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 September 30, 2010

 

 

o

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

 

For the transition period from                  to

 

Commission File Number 000-30833

 

BRUKER CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

04-3110160

(State or other jurisdiction of

 incorporation or organization)

 

(I.R.S. Employer

 Identification No.)

 

40 Manning Road, Billerica, MA 01821

 (Address of principal executive offices) (Zip Code)

 

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

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

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

 

Class

 

Outstanding at November 2, 2010

Common Stock, $0.01 par value per share

 

164.844.564 shares

 

 

 



Table of Contents

 

BRUKER CORPORATION

 

Quarterly Report on Form 10-Q

For the Quarter Ended September 30, 2010

 

Index

 

 

 

 

 

Page

Part I

 

FINANCIAL INFORMATION

 

1

Item 1:

 

Unaudited Condensed Consolidated Financial Statements

 

1

 

 

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009

 

1

 

 

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009

 

2

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009

 

3

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

4

Item 2:

 

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

 

17

Item 3:

 

Quantitative and Qualitative Disclosures About Market Risk

 

36

Item 4:

 

Controls and Procedures

 

37

Part II

 

OTHER INFORMATION

 

37

Item 1:

 

Legal Proceedings

 

37

Item 1A:

 

Risk Factors

 

38

Item 2:

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

38

Item 3:

 

Defaults Upon Senior Securities

 

38

Item 4:

 

[Removed and Reserved]

 

38

Item 5:

 

Other Information

 

38

Item 6:

 

Exhibits

 

38

 

 

Signatures

 

40

 


 


Table of Contents

 

PART I                                                       FINANCIAL INFORMATION

 

ITEM 1.                                                     UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

BRUKER CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share data)

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

188.0

 

$

207.1

 

Restricted cash

 

2.5

 

2.0

 

Accounts receivable, net

 

195.4

 

184.1

 

Inventory

 

487.8

 

422.8

 

Other current assets

 

80.3

 

57.5

 

Total current assets

 

954.0

 

873.5

 

 

 

 

 

 

 

Property, plant and equipment, net

 

218.7

 

223.4

 

Intangibles and other long-term assets

 

104.4

 

75.1

 

Total assets

 

$

1,277.1

 

$

1,172.0

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term borrowings

 

$

27.1

 

$

22.0

 

Accounts payable

 

60.1

 

49.8

 

Customer advances

 

211.7

 

219.2

 

Other current liabilities

 

292.7

 

249.2

 

Total current liabilities

 

591.6

 

540.2

 

 

 

 

 

 

 

Long-term debt

 

94.3

 

115.7

 

Other long-term liabilities

 

97.2

 

97.3

 

Commitments and contingencies (Note 18)

 

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

Preferred stock, $0.01 par value 5,000,000 shares authorized,
none issued or outstanding at September 30, 2010 and December 31, 2009

 

 

 

Common stock, $0.01 par value 260,000,000 shares authorized,
164,861,846 and 164,384,679 shares issued and 164,844,627 and 164,371,384 outstanding at September 30, 2010 and December 31, 2009, respectively

 

1.6

 

1.6

 

Treasury stock at cost, 17,219 at September 30, 2010 and 13,295 at December 31, 2009

 

(0.2

)

(0.1

)

Other shareholders’ equity

 

490.4

 

415.7

 

Total shareholders’ equity attributable to Bruker Corporation

 

491.8

 

417.2

 

Noncontrolling interest in consolidated subsidiaries

 

2.2

 

1.6

 

Total shareholders’ equity

 

494.0

 

418.8

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

1,277.1

 

$

1,172.0

 

 

The accompanying notes are an integral part of these statements.

 

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BRUKER CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Product revenue

 

$

269.7

 

$

230.7

 

$

780.7

 

$

655.8

 

Service revenue

 

39.1

 

32.4

 

103.1

 

87.6

 

Other revenue

 

1.4

 

2.0

 

5.0

 

4.7

 

Total revenue

 

310.2

 

265.1

 

888.8

 

748.1

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenue

 

143.5

 

127.9

 

426.8

 

364.8

 

Cost of service revenue

 

19.8

 

18.0

 

53.1

 

50.2

 

Total cost of revenue

 

163.3

 

145.9

 

479.9

 

415.0

 

Gross profit

 

146.9

 

119.2

 

408.9

 

333.1

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

72.2

 

61.2

 

201.9

 

180.1

 

Research and development

 

32.5

 

31.6

 

96.5

 

91.8

 

Amortization of acquisition-related intangible assets

 

1.0

 

0.4

 

2.1

 

1.3

 

Other charges (credits), net

 

1.9

 

 

4.3

 

(0.6

)

Total operating expenses

 

107.6

 

93.2

 

304.8

 

272.6

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

39.3

 

26.0

 

104.1

 

60.5

 

 

 

 

 

 

 

 

 

 

 

Interest and other income (expense), net

 

(1.1

)

(1.8

)

(5.6

)

(4.6

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes and noncontrolling interest in consolidated subsidiaries

 

38.2

 

24.2

 

98.5

 

55.9

 

Income tax provision

 

10.3

 

8.1

 

31.7

 

18.5

 

 

 

 

 

 

 

 

 

 

 

Consolidated net income

 

27.9

 

16.1

 

66.8

 

37.4

 

Net income (loss) attributable to noncontrolling interest in consolidated subsidiaries

 

0.5

 

(0.3

)

0.7

 

(0.3

)

Net income attributable to Bruker Corporation

 

$

27.4

 

$

16.4

 

$

66.1

 

$

37.7

 

 

 

 

 

 

 

 

 

 

 

Net income per common share attributable to

 

 

 

 

 

 

 

 

 

Bruker Corporation shareholders:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

0.17

 

$

0.10

 

$

0.40

 

$

0.23

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

164.5

 

163.5

 

164.3

 

163.4

 

Diluted

 

165.7

 

165.0

 

165.6

 

164.7

 

 

The accompanying notes are an integral part of these statements.

 

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BRUKER CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2010

 

2009

 

Cash flows from operating activities:

 

 

 

 

 

Consolidated net income

 

$

66.8

 

$

37.4

 

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

 

 

 

 

 

Depreciation and amortization

 

23.8

 

20.4

 

Amortization of deferred financing costs

 

0.5

 

0.5

 

Stock-based compensation

 

5.0

 

4.8

 

Deferred income taxes

 

(7.5

)

(6.8

)

Gain on bargain purchase

 

 

(2.1

)

Other non-cash expense

 

1.7

 

0.5

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(11.4

)

26.9

 

Inventories

 

(55.5

)

7.7

 

Accounts payable

 

10.8

 

0.6

 

Customer advances

 

(2.1

)

(16.6

)

Other changes in operating assets and liabilities, net

 

30.6

 

(6.0

)

Net cash provided by operating activities

 

62.7

 

67.3

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(20.5

)

(8.9

)

Acquisitions, net of cash acquired

 

(37.8

)

(1.6

)

Net cash used in investing activities

 

(58.3

)

(10.5

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Repayments of revolving lines of credit, net

 

(0.5

)

(51.5

)

Repayment of term debt

 

(15.8

)

(20.1

)

Changes in restricted cash

 

(0.8

)

(0.7

)

Issuance of common stock under stock plans

 

2.7

 

0.6

 

Cash payments to noncontrolling interests

 

(0.1

)

 

Net cash used in financing activities

 

(14.5

)

(71.7

)

Effect of exchange rate changes on cash and cash equivalents

 

(9.0

)

(2.8

)

Net change in cash and cash equivalents

 

(19.1

)

(17.7

)

Cash and cash equivalents at beginning of period

 

207.1

 

166.2

 

Cash and cash equivalents at end of period

 

$

188.0

 

$

148.5

 

 

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 (“Bruker” or the “Company”) is a designer and manufacturer of proprietary life science and materials research systems and associated products that address the rapidly evolving needs of a diverse array of customers in life science, pharmaceutical, biotechnology and molecular diagnostics research, as well as in materials and chemical analysis in various industries and government applications. The Company’s core technology platforms include X-ray technologies, magnetic resonance technologies, mass spectrometry technologies, optical emission spectroscopy and infrared and Raman molecular spectroscopy technologies. The Company also manufactures and distributes a broad range of field analytical systems for chemical, biological, radiological, nuclear and explosives, or CBRNE, detection. The Company also develops and manufactures low temperature and high temperature superconducting materials, consisting primarily of wire, and superconducting devices for use in advanced magnet technology, physics research and energy applications. The Company maintains major technical and manufacturing centers in Europe, North America and Japan, and has sales offices located throughout the world. The Company’s diverse customer base includes life science, pharmaceutical, biotechnology and molecular diagnostic research companies, academic institutions, advanced materials and semiconductor manufacturers and government agencies.

 

Management reports results on the basis of the following two segments:

 

·                  Scientific Instruments.  The operations of this segment include the design, manufacture and distribution of advanced instrumentation and automated solutions based on X-ray technology, spark-optical emission spectroscopy technology, atomic force microscopy, magnetic resonance technology, mass spectrometry technology and infrared and Raman molecular spectroscopy technology. Typical customers of the Scientific Instruments segment include pharmaceutical, biotechnology and molecular diagnostic companies, academic institutions, medical school and other non-profit organizations, and clinical microbiology laboratories, government departments and agencies, and nanotechnology, semiconductor, chemical, cement, metals and petroleum companies, and food, beverage and agricultural analysis companies and laboratories.

 

·                  Energy & Supercon Technologies. The operations of this segment include the design, manufacture and marketing of superconducting materials, primarily metallic low temperature superconductors, for use in magnetic resonance imaging, nuclear magnetic resonance, fusion energy research and other applications, and ceramic high temperature superconductors primarily for fusion energy research applications. The Company also utilizes its low temperature and high temperature superconductors to develop, manufacture and market devices that have applications primarily in “big science” research. Typical customers of the Energy & Supercon Technologies segment include companies in the medical, power and energy, and processing industries, private and public research and development laboratories in the fields of fundamental and applied sciences and energy research, academic institutions and government agencies.

