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, 2008

 

o

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

 

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 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

 

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

 

As of August 5, 2008, there were 163,626,252 shares of the Registrant’s common stock outstanding.

 

 

 



Table of Contents

 

BRUKER CORPORATION

 

Quarterly Report on Form 10-Q

For the Quarter Ended June 30, 2008

 

Index

 

 

 

 

Page

Part I

 

FINANCIAL INFORMATION

1

Item 1:

 

Unaudited Condensed Consolidated Financial Statements

1

 

 

Unaudited Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007

1

 

 

Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007

2

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007

3

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

4

Item 2:

 

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

16

Item 3:

 

Quantitative and Qualitative Disclosures About Market Risk

32

Item 4:

 

Controls and Procedures

33

Part II

 

OTHER INFORMATION

35

Item 1:

 

Legal Proceedings

35

Item 1A:

 

Risk Factors

35

Item 2:

 

Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 3:

 

Defaults Upon Senior Securities

36

Item 4:

 

Submission of Matters to a Vote of Security Holders

36

Item 5:

 

Other Information

36

Item 6:

 

Exhibits

37

 

 

Signatures

38

 



Table of Contents

 

PART I

FINANCIAL INFORMATION

 

 

ITEM 1.

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

BRUKER CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

125,399

 

$

332,368

 

Short term investments and restricted cash

 

6,391

 

12,186

 

Accounts receivable, net

 

164,236

 

185,217

 

Inventories

 

487,503

 

447,688

 

Other current assets

 

75,697

 

57,238

 

Total current assets

 

859,226

 

1,034,697

 

Property, plant and equipment, net

 

236,321

 

207,588

 

Intangibles and other assets

 

75,895

 

69,346

 

Total assets

 

$

1,171,442

 

$

1,311,631

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term borrowings

 

$

66,431

 

$

35,591

 

Accounts payable

 

54,288

 

52,293

 

Customer advances

 

220,254

 

233,466

 

Other current liabilities

 

235,455

 

239,841

 

Total current liabilities

 

576,428

 

561,191

 

Long-term debt

 

175,719

 

8,605

 

Other long-term liabilities

 

109,713

 

105,445

 

Minority interest in consolidated subsidiaries

 

753

 

538

 

Commitments and contingencies (Note 16)

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

Preferred stock, $0.01 par value, 5,000,000 shares authorized, none issued or outstanding at June 30, 2008 or December 31, 2007

 

 

 

Common stock, $0.01 par value, 260,000,000 and 200,000,000 shares authorized, 163,636,184 and 163,251,890 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively

 

1,628

 

1,624

 

Treasury stock, at cost, 9,359 shares and 0 shares at June 30, 2008 and December 31, 2007, respectively

 

(109

)

 

Other shareholders’ equity

 

307,310

 

634,228

 

Total shareholders’ equity

 

308,829

 

635,852

 

Total liabilities and shareholders’ equity

 

$

1,171,442

 

$

1,311,631

 

 

The accompanying notes are an integral part of these statements.

 

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BRUKER CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Product revenue

 

$

278,849

 

$

210,177

 

$

485,884

 

$

391,786

 

Service revenue

 

31,733

 

27,570

 

61,690

 

52,757

 

Other revenue

 

883

 

595

 

2,327

 

1,335

 

Total revenue

 

311,465

 

238,342

 

549,901

 

445,878

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenue

 

161,931

 

120,810

 

266,832

 

217,459

 

Cost of service revenue

 

20,896

 

17,617

 

41,302

 

33,956

 

Total cost of revenue

 

182,827

 

138,427

 

308,134

 

251,415

 

Gross profit

 

128,638

 

99,915

 

241,767

 

194,463

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

46,151

 

37,029

 

89,544

 

72,491

 

General and administrative

 

17,178

 

13,442

 

33,982

 

26,855

 

Research and development

 

36,514

 

27,657

 

67,719

 

53,621

 

Acquisition related charges

 

360

 

 

6,153

 

 

Total operating expenses

 

100,203

 

78,128

 

197,398

 

152,967

 

Operating income

 

28,435

 

21,787

 

44,369

 

41,496

 

 

 

 

 

 

 

 

 

 

 

Interest and other income (expense), net

 

3,527

 

2,214

 

(8,662

)

2,964

 

Income before income tax provision and minority interest in consolidated subsidiaries

 

31,962

 

24,001

 

35,707

 

44,460

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

10,196

 

6,284

 

14,466

 

12,307

 

Income before minority interest in consolidated subsidiaries

 

21,766

 

17,717

 

21,241

 

32,153

 

Minority interest in consolidated subsidiaries

 

80

 

60

 

240

 

146

 

Net income

 

$

21,686

 

$

17,657

 

$

21,001

 

$

32,007

 

Net income per common share - basic and diluted

 

$

0.13

 

$

0.11

 

$

0.13

 

$

0.20

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

162,440

 

161,728

 

162,371

 

161,050

 

Diluted

 

165,438

 

164,343

 

165,308

 

163,731

 

 

The accompanying notes are an integral part of these statements.

 

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BRUKER CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2008

 

2007

 

Operating activities:

 

 

 

 

 

Net cash provided by operating activities

 

$

18,103

 

$

16,633

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(27,066

)

(13,023

)

Acquisitions, net of cash acquired

 

(2,056

)

(2,468

)

Payments in connection with the acquisition of Bruker BioSpin

 

(5,247

)

 

Purchase of short-term investments

 

 

(273

)

Proceeds from sale of short-term investments

 

9,798

 

 

Changes in restricted cash

 

(3,390

144

 

Net cash used in investing activities

 

(27,961

)

(15,620

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

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

 

15,096

 

(9,321

)

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

 

178,289

 

(5,856

)

Payments of deferred financing costs

 

(2,916

)

 

Proceeds from issuance of common stock

 

1,534

 

18,417

 

Repurchase of common stock

 

(109

)

(92

)

Deemed dividend in connection with the acquisition of Bruker BioSpin

 

(385,963

)

 

Cash payments to shareholders

 

(23,416

)

(37,641

)

Net cash used in financing activities

 

(217,485

(34,493

)

Effect of exchange rate changes on cash and cash equivalents

 

20,374

 

3,828

 

Net change in cash and cash equivalents

 

(206,969

)

(29,652

)

Cash and cash equivalents at beginning of period

 

332,368

 

311,240

 

Cash and cash equivalents at end of period

 

$

125,399

 

$

281,588

 

 

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, and optical emission spectroscopy and infrared and Raman molecular spectroscopy technology. The Company also sells a broad range of field analytical systems for chemical, biological, radiological and nuclear (CBRN) detection. 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 and its wholly-owned subsidiaries. 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, 2008 and 2007 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.

 

On February 26, 2008, the Company completed the acquisition of all of the Bruker BioSpin Group (“Bruker BioSpin”). Both the Company and Bruker BioSpin were majority owned by six affiliated stockholders prior to the acquisition. As a result, the acquisition of Bruker BioSpin was considered a combination of companies under common control and has been accounted for at historical carrying values at the date of the acquisition. The 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 and Bruker BioSpin.

 

Following the acquisition of Bruker BioSpin, management reevaluated the way the Company is managed and the internal reporting structure and, as a result of that evaluation, reports its financial results on the basis of the following two reportable segments:

 

·                  BioScience. The operations of this segment include the design, manufacture and distribution of advanced instrumentation and automated solutions based on X-ray technology and optical emission spectroscopy, mass spectrometry technology and infrared and Raman molecular spectroscopy technology. Typical customers of the BioScience 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.

