Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-Q

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934

 

For the quarterly period ended June 30, 2009

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934

 

For the transition period from                      to                     

 

Commission File Number 000-30833

 

BRUKER CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

04-3110160

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

40 Manning Road, Billerica, MA 01821
(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (978) 663-3660

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer, large accelerated filer, smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at August 3, 2009

Common Stock, $0.01 par value per share

 

164,087,910 shares

 

 

 



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BRUKER CORPORATION

 

Quarterly Report on Form 10-Q

For the Quarter Ended June 30, 2009

 

Index

 

 

 

 

Page

Part I

 

FINANCIAL INFORMATION

1

Item 1:

 

Unaudited Condensed Consolidated Financial Statements

1

 

 

Unaudited Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008

1

 

 

Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008

2

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008

3

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

4

Item 2:

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3:

 

Quantitative and Qualitative Disclosures About Market Risk

35

Item 4:

 

Controls and Procedures

36

Part II

 

OTHER INFORMATION

37

Item 1:

 

Legal Proceedings

37

Item 1A:

 

Risk Factors

37

Item 2:

 

Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 3:

 

Defaults Upon Senior Securities

38

Item 4:

 

Submission of Matters to a Vote of Security Holders

38

Item 5:

 

Other Information

39

Item 6:

 

Exhibits

39

 

 

Signatures

40

 



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PART I                  FINANCIAL INFORMATION

 

ITEM 1.                  UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

BRUKER CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

 

 

 

June 30,
2009

 

December 31,
2008

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

152.6

 

$

166.2

 

Restricted cash

 

1.7

 

1.5

 

Accounts receivable, net

 

132.9

 

171.9

 

Inventories

 

436.4

 

425.1

 

Other current assets

 

65.6

 

56.0

 

Total current assets

 

789.2

 

820.7

 

 

 

 

 

 

 

Property, plant and equipment, net

 

221.3

 

221.3

 

Intangibles and other long-term assets

 

77.0

 

74.3

 

Total assets

 

$

1,087.5

 

$

1,116.3

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term borrowings

 

$

0.6

 

$

22.7

 

Current portion of long-term debt

 

42.5

 

18.3

 

Accounts payable

 

40.8

 

43.3

 

Customer advances

 

202.1

 

199.6

 

Other current liabilities

 

233.2

 

235.8

 

Total current liabilities

 

519.2

 

519.7

 

 

 

 

 

 

 

Long-term debt

 

127.6

 

182.8

 

Other long-term liabilities

 

104.2

 

101.1

 

Commitments and contingencies (Note 18)

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

Preferred stock, $0.01 par value 5,000,000 shares authorized, none issued or outstanding at June 30, 2009 and December 31, 2008

 

 

 

Common stock, $0.01 par value 260,000,000 shares authorized, 164,100,858 and 164,078,721 shares issued and 164,087,903 and 164,068,252 outstanding at June 30, 2009 and December 31, 2008, respectively

 

1.6

 

1.6

 

Treasury stock at cost, 12,955 and 10,469 at June 30, 2009 and December 31, 2008, respectively

 

(0.1

)

(0.1

)

Other shareholders' equity

 

333.8

 

310.4

 

Total shareholders' equity

 

335.3

 

311.9

 

Noncontrolling interest in subsidiaries

 

1.2

 

0.8

 

Total shareholders' equity of Bruker Corporation

 

336.5

 

312.7

 

Total liabilities and shareholders' equity

 

$

1,087.5

 

$

1,116.3

 

 

The accompanying notes are an integral part of these statements.

 

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BRUKER CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Product revenue

 

$

222.9

 

$

280.3

 

$

425.1

 

$

488.6

 

Service revenue

 

28.3

 

30.2

 

55.2

 

58.9

 

Other revenue

 

1.3

 

1.0

 

2.7

 

2.3

 

Total revenue

 

252.5

 

311.5

 

483.0

 

549.8

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenue

 

125.2

 

162.5

 

236.9

 

267.7

 

Cost of service revenue

 

16.1

 

19.4

 

32.2

 

38.5

 

Total cost of revenue

 

141.3

 

181.9

 

269.1

 

306.2

 

Gross profit

 

111.2

 

129.6

 

213.9

 

243.6

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

43.9

 

47.1

 

86.5

 

91.5

 

General and administrative

 

17.0

 

17.2

 

33.3

 

34.0

 

Research and development

 

31.1

 

36.5

 

60.2

 

67.7

 

Acquisition-related charges (credits), net

 

(1.0

)

0.4

 

(0.6

)

6.2

 

Total operating expenses

 

91.0

 

101.2

 

179.4

 

199.4

 

Operating income

 

20.2

 

28.4

 

34.5

 

44.2

 

 

 

 

 

 

 

 

 

 

 

Interest and other income (expense), net

 

(2.9

)

3.6

 

(2.8

)

(8.6

)

Income before income tax provision and noncontrolling interest in consolidated subsidiaries

 

17.3

 

32.0

 

31.7

 

35.6

 

Income tax provision

 

4.6

 

10.3

 

10.4

 

14.5

 

Consolidated net income

 

12.7

 

21.7

 

21.3

 

21.1

 

Less: net income (loss) attributable to noncontrolling interests

 

(0.2

)

 

 

0.2

 

Net income attributable to Bruker Corporation

 

$

12.9

 

$

21.7

 

$

21.3

 

$

20.9

 

 

 

 

 

 

 

 

 

 

 

Net income per common share attributable to

 

 

 

 

 

 

 

 

 

Bruker Corporation shareholders - basic and diluted

 

$

0.08

 

$

0.13

 

$

0.13

 

$

0.13

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

163.3

 

162.4

 

163.3

 

162.4

 

Diluted

 

164.7

 

165.5

 

164.5

 

165.3

 

 

The accompanying notes are an integral part of these statements.

 

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BRUKER CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

 

 

Six Months Ended
June 30,

 

 

 

2009

 

2008

 

Cash flows from operating activities:

 

 

 

 

 

Consolidated net income

 

$

21.3

 

$

21.1

 

Adjustments to reconcile net income to cash flows from operating activities:

 

 

 

 

 

Depreciation and amortization

 

13.8

 

14.5

 

Stock-based compensation

 

3.3

 

1.8

 

Gain on acquisition

 

(2.1

)

 

Other non-cash income

 

(2.8

)

(4.6

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

40.3

 

41.2

 

Inventories

 

(4.5

)

(6.9

)

Accounts payable

 

(2.3

)

(13.0

)

Customer advances

 

(4.7

)

(25.6

)

Other changes in operating assets and liabilities, net

 

(11.0

)

(10.4

)

Net cash provided by operating activities

 

51.3

 

18.1

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(7.1

)

(27.1

)

Redemption of short-term investments

 

 

9.8

 

Acquisitions, net of cash acquired

 

(1.1

)

(2.1

)

Payments in connection with the acquisition of Bruker BioSpin

 

 

(5.2

)

Changes in restricted cash

 

(0.5

)

(3.4

)

Net cash used in investing activities

 

(8.7

)

(28.0

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from (repayments of) short-term borrowings, net

 

(35.8

)

33.4

 

Proceeds from (repayments of) long-term debt, net

 

(15.9

)

160.0

 

Payment of deferred financing costs

 

 

(2.9

)

Proceeds from issuance of common stock, net of repurchases

 

0.1

 

1.4

 

Deemed dividend in connection with the acquisition of Bruker BioSpin

 

 

(386.0

)

Cash payments to shareholders

 

 

(23.4

)

Net cash used in financing activities

 

(51.6

)

(217.5

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(4.6

)

20.4

 

Net change in cash and cash equivalents

 

(13.6

)

(207.0

)

Cash and cash equivalents at beginning of period

 

166.2

 

332.4

 

Cash and cash equivalents at end of period

 

$

152.6

 

$

125.4

 

 

The accompanying notes are an integral part of these statements.

 

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BRUKER CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.              Description of Business

 

Bruker Corporation and its wholly-owned subsidiaries (the “Company”) design, manufacture, service and market proprietary life science and materials research systems based on its core technology platforms, including X-ray technologies, magnetic resonance technologies, mass spectrometry technologies, optical emission spectroscopy and infrared and Raman molecular spectroscopy technologies. The Company also sells a broad range of field analytical systems for chemical, biological, radiological and nuclear detection, as well as superconducting wire products and devices. The Company maintains major technical and manufacturing centers in Europe, North America and Japan and sales offices throughout the world. The Company’s diverse customer base includes pharmaceutical, biotechnology and proteomics companies, academic institutions, advanced materials and semiconductor industries and government agencies.

 

The financial statements represent the consolidated accounts of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements as of and for the three and six months ended June 30, 2009 and 2008 have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission for Quarterly Reports on Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial information presented herein does not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of the results expected for the full year. Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported net income or shareholders’ equity.

 

In February 2008, the Company completed the acquisition of the Bruker BioSpin Group (“Bruker BioSpin”). Both the Company and Bruker BioSpin were majority owned by six affiliated shareholders prior to the acquisition. As a result, the acquisition of Bruker BioSpin was considered a business combination of companies under common control and was accounted for at historical carrying values at the date of the acquisition. The unaudited condensed consolidated balance sheets, statements of operations, statements of cash flows and notes to the consolidated financial statements for all periods presented herein have been restated by combining the historical consolidated financial statements of the Company with those of Bruker BioSpin. Additionally, because this transaction was accounted for as a business combination of entities under common control, all one-time transaction costs were expensed as incurred.

 

In the second quarter of 2009, the Company reevaluated its reporting segments following the acquisition of a business engaged in developing and manufacturing superconducting devices and other advanced technologies for alternative energy research. As a result of the acquisition and the corresponding changes in the Company’s organizational structure, management will report results on the basis of the following two segments:

 

·                  Scientific Instruments. The operations of this segment include the design, manufacture and distribution of advanced instrumentation and automated solutions based on X-ray technology, spark-OES technology, magnetic resonance technology, mass spectrometry technology and infrared and Raman molecular spectroscopy technology. Typical customers of the Scientific Instruments segment include pharmaceutical, biotechnology, proteomics and molecular diagnostic companies, academic institutions, government agencies, semiconductor companies, chemical, cement, metals and petroleum companies, raw material manufacturers and food, beverage and agricultural companies.

 

·                  Energy and Supercon Technologies. The operations of this segment include development and production of low temperature superconductor and high temperature superconductor wires for use in advanced magnet technology and energy applications as well as electron and ion linear accelerators, superconducting and

 

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normal conducting accelerator cavities, insertion devices, superconducting fault current limiters, crystal growth magnets and other accelerator components for physics and energy research and a variety of other scientific applications.

