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BRKR > SEC Filings for BRKR > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for BRUKER CORP

Form 10-Q for BRUKER CORP


8-Nov-2012

Quarterly Report


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, 2011.

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 "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2011.

Although our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"), we believe describing income and expenses, excluding the effect of foreign exchange and our recent acquisitions, as well as certain other charges, provides meaningful supplemental information regarding our performance. We believe that this supplemental information is useful in assessing our operating performance and trends, as the excluded items are not indicative of our core business operating results. These non-GAAP financial measures are not in accordance with, nor are they a substitute for, the comparable GAAP financial measures and are intended to supplement our financial results that are prepared in accordance with GAAP. We also use these non-GAAP financial measures for financial and operational decision making and as a means to help evaluate period-to-period comparisons.

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, and challenges and risks that may impact our business in the future.

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

Results of operations. This section provides our analysis of the significant line items on our unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011.

Liquidity and capital resources. This section provides an analysis of our liquidity and cash flow and discussions of


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our outstanding debt and commitments.

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

EXECUTIVE OVERVIEW

Business Overview

Bruker Corporation and its wholly-owned subsidiaries design, manufacture, service and market proprietary life science and materials research systems based on our technology platforms, including magnetic resonance technologies, mass spectrometry technologies, chromatography technologies, X-ray technologies, spark-optical emission spectroscopy, atomic force microscopy, stylus and optical metrology technology 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. Our corporate headquarters are located in Billerica, Massachusetts. We maintain major technical and manufacturing centers in Europe and North America and we have sales offices located throughout the world.

Our business strategy is to capitalize on our ability to innovate and generate rapid revenue growth, both organically and through acquisitions. Our revenue growth strategy combined with anticipated improvements to our 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 profitability in the future.

We are organized into four operating segments: Bruker BioSpin group, Bruker CALID group, Bruker MAT group, and Bruker Energy & Supercon Technologies division. The Bruker BioSpin group is in the business of designing, manufacturing and distributing life science tools based on magnetic resonance technology. The Bruker CALID group combines the Bruker Daltonics Life-Science and Clinical, Chemical and Applied Markets, Bruker Detection and Bruker Optics divisions and is in the business of designing, manufacturing, and distributing mass spectrometry and chromatography instruments and solutions for life sciences, including proteomics, metabolomics, and clinical research applications. Our mass spectrometry and chromatography instruments also provide solutions for applied markets that include food safety, environmental analysis and petrochemical analysis. The Bruker CALID group also designs, manufactures, and distributes various analytical instruments for CBRNE detection and research, as well as analytical, research and process analysis instruments and solutions based on infrared and Raman molecular spectroscopy technologies. The Bruker MAT group is in the business of designing, manufacturing, and distributing advanced X-ray, combustion analysis, atomic force microscopy, and stylus and optical metrology instrumentation used in molecular, materials, and elemental analysis. The Bruker Energy & Supercon Technologies division is in the business of developing and producing superconducting materials and devices based primarily on metallic low temperature superconductors and ceramic high temperature superconductors with applications in renewable energy, energy infrastructure, medical imaging and life science analytics and ''big science'' research, which typically consists of large scale projects funded by a government or a group of governments.

For financial reporting purposes, we combine the Bruker BioSpin, Bruker CALID and Bruker MAT 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 financial 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 magnetic resonance technology, mass spectrometry technology, gas chromatography technology, X-ray technology, spark-optical emission spectroscopy technology, atomic force microscopy technology, stylus and optical metrology 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 schools and other non-profit organizations; clinical microbiology laboratories; government departments and agencies; nanotechnology, semiconductor, chemical, cement, metals and petroleum companies; and food, beverage and agricultural analysis companies and laboratories.


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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. Typical customers of the Energy & Supercon Technologies segment include companies in the medical industry, private and public research and development laboratories in the fields of fundamental and applied sciences and energy research, academic institutions and government agencies. The Energy & Supercon Technologies segment is also developing superconductors and superconducting-enabled devices for applications in power and energy, as well as industrial processing industries.