 

·                  BioSpin. The operations of this segment include the design, manufacture and distribution of enabling life science tools based on its core technology, magnetic resonance, as well as the manufacturing and development of low temperature superconductor (LTS) and high temperature superconductor (HTS) wires for use in advanced magnet technology and energy applications. Typical customers of the BioSpin segment include pharmaceutical and biotechnology companies, academic institutions and government agencies.

 

2.  Acquisition of Bruker BioSpin

 

On February 26, 2008, the Company completed the acquisition of all of Bruker BioSpin in accordance with the terms of various agreements dated as of December 2, 2007. Both the Company and Bruker BioSpin were majority owned by six affiliated stockholders prior to the acquisition. As a result, the acquisition of Bruker BioSpin by the Company was considered a combination of companies under common control and has been accounted for at historical

 

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carrying values at the date of the acquisition. Historical 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. In addition, because the transaction is accounted for a combination of companies under common control, all one-time transaction costs have been expensed as incurred. With the addition of Bruker BioSpin, the Company enhanced its position as a leading supplier for life science and materials research, its distribution in the Americas, Europe and Asia, and its sales and service infrastructure.

 

Upon 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 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. The unused portion of the $92.0 million indemnity escrow will be released to the sellers at the later of (1) the 30th day following the receipt by the Company of combined audited financial statements of Bruker BioSpin for the fiscal year ended December 31, 2008 or (2) the resolution of any claim for indemnification of which the sellers have received notice prior to the conclusion of the 30 day period described in (1) above. The $6.8 million working capital escrow was released to the sellers in May 2008 following the receipt by the Company of combined audited financial statements of Bruker BioSpin for the fiscal year ended December 31, 2007.

 

3.  Other Acquisitions

 

On January 31, 2008, the Company acquired JUWE Laborgeraete GmbH, a privately-held company located in Viersen, Germany. 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 BioScience segment from the date of acquisition. The aggregate purchase price of JUWE was $2.7 million, of which $1.2 million was paid in cash, $1.1 million was funded by the issuance of an aggregate of 111,000 restricted unregistered shares of the Company’s common stock, par value $0.01 per share, to JUWE’s shareholders and $0.4 million of net liabilities assumed by the Company. The Company recorded $2.2 million of goodwill in connection with the acquisition of JUWE and assigned the goodwill to the BioScience segment. Proforma financial information reflecting the acquisition of JUWE has not been presented because the impact on revenues, net income and net income per common share would not have been material.

 

4.  Provision for Income Taxes

 

The income tax provision for the three months ended June 30, 2008 was $10.2 million compared to an income tax provision of $6.3 million for the three months ended June 30, 2007, representing effective tax rates of 31.9% and 26.2%, respectively. The income tax provision for the six months ended June 30, 2008 was $14.5 million compared to an income tax provision of $12.3 million for the six months ended June 30, 2007, representing effective tax rates of 40.5% and 27.7%, respectively.

 

The Company’s effective tax rate reflects the tax provision 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 until evidence exists that it is more likely than not that the loss carryforward amounts will be utilized to offset U.S. taxable income. The Company’s tax rate may change 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.

 

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48,

 

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Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 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 income tax positions must achieve before being recognized in the financial statements. In connection with the adoption of FIN No. 48, the Company recorded a net reduction to retained earnings of $2.0 million as of January 1, 2007. The Company has unrecognized tax benefits of approximately $19.4 million as of June 30, 2008, of which $8.8 million, if recognized, would result in a reduction of the Company’s effective tax rate.  One of the Company’s Swiss entities is currently being audited and the audit is expected to be completed during the second half of 2008. The audit covers tax years 2003-2006 and the Company cannot reasonably estimate the outcome of this audit. As of June 30, 2008, the Company does not expect any material changes, except for the Swiss tax audit mentioned previously, to unrecognized tax positions within the next twelve months.

 

The Company recognizes penalties and interest related to unrecognized tax benefits in the provision for income taxes. As of June 30, 2008, approximately $2.4 million of accrued interest and penalties related to uncertain tax positions was included in other current liabilities on the consolidated balance sheet, of which $0.2 million and $0.6 million was recorded during the three and six months ended June 30, 2008.

 

The tax years 2003 to 2007 are open tax years in the Company’s major taxing jurisdictions. The Company files returns in many foreign and state jurisdictions with varying statutes of limitations.

 

5. Stock-Based Compensation

 

In 2000, the Board of Directors adopted and the shareholders approved the 2000 Stock Option Plan. The 2000 Stock Option Plan allows a committee of the Board of Directors to grant incentive stock options, non-qualified stock options, stock appreciation rights and stock awards (including 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. Awards granted by the committee typically vest over a period of three to five years.

 

In 2003, the Company’s shareholders approved an amendment and restatement of the 2000 Stock Option Plan to change the plan name and increase the number of shares available for issuance by 4,132,000 shares, from 2,188,000 shares to 6,320,000 shares. The name of the amended plan is the Bruker BioSciences Corporation Amended and Restated 2000 Stock Option Plan. 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 for issuance by 1,680,000 shares, from 6,320,000 shares to 8,000,000 shares. In January 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 for issuance by 2,000,000 shares, from 8,000,000 shares to 10,000,000 shares.

 

As of June 30, 2008, the Company’s primary types of share-based compensation were in the form of issuances of stock options and restricted stock. The Company recorded stock-based compensation expense for the three and six months ended June 30, 2008 and 2007, as follows (in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Stock options

 

$

973

 

$

241

 

$

1,501

 

$

474

 

Restricted stock

 

142

 

162

 

285

 

323

 

Total stock-based compensation, pre-tax

 

1,115

 

403

 

1,786

 

797

 

Tax benefit

 

(167

)

(113

)

(355

)

(223

)

Total stock-based compensation, net of tax

 

$

948

 

$

290

 

$

1,431

 

$

574

 

 

Restricted shares of the Company’s common stock are periodically awarded to executive officers and certain key employees of the Company subject to a service restriction which expires ratably over a period of three to five years. The restricted shares of common stock may not be sold or transferred during the restriction period. Stock

 

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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, 2008:

 

 

 

 

 

Weighted

 

 

 

Shares

 

Average

 

 

 

Subject to

 

Grant Date

 

 

 

Restriction

 

Fair Value

 

Outstanding at December 31, 2007

 

569,402

 

$

5.74

 

Granted

 

 

 

Vested

 

(31,370

)

5.70

 

Forfeited

 

(5,670

)

6.56

 

Outstanding at June 30, 2008

 

532,362

 

$

5.68

 

 

Unrecognized pretax expense of $1.9 million related to restricted stock awards is expected to be recognized over the weighted average remaining service period of 2.9 years for awards outstanding at June 30, 2008.

 

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 which expires ratably over a period of three to five years. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option-pricing model. Assumptions regarding volatility, expected term, dividend yield and risk-free interest rate are required for the Black-Scholes model. Volatility and expected term assumptions are based on the Company’s historical experience. The risk-free interest rate is based on a U.S. treasury note with a maturity similar to the stock option award’s expected life. The assumptions for volatility, expected life, dividend yield and risk-free interest rate are presented in the table below:

 

 

 

2008

 

2007

 

Risk-free interest rate

 

2.71% - 3.95

%

3.48% - 5.21

%

Expected life

 

6.5 years

 

6.5 years

 

Volatility

 

72.0

%

82.0

%

Expected dividend yield

 

0

%

0

%

 

All stock options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Stock option activity for the six months ended June 30, 2008 was as follows:

 

 

 

 

 

Weighted

 

Weighted

 

 

 

 

 

 

 

Average

 

Average

 

Aggregate

 

 

 

Shares

 

Option

 

Remaining

 

Intrinsic

 

 

 

Subject to

 

Price Per

 

Contractual

 

Value

 

 

 

Options

 

Share

 

Term (in years)

 

($’s in 000’s)

 

Outstanding at December 31, 2007

 