 

Management has evaluated subsequent events through August 10, 2009, the date the financial statements were filed with the Securities and Exchange Commission (“SEC”) and determined that there were none requiring disclosure.

 

2.              Acquisition of Bruker BioSpin

 

On February 26, 2008, the Company completed the acquisition of all of the outstanding capital stock of Bruker BioSpin in accordance with the terms of various stock purchase agreements dated as of December 2, 2007. The acquisition of Bruker BioSpin represented a combination of companies under common control due to the majority ownership of both companies by six related individuals as an affiliated shareholder group. As a result, the acquisition of Bruker BioSpin was accounted for at historical carrying values. The technologies of Bruker BioSpin are complementary to the Company’s accurate-mass electrospray time-of-flight mass spectrometers and single-crystal diffraction X-ray spectrometers and have created revenue synergies and provided opportunities to supply customers with equipment packages that have a broader range of applications and value. The addition of Bruker BioSpin has also enhanced the Company’s worldwide distribution and sales and service infrastructure.

 

At the completion of this acquisition, the Company paid an aggregate of $914.0 million of consideration to the shareholders of Bruker BioSpin, which was financed with 57,544,872 shares of unregistered common stock valued at $526.0 million, $351.0 million of cash obtained under a new credit facility and the balance with cash on hand. The value of the shares of common stock issued in connection with the merger was determined using a trailing average of the closing market prices of the Company’s stock for a period of ten consecutive trading days ending two days prior to the signing of the various stock purchase agreements.

 

Under the stock purchase agreements, $98.8 million of the purchase price was paid into escrow accounts pending the resolution of indemnification obligations and working capital obligations of the sellers. In May 2008, $6.8 million of the escrow was released following the receipt of combined audited financial statements of Bruker BioSpin for the year ended December 31, 2007. In April 2009, the remaining $92.0 million of the escrow was released following the receipt of audited financial statements of the Company, including Bruker BioSpin, for the year ended December 31, 2008.

 

3.              Other Acquisitions

 

In April 2009, the Company acquired substantially all of the assets of the research instruments portion of ACCEL Instruments GmbH (the “RI business”) from Varian Medical Systems, Inc. The acquisition of the RI business was accounted for under the acquisition method in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 141(R), Business Combinations. The RI business, located in Bergisch Gladbach, Germany, consists of the development and manufacture of electron and ion linear accelerators, superconducting and normal conducting accelerator cavities, insertion devices, superconducting fault current limiters, other accelerator components and specialty superconducting magnets for physics and energy research and a variety of other scientific applications. The results of the RI business have been included in the Energy and Supercon Technologies segment from the date of acquisition. The consideration transferred in acquiring the RI business was approximately $0.4 million and consisted entirely of cash. The Company acquired approximately $1.6 million of receivables, $4.4 million of inventory, $2.9 million of other current assets and $4.9 million of property, plant and equipment in this acquisition and assumed approximately $11.3 million of current liabilities. In connection with the acquisition of the RI business, the Company recorded a gain of approximately $2.1 million that has been recorded as a component of acquisition-related costs in the unaudited condensed consolidated statements of operations. Pro forma financial information reflecting the acquisition of the RI business has not been presented because the impact on revenues, net income and net income per common share attributable to Bruker Corporation shareholders is not material.

 

In August 2008, the Company acquired S.I.S. Surface Imaging Systems GmbH (“S.I.S.”), a privately-held company located in Herzogenrath, Germany. The acquisition of S.I.S. was accounted for under the purchase method in accordance with SFAS No. 141, Business Combinations. S.I.S. develops, manufactures and distributes advanced atomic force/scanning probe microscopy for applications in materials research, including semiconductors, data storage, electronic materials, solar cells, polymers and catalysts. The results of S.I.S. have been included in the

 

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Scientific Instruments segment from the date of acquisition. The aggregate purchase price of S.I.S. was $2.1 million. In addition, the Company issued an aggregate of 59,342 restricted unregistered shares of the Company’s common stock, par value $0.01 per share, to certain S.I.S. shareholders. These shares were not included in the purchase price because of contingencies related to the continuing employment of the shareholders and, accordingly, are being recorded as compensation expense. The Company recorded $2.1 million of goodwill in connection with the acquisition of S.I.S. and assigned the goodwill to the Scientific Instruments segment. Pro forma financial information reflecting the acquisition of S.I.S. has not been presented because the impact on revenues, net income and net income per common share attributable to Bruker Corporation shareholders was not material.

 

In January 2008, the Company acquired JUWE Laborgeraete GmbH (“JUWE”), a privately-held company located in Viersen, Germany. The acquisition of JUWE was accounted for under the purchase method in accordance with SFAS No. 141. JUWE develops, manufactures and distributes advanced combustion analysis systems for various carbon, hydrogen, nitrogen, oxygen and sulfur elemental applications. JUWE’s products are complementary to the Company’s optical emission spectroscopy products. The results of JUWE have been included in the Scientific Instruments segment from the date of acquisition. The aggregate purchase price of JUWE was $1.6 million, of which $1.2 million was paid in cash and $0.4 million consisted of net liabilities assumed by the Company. In addition, the Company issued an aggregate of 111,000 restricted unregistered shares of the Company’s common stock, par value $0.01 per share, to JUWE’s shareholders. These shares were not included in the purchase price because of contingencies related to the continuing employment of the shareholders and, accordingly, are being recorded as compensation expense. The Company recorded $1.1 million of goodwill in connection with the acquisition of JUWE and assigned the goodwill to the Scientific Instruments segment. Pro forma financial information reflecting the acquisition of JUWE has not been presented because the impact on revenues, net income and net income per common share attributable to Bruker Corporation shareholders was not material.

 

4.              Stock-Based Compensation

 

In 2000, the Board of Directors adopted and the shareholders approved the 2000 Stock Option Plan. The 2000 Stock Option Plan provides for the issuance of up to 2,188,000 shares of common stock in connection with awards under the Plan. The 2000 Stock Option Plan allows a committee of the Board of Directors (the “Committee”) to grant incentive stock options, non-qualified stock options, stock appreciation rights and stock awards (including the use of restricted stock and phantom shares). The Committee has the authority to determine which employees will receive the awards, the amount of the awards and other terms and conditions of the awards. In 2003, the Company’s shareholders approved an amendment and restatement of the 2000 Stock Option Plan to change the plan name to the Bruker BioSciences Corporation Amended and Restated 2000 Stock Option Plan and to increase the number of shares by 4,132,000 shares. In 2006, the Company’s shareholders approved an amendment and restatement of the Bruker BioSciences Corporation Amended and Restated 2000 Stock Option Plan to increase the number of shares available by 1,680,000 shares. In February 2008, the Company’s shareholders approved another amendment and restatement of the Bruker BioSciences Corporation Amended and Restated 2000 Stock Option Plan to increase the number of shares available by 2,000,000 shares, to a total of 10,000,000 shares.

 

As of June 30, 2009, the Company’s primary types of share-based compensation were in the form of stock options and restricted stock. The Company recorded stock-based compensation expense for the three and six months ended June 30, 2009 and June 30, 2008 as follows (in millions):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Stock options

 

$

1.2

 

$

1.0

 

$

2.5

 

$

1.5

 

Restricted stock

 

0.3

 

0.1

 

0.8

 

0.3

 

Total stock-based compensation, pre-tax

 

1.5

 

1.1

 

3.3

 

1.8

 

Tax benefit

 

0.2

 

0.2

 

0.6

 

0.4

 

Total stock-based compensation, net of tax

 

$

1.3

 

$

0.9

 

$

2.7

 

$

1.4

 

 

Compensation expense is amortized on a straight-line basis over the underlying vesting terms. Stock options of the Company’s common stock are periodically awarded to executive officers and other employees of the Company subject to a vesting period of three to five years. The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. Assumptions regarding volatility, expected life, dividend yield

 

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and risk-free interest rate are required for the Black-Scholes model and are presented in the table below:

 

 

 

2009

 

2008

 

Risk-free interest rate

 

1.71%-3.60

%

2.71%-3.95

%

Expected life

 

6.5 years

 

6.5 years

 

Volatility

 

64.0

%

72.0

%

Expected dividend yield

 

0.0

%

0.0

%

 

Risk-free interest rate is the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected life assumption. Expected life is determined through the simplified method as defined in the Securities and Exchange Commission Staff Accounting Bulletin No. 110. The Company believes that this is the best estimate of the expected life of a new option. Expected volatility is based on a number of factors. The Company currently believes that the exclusive use of historical volatility results in the best estimate of the grant-date fair value of employee stock options because it reflects the market’s current expectations of future volatility. Expected dividend yield was not considered in the option pricing formula since the Company does not pay dividends and has no current plans to do so in the future. The terms of some of the Company’s indebtedness also currently restricts its ability to pay dividends to its shareholders.

 

Stock option activity for the six months ended June 30, 2009 was as follows:

 

 

 

Shares Subject
to Options

 

Weighted
Average
Option Price

 

Weighted
Average
Remaining
Contractual
Term (Yrs)

 

Aggregate
Intrinsic Value
($'s in millions)

 

Outstanding at December 31, 2008

 

5,268,523

 

$

8.56

 

 

 

 

 

Granted

 

48,000

 

4.13

 

 

 

 

 

Exercised

 

(22,335

)

4.77

 

 

 

 

 

Forfeited

 

(55,641

)

9.31

 

 

 

 

 

Outstanding at June 30, 2009

 

5,238,547

 

$

8.53

 

3.9

 

$

10.4

 

 

 

 

 

 

 

 

 

 

 

Exercisable at June 30, 2009

 

2,670,614

 

$

7.54

 

3.9

 

$

7.6

 

 

 

 

 

 

 

 

 

 

 

Vested and expected to vest at June 30, 2009

 

5,089,607

 

$

8.50

 

3.9

 

$

10.3

 

 

Unrecognized pre-tax stock-based compensation expense of $14.9 million related to stock option awards is expected to be recognized over the weighted average remaining service period of 2.8 years for stock options outstanding at June 30, 2009. The intrinsic values above are based on the Company’s closing stock price of $9.26 on June 30, 2009.