 

The Company has announced plans to sell a minority ownership position in its Bruker Energy & Supercon Technologies, Inc. (“BEST”) subsidiary through an initial public offering of the capital stock of BEST. The Company believes the offering will provide Bruker shareholders greater visibility into BEST’s performance and growth and strengthen BEST’s access to financing for its revenue growth initiatives, including the development of products for the renewable energy and energy infrastructure markets.

 

The financial statements represent the consolidated accounts of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2010 and 2009 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 (“SEC”) for Quarterly Reports on Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial information presented herein does not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of the results expected for the full year. Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported net income or shareholders’ equity.

 

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2.              Acquisitions

 

On October 7, 2010, the Company completed the acquisition of Veeco Metrology Inc., a scanning probe microscopy and optical industrial metrology instruments business (the “nano surfaces business”), from Veeco Instruments Inc. for cash consideration of $229.4 million. The Company financed the acquisition with $167.6 million borrowed under a revolving credit agreement and the balance with cash on hand. The acquired business complements the Company’s existing atomic force microscopy products and expands the Company’s offerings to industrial and applied markets, specifically in the fields of materials and nanotechnology research and analysis. Under the purchase agreement $22.9 million of the purchase price was paid into escrow pending the resolution of indemnification obligations and working capital obligations of the seller.

 

On May 19, 2010, the Company completed the acquisition of three former Varian, Inc. product lines which Agilent Technologies, Inc. divested in connection with obtaining regulatory approval for its May 14, 2010 acquisition of Varian. The Company acquired certain assets and assumed certain liabilities in Varian’s inductively coupled plasma mass spectrometry instruments business, laboratory gas chromatography instruments business, and gas chromatography triple-quadrupole mass spectrometry instruments business (collectively, the “chemical analysis business”) for cash consideration of $37.5 million. The acquired business complements the Company’s existing mass spectrometry products and expands the Company’s offerings to industrial and applied markets that we did not previously serve.

 

The acquisition of the chemical analysis business is being accounted for under the acquisition method. The Company made the following adjustments to its allocation of the consideration transferred in the third quarter of 2010 (in millions):

 

 

 

Acquisition Date Fair Values, as Initially Reported

 

Measurement Period Adjustments

 

Acquisition Date Fair Values, as Adjusted

 

Accounts receivable

 

$

 

$

9.2

 

$

9.2

 

Inventory

 

13.0

 

3.6

 

16.6

 

Property, plant and equipment

 

2.8

 

(0.4

)

2.4

 

Intangible assets

 

9.7

 

12.2

 

21.9

 

Goodwill

 

22.0

 

(20.4

)

1.6

 

Liabilities assumed

 

(10.0

)

(4.2

)

(14.2

)

 

 

$

37.5

 

$

 

$

37.5

 

 

The Company expects to finalize the allocation of the consideration transferred in connection with the chemical analysis business in the fourth quarter of 2010.The Company has not finalized the valuation of inventory, intangible assets and certain assumed liabilities. The measurement period adjustments made during the third quarter of 2010 did not have a material impact on the results of operations for the three months ended September 30, 2010 and would not have had a material impact on the results of operations for the three months ended June 30, 2010.

 

The results of the chemical analysis business have been included in the Scientific Instruments segment from the date of acquisition. Pro forma financial information reflecting the acquisition of the chemical analysis business has not been presented because the impact on revenues, net income and net income per common share attributable to Bruker Corporation shareholders is not material.

 

In April 2009, the Company acquired substantially all of the assets of the research instruments portion of ACCEL Instruments GmbH (the “RI business”) from Varian Medical Systems, Inc. The acquisition of the RI business was accounted for under the acquisition method. The RI business, located in Bergisch Gladbach, Germany, consists of the development and manufacture of electron and ion linear accelerators, superconducting and normal conducting accelerator cavities, insertion devices, superconducting fault current limiters, other accelerator components and specialty superconducting magnets for physics and energy research and a variety of other scientific applications. The consideration transferred in acquiring the RI business was approximately $0.4 million and consisted entirely of cash. The Company acquired approximately $2.8 million of receivables, $4.4 million of inventory, $2.2 million of other current assets and $4.9 million of property, plant and equipment in this acquisition and assumed approximately $12.1 million of current liabilities. The Company also recorded $0.5 million representing the fair value of a noncontrolling interest. In 2009, in connection with the acquisition of the RI business, the Company recorded a gain of approximately $1.3 million that was recorded as a component of acquisition-related charges in the

 

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consolidated statements of operations. A gain of $2.1 million was initially recorded in the second quarter of 2009 based on a preliminary purchase price allocation, but was subsequently reduced by $0.8 million in the fourth quarter of 2009 based on the final allocation. The results of the RI business have been included in the Energy & Supercon Technologies segment from the date of acquisition. Pro forma financial information reflecting the acquisition of the RI business has not been presented because the impact on revenues, net income and net income per common share attributable to Bruker Corporation shareholders is not material.

 

3.              Stock-Based Compensation

 

The Company’s primary types of share-based compensation are in the form of stock options and restricted stock. The Company recorded stock-based compensation expense for the three and nine months ended September 30, 2010 and 2009 as follows (in millions):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Stock options

 

$

1.4

 

$

1.2

 

$

4.2

 

$

3.7

 

Restricted stock

 

0.3

 

0.3

 

0.8

 

1.1

 

Total stock-based compensation, pre-tax

 

1.7

 

1.5

 

5.0

 

4.8

 

Tax benefit

 

0.3

 

0.3

 

0.8

 

0.9

 

Total stock-based compensation, net of tax

 

$

1.4

 

$

1.2

 

$

4.2

 

$

3.9

 

 

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

 

 

 

2010

 

2009

 

Risk-free interest rate

 

1.85%-3.46%

 

1.71%-3.60%

 

Expected life

 

6.5 years

 

6.5 years

 

Volatility

 

62.0%

 

64.0%

 

Expected dividend yield

 

0.0%

 

0.0%

 

 

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

 

Bruker Corporation Stock Plan

 

In February 2010, the Bruker BioSciences Corporation Amended and Restated 2000 Stock Option Plan (the “2000 Plan”) expired at the end of its scheduled ten-year term. On March 9, 2010, the Company’s Board of Directors unanimously approved and adopted the Bruker Corporation 2010 Incentive Compensation Plan (the “2010 Plan”) and on May 14, 2010, the 2010 Plan was approved by the Company’s stockholders. The 2010 Plan provides for the issuance of up to 8,000,000 shares of the Company’s common stock. The Plan allows a committee of the Board of Directors (the “Committee”) to grant incentive stock options, non-qualified stock options and restricted stock awards. 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 award. Awards granted by the Committee typically vest over a period of three to five years.

 

At September 30, 2010, the Company expects to recognize pre-tax stock-based compensation expense of $11.1 million associated with outstanding stock option awards granted under the Company’s stock plans over the weighted average remaining service period of 1.6 years. In addition, the Company expects to recognize additional pre-tax stock-based compensation expense of $1.6 million associated with outstanding restricted stock awards granted under the Company’s stock plans over the weighted average remaining service period of 0.6 years.

 

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Bruker Energy & Supercon Technologies Stock Plan

 

In October 2009, the Board of Directors of BEST adopted the Bruker Energy & Supercon Technologies, Inc. 2009 Stock Option Plan (the “BEST Plan”). The BEST Plan provides for the issuance of up to 1,600,000 shares of BEST common stock in connection with awards under the BEST Plan. The BEST Plan allows a committee of the BEST Board of Directors to grant incentive stock options, non-qualified stock options and restricted stock awards. The Compensation Committee of the BEST Board of Directors has the authority to determine which employees will receive the awards, the amount of the awards and other terms and conditions of the award. Awards granted pursuant to the BEST Plan typically vest over a period of three to five years.

 

At September 30, 2010, the Company expects to recognize pre-tax stock-based compensation expense of $1.9 million associated with outstanding stock option awards granted under the BEST Plan over the weighted average remaining service period of 3.6 years.

 

4.              Earnings Per Share

 

Net income per share is calculated by dividing net income by the weighted-average shares outstanding during the period. The diluted net income per share computation includes the effect of shares which would be issuable upon the exercise of outstanding stock options and the vesting of restricted stock, reduced by the number of shares assumed to be purchased by the Company based on the treasury stock method.

 

The following table sets forth the computation of basic and diluted average shares outstanding for the three and nine months ended September 30, 2010 and 2009 (in millions, except per share amounts):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net income attributable to Bruker Corporation

 

$

27.4

 

$

16.4

 

$

66.1

 

$

37.7

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding-basic

 

164.5

 

163.5

 

164.3

 

163.4

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options and restricted stock

 

1.2

 

1.5

 

1.3

 

1.3

 

 

 

165.7

 

165.0

 

165.6

 

164.7

 

 

 

 

 

 

 

 

 

 

 

Net income per common share attributable
to Bruker Corporation shareholders:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

0.17

 

$

0.10

 

$

0.40

 

$

0.23

 

 

Stock options to purchase approximately 0.5 million shares and 2.1 million shares were excluded from the computation of diluted earnings per share in the three months ended September 30, 2010 and 2009, respectively, and approximately 0.4 million shares and 3.3 million shares were excluded from the computation of diluted earnings per share in the nine months ended September 30, 2010 and 2009, respectively, as their effect would have been anti-dilutive.