4,423,712

 

$

6.87

 

 

 

 

 

Granted

 

1,621,500

 

12.09

 

 

 

 

 

Exercised

 

(272,096

)

5.22

 

 

 

 

 

Forfeited

 

(106,298

)

9.18

 

 

 

 

 

Outstanding at June 30, 2008

 

5,666,818

 

$

8.39

 

4.7

 

$

26,107

 

Exercisable at June 30, 2008

 

2,341,186

 

$

6.75

 

3.8

 

$

15,081

 

 

The following table summarizes information about stock options outstanding and exercisable at June 30, 2008:

 

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Options Outstanding

 

Options Exercisable

 

 

 

 

 

Weighted

 

Weighted

 

 

 

 

 

Weighted

 

Weighted

 

 

 

 

 

 

 

Average

 

Average

 

Aggregate

 

 

 

Average

 

Average

 

Aggregate

 

 

 

 

 

Remaining

 

Option

 

Intrinsic

 

 

 

Remaining

 

Option

 

Intrinsic

 

Range of

 

Number

 

Contractual

 

Price Per

 

Value

 

Number

 

Contractual

 

Price Per

 

Value

 

Exercise Prices

 

Outstanding

 

Term (in years)

 

Share

 

($’s in 000’s)

 

Exercisable

 

Term (in years)

 

Share

 

($’s in 000’s)

 

$ 2.12 to $4.00

 

619,340

 

3.3

 

$

3.18

 

$

5,988

 

561,140

 

3.2

 

$

3.05

 

$

5,428

 

$ 4.01 to $6.00

 

1,355,804

 

4.0

 

5.14

 

10,452

 

887,139

 

4.0

 

5.07

 

6,904

 

$ 6.01 to $10.00

 

1,532,280

 

6.6

 

7.68

 

7,918

 

396,471

 

5.6

 

6.89

 

2,363

 

$ 10.01 to $13.00

 

1,759,894

 

7.6

 

11.86

 

1,749

 

204,436

 

3.9

 

10.96

 

386

 

$ 13.01 and above

 

399,500

 

2.9

 

14.98

 

 

292,000

 

2.8

 

15.62

 

 

 

 

5,666,818

 

4.7

 

$

8.39

 

$

26,107

 

2,341,186

 

 

 

$

6.75

 

$

15,081

 

 

The intrinsic values above are based on the Company’s closing stock price of $12.85 on June 30, 2008. The weighted-average grant-date fair value of options granted during the six months ended June 30, 2008 was $12.09. Unrecognized pretax expense of $20.4 million related to stock options is expected to be recognized over the weighted average remaining service period of 3.8 years for awards outstanding at June 30, 2008.

 

6. Fair Value of Financial Instruments

 

In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, Fair Value Measurements (“SFAS No. 157”), which is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS No. 157 as of January 1, 2008. As permitted by FASB Staff Position (“FSP”) No. SFAS 157-2, Effective Date of FASB Statement No. 157 (“FSP No. SFAS 157-2”), the Company elected to defer the adoption of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis until January 1, 2009. There was no cumulative effect of adoption related to SFAS No. 157 and the adoption did not have an impact on the Company’s financial position, results of operations, or cash flows. The Company is studying SFAS No. 157 with respect to non-financial assets and non-financial liabilities falling under the scope of FSP No. SFAS 157-2 and has not yet determined the expected impact on the Company’s financial position, results of operations, or cash flows.

 

SFAS No. 157 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. The three levels are defined as follows:

 

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

 

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company measures the following financial assets at fair value on a recurring basis. The fair value of these financial assets was determined using the following inputs at June 30, 2008 (in thousands):

 

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Total

 

Quoted Prices in 

Active Markets for 

Identical Assets 

(Level 1)

 

Significant Other 

Observable Inputs 

(Level 2)

 

Significant 

Unobservable Inputs 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

125,399

 

$

125,399

 

$

 

$

 

Short term investments and restricted cash

 

6,391

 

6,391

 

 

 

Interest rate swaps

 

875

 

 

875

 

 

Total assets recorded at fair value

 

$

132,665

 

$

131,790

 

$

875

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

77

 

$

 

$

77

 

$

 

Total liabilities recorded at fair value

 

$

77

 

$

 

$

77

 

$

 

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value and is effective for fiscal years beginning after November 15, 2007. The Company has elected not to apply the fair value option to any of its assets and liabilities.

 

7.  Inventories

 

Inventories consisted of the following as of June 30, 2008 and December 31, 2007 (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Raw materials

 

$

132,222

 

$

116,883

 

Work-in process

 

170,707

 

137,959

 

Demonstration units

 

40,552

 

37,195

 

Finished goods

 

144,022

 

155,651

 

 

 

 

 

 

 

Total inventories

 

$

487,503

 

$

447,688

 

 

8.  Goodwill and Other Intangible Assets

 

The following is a summary of other intangible assets subject to amortization as of June 30, 2008 and December 31, 2007 (in thousands):

 

 

 

 

 

June 30, 2008

 

December 31, 2007

 

 

 

Useful

 

Gross

 

 

 

Net

 

Gross

 

 

 

Net

 

 

 

Lives

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

 

 

in Years

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

 

Existing technology and related patents

 

3 to 10

 

$

14,582

 

$

(9,153

)

$

5,429

 

$

13,292

 

$

(7,937

)

$

5,355

 

Customer relationships

 

5

 

1,115

 

(573

)

542

 

1,115

 

(477

)

638

 

Trade names

 

5 to 10

 

439

 

(206

)

233

 

439

 

(176

)

263

 

Total amortizable intangible assets

 

 

 

$

16,136

 

$

(9,932

)

$

6,204

 

$

14,846

 

$

(8,590

)

$

6,256

 

 

For the three months ended June 30, 2008 and 2007, the Company recorded amortization expense of $0.3 million and $0.7 million, respectively, related to other amortizable intangible assets. For the six months ended June 30, 2008 and 2007, the Company recorded amortization expense of $1.3 million and $1.4 million, respectively, related to other amortizable intangible assets.

 

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

 

For the year ending December 31,

 

 

 

2008 (a)

 

$

828

 

2009

 

1,734

 

2010

 

1,470

 

2011

 

920

 

2012

 

386

 

Thereafter

 

866

 

 

 

 

 

Total

 

$

6,204

 

 


 

(a) Amount represents estimated amortization expense for the remaining six months ended December 31, 2008. 

 

The carrying amount of goodwill was $43.0 million and $40.8 million as of June 30, 2008 and December 31, 2007, respectively, and is included in the BioScience segment. The Company performs its annual test for indications of impairment as of December 31st each year. The Company completed its annual test for impairment as of December 31, 2007 and determined that goodwill was not impaired at that time. The Company has not identified any indicators of impairment as of June 30, 2008.

 

9.  Warranty Costs

 

The Company typically provides a one to two year parts and labor warranty with the purchase of equipment. The anticipated cost for this warranty is accrued upon recognition of the sale and is included as a current liability on the balance sheet. The Company also offers to its customers warranty and service agreements extending beyond the initial year of warranty for a fee. These fees are recorded as deferred revenue and amortized into income over the life of the extended warranty contract.

 

Changes in the Company’s accrued warranty liability during the six months ended June 30, 2008 were as follows (in thousands):

 

Warranty accrual at December 31, 2007

 

$

27,181

 

Accruals for warranties issued during the period

 

15,392

 

Settlements of warranty claims

 

(16,035

)

Foreign currency impact

 

2,520

 

 

 

 

 

Warranty accrual at June 30, 2008

 

$

29,058

 

 

10.  Debt

 

In connection with the acquisition of Bruker BioSpin, the Company entered into a credit agreement with a syndication of lenders, which is referred to as the Credit Agreement, and 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 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, 2008, the weighted average interest rate of borrowings under the Credit Agreement was approximately 4.0%.