 

Restricted shares of the Company’s common stock are periodically awarded to executive officers, directors and certain key employees of the Company, subject to service restrictions, which expire ratably over periods of three to five years. The restricted shares of common stock may not be sold or transferred during the restriction period. Stock compensation for restricted stock is recorded based on the stock price on the grant date and charged to expense ratably through the restriction period. The following table summarizes information about restricted stock activity during the six months ended June 30, 2009:

 

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Table of Contents

 

 

 

Shares Subject
to Restriction

 

Weighted
Average Grant
Date Fair
Value

 

Outstanding at December 31, 2008

 

591,675

 

$

7.26

 

Granted

 

 

 

Vested

 

(51,175

)

7.60

 

Forfeited

 

(940

)

5.00

 

Outstanding at June 30, 2009

 

539,560

 

$

7.23

 

 

Unrecognized pre-tax stock-based compensation expense of $3.1 million related to restricted stock awards is expected to be recognized over the weighted average remaining service period of 1.9 years for restricted stock awards outstanding at June 30, 2009.

 

5.              Earnings Per Share

 

Net income per share is calculated by dividing net income by the weighted-average shares outstanding during the period. The diluted net income per share computation includes the effect of shares, which would be issuable upon the exercise of outstanding stock options and the vesting of restricted stock, reduced by the number of shares, which are assumed to be purchased by the Company from the resulting proceeds at the average market price during the period.

 

The following table sets forth the computation of basic and diluted average shares outstanding for the three and six months ended June 30, 2009 and 2008 (in millions):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net income attributable to Bruker Corporation, as reported

 

$

12.9

 

$

21.7

 

$

21.3

 

$

20.9

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding-basic

 

163.3

 

162.4

 

163.3

 

162.4

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options and restricted stock

 

1.4

 

3.1

 

1.2

 

2.9

 

Weighted average shares outstanding - diluted

 

164.7

 

165.5

 

164.5

 

165.3

 

 

 

 

 

 

 

 

 

 

 

Net income per common share attributable to Bruker Corporation shareholders - basic and diluted

 

$

0.08

 

$

0.13

 

$

0.13

 

$

0.13

 

 

Stock options to purchase approximately 3.3 million shares and 0.4 million shares were excluded from the computation of diluted earnings per share in the three months ended June 30, 2009 and June 30, 2008, respectively, and approximately 3.5 million shares and 0.3 million shares were excluded from the computation of diluted earnings per share in the six months ended June 30, 2009 and June 30, 2008, respectively, because the exercise price of the stock options exceeded the average market price of the Company’s common stock and, as a result, would have had an anti-dilutive effect.

 

6.              Fair Value of Financial Instruments

 

The Company follows SFAS No. 157, Fair Value Measurements, which establishes a three-level valuation hierarchy for measuring fair value and expands financial statement disclosures about fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s characterization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:

 

Level 1:    Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in

 

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active markets.

 

Level 2:    Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

Level 3:    Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The Company measures the following financial assets and liabilities at fair value on a recurring basis. The fair value of these financial assets and liabilities was determined using the following inputs at June 30, 2009 (in millions):

 

 

 

Total

 

Quoted Prices in
Active Markets
Available (Level 1)

 

Significant Other
Observable
Inputs (Level 2)

 

Significant
Unobservable
Inputs (Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

59.3

 

$

59.3

 

$

 

$

 

Restricted cash

 

1.7

 

1.7

 

 

 

Long-term restricted cash

 

2.1

 

2.1

 

 

 

Total assets recorded at fair value

 

$

63.1

 

$

63.1

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap

 

$

3.7

 

$

 

$

3.7

 

$

 

Embedded derivatives in purchase and delivery contracts

 

1.6

 

 

1.6

 

 

Total liabilities recorded at fair value

 

$

5.3

 

$

 

$

5.3

 

$

 

 

The Company’s financial instruments consist primarily of cash equivalents, restricted cash, accounts receivable, short-term borrowings, accounts payable and long-term debt. The carrying amounts of the Company’s cash equivalents, restricted cash, accounts receivable, short-term borrowings and accounts payable approximate fair value due to their short-term nature. The Company’s long-term debt consists primarily of variable rate arrangements with interest rates that reset every three months and, as a result, reflect current interest rates. Consequently, the carrying value of the Company’s long-term debt approximates fair value.

 

7.              Inventories

 

Inventories consisted of the following as of June 30, 2009 and December 31, 2008 (in millions):

 

 

 

June 30, 2009

 

December 31,
2008

 

Raw materials

 

$

121.4

 

$

115.8

 

Work-in-process

 

136.2

 

129.6

 

Demonstration units

 

40.1

 

36.7

 

Finished goods

 

138.7

 

143.0

 

Inventories

 

$

436.4

 

$

425.1

 

 

The Company reduces the carrying value of its demonstration inventories for differences between its cost and estimated net realizable value through a charge to cost of revenue that is based on a number of factors including, the age of the unit, the physical condition of the unit and an assessment of technological obsolescence. Amounts recorded in cost of product revenue related to the write-down of demonstration units to net realizable value were $6.1 million and $6.4 million for the three months ended June 30, 2009 and 2008, respectively, and $11.9 million and $12.7 million for the six months ended June 30, 2009 and 2008, respectively.

 

Finished goods include in-transit systems that have been shipped to the Company’s customers but not yet installed and accepted by the customer. As of June 30, 2009 and December 31, 2008, inventory-in-transit was $85.2 million and $91.6 million, respectively.

 

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8.              Goodwill and Other Intangible Assets

 

The following table sets forth the changes in the carrying amount of goodwill as of June 30, 2009 (in millions):

 

Balance at December 31, 2008

 

$

46.4

 

Goodwill acquired during the period

 

0.3

 

Foreign currency impact

 

0.2

 

Balance at June 30, 2009

 

$

46.9

 

 

The Company accounts for goodwill and other intangible assets in accordance with SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives not be amortized. Instead, these assets are tested for impairment on a reporting unit basis annually, or on an interim basis when events or changes in circumstances warrant. The Company performed its annual test for impairment as of December 31, 2008 and determined that goodwill and other intangible assets were not impaired at that time. The Company did not identify any indicators of impairment during the three and six month periods ended June 30, 2009.

 

The following is a summary of other intangible assets subject to amortization at June 30, 2009 and December 31, 2008 (in millions):

 

 

 

June 30, 2009

 

December 31, 2008

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Existing technology and related patents

 

$

14.1

 

$

(9.9

)

$

4.2

 

$

14.1

 

$

(9.2

)

$

4.9

 

Customer relationships

 

1.6

 

(0.8

)

0.8

 

1.6

 

(0.6

)

1.0

 

Trade names

 

0.4

 

(0.3

)

0.1

 

0.4

 

(0.3

)

0.1

 

Total amortizable intangible assets

 

$

16.1

 

$

(11.0

)

$

5.1

 

$

16.1

 

$

(10.1

)

$

6.0

 

 

For the three months ended June 30, 2009 and 2008, the Company recorded amortization expense of $0.5 million and $0.3 million, respectively, related to intangible assets subject to amortization. For the six months ended June 30, 2009 and 2008, the Company recorded amortization expense of $0.9 million and $1.3 million, respectively, related to intangible assets subject to amortization.

 

The estimated future amortization expense related to other intangible assets is as follows (in millions):

 

2009 (a)

 

$

0.9

 

2010

 

1.7

 

2011

 

1.0

 

2012

 

0.4

 

2013

 

0.4

 

Thereafter

 

0.7

 

Total

 

$

5.1

 

 


(a) Amount represents estimated amortization expense for the remaining six months ending December 31, 2009.

 

9.              Debt

 

At June 30, 2009 and December 31, 2008, the Company’s debt obligations consisted of the following (in millions):

 

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June 30,
2009

 

December 31,
2008

 

US Dollar term loan under the Credit Agreement

 

$

138.8

 

$

144.4

 

 

 

 

 

 

 

US Dollar revolving loan under the Credit Agreement

 

22.3

 

35.6

 

 

 

 

 

 

 

Euro mortgage loan at six month European Interbank Offered Rate plus 1.00%, 2.7% at June 30, 2009 collateralized by a building of Bruker AXS GmbH, biannual principal and interest payments due and payable through 2012

 

2.0

 

2.2

 

 

 

 

 

 

 

Euro bank loans at fixed rates of 4.65% and 8.01%, respectively, collateralized by accounts receivable of certain subsidiaries of Bruker AXS, biannual principal payments and quarterly interest payments due and payable through 2013

 

0.3

 

0.3

 

 

 

 

 

 

 

Euro bank loans at fixed rate of 2.95%, collateralized by land and buildings of Bruker Daltonik GmbH, quarterly principal payments and monthly interest payments due and payable through 2010

 

0.6

 

1.0

 

 

 

 

 

 

 

Euro bank loans at fixed rate of 5.01%, collateralized by land and buildings of Bruker Optik GmbH, biannual principal payments and monthly interest payments due and payable through 2013

 

1.2

 

10.7

 

 

 

 

 

 

 

Japanese Yen bank loan at fixed rate of 2.03%, uncollateralized, quarterly principal and interest payments due and payable through 2011

 

 

1.6

 

 

 

 

 

 

 

Capital lease obligations

 

4.9

 

5.3

 

Total long-term debt

 

170.1

 

201.1

 

Current portion of long-term debt

 

(42.5

)

(18.3

)

Total long-term debt, less current portion

 

$

127.6

 

$

182.8

 

 

In connection with the acquisition of Bruker BioSpin, the Company entered into a credit agreement with a syndication of lenders (the “Credit Agreement”), which provides for a revolving credit line with a maximum commitment of $230.0 million and a term facility of $150.0 million. The outstanding principal and interest under the term loan is payable in quarterly installments through December 2012. Borrowings under the Credit Agreement bear interest, at the Company’s option, at either (i) the higher of the prime rate or the federal funds rate plus 0.50%, or (ii) adjusted LIBOR, plus margins ranging from 0.40% to 1.25% and a facility fee ranging from 0.10% to 0.20%. As of June 30, 2009, the weighted average interest rate of borrowings under the term facility of the Credit Agreement was approximately 2.8%.

 

Borrowings under the Credit Agreement are secured by the pledge to the banks of 100% of the capital stock of each of the Company’s wholly-owned domestic subsidiaries and 65% of the capital stock of certain of the Company’s direct or indirect wholly-owned foreign subsidiaries. The Credit Agreement also requires the Company to maintain certain financial ratios related to maximum leverage and minimum interest coverage, as defined in the Credit Agreement. In addition to the financial ratios, the Credit Agreement restricts, among other things, the Company’s ability to do the following: make certain payments; incur additional debt; incur certain liens; make certain investments, including derivative agreements; merge, consolidate, sell or transfer all or substantially all of the Company’s assets; and enter into certain transactions with affiliates.

