BRUKER CORP - Quarter Report: 2005 March (Form 10-Q)

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U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission File Number 000-30833

Bruker BioSciences Corporation
(Exact name of registrant as specified in its charter)

        Indicate by checkmark 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. ý Yes    No

        Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). ý Yes    No

        As of May 6, 2005, there were 89,470,853 shares of the Registrant's common stock outstanding.

Bruker BioSciences Corporation

Form 10-Q

For the Quarter Ended March 31, 2005

Index

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PART I FINANCIAL INFORMATION

ITEM 1: Financial Statements

Bruker BioSciences Corporation

Condensed Consolidated Balance Sheets

(in thousands, except share data)

See the accompanying notes to financial statements.

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Bruker BioSciences Corporation

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)

See the accompanying notes to financial statements.

4

Bruker BioSciences Corporation

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

See the accompanying notes to financial statements.

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Bruker BioSciences Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Description of Business and Basis of Presentation

        Bruker BioSciences Corporation and its wholly-owned subsidiaries (the "Company") design, manufacture, service and market proprietary life science systems based on mass spectrometry core technology platforms and X-ray technology. The Company also sells a broad range of field analytical systems for nuclear, biological and chemical ("NBC") detection. The Company maintains major technical centers in Europe, North America and Japan. The Company's diverse customer base includes pharmaceutical, biotechnology and proteomics companies, academic institutions, semiconductor industries and government agencies.

        The financial statements represent the consolidated accounts of Bruker BioSciences Corporation and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements as of and for the three months ended March 31, 2005 and 2004 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with Article 10 of Regulation S-X. The December 31, 2004 balance sheet is the balance sheet included in the audited financial statements as shown in the Company's 2004 Annual Report on Form 10-K. Accordingly, the financial information presented herein does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America 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 to be expected for the full year.

        The Company reports financial results on the basis of two reportable segments; Bruker Daltonics and Bruker AXS. Bruker Daltonics is in the business of manufacturing and distributing mass spectrometry instruments that can be integrated and used along with other analytical instruments. Bruker AXS is in the business of manufacturing and distributing advanced X-ray instrumentation used in non-destructive molecular and elemental analysis in academic, research and industrial applications.

        For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004.

2. Restatement of Financial Statements

        The Company has restated its previously issued consolidated financial statements for the quarter ended March 31, 2004. Certain costs historically classified in sales and marketing and research and development expense were reclassified to cost of sales. For the quarter ended March 31, 2004, approximately $2.0 million related to the write-down of demonstration inventory to net realizable value was reclassified from sales and marketing and research and development expense to cost of product sales. In addition, $1.6 million of service costs historically classified in sales and marketing expense have been reclassified to cost of service sales. The Company also made changes to the consolidated financial statements for the quarter ended March 31, 2004 increasing cost of product sales by $0.7 million and decreasing sales and marketing expense by $0.1 million for accounting corrections related primarily to inventory costing identified during the 2004 year-end closing process. The accounting corrections identified during the 2004 year-end closing process impacted the Company's U.S. operations and no tax benefit was realized on these adjustments.

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3. Stock Compensation Arrangements

        The Company measures compensation expense for its stock-based employee compensation plans using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation." The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure," an amendment of FASB Statement No. 123 (SFAS 148). Had compensation expense for the Company's stock option plans been determined based on the fair value at the grant date, consistent with the methodology prescribed by SFAS 148, the Company's net income (loss) and net income (loss) per common share for the three months ended March 31, 2005 and 2004 would have approximated the following pro forma amounts (in thousands, except per share data):

        The fair value of each stock option included in the preceding pro forma amounts was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

4. Inventories

        Inventories consisted of the following as of March 31, 2005 and December 31, 2004 (in thousands):

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5. Goodwill and Other Intangible Assets

        The following is a summary of other intangible assets subject to amortization as of March 31, 2005 and December 31, 2004 (in thousands):

        For each of the three months ended March 31, 2005 and 2004, the Company recorded amortization expense of approximately $0.1 million related to other amortizable intangible assets.

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

(a)

Amount represents estimated amortization expense for the remaining nine months ending December 31, 2005.