 

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 leverage and interest coverage as defined in the Credit Agreement. In addition to the

 

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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.

 

At June 30, 2008, the Company had outstanding debt totaling $242.2 million consisting of $194.3 million outstanding under the Credit Agreement, $33.6 million outstanding under other long-term debt arrangements, $11.2 million outstanding under revolving lines of credit and $3.1 million under capital lease obligations. At December 31, 2007, the Company had outstanding debt totaling $44.2 million consisting of $28.0 million outstanding under other long-term debt arrangements, $13.2 million outstanding under other revolving lines of credit and $3.0 million under capital lease obligations.

 

Amounts outstanding under other long-term debt arrangements include both collateralized and uncollateralized arrangements with various financial institutions in France, Germany, Japan and a government agency in the United States. The Company’s long-term debt arrangements also consist of fixed and variable interest rates ranging from 1.8% to 8.0% at June 30, 2008 and December 31, 2007. In connection with certain of these agreements the Company is required to maintain certain financial ratios as defined in the agreements. At June 30, 2008, the Company was not in compliance with one of the covenants required by its arrangement with a government agency in the United States. The failure to meet this covenant did not trigger any cross-default provisions in other borrowing arrangements, including the Credit Agreement. On July 28, 2008, the Company received a limited waiver from the holder of this debt for the quarterly period ended June 30, 2008 and agreement from the holder of the debt to modify the covenant for the remainder of 2008.

 

The Company’s revolving lines of credit are with various financial institutions in Germany, Switzerland, Japan and France and have aggregate maximum borrowing amounts of approximately $90.0 million and $145.5 million at June 30, 2008 and December 31, 2007, respectively. Effective February 26, 2008, the Company terminated a $75.0 million line of credit in the United States and replaced it with the revolving credit available under the Credit Agreement. With consideration to outstanding letters of credit, the Company had availability of approximately $65.5 million and $119.0 million under other revolving lines of credit at June 30, 2008 and December 31, 2007, respectively. The Company’s revolving lines of credit are generally uncollateralized and bear interest at variable rates ranging from 1.5% to 9.8% at June 30, 2008 and December 31, 2007.

 

11.  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. 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 will pay a fixed rate of 3.8% and receive a variable rate based on three month LIBOR. The initial notional amount of this interest rate swap is $90.0 million and will amortize in proportion to the term debt component of the Credit Agreement through December 2012. At June 30, 2008, the notional amount of this interest rate swap was $88.9 million. The Company has concluded that this swap has met the criteria to qualify as an effective hedge of the variability of cash flows of the interest payments and will account for the hedge as a cash flow hedge under SFAS No. 133. Accordingly, the Company has reflected all changes in the fair value of this interest rate swap in accumulated other comprehensive income, a component of shareholders’ equity. As of June 30, 2008, the Company has recorded a gain of $0.2 million, net of tax, related to the fair value of the interest rate swap.

 

12.  Employee Benefit Plans

 

The Company has defined benefit retirement plans that cover substantially all employees of a BioScience subsidiary in Germany who were employed as of September 30, 1997, as well as all employees of the BioSpin subsidiaries located in Switzerland, France, and Japan and certain employees of a BioSpin subsidiary in Germany. The plans provide pension benefits based upon final average salary and years of service.

 

The net periodic pension benefit cost includes the following components during the three and six months ended June 30, 2008 and 2007 (in thousands):

 

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Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Components of net periodic benefit cost

 

 

 

 

 

 

 

 

 

Service cost

 

$

1,159

 

$

932

 

$

2,095

 

$

1,761

 

Interest cost

 

1,168

 

749

 

2,121

 

1,497

 

Expected return on plan assets

 

(1,034

)

(705

)

(2,034

)

(1,417

)

Amortization and actuarial gains and losses

 

(6

)

 

(8

)

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

1,287

 

$

976

 

$

2,174

 

$

1,841

 

 

The Company made contributions of $1.3 million to its defined benefit plans during the six months ended June 30, 2008 and estimates contributions of $1.1 million during the remainder of 2008.

 

13.  Earnings Per Share

 

Basic earnings per share is calculated by dividing net earnings by the weighted-average number of common shares outstanding during the period.  Restricted stock is not included in the calculation of basic EPS until the time-based restriction has lapsed. Except where the result would be anti-dilutive, the diluted earnings per share computation includes the effect of potential shares, shares which would be issuable upon the exercise of outstanding stock options or outstanding restricted stock issuable when the restrictions lapse, 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, 2008 and 2007 (in thousands, except per share data):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Net income, as reported

 

$

21,686

 

$

17,657

 

$

21,001

 

$

32,007

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

162,440

 

161,728

 

162,371

 

161,050

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options and restricted stock

 

2,998

 

2,615

 

2,937

 

2,681

 

Weighted average shares outstanding - diluted

 

165,438

 

164,343

 

165,308

 

163,731

 

 

 

 

 

 

 

 

 

 

 

Net income per share - basic and diluted

 

$

0.13

 

$

0.11

 

$

0.13

 

$

0.20

 

 

Stock options to purchase approximately 360,000 shares and 530,000 shares were excluded from the computation of diluted earnings per share in the three months ended June 30, 2008 and 2007 respectively, and approximately 330,000 shares and 530,000 shares were excluded from the computation of diluted earnings per share in the six months ended June 30, 2008 and 2007, 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.

 

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, 2008 and 2007 (in thousands):

 

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Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Interest income

 

$

1,930

 

$

2,620

 

$

3,617

 

$

4,488

 

Interest expense

 

(3,817

)

(830

)

(5,676

)

(1,450

)

Exchange gains (losses) on foreign currency transactions

 

3,263

 

1,164

 

(8,956

)

453

 

Other

 

2,151

 

(740

)

2,353

 

(527

)

Interest and other income (expense), net

 

$

3,527

 

$

2,214

 

$

(8,662

)

$

2,964

 

 

15. Comprehensive Income

 

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 for the three and six months ended June 30, 2008 and 2007 (in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Net income

 

$

21,686

 

$

17,657

 

$

21,001

 

$

32,007

 

Foreign currency translation adjustments

 

(3,841

)

2,360

 

35,182

 

7,426

 

Unrealized gains on interest rate swap

 

222

 

 

222

 

 

Unrealized gains (losses) on available for sales securities:

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

(234

)

53

 

(71

)

698

 

Less reclassification adjustments for gains included in the determination of net income

 

(1,335

)

 

(1,335

)

 

Pension liability adjustments

 

115

 

69

 

(393

)

21

 

Total comprehensive income

 

$

16,613

 

$

20,139

 

$

54,606

 

$

40,152

 

 

16. Commitments and Contingencies

 

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.

 

17. Letters of Credit and Guarantees

 

As of June 30, 2008 and December 31, 2007, the Company had letters of credit and bank guarantees of $55.8 million and $67.7 million, respectively, for its customer advances. Certain of these letters of credit and bank guarantees affect the availability of the Company’s lines of credit.

 

18. 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.

 

In February 2008, the Company completed its acquisition of Bruker BioSpin and, as a result, management reevaluated the way the Company is managed and its internal reporting structure. The Company determined that it had four operating segments, representing each of its four divisions; Bruker AXS, Bruker Daltonics, Bruker Optics and

 

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Bruker BioSpin. Bruker AXS is in the business of manufacturing and distributing advanced X-ray and OES-spark instrumentation used in non-destructive molecular and elemental analysis. Bruker Daltonics is in the business of manufacturing and distributing mass spectrometry instruments that can be integrated and used along with other analytical instruments. 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 BioSpin is in the business of manufacturing and distributing enabling life science tools based on magnetic resonance technology, as well as the development and manufacturing of low temperature superconductor and high temperature superconductor wires for use in advanced magnet technology and energy applications.