 

5.              Fair Value of Financial Instruments

 

The Company applies the following hierarchy, which prioritizes the input used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The three levels are defined as follows:

 

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

 

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

 

The Company measures the following financial assets and liabilities at fair value on a recurring basis. The fair value of these financial assets and liabilities was determined using the following inputs at September 30, 2010 (in millions):

 

 

 

 

 

Quoted Prices in Active Markets Available

 

Significant Other Observable Inputs

 

Significant Unobservable Inputs

 

 

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

93.2

 

$

93.2

 

$

 

$

 

Embedded derivatives in purchase and delivery contracts

 

0.1

 

 

0.1

 

 

Foreign exchange contracts

 

0.7

 

 

0.7

 

 

Total assets recorded at fair value

 

$

94.0

 

$

93.2

 

$

0.8

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap

 

$

3.7

 

$

 

$

3.7

 

$

 

Embedded derivatives in purchase and delivery contracts

 

3.4

 

 

3.4

 

 

Foreign exchange contracts

 

0.7

 

 

0.7

 

 

Total liabilities recorded at fair value

 

$

7.8

 

$

 

$

7.8

 

$

 

 

The Company’s financial instruments consist primarily of cash equivalents, derivative instruments consisting of forward foreign exchange contracts and an interest rate swap, accounts receivable, short-term borrowings, accounts payable and long-term debt. The carrying amounts of the Company’s cash equivalents, accounts receivable, short-term borrowings and accounts payable approximate fair value due to their short-term nature. Derivative assets and liabilities are measured at fair value on a recurring basis. The fair value of derivative instruments is based primarily on quotes received from third party banks. These values represent the estimated amount the Company would receive or pay to terminate the agreements taking into consideration current foreign exchange or interest rates, as well as the creditworthiness of the counterparty. The Company’s long-term debt consists primarily of variable rate arrangements with interest rates that reset every three months and, as a result, reflect current interest rates. Consequently, the carrying value of the Company’s long-term debt approximates fair value.

 

6.              Inventories

 

Inventories consisted of the following as of September 30, 2010 and December 31, 2009 (in millions):

 

 

 

September 30,
2010

 

December 31,
2009

 

Raw materials

 

$

132.0

 

$

108.8

 

Work-in-process

 

181.4

 

134.6

 

Demonstration units

 

47.2

 

41.3

 

Finished goods

 

127.2

 

138.1

 

Inventories

 

$

487.8

 

$

422.8

 

 

The Company reduces the carrying value of its demonstration inventories for differences between its cost and estimated net realizable value through a charge to cost of product revenue that is based on a number of factors including the age of the unit, the physical condition of the unit and an assessment of technological obsolescence. Amounts recorded in cost of product revenue related to the write-down of demonstration units to net realizable value were $6.0 million and $7.0 million for the three months ended September 30, 2010 and 2009, respectively and $17.3 million and $18.9 million for the nine months ended September 30, 2010 and 2009, respectively.

 

Finished goods include in-transit systems that have been shipped to the Company’s customers but have not yet been installed and accepted by the customer. As of September 30, 2010 and December 31, 2009, inventory-in-transit was $63.4 million and $80.8 million, respectively.

 

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7.              Goodwill and Other Intangible Assets

 

The following table sets forth the changes in the carrying amount of goodwill for the nine months ended September 30, 2010 (in millions):

 

Balance at December 31, 2009

 

$

47.5

 

Goodwill acquired during the period

 

1.9

 

Foreign currency impact

 

(1.0

)

Balance at September 30, 2010

 

$

48.4

 

 

Goodwill is not amortized, instead, goodwill is tested for impairment on a reporting unit basis annually, or on an interim basis when events or changes in circumstances warrant. The Company performed its annual test for impairment as of December 31, 2009 and determined that goodwill and other intangible assets were not impaired at that time. The Company did not identify any indicators of impairment during the nine month period ended September 30, 2010 that would warrant an interim test.

 

The following is a summary of other intangible assets subject to amortization at September 30, 2010 and December 31, 2009 (in millions):

 

 

 

September 30, 2010

 

December 31, 2009

 

 

 

Gross Carrying Amount

 

Accumulated Amortization

 

Net Carrying Amount

 

Gross Carrying Amount

 

Accumulated Amortization

 

Net Carrying Amount

 

Existing technology and related patents

 

$

20.1

 

$

(11.8

)

$

8.3

 

$

14.4

 

$

(10.7

)

$

3.7

 

Customer relationships

 

17.8

 

(1.6

)

16.2

 

2.0

 

(0.9

)

1.1

 

Trade names

 

0.4

 

(0.2

)

0.2

 

0.4

 

(0.3

)

0.1

 

Intangible assets subject to amortization, net

 

$

38.3

 

$

(13.6

)

$

24.7

 

$

16.8

 

$

(11.9

)

$

4.9

 

 

For the three months ended September 30, 2010 and 2009, the Company recorded amortization expense of $1.0 million and $0.4 million, respectively, related to intangible assets subject to amortization. For the nine months ended September 30, 2010 and 2009, the Company recorded amortization expense of $2.1 million and $1.3 million, respectively, related to intangible assets subject to amortization.

 

8.              Debt

 

At September 30, 2010 and December 31, 2009, the Company’s debt obligations consisted of the following (in millions):

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

US Dollar term loan under the Credit Agreement

 

$

116.3

 

$

131.3

 

 

 

 

 

 

 

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

 

 

0.3

 

 

 

 

 

 

 

Capital lease obligations

 

5.1

 

6.0

 

Total long-term debt

 

121.4

 

137.6

 

Current portion of long-term debt

 

(27.1

)

(21.9

)

Total long-term debt, less current portion

 

$

94.3

 

$

115.7

 

 

In 2008, the Company entered into a credit agreement with a syndication of lenders (the “Credit Agreement”) which provides for a revolving credit line with a maximum commitment of $230.0 million and a term facility of $150.0 million. The outstanding principal and interest under the term loan is payable in quarterly installments through December 2012. Borrowings under the Credit Agreement bear interest, at the Company’s option, at either (i) the higher of the prime rate or the federal funds rate plus 0.50%, or (ii) adjusted LIBOR, plus margins ranging from 0.40% to 1.25% and a facility fee ranging from 0.10% to 0.20%. As of September 30, 2010, the weighted average interest rate of borrowings under the term facility of the Credit Agreement was approximately 2.7%.

 

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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 ratios and interest coverage ratios as defined in the Credit Agreement. In addition to the financial ratios, the Credit Agreement restricts, among other things, the Company’s ability to do the following: make certain payments; incur additional debt; incur certain liens; make certain investments, including derivative agreements; merge, consolidate, sell or transfer all or substantially all of the Company’s assets; and enter into certain transactions with affiliates. As of September 30, 2010, the latest measurement date, the Company was in compliance with the covenants under the Credit Agreement.

 

In addition to its long-term arrangements, the Company had the following amounts outstanding under revolving loan arrangements (in millions):

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

Revolving loans under the Credit Agreement

 

$

 

$

 

Other revolving loans

 

 

0.1

 

Total short-term borrowings

 

$

 

$

0.1

 

 

The following is a summary of the maximum commitments and net amounts available to the Company under revolving loans as of September 30, 2010 (in millions):

 

 

 

Weighted
Average
Interest Rate

 

Total Amount
Committed by
Lenders

 

Outstanding
Borrowings

 

Outstanding
Letters of
Credit

 

Total Amount
Available

 

Credit Agreement

 

%   

$

230.0

 

$

 

$

1.5

 

$

228.5

 

Other revolving loans

 

%

112.6

 

 

90.9

 

21.7

 

Total revolving loans

 

 

 

$

342.6

 

$

 

$

92.4

 

$

250.2

 

 

On October 1, 2010, we borrowed $170.0 million under the revolving loan component of the Credit Agreement to finance our acquisition and the working capital requirements of the nano surfaces business. The borrowing under the Credit Agreement reduced the total amount available to us from our lenders.

 

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

 

9.     Derivative Instruments and Hedging Activities

 

Interest Rate Risks

 

The Company’s exposure to interest rate risk relates primarily to outstanding variable rate debt and adverse movements in the related short-term market rates. The most significant component of the Company’s interest rate risk relates to amounts outstanding under the Credit Agreement. In April 2008, the Company entered into an interest rate swap arrangement to manage its exposure to interest rate movements and the related effect on its variable rate debt. Under this interest rate swap arrangement, the Company will pay a fixed rate of approximately 3.8% and receive a variable rate based on three month LIBOR. The initial notional amount of this interest rate swap was $90.0 million and it amortizes in proportion to the term debt component of the Credit Agreement through December 2012. At September 30, 2010, the notional amount of this interest rate swap was $69.8 million. The Company concluded that this swap met the criteria to qualify as an effective hedge of the

 

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variability of cash flows of the interest payments and accounts for the interest rate swap as a cash flow hedge. Accordingly, the Company reflects changes in the fair value of the effective portion of this interest rate swap in accumulated other comprehensive income, a separate component of shareholders’ equity. As of September 30, 2010 and December 31, 2009, the Company recorded a liability of $3.7 million and $3.5 million, respectively, related to the fair value of the interest rate swap that is included in other current liabilities in the consolidated balance sheets. Amounts recorded in accumulated other comprehensive income (loss) are reclassified to interest and other income (expense), net in the consolidated statement of operations when either the forecasted transaction occurs or it becomes probable that the forecasted transaction will not occur. The Company expects $2.2 million of the accumulated loss to be reclassified into earnings over the next twelve months.

 

Foreign Exchange Rate Risk Management

 

The Company generates a substantial portion of its revenues in international markets, principally Germany and other countries in the European Union, Switzerland and Japan, which subjects our operations to the exposure of exchange rate fluctuations. The impact of currency exchange rate movement can be positive or negative in any period.