        The carrying amount of goodwill as of March 31, 2005 and December 31, 2004 was $10.7 million and is included in the Bruker AXS segment. The Company performs its annual test for indications of impairment as of December 31^st each year. The Company completed its annual test for impairment as of December 31, 2004 and determined that goodwill was not impaired at that time.

6. Warranty Costs

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

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        Changes in the Company's accrued warranty liability during the three months ended March 31, 2005 were as follows (in thousands):

7. Provision for Income Taxes

        For the three months ended March 31, 2005, the Company recorded an income tax provision of $1.9 million compared with an income tax provision of $1.0 million for the three months ended March 31, 2004. In the United States, any income tax provision or benefit is currently recorded as an adjustment to the valuation allowance until sufficient positive evidence exists to support the reversal of a full valuation allowance which was established in 2003.

8. Employee Benefit Plans

        The Company has a defined benefit retirement plan that covers substantially all employees of the Bruker AXS German subsidiary who were employed on September 30, 1997. The plan provides pension benefits based upon final average salary and years of service.

        The net periodic pension benefit cost includes the following components during the three months ended March 31, 2005 and 2004 (in thousands):

        To date, the Company has not funded the defined benefit plan and is not required to make contributions during the remainder of 2005.

9. Earnings Per Share

        Basic earnings per share is calculated by dividing net earnings by the weighted-average number of common shares outstanding during the period. Except where the result would be antidilutive, the diluted earnings per share computation includes the effect of shares which would be issuable upon the exercise of outstanding stock options, reduced by the number of shares which are assumed to be purchased by the Company from the resulting proceeds at the average market price during the period.

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        The following table sets forth the computation of basic and diluted average shares outstanding for the three months ended March 31, 2005 and 2004 (in thousands):

10. Interest and Other Income (Expense), Net

        The components of interest and other income (expense), net, were as follows for the three months ended March 31, 2005 and 2004 (in thousands):

11. Comprehensive Income (Loss)

        Comprehensive income (loss) refers to revenues, expenses, gains and losses that under accounting principles generally accepted in the United States of America are included in other comprehensive income (loss), but excluded from net income (loss) as these amounts are recorded directly as an adjustment to stockholders' equity, net of tax. The following is a summary of comprehensive income (loss) for the three months ended March 31, 2005 and 2004 (in thousands):

12. Commitments and Contingencies

        Lawsuits, claims and proceedings of a nature considered normal to its businesses may be pending from time to time against the Company. The Company believes the outcome of these proceedings, if any, will not have a material impact on the Company's financial position or results of operations.

Letters of Credit and Guarantees

        As of March 31, 2005 and December 31, 2004, the Company had bank guarantees of $5.8 million and $7.3 million, respectively, for its customer advances. These bank guarantees affect the availability of the Company's lines of credit.

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13. Business Segment Information

        SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," (SFAS 131) establishes standards for reporting information about reportable segments in financial statements of public business enterprises. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company reports financial results on the basis of two reportable segments: Bruker Daltonics and Bruker AXS. Bruker Daltonics manufactures and distributes mass spectrometry instruments that can be integrated and used along with other analytical instruments. Bruker AXS manufactures and distributes advanced X-ray instrumentation used in non-destructive molecular and elemental analysis in academic, research and industrial applications. Bruker BioSciences Corporation, the parent company of Bruker Daltonics and Bruker AXS, is the corporate entity that holds excess cash and short-term investments and principally incurs certain public company costs.

        Selected reportable segment financial information for the three months ended March 31, 2005 and 2004 is presented below (in thousands):

14. Recent Accounting Pronouncements

        In December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share-Based Payment" ("SFAS No. 123R") that addresses the accounting for share-based payment transactions in which a Company receives employee services in exchange for (a) equity instruments of the Company or (b) liabilities that are based on the fair value of the Company's equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, "Accounting for Stock Issued to Employees," that was provided in Statement 123 as originally issued. As permitted by SFAS No. 123R, the Company currently accounts for share-based payments to employees using Opinion 25's intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123R fair value method will have a significant impact on the Company's results of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123R in prior periods, the impact would have approximated the amounts calculated using SFAS No. 123 as described in the disclosure of pro forma net loss and net loss per share in Note 3 to our consolidated financial statements.