 

The Company has combined the Bruker AXS, Bruker Daltonics and Bruker Optics operating segments into the BioScience reporting segment because each has similar economic characteristics, product processes and services, types and classes of customers, methods of distribution and regulatory environments. All historical segment numbers have been restated to conform to this change in reportable segments.

 

Selected business segment information for the three and six months ended June 30, 2008 and 2007 is presented below (in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

BioScience

 

$

160,593

 

$

124,203

 

$

303,222

 

$

236,956

 

BioSpin

 

163,770

 

125,764

 

275,888

 

233,411

 

Corporate, eliminations and other (a)

 

(12,898

)

(11,625

)

(29,209

)

(24,489

)

Total

 

$

311,465

 

$

238,342

 

$

549,901

 

$

445,878

 

 

 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

 

 

BioScience

 

$

6,727

 

$

8,124

 

$

18,476

 

$

17,067

 

BioSpin

 

26,471

 

15,965

 

36,532

 

31,196

 

Corporate, eliminations and other (a)

 

(4,763

)

(2,302

)

(10,639

)

(6,767

)

Total

 

$

28,435

 

$

21,787

 

$

44,369

 

$

41,496

 

 


 

(a)

Represents revenue transactions between segments which are eliminated in consolidation and corporate costs not allocated to the reportable segments.

 

Total assets by segment as of June 30, 2008 and December 31, 2007 are as follows (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

BioScience

 

$

650,009

 

$

584,902

 

BioSpin

 

912,389

 

782,627

 

Corporate

 

383,733

 

314,988

 

Eliminations

 

(774,689

)

(370,886

)

Total

 

$

1,171,442

 

$

1,311,631

 

 

19. Recent Accounting Pronouncements

 

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS No. 141(R)”). This statement will significantly change the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all of the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with certain limited exceptions. In addition, SFAS No. 141(R) will change the accounting treatment for acquisition costs, in-process research and development, restructuring costs associated with business combinations and

 

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changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date. SFAS No. 141(R) also includes a significant number of new disclosure requirements. Early adoption of SFAS No. 141(R) is prohibited and the Company will be required to apply SFAS No. 141(R) to acquisitions that occur on or after January 1, 2009.

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51 (“SFAS No. 160”). This statement establishes new accounting and reporting standards for the minority interest in a subsidiary and the deconsolidation of a subsidiary. SFAS No. 160 is effective as of the beginning of fiscal 2009 and early adoption is prohibited. The Company has not yet assessed the effect, if any, that adoption of SFAS No. 160 will have on its results of operations and financial position.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities and, thereby, improves the transparency of financial reporting. SFAS No. 161 is effective for fiscal years beginning on or after November 15, 2008. The Company is currently evaluating the impact that the adoption of SFAS No. 161 will have on its financial position, results of operations and cash flows.

 

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Table of Contents

 

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 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, 2007.

 

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, 2007.

 

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 condition and results of operations and 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, 2008 compared to the three and six months ended June 30, 2007.

 

·                  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

 

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 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 rapid revenue growth, both organically and through acquisitions. Our revenue growth strategy, combined with anticipated improvements to our

 

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

 

On February 26, 2008, the Company completed its acquisition of Bruker BioSpin. Both the Company and Bruker BioSpin were majority owned by six affiliated stockholders prior to the acquisition. As a result, the acquisition of Bruker BioSpin by the Company is considered a combination of companies under common control, and has been accounted for at historical carrying values. Historical 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. In addition, because the transaction is accounted for as an acquisition of businesses under common control, all one-time transaction costs have been expensed as incurred.

 

With the addition of Bruker BioSpin, we enhanced 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 are expected to create revenue synergies and provide opportunities to supply customers with equipment packages that have a broader range of applications and value. We believe the addition of Bruker BioSpin will also enhance our distribution in the Americas, Europe and Asia and our sales and service infrastructure, all of which should provide us with revenue growth opportunities and accelerate our drive to improve our margins, net income and operating cash flows.

 

Following the acquisition of Bruker BioSpin, management reevaluated the way the Company is managed and the internal reporting structure and, as a result of that evaluation, determined that it has four operating segments, representing each of its four divisions; Bruker AXS, Bruker Daltonics, Bruker Optics and Bruker BioSpin. Bruker AXS is in the business of manufacturing and distributing advanced X-ray and OES-spark instrumentation used in non-destructive molecular and elemental analysis. Bruker Daltonics is in the business of manufacturing and distributing mass spectrometry instruments that can be integrated and used along with other analytical instruments. 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 BioSpin is in the business of manufacturing and distributing enabling life science tools based on magnetic resonance technology, as well as the development and manufacturing of low temperature superconductor and high temperature superconductor wires for use in advanced magnet technology and energy applications.

 

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

 

·                  BioScience. The operations of this segment include the design, manufacture and distribution of advanced instrumentation and automated solutions based on X-ray technology, OES-spark technology, mass spectrometry technology and infrared and Raman molecular spectroscopy technology. Typical customers of the BioScience 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.

 

·                  BioSpin. The operations of this segment include the design, manufacture and distribution of enabling life science tools based on its core technology, magnetic resonance, as well as the manufacturing and development of low temperature superconductor (LTS) and high temperature superconductor (HTS) wires for use in advanced magnet technology and in energy applications. Typical customers of the BioSpin segment include pharmaceutical and biotechnology companies, academic institutions and government agencies.

 

Financial Overview

 

For the three months ended June 30, 2008, our revenue increased by $73.1 million, or 30.7%, to $311.5 million, compared to $238.3 million for the comparable period in 2007. Included in this change in revenue is approximately

 

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$26.9 million from the impact of foreign exchange. Excluding the effect of foreign exchange, revenue increased by $46.2 million, or 19.4%. The increase in revenue, excluding the effect of foreign exchange, is attributable to increases in system and aftermarket revenues in the BioScience segment and system and wire revenues in the BioSpin segment.

 

For the six months ended June 30, 2008, our revenue increased by $104.0 million, or 23.3%, to $549.9 million, compared to $445.9 million for the comparable period in 2007. Included in this change in revenue is approximately $47.5 million from the impact of foreign exchange. Excluding the effect of foreign exchange, revenue increased by $56.5 million, or 12.7%. The increase in revenue, excluding the effect of foreign exchange, is attributable to increases in system and aftermarket revenues in the BioScience segment and system and wire revenues in the BioSpin segment.

 

Income from operations for the three months ended June 30, 2008 was $28.4 million, resulting in an operating margin of 9.1%, compared to income from operations of $21.8 million, resulting in an operating margin of 9.1%, for the comparable period of 2007. The increase in income from operations was driven by the increase in revenue described above offset, in part, by lower gross profit margins and increases in operating expenses. The decrease in gross profit margins and increase in costs is, in part, attributable to changes in foreign currency exchange rates, primarily the Euro, as a majority of our production and research and development is performed in Europe. However, increases in headcount, material costs and other operating expenses also contributed to the increase in expenses for the three months ended June 30, 2008.

 

Income from operations for the six months ended June 30, 2008 was $44.4 million, resulting in an operating margin of 8.1%, compared to income from operations of $41.5 million, resulting in an operating margin of 9.3%, for the comparable period of 2007. Income from operations for the six months ended June 30, 2008 includes $6.2 million of charges related to the acquisition of Bruker BioSpin. The increase in income from operations was driven by the increase in revenue described above offset, in part, by increases in operating expenses. The increase in costs is, in part, attributable to changes in foreign currency exchange rates, primarily the Euro, as a majority of our production and research and development is performed in Europe. However, increases in headcount, material costs and other operating expenses also contributed to the increase in expenses for the six months ended June 30, 2008. In the second half of 2008 we intend to refocus efforts on gross margin improvement programs and implement various cost saving programs, including a partial hiring freeze, with the goal of improving operating margins.