 

In addition, at June 30, 2009 and December 31, 2008, the Company had the following amounts outstanding

 

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under revolving loan arrangements (in millions):

 

 

 

June 30,
2009

 

December 31,
2008

 

Euro revolving loans under the Credit Agreement

 

$

 

$

16.5

 

Other revolving loans

 

0.6

 

6.2

 

Total short-term borrowings

 

$

0.6

 

$

22.7

 

 

The following is a summary of the maximum commitments and net amounts available to the Company under revolving loans as of June 30, 2009 (in millions):

 

 

 

Weighted
Average
Interest Rate

 

Total Amount
Committed by
Lenders

 

Outstanding
Borrowings

 

Outstanding
Letters of
Credit

 

Total Amount
Available

 

Credit Agreement

 

0.8

%

$

230.0

 

$

22.3

 

$

1.4

 

$

206.3

 

Other revolving loans

 

4.9

%

66.4

 

0.6

 

52.3

 

13.5

 

Total revolving loans

 

0.9

%

$

296.4

 

$

22.9

 

$

53.7

 

$

219.8

 

 

Other revolving loans are with various financial institutions primarily in Germany, Japan and France. The Company’s other revolving lines of credit typically are due upon demand with interest payable monthly. Certain of these lines of credit are unsecured while others are secured by the accounts receivable and inventory of the related subsidiary.

 

10.       Derivative Instruments and Hedging Activities

 

The Company accounts for derivative financial instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, (“SFAS No. 133”) as amended. All derivatives, whether designated as hedging relations or not, are recorded on the unaudited condensed consolidated balance sheets at fair value. The accounting for changes in fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, the Company must designate the hedging instrument, based on the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.

 

A fair value hedge is a derivative instrument designated for the purpose of hedging the exposure of changes in fair value of an asset or a liability resulting from a particular risk. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are both recognized in the same caption in the unaudited condensed consolidated statements of operations. A cash flow hedge is a derivative instrument designated for the purpose of hedging the exposure to variability in future cash flows resulting from a particular risk. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in accumulated other comprehensive income and are recognized in the results of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in the results of operations. A hedge of a net investment in a foreign operation is designated for the purpose of hedging the exposure of changes in value of investments in foreign subsidiaries. If the derivative is designated as a hedge of a net investment in a foreign operation, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income as a part of the currency translation adjustment. Ineffective portions of net investment hedges are recognized in the results of operations. For derivative instruments not designated as hedging instruments, changes in fair value are recognized in the results of operations in the current period.

 

The Company is exposed to certain market risks associated with its ongoing business operations. The primary risks that are managed by using derivative instruments are associated with changes in interest rates and foreign exchange rates.

 

The Company’s exposure to interest rate risk relates primarily to outstanding variable-rate debt and adverse movements in the related short-term market rates. The most significant component of the Company’s interest rate

 

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risk relates to the amounts outstanding under the Credit Agreement. In April 2008, the Company entered into an interest rate swap arrangement to manage its exposure to interest rate movements and the related effect on its variable rate debt. Under this interest rate swap arrangement, the Company pays a fixed rate of approximately 3.8% and receives a variable rate based on three month LIBOR. The interest rate swap agreement utilized by the Company effectively modifies the Company’s exposure to interest rate risk by converting a portion of the Company’s variable rate debt to a fixed rate for the term of the Credit Agreement. The initial notional amount of this interest rate swap was $90.0 million and it amortizes in proportion to the term debt component of the Credit Agreement through December 2012. At June 30, 2009, the notional amount of this interest rate swap was $83.3 million. The Company concluded that this swap met the criteria to qualify as an effective hedge of the variability of cash flows of the interest payments and accounts for the hedge as a cash flow hedge under SFAS No. 133. Accordingly, the Company reflects changes in the fair value of this interest rate swap in accumulated other comprehensive income, a component of shareholders’ equity. The Company expects $2.4 million of the accumulated loss to be reclassified into earnings over the next twelve months.

 

The Company enters into contracts for the purchase of goods and the sale of the Company’s products that are denominated in currencies other than the functional currency of the parties to the transaction. In accordance with SFAS No. 133, the Company accounts for these transactions separately, valuing the “embedded derivative” component of these contracts. At June 30, 2009, contracts denominated in currencies other than the functional currency of the transacting parties amounted to $43.2 million for the delivery of products and $3.9 million for the purchase of products. At December 31, 2008, contracts denominated in currencies other than the functional currency of the transacting parties amounted to $44.2 million for the delivery of products and $5.4 million for the purchase of products.

 

The fair values of derivative instruments as of June 30, 2009 and December 31, 2008 are as follows (in millions):

 

 

 

June 30,
2009

 

December 31,
2008

 

Derivative liabilities:

 

 

 

 

 

Derivative liabilities designated as hedging instruments under SFAS No. 133:

 

 

 

 

 

Interest rate swap contract

 

$

3.7

 

$

4.8

 

 

 

 

 

 

 

Derivative liabilities not designated as hedging instruments under SFAS No. 133:

 

 

 

 

 

Embedded derivatives

 

1.6

 

2.2

 

Total derivative liabilities

 

$

5.3

 

$

7.0

 

 

Derivative liabilities are recorded in other current liabilities in the unaudited condensed consolidated balance sheets.

 

The gain recognized in other comprehensive income related to the effective portion of derivative instruments designated as hedging instruments for the three and six months ended June 30, 2009 and 2008 are as follows (in millions):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Interest rate swap contract

 

$

0.5

 

$

0.1

 

$

0.1

 

$

0.1

 

 

The losses reclassified from accumulated other comprehensive income to net income related to derivative instruments designated as hedging instruments for the three and six months ended June 30, 2009 and 2008 are as follows (in millions):

 

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Table of Contents

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Interest rate swap contract

 

$

(0.6

)

$

(0.1

)

$

(1.1

)

$

(0.1

)

 

The Company did not recognize any amounts related to ineffectiveness in the consolidated statements of operations during the three or six months ended June 30, 2009 and 2008.

 

The impact of changes in the fair value of derivative instruments not designated as hedging instruments on net income are as follows (in millions):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Foreign exchange contracts

 

$

(0.3

)

$

(0.3

)

$

 

$

(0.6

)

Embedded derivatives

 

(1.0

)

1.3

 

0.6

 

 

Income (expense), net

 

$

(1.3

)

$

1.0

 

$

0.6

 

$

(0.6

)

 

The amounts recorded in the unaudited condensed consolidated statements of operations related to derivative instruments not designated as hedging instruments are recorded in interest and other income (expense), net.

 

11.       Restructuring Activities

 

In the fourth quarter of 2008, the Company recorded restructuring charges of $2.3 million, which consisted primarily of severance costs associated with a restructuring of certain operations in the Netherlands (the “Netherlands Program”). The restructuring charges associated with the Netherlands Program were allocated to the Scientific Instruments segment. Approximately $2.2 million of the restructuring charges relate to an involuntary severance program under which approximately 30 employees are expected to leave the Company and the balance relates to exit costs associated with terminating certain leases. In the second quarter of 2009, the Company recorded an additional $0.3 million of restructuring charges related to the involuntary severance component of the Netherlands Program. The impact of the Netherlands Program reduced the number of employees in sales and marketing and research and development and consolidates the selling and developments efforts of the Company’s single crystal diffraction products. The Company does not expect to incur any additional costs related to the Netherlands Program and expects to have made all of the severance payments by the end of 2009. The liability for restructuring charges is recorded in other current liabilities in the unaudited condensed consolidated balance sheets. The reserves related to this program are as follows (in millions):

 

 

 

Total

 

Severance

 

Exit Costs

 

Balance at December 31, 2008

 

$

2.3

 

$

2.2

 

$

0.1

 

Restructuring charges

 

0.3

 

0.3

 

 

Cash payments

 

(1.9

)

(1.8

)

(0.1

)

Balance at June 30, 2009

 

$

0.7

 

$

0.7

 

$

 

 

12.       Impairment Charges

 

In the second quarter of 2009, the Company recorded an impairment charge of $0.7 million, which consisted of certain fixed assets used in the production of certain superconducting wire. The impairment loss was recorded because the Company determined that the carrying value of the assets exceeded their fair value based on the estimated undiscounted operating cash flows generated by those assets. The impairment charge was allocated to the Energy and Supercon Technologies segment and has been recorded as a component of acquisition-related charges in the unaudited condensed consolidated statements of operations.

 

13.       Employee Benefit Plans

 

Substantially all of the Company’s employees in Switzerland, France and Japan, as well as certain employees in Germany, are covered by Company-sponsored defined benefit pension plans. Retirement benefits are generally

 

14



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earned based on years of service and compensation during active employment. Eligibility is generally determined in accordance with local statutory requirements; however, the level of benefits and terms of vesting varies among plans.

 

The net periodic pension cost consists of the following components for the three and six months ended June 30, 2009 and 2008 (in millions):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Components of net periodic pension costs:

 

 

 

 

 

 

 

 

 

Service cost

 

$

1.1

 

$

1.1

 

$

2.0

 

$

2.1

 

Interest cost

 

1.0

 

1.2

 

2.0

 

2.1

 

Expected return on plan assets

 

(1.0

)

(1.0

)

(1.9

)

(2.0

)

Net periodic benefit costs

 

$

1.1

 

$

1.3

 

$

2.1

 

$

2.2

 

 

The Company made contributions of $1.2 million to its defined benefit plans during the six months ended June 30, 2009 and estimates contributions of $1.2 million will be made during the remainder of 2009.

 

14.       Interest and Other Income (Expense), Net

 

The components of interest and other income (expense), net, were as follows for the three and six months ended June 30, 2009 and 2008 (in millions):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Interest income

 

$

0.4

 

$

1.9

 

$

0.8

 

$

3.6

 

Interest expense

 

(2.1

)

(3.8

)

(4.4

)

(5.7

)

Exchange gains (losses) on foreign currency transactions

 

(0.7

)

3.3

 

0.6

 

(9.0

)

Other

 

(0.5

)

2.2

 

0.2

 

2.5

 

Interest and other income (expense), net

 

$

(2.9

)

$

3.6

 

$

(2.8

)

$

(8.6

)

 

15.       Provision for Income Taxes

 

The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”). SFAS No. 109 requires the asset and liability approach to account for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities, calculated using enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return. The Company records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized.

