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| BRKR > SEC Filings for BRKR > Form 10-K on 28-Feb-2013 | All Recent SEC Filings |
28-Feb-2013
Annual Report
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:
º •
º 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.
º •
º 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. All of our significant accounting
policies, including our critical accounting policies and estimates,
are summarized in Note 2 to our consolidated financial statements in
Item 8 of this Annual Report on Form 10-K.
º •
º Results of Operations. This section provides our analysis of the
significant line items on our consolidated statement of income for the
year ended December 31, 2012 compared to the year ended December 31,
2011 and for the year ended December 31, 2011 compared to the year
ended December 31, 2010.
º •
º Liquidity and Capital Resources. This section provides an analysis of
our liquidity and cash flow and a discussion of our outstanding debt
and commitments.
º •
º Transactions with Related Parties. This section summarizes
transactions with principal shareholders and directors.
º •
º 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, gas chromatography technologies, infrared and Raman molecular spectroscopy technologies, X-ray technologies, spark-optical emission spectroscopy, atomic force microscopy, and stylus and optical metrology technology. 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, North America and Japan 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: the Bruker BioSpin group, the Bruker CALID group, the Bruker MAT group, and Bruker Energy & Supercon Technologies division. The Bruker BioSpin group is in the business of designing, manufacturing and distributing enabling life science tools based on magnetic resonance technology. The Bruker CALID group combines the Bruker Daltonics, Bruker Chemical and Applied Markets (CAM), 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. Bruker CALID 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 combines the Bruker AXS, Bruker Nano Surfaces, Bruker Nano Analysitics and Bruker Elemental divisions and is in the business of manufacturing and distributing advanced X-ray, spark-optical emission spectroscopy, atomic force microscopy and stylus and optical metrology instrumentation used in non-destructive molecular, materials and elemental analysis. The Bruker Energy & Supercon Technologies division is in the business of developing and producing low temperature superconductor and high temperature superconductor materials for use in advanced magnet technology and energy applications as well as linear accelerators, accelerator cavities, insertion devices, other accelerator components and specialty superconducting magnets for physics and energy research and a variety of other scientific applications.
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:
º •
º 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, infrared and
Raman molecular spectroscopy technology, X-ray technology,
spark-optical emission spectroscopy technology, atomic force
microscopy technology, and stylus and optical metrology 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.
º •
º 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 energy grid and magnet 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 year ended December 31, 2012, our revenue increased by $139.7 million, or 8.5%, to $1,791.4 million, compared to $1,651.7 million for the year ended December 31, 2011. Included in this
change in revenue are a decrease of approximately $76.8 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 $19.8 million attributable to recent acquisitions. Excluding the effects of foreign exchange and our recent acquisitions, revenue increased by $196.7 million, or 11.9%. The increase in revenue on an adjusted basis is attributable to both the Scientific Instruments segment, which increased by $158.5 million, or 10.2%, and the Energy & Supercon Technologies segment, which increased by $33.9 million, or 29.9%.
Revenue in the Scientific Instruments segment reflects an increase in sales from many of our core technologies, particularly nuclear magnetic resonance, mass spectrometry and X-ray products. The mix of products sold in the Scientific Instruments segment during 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. 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.
Though we recognized increased revenue in 2012 on a year-over-year basis, we began to see a softening in demand, particularly in Europe. We also noted a weakening in global industrial and applied markets, 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 year ended December 31, 2012 was $831.4 million compared to $752.5 million for the year ended December 31, 2011. Our gross profit margin for the year ended December 31, 2012 was 46.4%, compared with 45.6% for the year ended December 31, 2011. Excluding the effects of inventory and fixed asset charges, amortization of acquisition-related intangible assets and restructuring charges totaling, in the aggregate, $21.9 million and $24.4 million for the year ended December 31, 2012 and 2011, respectively, gross profit margins increased to 47.6% for the year ended December 31, 2012 compared with 47.0% for the year ended December 31, 2011. The increase in gross profit margins for the year ended December 31, 2012 was driven by license revenue from the sale of technology in the Energy & Supercon Technologies segment, which had minimal associated cost, and sales of our newly introduced products, which carry higher gross margins than our previous generations of products. Offsetting these items were increasing pricing pressures in certain markets, changes in the mix of products and lower gross profit margins in our CAM division due to increased production costs.
Selling, general and administrative expenses and research and development expenses increased to $637.7 million, or 35.6% of revenue, in 2012 from $583.8 million, or 35.3% of revenue, in 2011. The increase in selling, general and administrative expenses and research and development expenses in 2012 is attributable to increases in headcount to support planned revenue growth in our existing businesses and from our recent acquisitions. Changes in foreign currency exchange rates, primarily the strengthening of the U.S. Dollar against the Euro and other foreign currencies, partially offset the increase because the majority of our employees are located in Europe. We are focused on controlling costs and are implementing selective cost saving programs with the goal of reducing operating expenses and improving operating margins in 2013.