 

During the six months ended June 30, 2008, we recorded net losses on foreign currency transactions of $(9.0) million compared to net gains of $0.5 million for the comparable period of 2007. Foreign exchange losses of $12.2 million were incurred in the first three months of 2008 and 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. The losses in the first quarter of 2008 resulted from the continued weakening of the U.S. Dollar and the Euro by approximately 11% and 3%, respectively, during the five weeks between the closing of the Bruker BioSpin acquisition and the end of the first quarter of 2008. In the second quarter of 2008 we recorded gains on foreign currency transactions of $3.2 million that were the result of more timely settlement of inter-company balances and a reduction of certain foreign currency denominated assets, principally cash. We believe that the actions we took in the second quarter of 2008 will reduce the impact that foreign currency gains and losses will have on our results in the second half of 2008.

 

We incurred approximately $4.5 million of interest expense on acquisition-related debt during the six months ended June 30, 2008, of which approximately $3.1 million was incurred in the second quarter of 2008. There was no acquisition-related debt outstanding during three and six months ended June 30, 2007. In an effort to reduce interest expense in future periods, we repaid approximately $158.4 million of acquisition-related debt in April and May 2008. Additionally, in April 2008, we entered into an interest rate swap with an initial notional amount of $90.0 million that will hedge a portion of our $150.0 million variable-rate term loan and fix the interest rate on the hedged portion of the debt at a rate of 3.8%.

 

Our net income for the three months ended June 30, 2008, was $21.7 million, or $0.13 per diluted share, compared to net income of $17.7 million, or $0.11 per diluted share, for the comparable period of 2007.

 

Our net income for the six months ended June 30, 2008, was $21.0 million, or $0.13 per diluted share, compared to net income of $32.0 million, or $0.20 per diluted share, for the comparable period of 2007.

 

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CRITICAL ACCOUNTING POLICIES

 

The discussion and analysis of our financial condition and results of operations is based upon our 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, allowance for doubtful accounts, inventories, goodwill, long-lived assets, warranty costs and income taxes. 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 condition 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 is generally 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, which assumes responsibility for installation, we recognize the system sale when the product has been shipped and title and risk of loss have been transferred. 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 to two-years. 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 pricing policies 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. Grant revenue is recognized when we complete the services required under the grant.

 

Warranty costs. We normally provide a one to two-year parts and labor warranty with the purchase of equipment. The anticipated cost for this warranty is accrued upon recognition of the sale and is included as a current liability on the balance sheet. Although our facilities 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.

 

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 one international location. We maintain an allowance 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 a charge to operations.

 

Goodwill, other intangible assets and other long-lived assets. We evaluate whether goodwill is impaired annually and when events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Fair value is determined using market comparables for similar businesses or forecasts of discounted future cash flows. We also review other intangible assets and other long-lived assets when indication of potential impairment exists, such as a significant reduction in 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.

 

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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.

 

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 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.

 

RESULTS OF OPERATIONS

 

Three Months Ended June 30, 2008 Compared to the Three Months Ended June 30, 2007

 

Consolidated Results

 

The following table presents our results for the three months ended June 30, 2008 and 2007 (dollars in thousands):

 

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Three Months Ended

 

 

 

June 30,

 

 

 

2008

 

2007

 

 

 

(In thousands, except per share data)

 

Product revenue

 

$

278,849

 

$

210,177

 

Service revenue

 

31,733

 

27,570

 

Other revenue

 

883

 

595

 

Total revenue

 

311,465

 

238,342

 

 

 

 

 

 

 

Cost of product revenue

 

161,931

 

120,810

 

Cost of service revenue

 

20,896

 

17,617

 

Total cost of revenue

 

182,827

 

138,427

 

Gross profit

 

128,638

 

99,915

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Sales and marketing

 

46,151

 

37,029

 

General and administrative

 

17,178

 

13,442

 

Research and development

 

36,514

 

27,657

 

Acquisition related charges

 

360

 

 

Total operating expenses

 

100,203

 

78,128

 

Operating income

 

28,435

 

21,787

 

 

 

 

 

 

 

Interest and other income (expense), net

 

3,527

 

2,214

 

Income before income tax provision and minority interest in consolidated subsidiaries

 

31,962

 

24,001

 

 

 

 

 

 

 

Income tax provision

 

10,196

 

6,284

 

Income before minority interest in consolidated subsidiaries

 

21,766

 

17,717

 

Minority interest in consolidated subsidiaries

 

80

 

60

 

Net income

 

$

21,686

 

$

17,657

 

Net income per common share - basic and diluted

 

$

0.13

 

$

0.11

 

Weighted average common shares outstanding:

 

 

 

 

 

Basic

 

162,440

 

161,728

 

Diluted

 

165,438

 

164,343

 

 

Revenue

 

Our revenue increased by $73.1 million, or 30.7%, to $311.5 million for the three months ended June 30, 2008, compared to $238.3 million for the comparable period in 2007. Included in this change in revenue is approximately $26.9 million from the impact of foreign exchange. Excluding the effect of foreign exchange, revenue increased by 19.4%. The increase in revenue, excluding the effect of foreign exchange, is attributable to increases in system and aftermarket revenues in the BioScience segment and system and wire revenues in the BioSpin segment.

 

Cost of Revenue

 

Our cost of product and service revenue for the three months ended June 30, 2008, was $182.8 million, resulting in a gross profit margin of 41.3%, compared to cost of product and service revenue of $138.4 million, resulting in a gross profit margin of 41.9% for the comparable period of 2007. Cost of revenue for the three months ended June 30, 2008 and 2007 includes charges of approximately $2.1 million and $1.5 million, respectively, to write down certain inventories to the lower of cost or market. The decrease in gross profit margins is

 

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attributable primarily to changes in foreign currency exchange rates, primarily the Euro, as a majority of our production is performed in Europe. Additionally, the mix of products sold and pricing pressure in certain markets and certain product lines contributed to the decrease in gross profit margins.

 

Sales and Marketing

 

Our sales and marketing expense for the three months ended June 30, 2008 increased to $46.2 million, or 14.9% of product and service revenue, from $37.0 million, or 15.6% of product and service revenue, for the comparable period of 2007. The increase in sales and marketing expense is attributable to higher commissions and other selling expenses associated with the increase in revenue. Additionally, increases in headcount resulting from our continued investment in direct sales, inside sales, product specialists and application resources have contributed to an increase in sales and marketing expense.

 

General and Administrative

 

Our general and administrative expense for the three months ended June 30, 2008 increased to $17.2 million, or 5.5% of product and service revenue, from $13.4 million, or 5.7% of product and service revenue, for the comparable period of 2007. The increase is attributable to additional headcount, primarily in the BioSpin segment, and was related to Bruker BioSpin becoming part of a publicly-traded company.

 

Research and Development

 

Our research and development expense for the three months ended June 30, 2008 increased to $36.5 million, or 11.8% of product and service revenue, from $27.7 million, or 11.6% of product and service revenue, for the comparable period of 2007. The increase in research and development expenses is attributable primarily to changes in foreign currency exchange rates, primarily the Euro, as a majority of our research and development is performed in Europe. We also incurred higher material costs associated with new product development.

 

Acquisition-Related Charges

 

On December 3, 2007, we announced that we had entered into a definitive agreement to acquire all of the stock of Bruker BioSpin. The acquisition of Bruker BioSpin was approved by our shareholders on February 25, 2008 and was completed on February 26, 2008. The acquisition 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 are expensed as incurred. During the three months ended June 30, 2008, the Company incurred and expensed acquisition-related charges totaling $0.4 million, which consisted primarily of legal fees.

