believe there are any competitive shifts resulting from the tariffs; instead, it's a cost headwind.

Operator, Operator

We'll take one more question, and then we will wrap things up for today. Next question comes from the line of Rachel Vatnsdal with JPMorgan.

Unidentified Analyst, Analyst

This is Rachel from JPMorgan. I would like to clarify your previous comments on tariffs. What are you currently assuming for those tariffs in your guidance? Are you projecting 39% or something lower? Additionally, could you provide more details on your updated tariff assumptions in light of the changes in Swiss and European tariffs?

Frank H. Laukien, CEO

Yes. We're assuming for the European Union and Israel we're at 15%, for Malaysia we're at 19%. Switzerland, we're presently modeling at 15%. In a worst-case scenario, if we didn't shift supply chain and it was 39%, that could be an additional $10 million hit that we presently don't have here, but we think that's just not going to happen. A, we think the number will be lower; and b, in that case, we will just not ship from Switzerland. We will build our NMRs and which is primarily an NMR story, in Germany or France. So that's why I think our modeling is appropriate.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Joe Kostka for closing remarks.

Joe Kostka, Director of Investor Relations

Thank you for joining us today. Bruker's leadership team looks forward to meeting with you at an event or speaking with you directly during the third quarter. Feel free to reach out to me to arrange any follow-up. Have a good day.

Operator, Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.