 

In addition, the Company accounts for uncertain tax positions in accordance with the provisions of FASB Interpretation No. 48,  Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN No. 48”). Among other things, FIN No. 48 provides guidance to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing a minimum recognition threshold, which an income tax position must achieve before being recognized in the financial statements.

 

The income tax provision for the three months ended June 30, 2009 was $4.6 million compared to an income tax provision of $10.3 million for the three months ended June 30, 2008, representing effective tax rates of 26.6% and 32.2%, respectively. The income tax provision for the six months ended June 30, 2009 was $10.4 million compared to an income tax provision of $14.5 million for the six months ended June 30, 2008, representing effective tax rates of 32.8% and 40.7%, respectively.

 

The Company’s effective tax rate generally reflects the tax provision (benefit) for non-U.S. entities only, since no benefit was recognized for cumulative losses incurred in the U.S. A full valuation allowance will be maintained for U.S. net operating losses and tax credits until evidence exists that it is more likely than not that the loss carryforward and credit amounts will be utilized to offset U.S. taxable income. The Company’s tax rate may change

 

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over time as the amount or mix of income and taxes outside the U.S. changes. The effective tax rate is calculated using projected annual pre-tax income or loss and is affected by research and development tax credits, the expected level of other tax benefits, the impact of changes to the valuation allowance, and changes in the mix of the Company’s pre-tax income and losses among jurisdictions with varying statutory tax rates and credits.

 

The Company has unrecognized tax benefits of approximately $21.8 million as of June 30, 2009, of which $12.1 million, if recognized, would result in a reduction of the Company’s effective tax rate. The Company recognizes penalties and interest related to unrecognized tax benefits in the provision for income taxes. As of June 30, 2009 and December 31, 2008, approximately $3.4 million and $3.0 million, respectively, of accrued interest and penalties related to uncertain tax positions was included in other current liabilities on the unaudited condensed consolidated balance sheets. Penalties and interest related to unrecognized tax benefits in the provision for income taxes of $0.2 million and $0.2 million were recorded during the three months ended June 30, 2009 and 2008, respectively, and $0.4 million and $0.6 million was recorded during the six months ended June 30, 2009 and 2008, respectively.

 

The Company files returns in many foreign and state jurisdictions with varying statutes of limitations, but considers its significant tax jurisdictions to include the United States, Germany and Switzerland. The tax years 2003 to 2008 are open tax years in these major taxing jurisdictions. One of the Company’s Swiss entities is currently being audited for the tax years 2003 through 2006 and the audit is expected to be completed during 2009. In addition, all of the Company’s German subsidiaries are under tax audit for the years 2003 through 2008. The Company cannot reasonably predict the timing or outcome of these audits.

 

16.       Comprehensive Income (Loss)

 

Comprehensive income refers to revenues, expenses, gains and losses that under GAAP are included in other comprehensive income, but excluded from net income as these amounts are recorded directly as an adjustment to shareholders’ equity, net of tax. The following is a summary of comprehensive income (loss) for the three and six months ended June 30, 2009 and 2008 (in millions):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Consolidated net income

 

$

12.7

 

$

21.7

 

$

21.3

 

$

21.1

 

Foreign currency translation adjustments

 

22.7

 

(3.9

)

(3.7

)

35.2

 

Unrealized gains on interest rate swap:

 

 

 

 

 

 

 

 

 

Unrealized holding gains arising during the period

 

0.5

 

0.1

 

0.1

 

0.1

 

Reclassification adjustments for settlements included in the determination of net income

 

0.6

 

0.1

 

1.1

 

0.1

 

Unrealized losses on available for sale securities

 

 

 

 

 

 

 

 

 

Unrealized holding losses arising during the period

 

 

(0.1

)

 

(0.1

)

Reclassification adjustments for settlements included in the determination of net income

 

 

(1.3

)

 

(1.3

)

Pension liability adjustments

 

 

0.1

 

1.0

 

(0.3

)

Total comprehensive income

 

36.5

 

 

16.7

 

19.8

 

54.8

 

Less: Comprehensive income (loss) attributable to noncontrolling interests

 

(0.2

)

 

 

0.2

 

Comprehensive income attributable to Bruker Corporation

 

$

36.7

 

$

16.7

 

$

19.8

 

$

54.6

 

 

17. Noncontrolling Interests

 

Noncontrolling interests represents the minority shareholders’ proportionate share of the net income recorded by the Company’s four majority-owned indirect subsidiaries, Bruker Baltic Ltd., InCoaTec GmbH and Perch Solutions OY, which are included in the Scientific Instruments segment, and RI Research Instruments GmbH which is included in the Energy and Supercon Technologies segment. Net income (loss) attributable to noncontrolling interests for the three months ended June 30, 2009 and June 30, 2008 was $(0.2) million and $0.0 million, respectively. Net income attributable to noncontrolling interests for the six months ended June 30, 2009 and June 30,

 

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2008 was $0.0 million and $0.2 million, respectively. There were no transfers to or from the noncontrolling interests during the six months ended June 30, 2009 or June 30, 2008.

 

18.       Commitments and Contingencies

 

Legal

 

Lawsuits, claims and proceedings of a nature considered normal to its businesses may be pending from time to time against the Company. The Company believes the outcome of these proceedings, if any, will not have a material impact on the Company’s financial position or results of operations. As of June 30, 2009 and December 31, 2008, no accruals have been recorded for such potential contingencies.

 

Letters of Credit and Guarantees

 

At June 30, 2009 and December 31, 2008, the Company had bank guarantees of $53.7 million and $62.1 million, respectively, for its customer advances. These arrangements guarantee the refund of advance payments received from customers in the event that the merchandise is not delivered in compliance with the terms of the contract. Certain of these guarantees affect the availability of the Company’s lines of credit.

 

19.       Business Segment Information

 

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments in annual financial statements of public business enterprises. It also establishes standards for related disclosures about products and service, geographic areas and major customers. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker for the purpose of allocating resources and assessing performance.

 

The Company has determined that it has five operating segments, representing each of its five divisions: Bruker AXS, Bruker BioSpin, Bruker Daltonics, Bruker Optics and Bruker Energy and Supercon Technologies. Bruker AXS is in the business of manufacturing and distributing advanced X-ray and spark-OES instrumentation used in non-destructive molecular and elemental analysis. Bruker BioSpin is in the business of manufacturing and distributing enabling life science tools based on magnetic resonance technology. Bruker Daltonics is in the business of manufacturing and distributing mass spectrometry instruments that can be integrated and used along with other analytical instruments and our CBRN detection products. Bruker Optics is in the business of manufacturing and distributing research, analytical and process analysis instruments and solutions based on infrared and Raman molecular spectroscopy technologies. Bruker Energy and Supercon Technologies is in the business of developing and producing low temperature superconductor and high temperature superconductor wires for use in advanced magnet technology and energy applications as well as linear accelerators, accelerator cavities, insertion devices, superconducting fault current limiters, other accelerator components and specialty superconducting magnets for physics and energy research and a variety of other scientific applications.

 

The Company has combined the Bruker AXS, Bruker BioSpin, Bruker Daltonics and Bruker Optics operating segments into the Scientific Instruments reporting segment because each has similar economic characteristics, product processes and services, types and classes of customers, methods of distribution and regulatory environments.

 

Selected business segment information for the three and six months ended June 30, 2009 and 2008 is presented below (in millions):

 

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Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Revenue:

 

 

 

 

 

 

 

 

 

Scientific Instruments

 

$

241.3

 

$

303.0

 

$

464.9

 

$

533.5

 

Energy and Superconducting Technologies

 

13.7

 

12.5

 

21.8

 

22.4

 

Eliminations (a)

 

(2.5

)

(4.0

)

(3.7

)

(6.1

)

Total revenue

 

$

252.5

 

$

311.5

 

$

483.0

 

$

549.8

 

 

 

 

 

 

 

 

 

 

 

Operating Income:

 

 

 

 

 

 

 

 

 

Scientific Instruments

 

$

20.4

 

$

29.5

 

$

36.5

 

$

47.7

 

Energy and Superconducting Technologies

 

(0.7

)

(1.3

)

(3.1

)

(3.7

)

Corporate, eliminations and other (b)

 

0.5

 

0.2

 

1.1

 

0.2

 

Total operating income

 

$

20.2

 

$

28.4

 

$

34.5

 

$

44.2

 

 


(a) Represents product and service revenue between reportable segments.

(b) Represents corporate costs and eliminations not allocated to the reportable segments.

 

Total assets by segment as of June 30, 2009 and December 31, 2008 are as follows (in millions):

 

 

 

June 30,
2009

 

December 31,
2008

 

Scientific Instruments

 

$

1,041.0

 

$

1,081.5

 

Energy and Superconducting Technologies

 

56.3

 

39.4

 

Corporate, eliminations and other (a)

 

(9.8

)

(4.6

)

Total

 

$

1,087.5

 

$

1,116.3

 

 


(a) Represents corporate assets not allocated to the reportable segments and eliminations of intercompany transactions.

 

20.       Recent Accounting Pronouncements

 

In June 2009, the FASB issued SFAS No. 168, The FASB Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement 162 (“SFAS No. 168”). SFAS No. 168 is effective for fiscal years and interim periods, ending after September 15, 2009. SFAS No. 168 is intended to improve financial reporting by identifying the FASB Accounting Standards Codification and rules and interpretive releases of the SEC under authority of federal securities laws as the sole sources of authoritative accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for SEC registrants. The adoption of SFAS No. 168 is not expected to have a material impact on the Company’s results of operations, financial position or cash flows.

 

In December 2008, the FASB issued Staff Position No. 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (“FSP 132(R)-1”). FSP 132(R)-1 requires detailed disclosures regarding the investment strategies, fair value measurements, and concentrations of risk of plan assets of a defined benefit pension or other postretirement plan. FSP 132(R)-1 is effective for fiscal years ending after December 15, 2009 and will be applied prospectively. The Company is currently assessing the impact that FSP 132(R)-1 will have on its results of operations and financial position.

 

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ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of our financial condition and results of operations should be read in conjunction with our interim unaudited condensed consolidated financial statements and the notes to those statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q, and in conjunction with the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2008.