 

Interest and Other Income (Expense), Net

 

Interest and other income (expense), net during the three months ended June 30, 2008, was $3.5 million, compared to $2.2 million during the three months ended June 30, 2007.

 

During the three months ended June 30, 2008, the major component within interest and other income (expense), net, was gains on foreign currency transactions of $3.3 million. These gains offset some of the foreign exchange losses recorded in the first quarter of 2007 and were partially the result of more timely settlement of inter-company balances and a reduction of foreign currency denominated assets, principally cash.

 

During the three months ended June 30, 2007, the major components within interest and other income (expense), net, were net interest income of $1.8 million and gains on foreign currency transactions of $1.2 million.

 

Provision for Income Taxes

 

Our effective tax rate 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 until evidence exists that it is more likely than not that the loss carryforward amounts will be utilized to offset U.S. taxable income.

 

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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 research and development 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, 2008, was $10.2 million compared to an income tax provision of $6.3 million for the three months ended June 30, 2007, representing effective tax rates of 31.9% and 26.2%, respectively.

 

Minority Interest in Consolidated Subsidiaries

 

Minority interest in consolidated subsidiaries for the three months ended June 30, 2008 and 2007 was $0.1 million. The minority interest in subsidiaries represents the minority shareholders’ proportionate share of net income of those subsidiaries for the three months ended June 30, 2008 and 2007. The minority interest relates to our two majority-owned indirect subsidiaries, InCoaTec GmbH and Bruker Baltic Ltd.

 

Net Income

 

Our net income for the three months ended June 30, 2008, was $21.7 million, or $0.13 per diluted share, compared to net income of $17.7 million, or $0.11 per diluted share, for the comparable period of 2007.

 

Segment Results

 

Revenue

 

The following table presents revenue, change in revenue and revenue growth by reportable segment for the three months ended June 30, 2008 and 2007 (dollars in thousands):

 

 

 

 

 

 

 

 

 

Percentage

 

 

 

2008

 

2007

 

$ Change

 

Change

 

BioScience

 

$

160,593

 

$

124,203

 

36,390

 

29.3

%

BioSpin

 

163,770

 

125,764

 

38,006

 

30.2

%

Eliminations (a)

 

(12,898

)

(11,625

)

(1,273

)

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenue

 

$

311,465

 

$

238,342

 

73,123

 

30.7

%

 


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

 

BioScience Segment Revenues

 

BioScience segment revenue increased by $36.4 million, or 29.3%, to $160.6 million for the three months ended June 30, 2008, compared to $124.2 million for the comparable period in 2007. Included in this change in revenue is approximately $11.5 million from the impact of foreign exchange. Excluding the effect of foreign exchange, revenue increased by 20.0%. The increase in revenue, excluding the effect of foreign exchange, is attributable to increases in system revenues across several of the product lines, in particular X-ray systems, molecular spectroscopy systems and chemical detections systems, as well as higher aftermarket revenue. Revenue in the three months ended June 30, 2007 includes $2.6 million of molecular spectroscopy revenue that was recognized from our order with the Chinese State Food and Drug Administration. The order from the Chinese State Food and Drug Administration was completed during 2007 and we did not recognize any system revenue from this order during the three months ended June 30, 2008.

 

System revenue, other system revenue and aftermarket revenue as a percentage of total BioScience segment revenue were as follows during the three months ended June 30, 2008 and 2007 (dollars in thousands):

 

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2008

 

2007

 

 

 

 

 

Percentage of

 

 

 

Percentage of

 

 

 

Revenue

 

Segment Revenue

 

Revenue

 

Segment Revenue

 

System Revenue

 

$

117,720

 

73.3

%

$

93,564

 

75.3

%

Other System Revenue

 

12,487

 

7.8

%

9,223

 

7.4

%

Aftermarket Revenue

 

30,386

 

18.9

%

21,416

 

17.3

%

 

 

 

 

 

 

 

 

 

 

Total Revenue

 

$

160,593

 

100.0

%

$

124,203

 

100.0

%

 

System revenues in the BioScience segment include X-ray systems, mass spectrometry systems, CBRN detection systems and molecular spectroscopy systems. Other system revenues in the BioScience segment relate primarily to the distribution of products not manufactured by the BioScience segment. Aftermarket revenues in the BioScience segment include accessory sales, consumables, training and services.

 

BioSpin Segment Revenues

 

BioSpin segment revenue increased by $38.0 million, or 30.2%, to $163.8 million for the three months ended June 30, 2008, compared to $125.8 million for the comparable period in 2007. Included in this change in revenue is approximately $15.4 million from the impact of foreign exchange. Excluding the effect of foreign exchange, revenue increased by 18.0%. The increase in revenue, excluding the effect of foreign exchange, is attributable to increases in magnetic resonance system revenues, offset partially by lower aftermarket revenue.

 

System and wire revenue, other system revenue and aftermarket revenue as a percentage of total BioSpin segment revenue were as follows during the three months ended June 30, 2008 and 2007 (dollars in thousands):

 

 

 

2008

 

2007

 

 

 

 

 

Percentage of

 

 

 

Percentage of

 

 

 

Revenue

 

Segment Revenue

 

Revenue

 

Segment Revenue

 

System and Wire Revenue

 

$

134,227

 

82.0

%

$

94,653

 

75.3

%

Other System Revenue

 

7,135

 

4.3

%

2,534

 

2.0

%

Aftermarket Revenue

 

22,408

 

13.7

%

28,577

 

22.7

%

 

 

 

 

 

 

 

 

 

 

Total Revenue

 

$

163,770

 

100.0

%

$

125,764

 

100.0

%

 

System and wire revenues in the BioSpin segment include nuclear magnetic resonance systems, magnetic resonance imaging systems, electron paramagnetic resonance systems, Minispec systems, power supplies and our LTS and HTS wire business. Other system revenues in the BioSpin segment relate primarily to the distribution of products not manufactured by the BioSpin segment. Aftermarket revenues in the BioSpin segment include accessory sales, consumables, training and services.

 

Income from Operations

 

The following table presents income from operations and operating margins on revenue by reportable segment for the three months ended June 30, 2008 and 2007 (dollars in thousands):

 

 

 

2008

 

2007

 

 

 

Operating

 

Operating

 

Operating

 

Operating

 

 

 

Income

 

Margin

 

Income

 

Margin

 

BioScience

 

$

6,727

 

4.2

%

$

8,124

 

6.5

%

BioSpin

 

26,471

 

16.2

%

15,965

 

12.7

%

Corporate, Eliminations and Other (a)

 

(4,763

)

 

 

(2,302

)

 

 

 

 

 

 

 

 

 

 

 

 

Total Operating Income

 

$

28,435

 

9.1

%

$

21,787

 

9.1

%

 


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

 

BioScience segment income from operations for the three months ended June 30, 2008, was $6.7 million,

 

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resulting in an operating margin of 4.2%, compared to income from operations of $8.1 million, resulting in an operating margin of 6.5%, for the comparable period of 2007. The decrease in income from operations was driven by lower gross profit margins and increases in operating expenses offset partially by an increase in revenue. The increase in costs is, in part, attributable to changes in foreign currency exchange rates, primarily the Euro, as a majority of our production and research and development is performed in Europe. However, increases in headcount, primarily in sales and marketing, and research and development material costs also contributed to the increase in expenses for the three months ended June 30, 2008.