We recorded an impairment charge in the amount of $23.8 million for the year ended December 31, 2012, comprising goodwill and definite-lived intangible assets of $1.4 million and $16.4 million, respectively, related to our CAM division, and an impairment charge of $6.0 million for other long-lived assets to reduce the carrying value to their estimated fair value.
Income from operations for the year ended December 31, 2012 was $156.0 million, resulting in an operating margin of 8.7%, compared to income from operations of $155.6 million, resulting in an
operating margin of 9.4%, for the year ended December 31, 2011. The decrease in operating margin was largely due to the impairment of assets noted above, partially offset by 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, impairment of goodwill, intangible assets and other long-term assets, deferred offering costs that have been expensed, legal and other professional services fees related to our internal investigation and review of our operations in China, and restructuring and relocation costs totaling, in the aggregate, $63.0 million and $41.2 million in 2012 and 2011, respectively. Excluding these charges, operating margins were 12.2% in 2012 and 11.9% in 2011. The increase in adjusted operating margins for the year ended December 31, 2012 compared to the prior year is due to the revenue growth noted above, in particular the recognition of the license revenue in the Energy & Supercon Technologies segment, offset by pricing pressures experienced in certain markets, changes in the mix of products sold and higher operating expenses.
Our effective tax rate for 2012 was 43.5%, compared to 35.4% for 2011. The increase in the effective tax rate is primarily due to the impairment charges noted above, which are unbenefitted in certain jurisdictions.
Our net income attributable to the shareholders of Bruker Corporation for the year ended December 31, 2012 was $77.5 million, or $0.46 per diluted share, compared to $92.3 million, or $0.55 per diluted share, for the year ended December 31, 2011. The decrease for the year ended December 31, 2012 was due to increases in operating expenses, including impairment of goodwill, intangibles, and other long-lived assets, higher spending on non-recurring items and higher net interest expense. These were partially offset by revenue growth and higher gross margins.
CRITICAL ACCOUNTING POLICIES
This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, the expensing and capitalization of software development costs, stock-based compensation expense, restructuring and other related charges, income taxes, including the recoverability of deferred tax assets, allowances for doubtful accounts, reserves for excess and obsolete inventories, estimated fair values of long-lived assets used to evaluate the recoverability of long-lived assets, intangible assets and goodwill, expected future cash flows used to evaluate the recoverability of intangible assets and long-lived assets, warranty costs, derivative financial instruments and contingent liabilities. 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 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 or 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.
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 other 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 first step of the goodwill 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 a weighting of both the market approach and the income approach methodologies. The income approach valuation methodology includes discounted cash flow estimates. Estimating the fair value of the reporting units requires significant judgment 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.
At December 31, 2012, the Company performed its annual goodwill impairment evaluation and concluded all reporting units' fair values exceeded their carrying values, with the exception of the CAM division, which experienced increased deterioration in its financial performance. The Company, therefore, performed step two of the impairment test to measure potential impairment and concluded an impairment charge of $1.4 million was required. This amount represents all the goodwill allocated to the CAM division and is recorded within "Impairment of assets" in the accompanying statements of income and comprehensive income for the year ended December 31, 2012. There were no indefinite-lived intangible assets associated with the CAM division and no impairment of indefinite-lived intangible assets during the year ended December 31, 2012.
We also review definite-lived intangible assets and other long-lived assets when indications of potential impairment exist. Should the fair value of our long-lived assets decline because of reduced operating performance, market declines, or other indicators of an impairment, a charge to operations for impairment may be necessary.
The Company determined the increased deterioration in financial performance of the CAM division discussed above was an indicator requiring the evaluation of the definite-lived intangible assets within that reporting unit for recoverability. The Company performed a test based on projected future undiscounted cash flows at December 31, 2012 and determined that the definite-lived intangible assets within the CAM division were impaired. The Company recorded an impairment charge in the amount of $16.4 million for the year ended December 31, 2012 to reduce the carrying value of those assets to their estimated fair values. The impairment charge is included within "Impairment of assets" in the accompanying statements of income and comprehensive income. No impairment losses were recorded related to definite-lived intangible assets during the years ended December 31, 2011 and 2010.
The increased deterioration in financial performance of the CAM division discussed above was also an indicator requiring the evaluation of other long-lived assets within that reporting unit for recoverability. In addition, based on the abandonment of a project in the Energy & Supercon Technologies reporting unit there was an indicator requiring the evaluation of those long-lived assets for recoverability. The Company performed a test of projected future undiscounted cash flows at December 31, 2012, and determined that certain of the other long-lived assets within the CAM division and the Energy & Supercon Technologies reporting unit were impaired. During the year ended December 31, 2012, an impairment charge in the amount of $6.0 million related to property, plant and equipment was recorded to reduce the carrying value of those assets to their estimated fair values. This amount is recorded within "Impairment of assets" in the accompanying statements of income and comprehensive income.
We will continue to monitor goodwill and long-lived intangible assets, as well as long-lived tangible assets, for possible future impairment.
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.
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.
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