 

Statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations, which express that we “believe,” “anticipate,” “plan,” “expect,” “seek,” “estimate,” or “should,” as well as other statements, which are not historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. Actual events or results may differ materially from those set forth in forward-looking statements. Certain factors that might cause such a difference are discussed in “Factors Affecting Our Business, Operating Results and Financial Condition” set forth in our Annual Report on Form 10-K for the year ended December 31, 2008.

 

OVERVIEW

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, describes the principal factors affecting the results of our operations, financial condition and changes in financial condition, as well as our critical accounting policies and estimates. Our MD&A is organized as follows:

 

·                  Executive overview. This section provides a general description and history of our business, a brief discussion of our reportable segments, significant recent developments in our business and other opportunities, challenges and risks that may impact our business in the future.

 

·                  Critical accounting policies. This section discusses the accounting estimates that are considered important to our financial position and results of operations and that require us to exercise subjective or complex judgments in their application.

 

·                  Results of operations. This section provides our analysis of the significant line items on our consolidated statement of operations for the three and six months ended June 30, 2009 compared to the three and six months ended June 30, 2008.

 

·                  Liquidity and capital resources. This section provides an analysis of our liquidity and cash flow and a discussion of our outstanding debt and commitments.

 

·                  Recent accounting pronouncements. This section provides information about new accounting standards that have been issued but for which adoption is not yet required.

 

EXECUTIVE OVERVIEW

 

Business Overview

 

Bruker Corporation and its wholly-owned subsidiaries design, manufacture, market and service proprietary life science and materials research systems based on our core technology platforms, including X-ray technologies, magnetic resonance technologies, mass spectrometry technologies, optical emission spectroscopy and infrared and Raman molecular spectroscopy technologies. We also manufacture and distribute a broad range of field analytical systems for chemical, biological, radiological and nuclear, or CBRN, detection. We also develop and manufacture low temperature and high temperature wires for use in advanced magnet technology and energy applications. We maintain major technical and manufacturing centers in Europe, North America and Japan and we have sales offices located throughout the world. Our corporate headquarters are located in Billerica, Massachusetts.

 

Our business strategy is to capitalize on our ability to innovate and generate above industry-average revenue performance, both organically and through acquisitions. Our growth strategy combined with anticipated

 

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improvements to our gross profit margins and increased leverage on our research and development, sales and marketing and distribution investments and general and administrative expenses is expected to enhance our operating margins and improve our earnings in the future.

 

On February 26, 2008, we completed our acquisition of Bruker BioSpin. Both the Company and Bruker BioSpin were majority owned by six affiliated shareholders prior to the acquisition. As a result, the acquisition of Bruker BioSpin is considered a combination of companies under common control, and has been accounted for at historical carrying values. Historical unaudited condensed consolidated balance sheets, statements of operations, statements of cash flows and notes to the consolidated financial statements have been restated by combining the historical consolidated financial statements of Bruker Corporation with those of Bruker BioSpin. Because the transaction was accounted for as an acquisition of businesses under common control, all one-time transaction costs were expensed as incurred.

 

With the addition of Bruker BioSpin, we enhanced our scientific instruments business and thus furthered our position as a leading supplier of life science and materials research systems. The technologies of Bruker BioSpin are particularly complementary to our accurate-mass electrospray time-of-flight mass spectrometers and our single-crystal diffraction X-ray spectrometers and have created revenue synergies and provided opportunities to supply customers with equipment packages that have a broader range of applications and value. The addition of Bruker BioSpin has also enhanced our distribution of scientific instruments in the Americas, Europe and Asia and our sales and service infrastructure.

 

We are organized into five operating segments, representing each of our five divisions: Bruker AXS, Bruker BioSpin, Bruker Daltonics, Bruker Optics and Bruker Energy and Supercon Technologies. Bruker AXS is in the business of manufacturing and distributing advanced X-ray and spark-OES instrumentation used in non-destructive molecular and elemental analysis. Bruker BioSpin is in the business of manufacturing and distributing enabling life science tools based on magnetic resonance technology. Bruker Daltonics is in the business of manufacturing and distributing mass spectrometry instruments that can be integrated and used along with other analytical instruments and our CBRN detection products. Bruker Optics is in the business of manufacturing and distributing research, analytical and process analysis instruments and solutions based on infrared and Raman molecular spectroscopy technologies. Bruker Energy and Supercon Technologies is in the business of developing and producing low temperature superconductor and high temperature superconductor wires for use in advanced magnet technology and energy applications as well as linear accelerators, accelerator cavities, insertion devices, superconducting fault current limiters, other accelerator components and specialty superconducting magnets for physics and energy research and a variety of other scientific applications.

 

We have combined the Bruker AXS, Bruker BioSpin, Bruker Daltonics and Bruker Optics operating segments into the Scientific Instruments reporting segment because each has similar economic characteristics, product processes and services, types and classes of customers, methods of distribution and regulatory environments. As such, management reports its results based on the following segments:

 

·                  Scientific Instruments. The operations of this segment include the design, manufacture and distribution of advanced instrumentation and automated solutions based on X-ray technology, spark-OES technology, magnetic resonance technology, mass spectrometry technology and infrared and Raman molecular spectroscopy technology. Typical customers of the Scientific Instruments segment include pharmaceutical, biotechnology, proteomics and molecular diagnostic companies, academic institutions, government agencies, semiconductor companies, chemical, cement, metals and petroleum companies, raw material manufacturers and food, beverage and agricultural companies.

 

·                  Energy and Supercon Technologies. The operations of this segment include development and production of low temperature superconductor and high temperature superconductor wires for use in advanced magnet technology and energy applications as well as electron and ion linear accelerators, superconducting and normal conducting accelerator cavities, insertion devices, superconducting fault current limiters, crystal growth magnets and other accelerator components for physics and energy research and a variety of other scientific applications.

 

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Financial Overview

 

For the three months ended June 30, 2009, our revenue decreased by $59.0 million, or 18.9%, to $252.5 million, compared to $311.5 million for the comparable period in 2008. Included in this change in revenue is a reduction of approximately $24.4 million from the impact of foreign exchange due to the strengthening of the U.S. Dollar versus the Euro and other foreign currencies. Excluding the effect of foreign exchange, revenue decreased by $34.6 million, or 11.1%. The decrease in revenue, excluding the effect of foreign exchange, is attributable to the Scientific Instruments segment and is related primarily to decreased sales volume of magnetic resonance systems and X-ray and spark-OES products. The decrease in revenue was offset, in part, by higher volumes of mass spectrometry systems. The mix of products sold in the Scientific Instruments segment as described above is consistent with the trend in revenue over the previous four quarters and continues to reflect lower demand from industrial customers partially offset by increased demand from academic and government customers. The Company attributes this trend in reduced sales to industrial customers as a function of the worldwide recession, while spending from academic and government customers has increased as a result of stimulus packages implemented by governments in various countries, including the United States, Germany and Japan.

 

For the six months ended June 30, 2009, our revenue decreased by $66.8 million, or 12.2%, to $483.0 million, compared to $549.8 million for the comparable period in 2008. Included in this change in revenue is a reduction of approximately $43.0 million from the impact of foreign exchange due to the strengthening of the U.S. Dollar versus the Euro and other foreign currencies. Excluding the effect of foreign exchange, revenue decreased by $23.8 million, or 4.4%. The decrease in revenue, excluding the effect of foreign exchange, is attributable to the Scientific Instruments segment and is related primarily to decreased sales volume of magnetic resonance systems and X-ray and spark-OES products. The decrease in revenue was offset, in part, by higher volumes of mass spectrometry systems.

 

Income from operations for the three months ended June 30, 2009 was $20.2 million, resulting in an operating margin of 8.0%, compared to income from operations of $28.4 million, resulting in an operating margin of 9.1%, for the comparable period in 2008. Income from operations for the three months ended June 30, 2009 decreased by $8.2 million as a result of lower gross profits partially offset by a decrease in operating expenses. Our gross profit margin as a percentage of revenue for the second quarter of 2009 was 44.0%, compared to 41.6% for the comparable period in 2008. Lower gross profits were driven by lower revenues, while the improvement in gross profit margins as a percentage of revenue is a function of product mix and reflects higher margins on newly introduced mass spectrometry products. Productivity improvements, the benefits of cost cutting initiatives and changes in foreign currency exchange rates also contributed to the improvement in gross profit margins as a percentage of revenue. The decrease in operating expenses is attributable to changes in foreign currency exchange rates and cost savings programs implemented in the second half of 2008.

 

Income from operations for the six months ended June 30, 2009 was $34.5 million, resulting in an operating margin of 7.1%, compared to income from operations of $44.2 million, resulting in an operating margin of 8.0%, for the comparable period in 2008. Operating margins in the first half of 2008 included $6.2 million of acquisition-related charges incurred in connection with the acquisition of Bruker BioSpin. Excluding the effect of these acquisition-related charges, income from operations decreased by $15.9 million as a result of lower gross profits partially offset by a decrease in operating expenses. Our gross profit margin as a percentage of revenue was 44.3% for the first half of 2009 and the comparable period in 2008. Lower gross profits were driven by lower revenues. The decrease in operating expenses is attributable to changes in foreign currency exchange rates and cost savings programs implemented in the second half of 2008.

 

During the six months ended June 30, 2009, we recorded net gains on foreign currency transactions of $0.6 million compared to net losses of $9.0 million for the comparable period in 2008. We incurred $12.2 million of foreign exchange losses in the first three months of 2008 that were driven by the re-measurement of certain foreign currency denominated assets, principally cash, inter-company receivables and a short-term inter-company loan into the functional currency of the affected entities. In the last twelve months, we have implemented programs designed to reduce our exposure to changes in foreign currency exchange rates and are considering additional actions, including a transactional hedging program.

 

We incurred approximately $4.4 million of interest expense during the six months ended June 30, 2009 compared to $5.7 million for the comparable period in 2008. Of the total interest expense incurred during the six months ended June 30, 2009, approximately $3.5 million related to a credit facility that we entered into during the

 

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first quarter of 2008. We initially borrowed $351.0 million under this credit facility in order to finance the acquisition of Bruker BioSpin. In the first half of 2009, we repaid approximately $34.6 million of the amounts outstanding under this credit agreement and from the inception of this credit agreement, we have reduced the net amount outstanding by approximately $190.0 million.