Financial Overview

For the three months ended September 30, 2012, our revenue increased by $29.4 million, or 7.0%, to $447.8 million, compared to $418.4 million for the comparable period in 2011. Included in this change in revenue is a decrease of approximately $33.3 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 $5.1 million attributable to our recent acquisitions. Excluding the effect of foreign exchange and our recent acquisitions, revenue increased by $57.6 million, or 13.8%. The increase in revenue, excluding the effect of foreign exchange and acquisitions, is attributable to both the Scientific Instruments segment, which increased by $37.6 million, or 9.5%, and the Energy & Supercon Technologies segment, which increased by $20.1 million, or 72.6%. Revenue in the Scientific Instruments segment reflects an increase in sales from many of our core technologies, particularly nuclear magnetic resonance products and mass spectrometry. Revenues in the Energy & Supercon Technologies segment increased primarily due to $16.4 million of license revenue recognized during the three months ended September 30, 2012 on the sale of technology.

For the nine months ended September 30, 2012, our revenue increased by $97.5 million, or 8.3%, to $1,274.1 million, compared to $1,176.6 million for the comparable period in 2011. Included in this change in revenue is a decrease of approximately $66.9 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 $15.9 million attributable to our recent acquisitions. Excluding the effect of foreign exchange and our recent acquisitions, revenue increased by $148.5 million, or 12.6%. The increase in revenue on an adjusted basis is attributable to both the Scientific Instruments segment, which increased by $117.4 million, or 10.6%, and the Energy & Supercon Technologies segment, which increased by $28.3 million, or 35.5%. Revenue in the Scientific Instruments segment reflects an increase in sales from many of our core technologies, particularly nuclear magnetic resonance products, mass spectrometry and X-ray. Revenues in the Energy & Supercon Technologies segment increased primarily due to recognition of license revenue on the sale of technology. In addition, revenue benefitted from higher demand for low temperature superconducting wire.

The mix of products sold in the Scientific Instruments segment during the first nine months of 2012 reflects increased demand from academic, government and industrial customers. We attribute the increase in sales to academic and government customers to increased spending from these customers and to new product introductions. The improvement in revenues from our industrial customers reflects continued growth in these end markets and our new product introductions.

Though we recognized increased revenue in 2012 on both a quarter-over-quarter and year-over-year basis, during the latter part of the second quarter we began to see a softening in demand, particularly in Europe, which continued in the third quarter. We also noted a weakening in global industrial and applied markets and as well as in the semiconductor and data storage metrology markets. We are uncertain whether the recent market conditions will continue or how our revenue derived from those market segments may be affected.

Gross profit for the three months ended September 30, 2012 was $210.6 million compared to $189.4 million for the three months ended September 30, 2011. Our gross profit margin for the three months ended September 30, 2012 was 47.0%, compared with 45.3% for the three months ended September 30, 2011. Excluding the effects of acquisition-related inventory and fixed asset charges, amortization of acquisition-related intangible assets and restructuring charges totaling, in the aggregate, $5.8 million and $5.5 million for the three months ended September 30, 2012 and 2011, respectively, gross profit margins increased to 48.3% for the three months ended September 30, 2012 compared with 46.6% for the three months ended September 30, 2011. Gross profit for the nine months ended September 30, 2012 was $589.2 million compared to $534.8 million for the nine months ended September 30, 2011. Our gross profit margin for the nine months ended September 30, 2012 was 46.2%, compared with 45.5% for the three months ended September 30, 2011. Excluding the effects of inventory and fixed asset charges, amortization of acquisition-related intangible assets and restructuring charges totaling, in the aggregate, $17.2 million and $21.4 million for the nine months ended September 30, 2012 and 2011, respectively, gross profit margins increased to 47.6% for the nine months ended September 30, 2012 compared with 47.3% for the nine months ended September 30, 2011.


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The increase in gross profit margins in the three and nine months ended September 30, 2012 was driven by recognizing license revenue on the sale of technology in the Energy & Supercon Technologies segment, which had minimal cost of revenue, and sales of our newly introduced products which carry higher gross margins than our previous generations of products. Offsetting these increases were increasing pricing pressures in certain markets, changes in the mix of products and our chemical analysis business contributing lower gross profit margins due to higher production costs.