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ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion of our financial condition and results of operations should be read in conjunction with our interim 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, 2004.

        Statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations which express that we "believe," "anticipate," "expect" or "plan to," 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, 2004.

OVERVIEW

Bruker BioSciences

        Bruker BioSciences Corporation and its wholly-owned subsidiaries (the "Company") design, manufacture, service and market proprietary life science systems based on mass spectrometry core technology platforms and X-ray technology. The Company also sells a broad range of field analytical systems for nuclear, biological and chemical ("NBC") detection. The Company maintains major technical centers in Europe, North America and Japan. The Company's diverse customer base includes pharmaceutical, biotechnology and proteomics companies, academic institutions, semiconductor industries and government agencies. Our business strategy includes focusing on innovative product and solution development, while continuing to expand our global distribution and customer support capabilities.

        The Company has made adjustments to its previously issued consolidated financial statements for the quarter ended March 31, 2004. These adjustments reflect reclassifications made to certain costs historically classified in sales and marketing and research and development expense to cost of sales. For the quarter ended March 31, 2004, approximately $2.0 million related to the write-down of demonstration inventory to net realizable value was reclassified from sales and marketing and research and development expense to cost of product sales. In addition, for the quarter ended March 31, 2004, $1.6 million of service costs historically classified in sales and marketing expense have been reclassified to cost of service sales. The Company also made changes to the consolidated financial statements for the quarter ended March 31, 2004 increasing cost of product sales by $0.7 million and decreasing sales and marketing expense by $0.1 million for accounting corrections related primarily to inventory costing identified during the 2004 year-end closing process. The accounting corrections identified during the 2004 year-end closing process impacted the Company's U.S. operations and no tax benefit was realized on these adjustments.

        For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004.

        The Company reports financial results on the basis of two reportable segments; Bruker Daltonics and Bruker AXS. Bruker Daltonics is in the business of manufacturing and distributing mass spectrometry instruments that can be integrated and used along with other analytical instruments. Bruker AXS is in the business of manufacturing and distributing advanced X-ray instrumentation used in non-destructive molecular and elemental analysis in academic, research and industrial and security applications.

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Bruker Daltonics

        The performance of the Bruker Daltonics business is driven by its products in life-science mass spectrometry and Nuclear, Biological and Chemical ("NBC") detection. During the first quarter of 2005, revenues increased by 9.8% over the comparable period in 2004. In the fourth quarter of 2004, we introduced several new products, of which the most significant introductions were our next generation high-end ultraflex II TOF/TOF system, which provides additional research capabilities in expression and clinical proteomics, as well as our pre-spotted anchor chip for MALDI-TOF for expression proteomics. During the first quarter of 2005, we introduced additional new products including, among others, our microTOF-Q, HCTultra and Apollo II ion funnel electrospray ionization source. We expect these new product introductions to contribute to our revenue growth in future periods.

Bruker AXS

        The analytical X-Ray performance of the Bruker AXS business is driven by its products in single crystal X-ray diffraction ("SCD"), polycrystalline X-ray diffraction ("XRD"), X-ray flourescence ("XRF") as well as thermal analyzers. During the first quarter of 2005, revenues increased by 10.9% over the comparable period in 2004. During the second half of 2004 and the first quarter of 2005, Bruker AXS introduced a series of new products in life sciences SCD and materials research XRD in order to regain growth in the marketplace. In life sciences SCD, we introduced the MICROSTAR™ high brilliancy X-Ray source and in materials research XRD we introduced our new D8 SuperSpeed™ solutions with integrated, high-power X-Ray source technology, the Vantec-1™ X-Ray detector technology to provide higher speed and sensitivity compared to other available products on the market, and our new VANTEC-2000 two- dimensional X-ray detector. We expect these new products to continue to contribute to our revenue growth in future periods.