 

BioSpin segment income from operations for the three months ended June 30, 2008, was $26.5 million, resulting in an operating margin of 16.2%, compared to income from operations of $16.0 million, resulting in an operating margin of 12.7%, for the comparable period of 2007. The increase in income from operations was attributable primarily to an increase in revenue and higher gross profit margins offset partially by higher operating expenses. The increase in gross profit margins is the result of improved utilization driven by higher revenues. The increase in costs relates primarily to research and development expenses and is associated with changes in foreign currency exchange rates and higher material costs and salaries associated with new product development.

 

Six Months Ended June 30, 2008 Compared to the Six Months Ended June 30, 2007

 

Consolidated Results

 

The following table presents our results for the six months ended June 30, 2008 and 2007 (dollars in thousands):

 

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Six Months Ended

 

 

 

June 30,

 

 

 

2008

 

2007

 

 

 

(In thousands, except per share data)

 

Product revenue

 

$

485,884

 

$

391,786

 

Service revenue

 

61,690

 

52,757

 

Other revenue

 

2,327

 

1,335

 

Total revenue

 

549,901

 

445,878

 

 

 

 

 

 

 

Cost of product revenue

 

266,832

 

217,459

 

Cost of service revenue

 

41,302

 

33,956

 

Total cost of revenue

 

308,134

 

251,415

 

Gross profit

 

241,767

 

194,463

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Sales and marketing

 

89,544

 

72,491

 

General and administrative

 

33,982

 

26,855

 

Research and development

 

67,719

 

53,621

 

Acquisition related charges

 

6,153

 

 

Total operating expenses

 

197,398

 

152,967

 

Operating income

 

44,369

 

41,496

 

 

 

 

 

 

 

Interest and other income (expense), net

 

(8,662

)

2,964

 

Income before income tax provision and minority interest in consolidated subsidiaries

 

35,707

 

44,460

 

 

 

 

 

 

 

Income tax provision

 

14,466

 

12,307

 

Income before minority interest in consolidated subsidiaries

 

21,241

 

32,153

 

Minority interest in consolidated subsidiaries

 

240

 

146

 

Net income

 

$

21,001

 

$

32,007

 

Net income per common share - basic and diluted

 

$

0.13

 

$

0.20

 

Weighted average common shares outstanding:

 

 

 

 

 

Basic

 

162,371

 

161,050

 

Diluted

 

165,308

 

163,731

 

 

Revenue

 

Our revenue increased by $104.0 million, or 23.3%, to $549.9 million for the six months ended June 30, 2008, compared to $445.9 million for the comparable period in 2007. Included in this change in revenue is approximately $47.5 million from the impact of foreign exchange. Excluding the effect of foreign exchange, revenue increased by 12.7%. The increase in revenue, excluding the effect of foreign exchange, is attributable to increases in system and aftermarket revenues in the BioScience segment and system and wire revenues in the BioSpin segment.

 

Cost of Revenue

 

Our cost of product and service revenue for the six months ended June 30, 2008, was $308.1 million, resulting in a gross profit margin of 44.0%, compared to cost of product and service revenue of $251.4 million, resulting in a gross profit margin of 43.6% for the comparable period of 2007. The increase in gross profit margins as a percentage of revenue is attributable primarily to product mix and improved utilization resulting from higher revenues. The increase in gross profit margins was partially offset by the continued weakening of the U.S. Dollar coupled with the fact that most of our manufacturing is done in Europe.

 

Sales and Marketing

 

Our sales and marketing expense for the six months ended June 30, 2008 increased to $89.5 million, or 16.4% of

 

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product and service revenue, from $72.5 million, or 16.3% of product and service revenue, for the comparable period of 2007. The increase in sales and marketing expense is attributable to higher commission expenses associated with the increase in revenue. Additionally, increases in headcount resulting from our continued investment in direct sales, inside sales, product specialists and application resources have contributed to an increase in sales and marketing expense.

 

General and Administrative

 

Our general and administrative expense for the six months ended June 30, 2008 increased to $34.0 million, or 6.2% of product and service revenue, from $26.9 million, or 6.0% of product and service revenue, for the comparable period of 2007. The increase is attributable to additional headcount, primarily in the BioSpin segment, and was related to Bruker BioSpin becoming part of a publicly-traded company.

 

Research and Development

 

Our research and development expense for the six months ended June 30, 2008 increased to $67.7 million, or 12.4% of product and service revenue, from $53.6 million, or 12.1% of product and service revenue, for the comparable period of 2007. The increase in research and development expenses is attributable primarily to changes in foreign currency exchange rates, primarily the Euro, as a majority of our research and development is performed in Europe. We also incurred higher material costs associated with new product development.

 

Acquisition Related Charges

 

On December 3, 2007, we announced that we had entered into a definitive agreement to acquire all of the stock of Bruker BioSpin. The acquisition of Bruker BioSpin was approved by our shareholders on February 25, 2008 and was completed on February 26, 2008. The acquisition represented a business 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 are expensed as incurred. During the six months ended June 30, 2008, the Company incurred and expensed acquisition-related charges totaling $6.2 million, which consisted of investment banking fees, legal fees and accounting fees.

 

Interest and Other Income (Expense), Net

 

Interest and other income (expense), net during the six months ended June 30, 2008, was $(8.7) million, compared to $3.0 million during the six months ended June 30, 2007.

 

During the six months ended June 30, 2008, the major component within interest and other income (expense), net, was losses on foreign currency transactions of $9.0 million. Foreign exchange losses of $12.2 million were incurred in the first three months of 2008 and were driven primarily 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. The losses resulted from the continued weakening of the U.S. Dollar and the Euro by approximately 11% and 3%, respectively, during the five weeks between the closing of the Bruker BioSpin acquisition and the end of the first quarter of 2008.

 

During the six months ended June 30, 2007, the major components within interest and other income (expense), net, were net interest income of $3.0 million and gains on foreign currency transactions of $0.5 million.

 

Provision for Income Taxes

 

Our effective tax rate 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 until evidence exists that it is more likely than not that the loss carryforward 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 research and development 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.

 

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The income tax provision for the six months ended June 30, 2008, was $14.5 million compared to an income tax provision of $12.3 million for the six months ended June 30, 2007, representing effective tax rates of 40.5% and 27.7%, respectively. The effective tax rate for the six months ended June 30, 2008 is a result of the acquisition-related charges and the foreign exchange losses that resulted in only modest tax benefits. The acquisition-related costs did not generate tax significant benefits for us because they were incurred primarily in the U.S. and the foreign exchange losses did not generate tax significant benefits for us because they occurred in foreign locations with relatively low tax rates.

 

Minority Interest in Consolidated Subsidiaries

 

Minority interest in consolidated subsidiaries for the six months ended June 30, 2008, was $0.2 million compared to $0.1 million for the comparable period of 2007. The minority interest in subsidiaries represents the minority shareholders’ proportionate share of net income of those subsidiaries for the six months ended June 30, 2008 and 2007. The minority interest relates to our two majority-owned indirect subsidiaries, InCoaTec GmbH and Bruker Baltic Ltd.

 

Net Income

 

Our net income for the six months ended June 30, 2008, was $21.0 million, or $0.13 per diluted share, compared to $32.0 million, or $0.20 per diluted share, for the comparable period of 2007.

 

Segment Results

 

Revenue

 

The following table presents revenue, change in revenue and revenue growth by reportable segment for the six months ended June 30, 2008 and 2007 (dollars in thousands):

 

 

 

 

 

 

 

 

 

Percentage

 

 

 

2008

 

2007

 

$ Change

 

Change

 

BioScience

 

$

303,222

 

$

236,956

 

$

66,266

 

28.0

%

BioSpin

 

275,888

 

233,411

 

42,477

 

18.2

%

Eliminations (a)

 

(29,209

)

(24,489

)

(4,720

)

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenue

 

$

549,901

 

$

445,878

 

$

104,023

 

23.3

%