 

The Company periodically enters into foreign currency contracts, primarily forward contracts, to minimize the volatility that fluctuations in currency exchange rates have on the Company’s cash flows related to purchases and sales denominated in foreign currencies. Under these arrangements, the Company typically agrees to purchase a fixed amount of a foreign currency in exchange for a fixed amount of U.S. Dollars or other currencies on specified dates with maturities of less than two years. These transactions do not qualify for hedge accounting and, accordingly, the instrument is recorded at fair value with the corresponding gains and losses recorded in interest and other income (expense), net in the consolidated statements of operations. At September 30, 2010, and December 31, 2009, the following foreign currency contracts were outstanding (in millions):

 

 

 

 

 

Notional Amount

Buy

 

Sell

 

September 30, 
2010

 

December 31,
2009

Euro

 

Australian Dollars

 

$

 2.1

 

$

 —

Euro

 

U.S. Dollars

 

20.3

 

5.5

Swiss Francs

 

Euro

 

18.5

 

Swiss Francs

 

U.S. Dollars

 

64.0

 

13.1

U.S. Dollars

 

Euro

 

 

6.7

U.S. Dollars

 

Swiss Francs

 

49.7

 

 

 

 

 

$

 154.6

 

$

 25.3

 

In addition, the Company periodically enters into purchase and sales contracts denominated in currencies other than the functional currency of the parties to the transaction. The Company accounts for these transactions separately valuing the “embedded derivative” component of these contracts. The contracts, denominated in currencies other than the functional currency of the transacting parties, amounted to $18.8 million for the delivery of products and $0.2 million for the purchase of products at September 30, 2010 and $30.4 million for the delivery of products and $0.2 million for the purchase of products at December 31, 2009. The changes in the fair value of these embedded derivatives are recorded in interest and other income (expense), net in the consolidated statements of operations.

 

The fair value of the foreign exchange derivative instruments described above is recorded in our consolidated balance sheets for the periods ended September 30, 2010 and December 31, 2009 as follows (in millions):

 

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Table of Contents

 

 

 

 

 

 

Fair Value

 

 

 

Balance Sheet Location

 

September 30,
2010

 

December 31,
2009

 

Derivative assets:

 

 

 

 

 

 

 

Embedded derivatives in purchase and delivery contracts

 

Other current assets

 

$

0.1

 

$

 

Foreign exchange contracts

 

Other current assets

 

0.7

 

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

Interest rate swap contract

 

Other current liabilities

 

$

3.7

 

$

3.5

 

Embedded derivatives in purchase and delivery contracts

 

Other current liabilities

 

3.4

 

1.5

 

Foreign exchange contracts

 

Other current liabilities

 

0.7

 

 

 

The losses recognized in other comprehensive income related to the effective portion of the interest rate swap designated as a hedging instrument for the three and nine months ended September 30, 2010 and 2009 are as follows (in millions):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Interest rate swap contract

 

$

(0.7

)

$

(1.0

)

$

(2.2

)

$

(0.9

)

 

The losses related to the effective portion of the interest rate swap designated as a hedging instrument that were reclassified from other comprehensive income and recognized in net income for the three and nine months ended September 30, 2010 and 2009 are as follows (in millions):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Interest rate swap contract

 

$

(0.6

)

$

(0.7

)

$

(2.0

)

$

(1.8

)

 

The Company did not recognize any amounts related to ineffectiveness in the results of operations for the three and nine months ended September 30, 2010 and 2009.

 

The impact on net income of changes in the fair value of derivative instruments not designated as hedging instruments for the three and nine months ended September 30, 2010 and 2009 are as follows (in millions):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Foreign exchange contracts

 

$

1.3

 

$

(1.0

)

$

 

$

(1.0

)

Embedded derivatives in purchase and delivery contracts

 

0.5

 

(0.7

)

(1.8

)

(0.1

)

Income (expense), net

 

$

1.8

 

$

(1.7

)

$

(1.8

)

$

(1.1

)

 

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

 

10.  Other Charges (Credits), Net

 

The components of other charges (credits), net, were as follows for the three and nine months ended September 30, 2010 and 2009 (in millions):

 

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Table of Contents

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Acquisition-related charges

 

$

1.0

 

$

 

$

1.7

 

$

0.8

 

Transition-related charges incurred in connection with acquired businesses

 

0.9

 

 

1.4

 

 

Loss on divestiture of businesses

 

 

 

1.0

 

 

Restructuring charges (Note 11)

 

 

 

0.2

 

 

Impairment charges (Note 12)

 

 

 

 

0.7

 

Gain on bargain purchase (Note 2)

 

 

 

 

(2.1

)

Other charges (credits), net

 

$

1.9

 

$

 

$

4.3

 

$

(0.6

)

 

11.  Restructuring Charges

 

In the first quarter of 2010, the Company recorded restructuring charges of $0.2 million, which related primarily to severance incurred in connection with the closing of a production facility in Herzogenrath, Germany and relocating the associated operations. These charges were recorded in the Scientific Instruments segment. The Company does not expect to incur any additional costs related to this move. The liability for restructuring charges was included in other current liabilities in the unaudited condensed consolidated balance sheets. The charges related to this restructuring reserve are as follows (in millions):

 

 

 

Total

 

Severance

 

Balance at December 31, 2009

 

$

 

$

 

Restructuring charges

 

0.2

 

0.2

 

Cash payments

 

(0.2

)

(0.2

)

Foreign currency impact

 

 

 

Balance at September 30, 2010

 

$

 

$

 

 

12.  Impairment Charges

 

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

 

13.  Employee Benefit Plans

 

Substantially all of the Company’s employees in Switzerland, France and Japan, as well as certain employees in Germany, are covered by Company-sponsored defined benefit pension plans. Retirement benefits are generally earned based on years of service and compensation during active employment. Eligibility is generally determined in accordance with local statutory requirements; however, the level of benefits and terms of vesting varies among plans.

 

The net periodic pension cost consists of the following components for the three and nine months ended September 30, 2010 and 2009 (in millions): 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Components of net periodic benefit costs:

 

 

 

 

 

 

 

 

 

Service cost

 

$

1.3

 

$

1.3

 

$

3.3

 

$

3.4

 

Interest cost

 

1.5

 

1.3

 

4.0

 

3.4

 

Expected return on plan assets

 

(0.9

)

(1.0

)

(2.7

)

(3.0

)

Amortization of prior service costs

 

 

 

0.5

 

 

Net periodic benefit costs

 

$

1.9

 

$

1.6

 

$

5.1

 

$

3.8

 

 

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The Company made contributions of $1.9 million to its defined benefit plans during the nine months ended September 30, 2010 and estimates contributions of $0.7 million will be made during the remainder of 2010.

 

14.  Interest and Other Income (Expense), Net

 

The components of interest and other income (expense), net, were as follows for the three and nine months ended September 30, 2010 and 2009 (in millions):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Interest income

 

$

0.1

 

$

0.4

 

$

0.4

 

$

1.2

 

Interest expense

 

(1.2

)

(1.8

)

(4.0

)

(6.2

)

Exchange gains (losses) on foreign currency transactions

 

(0.1

)

(0.8

)

(2.0

)

(0.2

)

Other

 

0.1

 

0.4

 

 

0.6

 

Interest and other income (expense), net

 

$

(1.1

)

$

(1.8

)

$

(5.6

)

$

(4.6

)

 

15.  Provision for Income Taxes

 

The Company accounts for income taxes using the asset and liability approach by recognizing deferred tax assets and liabilities for the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities, calculated using enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return. The Company records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. In addition, the Company accounts for uncertain tax positions that have reached a minimum recognition threshold.

 

The income tax provision for the three months ended September 30, 2010 and 2009 was $10.3 million and $8.1 million, respectively, representing effective tax rates of 27.0% and 33.5%, respectively. The income tax provision for the nine months ended September 30, 2010 and 2009 was $31.7 million and $18.5 million, respectively, representing effective tax rates of 32.2% and 33.1%, respectively. In the third quarter of 2010, the Company completed a study of its research and development activities and identified additional U.S. Federal tax credits of approximately $2.8 million. These credits reduced our effective tax rate by approximately 7.3% and 2.8% for the three and nine month periods ended September 30, 2010, respectively.

 

The Company’s effective tax rate mainly reflects the tax provision (benefit) for non-U.S. entities only. A full valuation allowance will be maintained against all U.S. deferred tax assets, including U.S. net operating losses and tax credits, until evidence exists that it is more likely than not that the loss carryforward and credit amounts will be utilized to offset U.S. taxable income. The Company’s tax rate may change over time as the amount or mix of income and taxes outside the U.S. changes. The effective tax rate is calculated using projected annual pre-tax income or loss and is affected by research and development tax credits, the expected level of other tax benefits, the impact of changes to the valuation allowance, and changes in the mix of the Company’s pre-tax income and losses among jurisdictions with varying statutory tax rates and credits.

 

The Company has unrecognized tax benefits of approximately $25.6 million as of September 30, 2010, of which $17.3 million, if recognized, would result in a reduction of the Company’s effective tax rate. The Company recognizes penalties and interest related to unrecognized tax benefits in the provision for income taxes. As of September 30, 2010 and December 31, 2009, approximately $4.5 million and $3.8 million, respectively, of accrued interest and penalties related to uncertain tax positions was included in other current liabilities on the unaudited condensed consolidated balance sheets. Penalties and interest related to unrecognized tax benefits in the provision for income taxes of $0.2 million were recorded during the three months ended September 30, 2010 and 2009, and $0.7 million and $0.6 million were recorded during the nine months ended September 30, 2010 and 2009, respectively.