Critical Accounting Policies and Estimates

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

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

Revenue recognition.    We recognize revenue from system sales when persuasive evidence of an arrangement exists, the price is fixed or determinable, title and risk of loss has been transferred to the customer and collectibility of the resulting receivable is reasonably assured. Title and risk of loss is generally transferred to the customer upon receipt of a signed customer acceptance form for a system that has been shipped, installed, and for which the customer has been trained. As a result, the timing of customer acceptance or readiness could cause our reported revenues to differ materially from expectations. When products are sold

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through an independent distributor, a strategic distribution partner or an unconsolidated affiliated distributor, which assumes responsibility for installation, we recognize the system sale when the product has been shipped and title and risk of loss has been transferred. Our distributors do not have price protection rights or rights to return; however, our products are warranted to be free from defect for a period of one year. For arrangements with multiple elements, we recognize revenue for each element based on the fair value of the element provided all other criteria for revenue recognition have been met. The fair value for each element provided in multiple element arrangements is typically determined by referencing historical pricing policies when the element is sold separately. Changes in our ability to establish the fair value for each element in multiple element arrangements could affect the timing of revenue recognition.

Revenue from accessories and parts is recognized upon shipment and service revenue is recognized as the services are performed.

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 cost determined by the first-in, first-out method. We maintain an allowance for excess and obsolete inventory to reflect the expected un-saleable or un-refundable inventory based on an evaluation of slow moving products. If ultimate usage or demand varies significantly from expected usage or demand, additional write-downs may be required, resulting in a charge to operations.

Goodwill, other intangible assets, investments in other companies, and other long-lived assets.    We perform an evaluation of whether goodwill is impaired annually or when events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Fair value is determined using market comparables for similar businesses or forecasts of discounted future cash flows. We also review other intangible assets, investments in other companies, and other long-lived assets when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets. Should the fair value of our long-lived assets decline because of reduced operating performance, market declines, or other indicators of impairment, a charge to operations for impairment may be necessary.

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

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

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Contingencies.    We estimate losses on contingencies and provide a reserve for these losses when the losses are probable and estimable. Should the ultimate losses on contingencies and litigation differ from estimates, adjustments to those reserves may be required.

Results of Operations

Three months ended March 31, 2005 compared to the three months ended March 31, 2004

        The Company, as discussed above, has restated its previously issued consolidated financial statements for the quarter ended March 31, 2004. These adjustments are reflected in the following tables and discussions within Management's Discussion and Analysis of Financial Condition and Results of Operations.

Sales

        The following table presents sales, change in sales and sales growth by reportable segment for the three months ended March 31, 2005 and 2004 (dollars in thousands):

(a)

Includes other sales of $0.3 million and $0.2 million for the three months ended March 31, 2005 and 2004, respectively, related to grant revenue received for research and development projects.

        Bruker Daltonics' sales increased by $3.8 million, or 9.8%, to $42.6 million for the three months ended March 31, 2005 compared to $38.8 million for the comparable period in 2004. Included in this change in sales is approximately $1.4 million from the impact of foreign exchange. Excluding the effect of foreign exchange, sales would have increased by 6.3%. The increase in sales excluding the effect of foreign exchange is a result of an increase in the number of life science and NBC systems sold year-over-year, partially offset by pricing pressures due to increased competition. Included in other sales for the three months ended March 31, 2005 and 2004 are grant revenues from various projects for early-stage research and development projects funded by the German government. Life science systems, NBC detection systems and aftermarket sales as a percentage of Bruker Daltonics' product and service sales were as follows during the three months ended March 31, 2005 and 2004:

        Bruker AXS' sales increased by $3.2 million, or 10.9%, to $32.5 million for the three months ended March 31, 2005 compared to $29.3 million for the comparable period in 2004. Included in this change in sales is approximately $1.3 million from the impact of foreign exchange. Excluding the effect of foreign exchange, sales would have increased by 6.4%. The increase in sales excluding the effect of foreign exchange is driven by growth in SCD our life sciences and materials research XRD system sales

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and continued strong aftermarket sales, partially offset by reduced XRF elemental composition system sales. X-ray systems and aftermarket sales as a percentage of Bruker AXS' product sales were as follows during the three months ended March 31, 2005 and 2004:

Cost of Sales

        The following table presents cost of product and service sales and cost of product and service sales as a percentage of product and service sales by reportable segment for the three months ended March 31, 2005 and 2004 (dollars in thousands):

        Bruker Daltonics' cost of product and service sales for the three months ended March 31, 2005 were $24.6 million, or a gross profit margin of 41.9%, compared to $22.1 million, or a gross profit margin of 42.6% for the comparable period in 2004. The decrease in gross profit margins is attributable to pricing pressures due to increased competition, partially offset by an unprofitable multi-year contract with the U.K. Ministry of Defense which was completed in the second half of 2004.