Selling, general and administrative expenses and research and development expenses increased to $147.8 million, or 33.0% of revenue, in the three months ended September 30, 2012 from $145.6 million, or 34.8% of revenue, for the three months ended September 30, 2011. Selling, general and administrative expenses and research and development expenses increased to $462.9 million, or 36.3% of revenue, in the nine months ended September 30, 2012 from $422.1 million, or 35.9% of revenue, for the nine months ended September 30, 2011. The increase in selling, general and administrative expenses and research and development expenses in 2012 is driven by increases in headcount from our recent acquisitions and increases in headcount to support planned revenue growth in our existing businesses.

Income from operations for the three months ended September 30, 2012 was $60.3 million, resulting in an operating margin of 13.5%, compared to income from operations of $37.5 million, resulting in an operating margin of 9.0%, for the comparable period in 2011. Income from operations for the nine months ended September 30, 2012 was $116.8 million, resulting in an operating margin of 9.2%, compared to income from operations of $101.9 million, resulting in an operating margin of 8.7%, for the comparable period in 2011. The increase in operating margin was largely due to the recognition of license revenue on the sale of technology in the Energy & Supercon Technologies segment.

Included in income from operations are various charges for inventory write-downs, amortization of acquisition-related intangible assets and other acquisition-related costs, deferred offering costs that have been written off, legal and other professional service fees related to our internal FCPA investigation, and restructuring and relocation costs totaling, in the aggregate, $9.1 million and $12.6 million for the three months ended September 30, 2012 and 2011, respectively, and $29.2 million and $34.3 million for the nine months ended September 30, 2012 and September 30, 2011, respectively. Excluding these charges, operating margins were 15.5% and 12.0% for the three months ended September 30, 2012 and 2011, respectively, and 11.5% and 11.6% for the nine months ended September 30, 2012 and 2011, respectively. The increase in adjusted operating margins for the three months ended September 30, 2012 compared to the prior year is primarily due to the license revenue noted above. The decrease in adjusted operating margins for the nine months ended September 30, 2012 compared to the prior year is due to pricing pressures experienced in certain markets in the first half of the year, changes in the mix of products sold and higher operating expenses, offset by the revenue growth noted above, in particular the recognition of the license revenue.

Our effective tax rate for the three months ended September 30, 2012 was 30.7% compared to 49.0% for the comparable period in 2011. Our effective tax rate for the nine months ended September 30, 2012 was 37.5% compared to 41.6% for the comparable period in 2011. The decrease in the effective tax rate is primarily due to a mix of earnings within certain jurisdictions and the release of valuation allowances related to net operating losses at certain subsidiaries. In addition, during the third quarter of 2011 we recorded additional reserves for certain ongoing tax audits of $2.5 million, increasing the effective tax rate for the three and nine months ended September 30, 2012 by 6.4% and 2.7%, respectively.

Our net income attributable to the shareholders of Bruker Corporation for the three months ended September 30, 2012 was $39.7 million, or $0.24 per diluted share, compared to $19.8 million, or $0.12 per diluted share, for the comparable period in 2011. Our net income attributable to the shareholders of Bruker Corporation for the nine months ended September 30, 2012 was $64.7 million, or $0.39 per diluted share, compared to $53.2 million, or $0.32 per diluted share, for the comparable period in 2011. The increase for the three and nine months ended September 30, 2012 was due to revenue growth and higher gross margins, offset by increases in operating expenses, including higher spending on non-recurring items, and net interest expense.

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


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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 is generally transferred upon customer acceptance for a system that has been delivered to the customer. 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 or when the price is not fixed and determinable. For arrangements with multiple elements, we allocate revenue to each element based on their relative selling prices. The relative selling price of each element is based on our vendor specific objective evidence, if available. If vendor specific objective evidence is not available, we use evidence from third-parties or, when third-party evidence is not available, we use management's best estimate of the selling price. Typically, we cannot ascertain third-party evidence of selling price. When products and services offered do not qualify as separate units of accounting, we recognize revenue upon customer acceptance 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 reported revenues to differ materially from expectations. 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 model and completed contract model of revenue recognition. Application of these methods 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.

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, which is 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


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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 exist, 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 . . .

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