 

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

 

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16.  Accumulated Other Comprehensive Income (Loss)

 

Comprehensive income (loss) refers to revenues, expenses, gains and losses that under GAAP are included in other comprehensive income, but excluded from net income as these amounts are recorded directly as an adjustment to shareholders’ equity, net of tax. The following is a summary of comprehensive income (loss) for the three and nine months ended September 30, 2010 and 2009 (in millions):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Consolidated net income

 

$

27.9

 

$

16.1

 

$

66.8

 

$

37.4

 

Foreign currency translation adjustments

 

53.3

 

19.5

 

2.6

 

15.8

 

Unrealized gains (losses) on interest rate swap:

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

(0.7

)

(1.0

)

(2.2

)

(0.9

)

Less reclassification adjustments for settlements included in the determination of net income (loss)

 

0.6

 

0.7

 

2.0

 

1.8

 

Pension liability adjustments

 

(2.0

)

 

(1.6

)

1.0

 

Total comprehensive income (loss)

 

79.1

 

35.3

 

67.6

 

55.1

 

Less: Comprehensive income (loss) attributable to noncontrolling interests

 

0.5

 

(0.3

)

0.7

 

(0.3

)

Comprehensive income (loss) attributable to Bruker Corporation

 

$

78.6

 

$

35.6

 

$

66.9

 

$

55.4

 

 

17.  Noncontrolling Interests

 

Net income (loss) attributable to noncontrolling interests for the three months ended September 30, 2010 and 2009 was $0.5 million and $(0.3) million, respectively. Net income (loss) attributable to noncontrolling interests for the nine months ended September 30, 2010 and 2009 was $0.7 million and $(0.3) million, respectively. The net income (loss) attributable to noncontrolling interests represents the minority shareholders’ proportionate share of the net loss recorded by the Company’s majority-owned indirect subsidiaries.

 

In the second quarter of 2010, the Company sold its ownership interest in Bruker Baltic Ltd. to one of its minority shareholders as part of its efforts to consolidate production and know-how into certain key locations. In addition, the Company made a payment of $0.1 million to certain minority shareholders of RI Research Instruments GmbH during the second quarter of 2010.

 

18.  Commitments and Contingencies

 

Legal

 

Lawsuits, claims and proceedings of a nature considered normal to its businesses may be pending from time to time against the Company. The Company believes the outcome of these proceedings, if any, will not have a material impact on the Company’s financial position or results of operations. As of September 30, 2010, the Company recorded an accrual to recognize an expected loss from a patent infringement action brought by The Research Foundation of the State University of New York. At December 31, 2009, no accruals had been recorded for such potential contingencies.

 

Letters of Credit and Guarantees

 

At September 30, 2010 and December 31, 2009, the Company had bank guarantees of $92.4 million and $87.0 million, respectively, for its customer advances. These arrangements guarantee the refund of advance payments received from customers in the event that the merchandise is not delivered in compliance with the terms of the contract. Certain of these guarantees affect the availability of the Company’s lines of credit.

 

19.  Business Segment Information

 

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

 

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Management evaluates segment operating performance and allocates resources based on operating income (loss). The Company uses this measure because it helps provide an understanding of our core operating results. Selected business segment information is presented below for the three and nine months ended September 30, 2010 and 2009 (in millions):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Revenue:

 

 

 

 

 

 

 

 

 

Scientific Instruments

 

$

290.5

 

$

251.6

 

$

835.7

 

$

716.5

 

Energy & Supercon Technologies

 

22.4

 

14.2

 

61.2

 

36.0

 

Eliminations (a)

 

(2.7

)

(0.7

)

(8.1

)

(4.4

)

Total revenue

 

$

310.2

 

$

265.1

 

$

888.8

 

$

748.1

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss):

 

 

 

 

 

 

 

 

 

Scientific Instruments

 

$

40.4

 

$

26.9

 

$

108.5

 

$

63.4

 

Energy & Supercon Technologies

 

(0.8

)

(1.2

)

(3.0

)

(4.3

)

Corporate, eliminations and other (b)

 

(0.3

)

0.3

 

(1.4

)

1.4

 

Total operating income

 

$

39.3

 

$

26.0

 

$

104.1

 

$

60.5

 


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

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

 

16


 


Table of Contents

 

Total assets by segment as of September 30, 2010 and December 31, 2009 are as follows (in millions):

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

Assets:

 

 

 

 

 

Scientific Instruments

 

$

1,251.2

 

$

1,139.7

 

Energy & Supercon Technologies

 

70.8

 

70.3

 

Eliminations and other (a)

 

(44.9

)

(38.0

)

Total assets

 

$

1,277.1

 

$

1,172.0

 


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

 

20.       Recent Accounting Pronouncements

 

In September 2009, the Emerging Issues Task Force reached consensus on FASB Accounting Standards Update 2009-14, Software (Topic 985)—Certain Revenue Arrangements That Include Software Elements. FASB Accounting Standards Updates 2009-14 changes the accounting model for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are excluded from the software revenue guidance in Subtopic 985-605,  Software-Revenue Recognition. In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance. FASB Accounting Standards Updates 2009-14 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, however, early adoption is permitted. The Company is currently assessing the impact that this update will have on its results of operations and financial position and when the Company will adopt these requirements.

 

In September 2009, the Emerging Issues Task Force reached consensus on FASB Accounting Standards Update 2009-13, Revenue Recognition (Topic 605)—Multiple-Deliverable Revenue Arrangements. FASB Accounting Standards Update 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. Specifically, this guidance amends the criteria in Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements, for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. FASB Accounting Standards Update 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, however, early adoption is permitted. The Company is currently assessing the impact that this update will have on its results of operations and financial position and when the Company will adopt these requirements.

 

ITEM 2.

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

 

The following discussion of our financial condition and results of operations should be read in conjunction with our interim unaudited condensed consolidated financial statements and the notes to those statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q, and in conjunction with the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2009.

 

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, 2009.

 

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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 we face and risks that may impact our business in the future.

 

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

 

·                  Results of operations. This section provides our analysis of the significant line items on our unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2010 compared to the three and nine months ended September 30, 2009.

 

·                  Liquidity and capital resources. This section provides an analysis of our liquidity and cash flow and discussions of our outstanding debt and commitments and matters relating to our common stock.

 

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

 

EXECUTIVE OVERVIEW

 

Business Overview

 

Bruker Corporation and its wholly-owned subsidiaries design, manufacture, service and market proprietary life science and materials research systems based on its core technology platforms, including X-ray technologies, magnetic resonance technologies, mass spectrometry technologies, optical emission spectroscopy and infrared and Raman molecular spectroscopy technologies. We sell a broad range of field analytical systems for chemical, biological, radiological, nuclear and explosive, or CBRNE, detection. We also develop and manufacture low temperature and high temperature superconducting wire products and superconducting wire and superconducting devices for use in advanced magnet technology, physics research and energy applications. Our diverse customer base includes life science, pharmaceutical, biotechnology and molecular diagnostic research companies, academic institutions, advanced materials and semiconductor industries and government agencies. 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 performance, both organically and through acquisitions. Our revenue growth strategy, combined with anticipated improvements to our gross profit margins and increased leverage on our research and development, sales and marketing and distribution investments and general and administrative expenses, is expected to enhance our operating margins and improve our earnings in the future.

 

On May 19, 2010, we completed our acquisition of three former Varian, Inc. product lines which Agilent Technologies, Inc., divested in connection with obtaining regulatory approval for its May 14, 2010 acquisition of Varian. The Company acquired certain assets and assumed certain liabilities in Varian’s inductively coupled plasma mass spectrometry instruments business, laboratory gas chromatography instruments business, and gas chromatography triple-quadrupole mass spectrometry instruments business, collectively, the chemical analysis business. The chemical analysis business complements our existing mass spectrometry products and expands our offerings to industrial and applied markets that we did not previously serve and also provides opportunities to supply customers with equipment packages that have a broader range of applications and value.

 

On August 16, 2010, we announced that we entered into a Stock Purchase Agreement with Veeco Instruments Inc. and Veeco Metrology Inc. to acquire Veeco’s scanning probe microscopy and optical industrial metrology instruments business, or the nano surfaces business. We completed the acquisition of the nano surfaces business on October 7, 2010. We believe that the acquired business complements our existing atomic force microscopy products and expands our offerings to industrial and applied markets, specifically, in the fields of materials and nanotechnology research and analysis.

 

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Table of Contents

 

We are organized into five operating segments, representing each of our five divisions: Bruker AXS, Bruker BioSpin, Bruker Daltonics, Bruker Optics and Bruker Energy & Supercon Technologies. Bruker AXS is in the business of manufacturing and distributing advanced X-ray, spark-optical emission spectroscopy and atomic force microscopy instrumentation used in non-destructive molecular and elemental analysis. Bruker BioSpin is in the business of manufacturing and distributing enabling life science tools based on magnetic resonance technology. Bruker Daltonics is in the business of manufacturing and distributing mass spectrometry instruments that can be integrated and used along with other analytical instruments, as well as our CBRNE detection products. Bruker Optics is in the business of manufacturing and distributing research, analytical and process analysis instruments and solutions based on infrared and Raman molecular spectroscopy technologies. Bruker Energy & Supercon Technologies is in the business of developing and producing superconductivity-based materials and superconductivity-enabled devices.

 

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

 

·                  Scientific Instruments.  The operations of this segment include the design, manufacture and distribution of advanced instrumentation and automated solutions based on X-ray technology, spark-optical emission spectroscopy technology, atomic force microscopy, magnetic resonance technology, mass spectrometry technology and infrared and Raman molecular spectroscopy technology. Typical customers of the Scientific Instruments segment include pharmaceutical, biotechnology, and molecular diagnostic companies, academic institutions, medical school and other non-profit organizations, and clinical microbiology laboratories, government departments and agencies, and nanotechnology, semiconductor, chemical, cement, metals and petroleum companies, and food, beverage and agricultural analysis companies and laboratories.