 

Our effective tax rate for the three months ended June 30, 2009 was 26.6%, compared to 32.2% for the comparable period in 2008. Our effective tax rate for the six months ended June 30, 2009 was 32.8%, compared to 40.7% for the comparable period in 2008. The change in our effective tax rate relates primarily to the amount and mix of income and taxes outside the U.S because we are not able to record a tax benefit on losses incurred in the U.S. However, in addition to the amount and mix of income and taxes outside the U.S., our income tax provision in the first quarter of 2008 was negatively impacted by acquisition-related charges and foreign exchange losses that did not result in significant tax benefits because they were incurred primarily either in the U.S. or in foreign locations with relatively low tax rates.

 

Our net income attributable to the shareholders of Bruker Corporation for the three months ended June 30, 2009 was $12.9 million, or $0.08 per diluted share, compared to $21.7 million, or $0.13 per diluted share, for the comparable period in 2008. Our net income attributable to the shareholders of Bruker Corporation for the six months ended June 30, 2009 was $21.3 million, or $0.13 per diluted share, compared to $20.9 million, or $0.13 per diluted share, for the comparable period in 2008.

 

CRITICAL ACCOUNTING POLICIES

 

This discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, income taxes, allowance for doubtful accounts, inventories, goodwill, other intangible assets and long-lived assets, warranty costs and derivative financial instruments. We base our estimates and judgments on historical experience, current market and economic conditions, industry trends and other assumptions that we believe are reasonable and form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.

 

We believe the following critical accounting policies to be both those most important to the portrayal of our financial position and results of operations and those that require the most subjective judgment.

 

Revenue recognition. We recognize revenue from system sales when persuasive evidence of an arrangement exists, the price is fixed or determinable, title and risk of loss has been transferred to the customer and collectibility of the resulting receivable is reasonably assured. Title and risk of loss generally are transferred to the customer upon receipt of a signed customer acceptance form for a system that has been shipped, installed, and for which the customer has been trained. As a result, the timing of customer acceptance or readiness could cause our reported revenues to differ materially from expectations. When products are sold through an independent distributor or a strategic distribution partner, who assumes responsibility for installation, we recognize the system sale when the product has been shipped and title and risk of loss have been transferred to the distributor. Our distributors do not have price protection rights or rights of return; however, our products are typically warranted to be free from defect for a period of one year. Revenue is deferred until cash is received when a significant portion of the fee is due over one year after delivery, installation and acceptance of a system. For arrangements with multiple elements, we recognize revenue for each element based on the fair value of the element, provided all other criteria for revenue recognition have been met. The fair value for each element provided in multiple element arrangements is typically determined by referencing historical sales prices when the element is sold separately. Changes in our ability to establish the fair value for each element in multiple element arrangements could affect the timing of revenue recognition. Revenue from accessories and parts is recognized upon shipment and service revenue is recognized as the services are performed. We also have contracts for which we apply the percentage-of-completion method for revenue recognition. Application of the percentage-of-completion method requires us to make reasonable estimates

 

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of the extent of progress toward completion of the contract and the total costs we will incur under the contract. Changes in our estimates could affect the timing of revenue recognition. Grant revenue is recognized when we complete the services required under the grant.

 

Income taxes. We estimate the degree to which tax assets and loss carryforwards will result in a benefit based on expected profitability by tax jurisdiction, and we provide a valuation allowance for tax assets and loss carryforwards that we believe will more likely than not go unused. If it becomes more likely than not that a tax asset or loss carryforward will be used for which a reserve has been provided, we reverse the related valuation allowance. If our actual future taxable income by tax jurisdiction differs from estimates, additional allowances or reversals of reserves may be necessary.

 

Allowance for doubtful accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to pay amounts due. If the financial condition of our customers were to deteriorate, reducing their ability to make payments, additional allowances would be required, resulting in a charge to operations.

 

Inventories. Inventories are stated at the lower of cost or market, with costs determined by the first-in, first-out method for a majority of subsidiaries and by average cost for certain international subsidiaries. We record provisions to account for excess and obsolete inventory to reflect the expected non-saleable or non-refundable inventory based on an evaluation of slow moving products. If ultimate usage or demand varies significantly from expected usage or demand, additional write-downs may be required, resulting in additional charges to operations.

 

Goodwill, other intangible assets and other long-lived assets. We evaluate whether goodwill and indefinite lived intangible assets are impaired annually and when events occur or circumstances change. Goodwill is impaired when the fair value of a reporting unit is less than its carrying amount. Fair value is determined using discounted future cash flows. We also review long-lived intangible assets and other assets when indication of potential impairment exists, such as a significant reduction in undiscounted cash flows associated with the assets. Should the fair value of our long-lived assets decline because of reduced operating performance, market declines, or other indicators of impairment, a charge to operations for impairment may be necessary.

 

Warranty costs. We normally provide a one year parts and labor warranty with the purchase of equipment. The anticipated cost for this warranty is accrued upon recognition of the sale based on historical warranty rates and our assumptions of future warranty claims. The warranty accrual is included as a current liability on the unaudited condensed consolidated balance sheets. Although our products undergo quality assurance and testing procedures throughout the production process, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Although our actual warranty costs have historically been consistent with expectations, to the extent warranty claim activity or costs associated with servicing those claims differ from our estimates, revisions to the warranty accrual may be required.

 

Derivative financial instruments. All derivative instruments are recorded as other assets or other liabilities at fair value, which is calculated as an estimate of the future cash flows, and subsequent changes in a derivative’s fair value are recognized in income, unless specific hedge accounting criteria are met. Changes in the fair value of a derivative that is highly effective and designated as a cash flow hedge are recognized in accumulated other comprehensive income until the forecasted transaction occurs or it becomes probable that the forecasted transaction will not occur. We perform an assessment at the inception of the hedge and on a quarterly basis thereafter, to determine whether our derivatives are highly effective in offsetting changes in the value of the hedged items. Any changes in the fair value resulting from hedge ineffectiveness are immediately recognized as income or expense.

 

RESULTS OF OPERATIONS

 

Three Months Ended June 30, 2009 Compared to the Three Months Ended June 30, 2008

 

Consolidated Results

 

The following table presents our results for the three months ended June 30, 2009 and 2008 (dollars in millions):

 

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Table of Contents

 

 

 

Three Months Ended
June 30,

 

 

 

2009

 

2008

 

Product revenue

 

$

 222.9

 

$

 280.3

 

Service revenue

 

28.3

 

30.2

 

Other revenue

 

1.3

 

1.0

 

Total revenue

 

252.5

 

311.5

 

 

 

 

 

 

 

Cost of product revenue

 

125.2

 

162.5

 

Cost of service revenue

 

16.1

 

19.4

 

Total cost of revenue

 

141.3

 

181.9

 

Gross profit

 

111.2

 

129.6

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Sales and marketing

 

43.9

 

47.1

 

General and administrative

 

17.0

 

17.2

 

Research and development

 

31.1

 

36.5

 

Acquisition-related charges (credits), net

 

(1.0

)

0.4

 

Total operating expenses

 

91.0

 

101.2

 

Operating income

 

20.2

 

28.4

 

 

 

 

 

 

 

Interest and other income (expense), net

 

(2.9

)

3.6

 

Income before income tax provision and noncontrolling interest in consolidated subsidiaries

 

17.3

 

32.0

 

Income tax provision

 

4.6

 

10.3

 

Consolidated net income

 

12.7

 

21.7

 

Less: net income (loss) attributable to noncontrolling interests

 

(0.2

)

 

Net income attributable to Bruker Corporation

 

$

 12.9

 

$

 21.7

 

 

 

 

 

 

 

Net income per common share attributable to Bruker Corporation shareholders - basic and diluted

 

$

 0.08

 

$

 0.13

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

Basic

 

163.3

 

162.4

 

Diluted

 

164.7

 

165.5

 

 

Revenue

 

Our revenue decreased by $59.0 million, or 18.9%, to $252.5 million for the three months ended June 30, 2009, compared to $311.5 million for the comparable period in 2008. Included in this change in revenue is approximately $24.4 million from the impact of foreign exchange. Excluding the effect of foreign exchange, revenue decreased by 11.1%. The decrease in revenue, excluding the effect of foreign exchange, is attributable to the Scientific Instruments segment and is related primarily to decreased sales volume of magnetic resonance systems and X-ray and spark-OES products. The decrease in revenue was offset, in part, by higher volumes of mass spectrometry systems. The mix of products sold in the Scientific Instruments segment is consistent with the trend in revenue over the previous four quarters and continues to reflect lower demand from industrial customers offset by increased demand from academic and government customers.

 

Cost of Revenue

 

Our cost of product and service revenue for the three months ended June 30, 2009, was $141.3 million, resulting

 

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in a gross profit margin of 44.0%, compared to cost of product and service revenue of $181.9 million, resulting in a gross profit margin of 41.6%, for the comparable period in 2008. Lower gross profits were driven by lower revenues, while the improvement in gross profit margins as a percentage of revenue is a function of product mix and reflects higher margins on newly introduced mass spectrometry products. Productivity improvements, the benefits of cost cutting initiatives and changes in foreign currency exchange rates also contributed to the improvement in gross profit margins as a percentage of revenue.

 

Sales and Marketing

 

Our sales and marketing expense for the three months ended June 30, 2009 decreased to $43.9 million, or 17.5% of product and service revenue, from $47.1 million, or 15.2% of product and service revenue, for the comparable period in 2008. The decrease in sales and marketing expense is attributable mainly to changes in foreign currency exchange rates, primarily the Euro. Additionally, we have started to realize the benefits from certain cost cutting initiatives, but the savings were partially offset by selling and marketing efforts associated with a number of recently introduced products.

 

General and Administrative

 

Our general and administrative expense for the three months ended June 30, 2009 was $17.0 million, or 6.8% of product and service revenue, and was essentially flat compared with general and administrative expense of $17.2 million, or 5.5% of product and service revenue, for the comparable period in 2008.

 

Research and Development

 

Our research and development expense for the three months ended June 30, 2009 decreased to $31.1 million, or 12.4% of product and service revenue, from $36.5 million, or 11.8% of product and service revenue, for the comparable period in 2008. The decrease in research and development expense is attributable mainly to changes in foreign currency exchange rates, primarily the Euro, as a majority of our research and development is performed in Europe. Additionally, we have started to realize the benefits from certain cost cutting initiatives, but the savings were partially offset by investments in a number of new products and applications scheduled to be released in the next six to twelve months.

 

Acquisition-Related Charges (Credits), Net

 

Acquisition-related credits of $(1.0) million in the second quarter of 2009 relate entirely to the Energy and Supercon Technologies segment and include a bargain purchase gain of $2.1 million recorded in connection with the acquisition of the RI business from Varian Medical Systems, Inc. offset, in part, by $0.4 million of transaction costs incurred in connection with the acquisition of the RI business and $0.7 million of impairment charges associated with certain fixed assets used in the production of certain superconducting wire.