 

·                  Energy & Supercon Technologies.  The operations of this segment include the design, manufacture and marketing of superconducting materials, primarily metallic low temperature superconductors, for use in magnetic resonance imaging, nuclear magnetic resonance and fusion energy research and other applications, and ceramic high temperature superconductors primarily for fusion energy research applications. We also utilize our low temperature and high temperature superconductors to develop, manufacture and market devices that have applications primarily in “big science” research. Typical customers of the Energy & Supercon Technologies segment include companies in the medical, power and energy, and processing industries, private and public research and development laboratories in the fields of fundamental and applied sciences and energy research, academic institutions and government agencies.

 

We have announced plans to sell a minority ownership position in our Bruker Energy & Supercon Technologies, Inc. (“BEST”) subsidiary through an initial public offering of the capital stock of BEST. We believe the offering will provide our shareholders greater visibility into BEST’s performance and growth and strengthen BEST’s access to financing for its revenue growth initiatives, including the development of products for the renewable energy and energy infrastructure markets.

 

Financial Overview

 

For the three months ended September 30, 2010, our revenue increased by $45.1 million, or 17.0%, to $310.2 million, compared to $265.1 million for the comparable period in 2009. Included in this change in revenue is a decrease of approximately $18.1 million from the impact of foreign exchange due to the strengthening of the U.S. Dollar versus the Euro and other foreign currencies and an increase of approximately $17.1 million attributable to the acquisition of the chemical analysis business. Excluding the effect of foreign exchange and the acquisition, revenue increased by $46.1 million, or 17.4%. The increase in revenue on an adjusted basis is attributable to both the Scientific Instruments segment, which increased by $37.6 million, or 14.9%, and the Energy & Supercon Technologies segment, which increased by $10.5 million, or 73.9%. Revenue in the Scientific Instruments segment reflects an increase in sales from many of our core technologies, particularly in magnetic resonance, mass spectrometry and X-ray. Revenues in the Energy & Supercon Technologies segment increased due to higher demand for low temperature superconducting wire.

 

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Table of Contents

 

For the nine months ended September 30, 2010, our revenue increased by $140.7 million, or 18.8%, to $888.8 million, compared to $748.1 million for the comparable period in 2009. Included in this change in revenue is a decrease of approximately $5.3 million from the impact of foreign exchange due to the strengthening of the U.S. Dollar versus the Euro and other foreign currencies and an increase of approximately $27.6 million attributable to the acquisitions of the chemical analysis business and the research instruments business. Excluding the effect of foreign exchange and the acquisitions, revenue increased by $118.4 million, or 15.8%. The increase in revenue on an adjusted basis is attributable to both the Scientific Instruments segment, which increased by $101.3 million, or 14.1%, and the Energy & Supercon Technologies segment, which increased by $20.8 million, or 57.8%. Revenue in the Scientific Instruments segment reflects an increase in sales of all of our core technologies, particularly in magnetic resonance, X-ray and mass spectrometry. Revenues in the Energy & Supercon Technologies segment increased due to higher demand for low temperature superconducting wire.

 

The mix of products sold in the Scientific Instruments segment in the three and nine months ended September 30, 2010 reflects increased demand from academic, government and industrial customers. We attribute the increase in sales of magnetic resonance and mass spectrometry products and spending by academic and government customers to our new product introductions over the last twelve to eighteen months and to stimulus packages implemented by governments of various countries, including the U.S., Germany, Japan and China. The improvement in revenues from our industrial customers reflects an ongoing economic improvement in these end markets. In general, the spending patterns of our industrial customers were negatively impacted by the global recession through the first half of 2009. Over the last several quarters we have experienced an increase in demand from these customers and we remain optimistic that the industrial markets we serve will continue to improve. However, we will continue to monitor the recovery of these markets given the current economic environment. Additionally, while many European governments have announced their intentions to reduce overall spending, a number of our key European markets, including Germany, France and the U.K., have announced that research spending will remain stable, or grow in some cases. Based on the recent announcements from these governments and recent announcements from the European Union, we believe that funding for the majority of our products and markets will remain stable, or grow, in most of our key European markets.

 

Income from operations for the three months ended September 30, 2010 was $39.3 million, resulting in an operating margin of 12.7%, compared to income from operations of $26.0 million, resulting in an operating margin of 9.8%, for the comparable period in 2009. The increase in operating margin is primarily the result of the higher revenue described above and a corresponding improvement in our gross profit margins. Our gross profit margin for the third quarter of 2010 was 47.4%, compared with 45.0% for the comparable period in 2009. The increase in revenue also allowed us to leverage our selling, general and administrative costs and our research and development costs, which decreased to 33.8% of revenue for the three months ended September 30, 2010 compared with 35.0% of revenue for the comparable period of 2009. Improvements in operating margins are attributable to both the Scientific Instruments segment, which increased by $13.5 million, improving operating margins by 3.2%, and the Energy & Supercon Technologies segment which decreased its operating loss by $0.4 million, improving operating margins by 4.9%.

 

Income from operations for the nine months ended September 30, 2010 was $104.1 million, resulting in an operating margin of 11.7%, compared to income from operations of $60.5 million, resulting in an operating margin of 8.1%, for the comparable period in 2009. The increase in operating margin is primarily the result of higher revenue described above and a corresponding improvement in our gross profit margins. Our gross profit margin as a percentage of revenue was 46.0% for the first nine months of 2010 and 44.5% for the comparable period in 2009. The increase in revenue also allowed us to leverage our selling, general and administrative costs and our research and development costs, which decreased to 33.6% of revenue for the nine months ended September 30, 2010 compared with 36.3% of revenue for the comparable period of 2009. Improvements in operating margins are attributable to both the Scientific Instruments segment, which increased by $45.1 million, improving operating margins by 4.2%, and the Energy & Supercon Technologies segment which decreased its operating loss by $1.3 million, improving operating margins by 7.0%.

 

Higher gross profit margins in the three and nine months ended September 30, 2010 resulted primarily from changes in product mix, specifically an increase in revenues from high-end instrumentation, including our newly introduced products which were designed to carry higher gross margins than our previous generations of products, and the weakening of the Euro, which favorably impacts our gross profit margins as a majority of our production is performed in Europe. The increase in revenue also allowed us to better utilize our production facilities and leverage our fixed production costs.

 

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Table of Contents

 

We incurred approximately $4.0 million of interest expense during the nine months ended September 30, 2010 compared to $6.2 million for the comparable period in 2009. Of the total interest expense incurred in the first nine months of 2010, approximately $3.6 million related to a credit facility that we entered into during the first quarter of 2008. We initially borrowed $351.0 million under this credit facility in order to finance the acquisition of Bruker BioSpin. In the first nine months of 2010, we repaid approximately $15.0 million of the amounts outstanding under this credit agreement and, from the inception of this agreement through September 30, 2010, we reduced the net amount outstanding by approximately $234.7 million. However, in October 2010, we borrowed $170.0 million under the revolving component of this credit agreement to finance our acquisition and the working capital requirements of the nano surfaces business. The amount borrowed is at an interest rate of less than 1% and will result in approximately $0.3 million of incremental interest expense in the fourth quarter of 2010.

 

Our effective tax rate for the three months ended September 30, 2010 was 27.0%, compared to 33.5% for the comparable period in 2009. Our effective tax rate for the nine months ended September 30, 2010 was 32.2%, compared to 33.1% for the comparable period in 2009. In the third quarter of 2010, the Company completed a study of its research and development activities and identified additional U.S. Federal tax credits of approximately $2.8 million. These credits reduced our effective tax rate by approximately 7.3% and 2.8% for the three and nine month periods ended September 30, 2010, respectively. The remaining change in our effective tax rate relates primarily to the amount and mix of income and taxes outside the U.S.

 

Our net income attributable to the shareholders of Bruker Corporation for the three months ended September 30, 2010 was $27.4 million, or $0.17 per diluted share, compared to $16.4 million, or $0.10 per diluted share, for the comparable period in 2009. Our net income attributable to the shareholders of Bruker Corporation for the nine months ended September 30, 2010 was $66.1 million, or $0.40 per diluted share, compared to $37.7 million, or $0.23 per diluted share, for the comparable period in 2009.

 

CRITICAL ACCOUNTING POLICIES

 

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

 

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

 

Revenue recognition. We recognize revenue from system sales when persuasive evidence of an arrangement exists, the price is fixed or determinable, title and risk of loss has been transferred to the customer and collectability of the resulting receivable is reasonably assured. Title and risk of loss generally are transferred to the customer upon receipt of a signed customer acceptance form for a system that has been shipped, installed, and for which the customer has been trained. As a result, the timing of customer acceptance or readiness could cause our reported revenues to differ materially from expectations. When products are sold through an independent distributor or a strategic distribution partner who assumes responsibility for installation, we recognize the system sale when the product has been shipped and title and risk of loss have been transferred to the distributor. Our distributors do not have price protection rights or rights of return; however, our products are typically warranted to be free from defect for a period of one year. Revenue is deferred until cash is received when collectability is not reasonably assured, such as 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 relative fair value of the elements, 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 the prices charged when the element is sold separately. If there is objective and reliable evidence of the fair value of the undelivered items in an arrangement, but no such evidence for the delivered items, we use the residual method to allocate the arrangement consideration. Changes in our ability to establish

 

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Table of Contents

 

the fair value for each element in multiple element arrangements could affect the timing of revenue recognition. Revenue from accessories and parts is recognized upon shipment and service revenue is recognized as the services are performed. We also have contracts for which we apply the percentage-of-completion method for revenue recognition. Application of the percentage-of-completion method requires us to make reasonable estimates of the extent of progress toward completion of the contract and the total costs we will incur under the contract. Changes in our estimates could affect the timing of revenue recognition. Grant revenue is recognized when we complete the services required under the grant.

 

Income taxes. The determination of income tax expense requires us to make certain estimates and judgments concerning the calculation of deferred tax assets and liabilities, as well as the deductions, carryforwards and credits that are available to reduce taxable income. Deferred tax assets and liabilities arise from differences in the timing of the recognition of revenue and expenses for financial statement and tax purposes. Deferred tax assets and liabilities are measured using the tax rates in effect for the year in which these temporary differences are expected to be settled. We estimate the degree to which tax assets and loss carryforwards will result in a benefit based on expected profitability by tax jurisdiction, and we provide a valuation allowance for tax assets and loss carryforwards that we believe will more likely than not go unused. If it becomes more likely than not that a tax asset or loss carryforward will be used for which a reserve has been provided, we reverse the related valuation allowance. If our actual future taxable income by tax jurisdiction differs from estimates, additional allowances or reversals of reserves may be necessary. In addition, we only recognize benefits for tax positions that we believe are more likely than not of being sustained upon review by a taxing authority with knowledge of all relevant information. We reevaluate our uncertain tax positions on a quarterly basis and any changes to these positions as a result of tax audits, tax laws or other facts and circumstances could result in additional charges to operations.

 

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

 

Inventories. Inventories are stated at the lower of cost or market, with costs determined by the first-in, first-out method for a majority of subsidiaries and by average cost for certain international subsidiaries. We record provisions to account for excess and obsolete inventory to reflect the expected non-saleable or non-refundable inventory based on an evaluation of slow moving products. Inventories also include demonstration units located in our demonstration laboratories or installed at the sites of potential customers. We consider our demonstration units to be available for sale. We reduce the carrying value of demonstration inventories for differences between cost and estimated net realizable value, taking into consideration usage in the preceding twelve months, expected demand, technological obsolescence and other information including the physical condition of the unit. If ultimate usage or demand varies significantly from expected usage or demand, additional write-downs may be required, resulting in additional charges to operations.

 

Goodwill, other intangible assets and other long-lived assets. We evaluate whether goodwill is impaired annually and when events occur or circumstances change. We test goodwill for impairment at the reporting unit level (the operating segment or one level below an operating segment). The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. We generally determine the fair value of our reporting units using an income approach methodology of valuation that includes the discounted cash flow method. Estimating the fair value of the reporting units requires significant judgments by management about the future cash flows. If the carrying amount of a reporting unit exceeds the fair value of the reporting unit, we perform the second step of the goodwill impairment test to measure the amount of the impairment. In the second step of the goodwill impairment test we compare the implied fair value of the reporting unit’s goodwill with the carrying value of that goodwill. We also review finite-lived intangible assets and other long-lived assets when indications of potential impairment exists, such as a significant reduction in undiscounted cash flows associated with the assets. Should the fair value of our long-lived assets decline because of reduced operating performance, market declines, or other indicators of impairment, a charge to operations for impairment may be necessary.

 

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

 

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Table of Contents

 

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

 

RESULTS OF OPERATIONS

 

Three Months Ended September 30, 2010 compared to the Three Months Ended September 30, 2009

 

Consolidated Results

 

The following table presents our results for the three months ended September 30, 2010 and 2009 (dollars in millions, except per share data):

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2010

 

2009

 

Product revenue

 

$

269.7

 

$

230.7

 

Service revenue

 

39.1

 

32.4

 

Other revenue

 

1.4

 

2.0

 

Total revenue

 

310.2

 

265.1

 

 

 

 

 

 

 

Cost of product revenue

 

143.5

 

127.9

 

Cost of service revenue

 

19.8

 

18.0

 

Total cost of revenue

 

163.3

 

145.9

 

Gross profit

 

146.9

 

119.2

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative

 

72.2

 

61.2

 

Research and development

 

32.5

 

31.6

 

Amortization of acquisition-related intangible assets

 

1.0

 

0.4

 

Other charges

 

1.9

 

 

Total operating expenses

 

107.6

 

93.2

 

Operating income

 

39.3

 

26.0

 

 

 

 

 

 

 

Interest and other income (expense), net

 

(1.1

)

(1.8

)

Income before income taxes and noncontrolling interest in consolidated subsidiaries

 

38.2

 

24.2

 

Income tax provision

 

10.3

 

8.1

 

Consolidated net income

 

27.9

 

16.1

 

Net income (loss) attributable to noncontrolling interest in consolidated subsidiaries

 

0.5

 

(0.3

)

Net income attributable to Bruker Corporation

 

$

27.4

 

$

16.4

 

 

 

 

 

 

 

Net income per common share attributable to

 

 

 

 

 

Bruker Corporation shareholders:

 

 

 

 

 

Basic and diluted

 

$

0.17

 

$

0.10

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

Basic

 

164.5

 

163.5

 

Diluted

 

165.7

 

165.0

 

 

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Revenue

 

For the three months ended September 30, 2010, our revenue increased by $45.1 million, or 17.0%, to $310.2 million, compared to $265.1 million for the comparable period in 2009. Included in this change in revenue is a decrease of approximately $18.1 million from the impact of foreign exchange due to the strengthening of the U.S. Dollar versus the Euro and other foreign currencies and an increase of approximately $17.1 million attributable to the acquisition of the chemical analysis business. Excluding the effect of foreign exchange and the acquisition, revenue increased by $46.1 million, or 17.4%. The increase in revenue on an adjusted basis is attributable to both the Scientific Instruments segment, which increased by $37.6 million, or 14.9%, and the Energy & Supercon Technologies segment, which increased by $10.5 million, or 73.9%. Revenue in the Scientific Instruments segment reflects an increase in sales from many of our core technologies, particularly in magnetic resonance, mass spectrometry and X-ray. Revenues in the Energy & Supercon Technologies segment increased due to higher demand for low temperature superconducting wire.

 

The mix of products sold in the Scientific Instruments segment reflects increased demand from academic, government and industrial customers. We attribute the increase in sales of magnetic resonance and mass spectrometry products and spending by academic and government customers to our new product introductions over the last twelve to eighteen months and to stimulus packages implemented by governments of various countries, including the U.S., Germany, Japan and China. The improvement

 

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in revenues from our industrial customers reflects an ongoing economic improvement in these end markets.

 

Cost of Revenue

 

Our cost of product and service revenue for the three months ended September 30, 2010 was $163.3 million, resulting in a gross profit margin of 47.4%, compared to cost of product and service revenue of $145.9 million, resulting in a gross profit margin of 45.0%, for the comparable period in 2009. Higher gross profit margins resulted primarily from changes in product mix, specifically an increase in revenues from high-end instrumentation, including our newly introduced products which were designed to carry higher gross margins than our previous generations of products, and the weakening of the Euro, which favorably impacts our gross profit margins as a majority of our production is performed in Europe. The increase in revenue also allowed us to better utilize our production facilities and leverage our fixed production costs. We also reduced production costs through various cost saving initiatives and strict cost control in our manufacturing facilities.

 

In the third quarter of 2010, we delivered, installed and received customer acceptance on a 17.2 Tesla magnetic resonance imaging system. Because of nature of this project, the majority of costs incurred were charged to research and development expense rather than capitalized as inventory. As a result, the sale of the system carried a gross profit margin that was higher than that of our other magnetic resonance imaging systems. Additionally, the costs of the labor and materials required for the rework of certain specialty magnets that did not meet customer specifications were recorded as a charge to cost of product revenue in the third quarter of 2010. Although these items individually impacted our gross profit margin in the third quarter of 2010, in the aggregate they did not have a material impact on gross profit margins in the quarter.

 

Selling, General and Administrative

 

Our selling, general and administrative expense for the three months ended September 30, 2010 increased to $72.2 million, or 23.3% of total revenue, from $61.2 million, or 23.1% of total revenue, for the comparable period in 2009. The increase in selling, general and administrative expense is attributable to increases in headcount in support of our revenue growth and as a result of acquisitions. Higher revenues resulted in an increase in commissions and related selling expenses which also contributed to the increase in selling, general and administrative expense. Increases in selling, general and administrative expenses were offset, in part, by changes in foreign currency exchange rates, primarily the Euro.

 

Research and Development

 

Our research and development expense for the three months ended September 30, 2010 increased to $32.5 million, or 10.5% of total revenue, compared with research and development expense of $31.6 million, or 11.9% of total revenue, for the comparable period in 2009. Research and development expenses increased in the third quarter of 2010 compared with the third quarter of 2009 as a result of increases in headcount and materials costs in support of new product development and as a result of acquisitions. However, these increases were offset by changes in foreign currency exchange rates, primarily the Euro, as the majority of our research and development is performed in Europe.

 

Amortization of Acquisition-Related Intangible Assets

 

Our amortization expense from acquisition-related intangible assets was $1.0 million for the three months ended September 30, 2010 compared with $0.4 million for the comparable period in 2009. The increase in amortization expense relates to intangible assets acquired in connection with the purchase of the chemical analysis business from Agilent.

 

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Table of Contents

 

Other Charges

 

Other charges of $1.9 million in the third quarter of 2010 relate entirely to the Scientific Instruments segment. Other charges consists of $1.0 million of acquisition-related costs incurred in connection with our acquisitions of the chemical analysis business from Agilent and the nano surfaces business from Veeco and $0.9 million incurred under transition services agreements with Agilent. We do not expect these transition costs to recur after the end of the transition services agreements.

 

There were no similar charges recorded in the third quarter of 2009.

 

Interest and Other Income (Expense), Net

 

Interest and other income (expense), net during the three months ended September 30, 2010 was $(1.1) million, compared to $(1.8) million for the comparable period of 2009.

 

During the three months ended September 30, 2010, the major component within interest and other income (expense), net was net interest expense of $1.1 million. During the three months ended September 30, 2009, the major components within interest and other income (expense), net, were net interest expense of $1.4 million and realized and unrealized losses on foreign currency transactions of $0.8 million.

 

The decrease in interest expense is a function of lower outstanding debt, as we repaid approximately $16.3 million of debt in the first nine months of 2010.