 

Acquisition-related charges in the second quarter of 2008 relate entirely to the Scientific Instruments segment and consist of $0.4 million of transaction costs incurred in connection with the acquisition of Bruker BioSpin. The acquisition of Bruker BioSpin represented a combination of companies under common control due to a majority of ownership of both Bruker Corporation and Bruker BioSpin by the same individuals and, as a result, transaction costs were expensed as incurred.

 

Interest and Other Income (Expense), Net

 

Interest and other income (expense), net during the three months ended June 30, 2009 was $(2.9) million, compared to $3.6 million for the comparable period of 2008.

 

During the three months ended June 30, 2009, the major components within interest and other income (expense), net were net interest expense of $1.7 million and realized and unrealized losses on foreign currency transactions of $0.7 million. During the three months ended June 30, 2008, the major component within interest and other income (expense), net, was realized and unrealized losses on foreign currency transactions of $3.3 million.

 

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Income Tax Provision

 

Our effective tax rate generally reflects our tax provision for non-U.S. entities only since no benefit was recognized for losses incurred in the U.S. We will maintain a full valuation allowance for our U.S. net operating losses and tax credits until evidence exists that it is more likely than not that the loss carryforward and credit amounts will be utilized to offset U.S. taxable income. Our tax rate may change over time as the amount and mix of income and taxes outside the U.S. changes. The effective tax rate is calculated using our projected annual pre-tax income or loss and is affected by tax credits, the expected level of other tax benefits, and the impact of changes to the valuation allowance, as well as changes in the mix of our pre-tax income and losses among jurisdictions with varying statutory tax rates and credits.

 

The income tax provision for the three months ended June 30, 2009, was $4.6 million compared to an income tax provision of $10.3 million for the three months ended June 30, 2008, representing effective tax rates of 26.6% and 32.2%, respectively. The change in our effective tax rate relates primarily to the amount and mix of income and taxes outside the U.S.

 

Net Income Attributable to Noncontrolling Interests

 

Net income (loss) attributable to noncontrolling interests for the three months ended June 30, 2009 was $(0.2) million compared to $0.0 million for the comparable period of 2008. Net income attributable to noncontrolling interests represents the minority shareholders’ proportionate share of the net income recorded by four majority-owned indirect subsidiaries, Bruker Baltic Ltd., InCoaTec GmbH and Perch Solutions OY which are included in the Scientific Instruments segment, and RI Research Instruments GmbH which is included in the Energy and Supercon Technologies segment.

 

Net Income Attributable to Bruker Corporation

 

Our net income for the three months ended June 30, 2009, was $12.9 million, or $0.08 per diluted share, compared to $21.7 million, or $0.13 per diluted share for the comparable period in 2008.

 

Segment Results

 

Revenue

 

The following table presents revenue, change in revenue and revenue growth by reportable segment for the three months ended June 30, 2009 and 2008 (dollars in millions):

 

 

 

2009

 

2008

 

Dollar Change

 

Percentage
Change

 

Scientific Instruments

 

$

 241.3

 

$

 303.0

 

$

 (61.7

)

(20.4

)%

Energy and Superconducting Technologies

 

13.7

 

12.5

 

1.2

 

9.6

%

Eliminations (a)

 

(2.5

)

(4.0

)

1.5

 

 

 

 

 

$

 252.5

 

$

 311.5

 

$

 (59.0

)

(18.9

)%

 


(a) Represents product and service revenue between reportable segments.

 

Scientific Instruments Segment Revenues

 

Scientific Instruments segment revenue decreased by $61.7 million, or 20.4%, to $241.3 million for the three months ended June 30, 2009, compared to $303.0 million for the comparable period in 2008. Included in this change in revenue is approximately $22.4 million from the impact of foreign exchange. Excluding the effect of foreign exchange, revenue decreased by 13.0%. The decrease in revenue, excluding the effect of foreign exchange, is related primarily to decreased sales volume of magnetic resonance systems and X-ray and spark-OES products. The decrease in revenue was offset, in part, by higher volumes of mass spectrometry systems. The mix of products sold in the Scientific Instruments segment is consistent with the trend in revenue over the previous four quarters and continues to reflect lower demand from industrial customers offset by increased demand from

 

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academic and government customers.

 

System revenue and aftermarket revenue as a percentage of total Scientific Instruments segment revenue were as follows during the three months ended June 30, 2009 and 2008 (dollars in millions):

 

 

 

2009

 

2008

 

 

 

Revenue

 

Percentage of
Segment
Revenue

 

Revenue

 

Percentage of
Segment
Revenue

 

System revenue

 

$

 191.3

 

79.3

%

$

 249.6

 

82.4

%

Aftermarket revenue

 

50.0

 

20.7

%

53.4

 

17.6

%

Total revenue

 

$

 241.3

 

100.0

%

$

 303.0

 

100.0

%

 

System revenues in the Scientific Instruments segment include X-ray systems, nuclear magnetic resonance systems, magnetic resonance imaging systems, electron paramagnetic resonance systems, mass spectrometry systems, CBRN detection systems and molecular spectroscopy systems. Aftermarket revenues in the Scientific Instruments segment include accessory sales, consumables, training and services.

 

Energy and Supercon Technologies Segment Revenues

 

Energy and Supercon Technologies segment revenue increased by $1.2 million, or 9.6%, to $13.7 million for the three months ended June 30, 2009, compared to $12.5 million for the comparable period in 2008. Included in this change in revenue is a reduction of approximately $2.0 million from the impact of foreign exchange. Excluding the effect of foreign exchange, revenue increased by 25.6%. The increase in revenue, excluding the effect of foreign exchange, is attributable to the acquisition of the research instruments business of ACCEL Instruments GmbH from Varian Medical Systems, Inc., which contributed approximately $5.0 million of revenue in the second quarter of 2009.

 

System and wire revenue and aftermarket revenue as a percentage of total Energy and Supercon Technologies segment revenue were as follows during the three months ended June 30, 2009 and 2008 (dollars in millions):

 

 

 

2009

 

2008

 

 

 

Revenue

 

Percentage of
Segment
Revenue

 

Revenue

 

Percentage of
Segment
Revenue

 

System and wire revenue

 

$

 13.3

 

97.1

%

$

 11.5

 

92.0

%

Aftermarket revenue

 

0.4

 

2.9

%

1.0

 

8.0

%

Total revenue

 

$

 13.7

 

100.0

%

$

 12.5

 

100.0

%

 

System and wire revenues in the Energy and Supercon Technologies segment include low and high temperature superconducting wire and electron and ion linear accelerators, superconducting and normal conducting accelerator cavities, insertion devices, superconducting fault current limiters, other accelerator components and specialty superconducting magnets for physics and energy research and a variety of other scientific applications. Aftermarket revenues in the Energy and Supercon Technologies segment include services and accessory sales.

 

Income (Loss) from Operations

 

The following table presents income (loss) from operations and operating margins on revenue by reportable segment for the three months ended June 30, 2009 and 2008 (dollars in millions):

 

 

 

2009

 

2008

 

 

 

Operating
Income

 

Percentage of
Segment
Revenue

 

Operating
Income

 

Percentage of
Segment
Revenue

 

Scientific Instruments

 

$

 20.4

 

8.5

%

$

 29.5

 

9.7

%

Energy and Superconducting Technologies

 

(0.7

)

(5.1

)%

(1.3

)

(10.4

)%

Corporate, eliminations and other (a)

 

0.5

 

 

 

0.2

 

 

 

Total operating income

 

$

 20.2

 

8.0

%

$

 28.4

 

9.1

%

 


(a) Represents corporate costs and eliminations not allocated to the reportable segments

 

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Scientific Instruments segment income from operations for the three months ended June 30, 2009 was $20.4 million, resulting in an operating margin of 8.5%, compared to income from operations of $29.5 million, resulting in an operating margin of 9.7%, for the comparable period in 2008.

 

Income from operations in the Scientific Instruments segment decreased as a result of the lower revenues described above. The decrease in gross profit was offset, in part, by lower operating expenses. In the second quarter of 2009 our gross profit margin as a percentage of revenue increased to 45.4% compared to 42.1% for the comparable period in 2008. The improvement in gross profit margins as a percentage of revenue is a function of product mix and reflects higher margins on newly introduced mass spectrometry products. In addition, productivity improvements, the benefits of cost cutting initiatives and changes in foreign currency exchange rates also contributed to the improvement in gross profit margins as a percentage of revenue. The decrease in operating expenses is attributable to changes in foreign currency exchange rates and cost savings programs implemented in the second half of 2008.

 

Energy and Supercon Technologies segment loss from operations for the three months ended June 30, 2009 was $0.7 million, resulting in an operating margin of (5.1)%, compared to a loss from operations of $1.3 million, resulting in an operating margin of (10.4)%, for the comparable period in 2008.

 

Loss from operations in the Energy and Supercon Technologies segment in the second quarter of 2009 included a bargain purchase gain of $2.1 million recorded in connection with the acquisition of the RI business offset, in part, by $0.4 million of transaction costs incurred in connection with the acquisition of the RI business and $0.7 million of impairment charges associated with certain fixed assets used in the production of certain superconducting wire. Excluding the effect of these acquisition-related charges, loss from operations increased by $0.4 million for the three months ended June 30, 2009 compared to the comparable period in 2008. The increase in the loss from operations resulted from higher research and development costs.

 

Six Months Ended June 30, 2009 Compared to the Six Months Ended June 30, 2008

 

Consolidated Results

 

The following table presents our results for the six months ended June 30, 2009 and 2008 (dollars in millions):

 

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Six Months Ended
June 30,

 

 

 

2009

 

2008

 

Product revenue

 

$

 425.1

 

$

 488.6

 

Service revenue

 

55.2

 

58.9

 

Other revenue

 

2.7

 

2.3

 

Total revenue

 

483.0

 

549.8

 

 

 

 

 

 

 

Cost of product revenue

 

236.9

 

267.7

 

Cost of service revenue

 

32.2

 

38.5

 

Total cost of revenue

 

269.1

 

306.2

 

Gross profit

 

213.9

 

243.6

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Sales and marketing

 

86.5

 

91.5

 

General and administrative

 

33.3

 

34.0

 

Research and development

 

60.2

 

67.7

 

Acquisition-related charges (credits), net