 

Income Tax Provision

 

Our effective tax rate generally reflects our tax provision for non-U.S. entities only. We maintain a full valuation allowance against all U.S. deferred tax assets, including our U.S. net operating losses and tax credits, until evidence exists that it is more likely than not that the loss carryforward and credit amounts will be utilized to offset U.S. taxable income. Our tax rate may change over time as the amount and mix of income and taxes outside the U.S. changes. The effective tax rate is calculated using our projected annual pre-tax income or loss and is affected by tax credits, the expected level of other tax benefits, and the impact of changes to the valuation allowance, as well as changes in the mix of our pre-tax income and losses among jurisdictions with varying statutory tax rates and credits.

 

The income tax provision for the three months ended September 30, 2010 was $10.3 million compared to $8.1 million for the three months ended September 30, 2009, representing effective tax rates of 27.0% and 33.5%, respectively. In the third quarter of 2010, the Company completed a study of its research and development activities and identified additional U.S. Federal tax credits of approximately $2.8 million. These credits reduced our effective tax rate by approximately 7.3% for the third quarter of 2010. There were no discrete items of a material nature that impacted the effective tax rate for the third quarter of 2009.

 

Net Income (Loss) Attributable to Noncontrolling Interests

 

Net income (loss) attributable to noncontrolling interests for the three months ended September 30, 2010 was $0.5 million compared to $(0.3) million for the comparable period of 2009. Net income (loss) attributable to noncontrolling interests represents the minority shareholders’ proportionate share of the net income (loss) recorded by our majority-owned indirect subsidiaries.

 

Net Income Attributable to Bruker Corporation

 

Our net income for the three months ended September 30, 2010 was $27.4 million, or $0.17 per diluted share, compared to $16.4 million, or $0.10 per diluted share for the comparable period in 2009.

 

Segment Results

 

Revenue

 

The following table presents revenue, change in revenue and revenue growth by reportable segment for the three months ended September 30, 2010 and 2009 (dollars in millions):

 

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Table of Contents

 

 

 

 

Three Months Ended September 30,

 

Dollar

 

Percentage

 

 

 

2010

 

2009

 

Change

 

Change

 

Scientific Instruments

 

$

290.5

 

$

251.6

 

$

38.9

 

15.5

%

Energy & Supercon Technologies

 

22.4

 

14.2

 

8.2

 

57.7

%

Eliminations (a)

 

(2.7

)

(0.7

)

(2.0

)

 

 

 

 

$

310.2

 

$

265.1

 

$

45.1

 

17.0

%


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

 

Scientific Instruments Segment Revenues

 

Scientific Instruments segment revenue increased by $38.9 million, or 15.5%, to $290.5 million for the three months ended September 30, 2010, compared to $251.6 million for the comparable period in 2009. Included in this change in revenue is a decrease of approximately $15.8 million from the impact of foreign exchange due to the strengthening of the U.S. Dollar versus the Euro and other foreign currencies and an increase of approximately $17.1 million attributable to the acquisition of the chemical analysis business. Excluding the effect of foreign exchange and the acquisition, revenue increased by $37.6 million, or 14.9%. The increase in revenue, excluding the effect of foreign exchange and acquisition, reflects an increase in sales from many of our core technologies, particularly in magnetic resonance, mass spectrometry and X-ray. The mix of products sold in the Scientific Instruments segment reflects increased demand from academic, government and industrial customers. We attribute the increase in spending by academic and government customers to our new product introductions over the last twelve to eighteen months and stimulus packages implemented by governments of various countries, including the U.S., Germany, Japan and China. We have also seen increased demand from our industrial customers as economic conditions have shown signs of improvement.

 

System revenue and aftermarket revenue as a percentage of total Scientific Instruments segment revenue were as follows during the three months ended September 30, 2010 and 2009 (dollars in millions):

 

 

 

Three Months Ended September 30,

 

 

 

2010

 

2009

 

 

 

Revenue

 

Percentage of
Segment
Revenue

 

Revenue

 

Percentage of
Segment
Revenue

 

System revenue

 

$

234.5

 

80.7

%

$

197.6

 

78.5

%

Aftermarket revenue

 

56.0

 

19.3

%

54.0

 

21.5

%

Total revenue

 

$

290.5

 

100.0

%

$

251.6

 

100.0

%

 

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

 

Energy & Supercon Technologies Segment Revenues

 

Energy & Supercon Technologies segment revenue increased by $8.2 million, or 57.7%, to $22.4 million for the three months ended September 30, 2010, compared to $14.2 million for the comparable period in 2009. Included in this change in revenue is a decrease of approximately $2.3 million from the impact of foreign exchange due to the strengthening of the U.S. Dollar versus the Euro and other foreign currencies. Excluding the effect of foreign exchange, revenue increased by $10.5 million, or 73.9%. The increase in revenue was the result of higher demand for low temperature superconducting wire.

 

System and wire revenue and aftermarket revenue as a percentage of total Energy & Supercon Technologies segment revenue were as follows during the three months ended September 30, 2010 and 2009 (dollars in millions):

 

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Table of Contents

 

 

 

 

Three Months Ended September 30,

 

 

 

2010

 

2009

 

 

 

Revenue

 

Percentage of
Segment
Revenue

 

Revenue

 

Percentage of
Segment
Revenue

 

System and wire revenue

 

$

20.9

 

93.3

%

$

13.5

 

95.1

%

Aftermarket revenue

 

1.5

 

6.7

%

0.7

 

4.9

%

Total revenue

 

$

22.4

 

100.0

%

$

14.2

 

100.0

%

 

System and wire revenues in the Energy & Supercon Technologies segment include low and high temperature superconducting wire and superconducting devices, including magnets, linear accelerators and radio frequency cavities. Aftermarket revenues in the Energy & Supercon Technologies segment include accessory sales.

 

Income (Loss) from Operations

 

The following table presents income (loss) from operations and operating margins on revenue by reportable segment for the three months ended September 30, 2010 and 2009 (dollars in millions):

 

 

 

Three Months Ended September 30,

 

 

 

2010

 

2009

 

 

 

Operating
Income (Loss)

 

Percentage of
Segment
Revenue

 

Operating
Income (Loss)

 

Percentage of
Segment
Revenue

 

Scientific Instruments

 

$

40.4

 

13.9

%

$

26.9

 

10.7

%

Energy & Supercon Technologies

 

(0.8

)

(3.6

)%

(1.2

)

(8.5

)%

Corporate, eliminations and other (a)

 

(0.3

)

 

 

0.3

 

 

 

Total operating income

 

$

39.3

 

12.7

%

$

26.0

 

9.8

%


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

 

Scientific Instruments segment income from operations for the three months ended September 30, 2010 was $40.4 million, resulting in an operating margin of 13.9%, compared to income from operations of $26.9 million, resulting in an operating margin of 10.7%, for the comparable period in 2009. Income from operations in the Scientific Instruments segment improved as a result of the higher revenues described above and an improvement in gross profit margins.

 

In the third quarter of 2010, gross profit margin as a percentage of revenue in the Scientific Instruments segment increased to 49.5% from 45.7% for the comparable period in 2009. Higher gross profit margins resulted primarily from changes in product mix, specifically an increase in revenues from high-end instrumentation, including our newly introduced products which were designed to carry higher gross margins than our previous generations of products, and the weakening of the Euro, which favorably impacts our gross profit margins as a majority of our production is performed in Europe. The increase in revenue also allowed us to better utilize our production facilities and leverage our fixed production costs. We also reduced production costs through various cost saving initiatives.

 

In the third quarter of 2010, selling, general and administrative expenses and research and development expenses in the Scientific Instruments segment increased to $100.7 million, or 34.7% of segment revenue, from $87.7 million, or 34.9% of segment revenue for the comparable period in 2009. This increase in cost is a function of incremental investments in sales and marketing activities and research and development activities that we believe will generate future growth, as well as increases in operating expenses related to acquisitions completed in 2010. Changes in foreign currency exchange rates partially offset the increase in operating expenses.

 

Energy & Supercon Technologies segment loss from operations for the three months ended September 30, 2010 was $0.8 million, resulting in an operating margin of (3.6)%, compared to a loss from operations of $1.2 million, resulting in an

 

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Table of Contents

 

operating margin of (8.5)%, for the comparable period in 2009. The improvement in operating loss is a function of higher revenues.

 

Nine Months Ended September 30, 2010 compared to the Nine Months Ended September 30, 2009

 

Consolidated Results

 

The following table presents our results for the nine months ended September 30, 2010 and 2009 (dollars in millions, except per share data):

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2010

 

2009

 

Product revenue

 

$

780.7

 

$

655.8

 

Service revenue

 

103.1

 

87.6

 

Other revenue

 

5.0

 

4.7

 

Total revenue

 

888.8

 

748.1

 

 

 

 

 

 

 

Cost of product revenue

 

426.8

 

364.8

 

Cost of service revenue

 

53.1

 

50.2

 

Total cost of revenue

 

479.9

 

415.0

 

Gross profit

 

408.9

 

333.1

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative

 

201.9

 

180.1

 

Research and development

 

96.5

 

91.8

 

Amortization of acquisition-related intangible assets

 

2.1

 

1.3

 

Other charges (credits), net

 

4.3

 

(0.6

)

Total operating expenses

 

304.8

 

272.6

 

Operating income

 

104.1

 

60.5

 

 

 

 

 

 

 

Interest and other income (expense), net

 

(5.6

)

(4.6

)

Income before income taxes and noncontrolling interest in consolidated subsidiaries

 

98.5

 

55.9

 

Income tax provision

 

31.7

 

18.5

 

Consolidated net income

 

66.8

 

37.4

 

Net income attributable to noncontrolling interest in consolidated subsidiaries

 

0.7

 

(0.3

)

Net income attributable to Bruker Corporation

 

$

66.1

 

$

37.7