        Bruker AXS' cost of product and service sales for the three months ended March 31, 2005 were $19.2 million, or a gross profit margin of 40.9%, compared to $17.9 million, or a gross profit margin of 39.1% for the comparable period in 2004. The increase in gross profit margins is primarily due to certain manufacturing efficiencies being realized and reduced quality costs, including warranty expenses, as improvements have been made to new products introduced during 2004.

Sales and Marketing

        The following table presents sales and marketing expense and sales and marketing expense as a percentage of product and service sales by reportable segment for the three months ended March 31, 2005 and 2004 (dollars in thousands):

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        Bruker Daltonics' sales and marketing expense for the three months ended March 31, 2005 decreased to $5.8 million, or 13.8% of product and service sales, from $5.9 million, or 15.2% of product and service sales for the comparable period in 2004. The decrease in sales and marketing as a percentage of product and service sales is primarily attributable to cost control initiatives implemented during the second half of 2004, partially offset by incremental investments in certain sales and marketing initiatives.

        Bruker AXS' sales and marketing expense for the three months ended March 31, 2005 decreased to $6.3 million, or 19.5% of product and service sales, from $6.8 million, or 23.2% of product and service sales for the comparable period in 2004. The decrease in sales and marketing as a percentage of product and service sales is primarily attributable to leveraging our fixed costs on increased sales during the first quarter of 2005 compared to 2004 and cost control initiatives implemented during the second half of 2004, partially offset by increased investments in sales personnel in Spain during the first quarter of 2005.

General and Administrative

        The following table presents general and administrative expense and general and administrative expense as a percentage of product and service sales by reportable segment for the three months ended March 31, 2005 and 2004 (dollars in thousands):

        Bruker Daltonics' general and administrative expense for the three months ended March 31, 2005 and 2004 was $1.9 million, or 4.6% and 4.9% of product and service sales, respectively. The decrease in general and administrative expenses as a percentage of product and service sales is primarily due to continued improved cost controls established during the second half of 2004 for which the benefits were realized in the first quarter of 2005 and the reclassification in the first quarter of 2005 of certain costs associated with being a public company which are now being captured at the corporate level.

        Bruker AXS' general and administrative expense for the three months ended March 31, 2005 increased to $2.5 million, or 7.6% of product and service sales, from $2.0 million, or 6.9% of product and service sales for the comparable period in 2004. The increase in general and administrative expense as a percentage of product and service sales is primarily due to an increase in headcount in the first quarter of 2005 and increased costs associated with establishing new international locations in the second half of 2004.

        Corporate general and administrative expense for the three months ended March 31, 2005 increased to $1.3 million from $0.2 million for the comparable period in 2004. Corporate general and administrative expenses represent expenses associated with being a public company not allocated to our reportable segments, including legal fees, audit and consulting fees and filing fees. The increase in expenses is primarily attributable to accounting and consulting fees associated with additional implementation and ongoing maintenance work to comply with Sarbanes-Oxley requirements and the reclassification in the first quarter of 2005 of certain costs associated with being a public company which were previously included in segment results.

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Research and Development

        The following table presents research and development expense and research and development expense as a percentage of product and service sales by reportable segment for the three months ended March 31, 2005 and 2004 (dollars in thousands):

        Bruker Daltonics' research and development expense for the three months ended March 31, 2005 increased to $7.4 million, or 17.4% of product and service sales, from $7.1 million, or 18.5% of product and service sales for the comparable period in 2004. The decrease in research and development expense as a percentage of product and service sales is primarily attributable to increased sales in the first quarter of 2005 as compared to the first quarter of 2004, partially offset by increased investments in research and development projects which we expect to result in new product introductions later in 2005 and 2006.

        Bruker AXS' research and development expense for the three months ended March 31, 2005 increased to $3.7 million, or 11.3% of product and service sales, from $2.8 million, or 9.5% of product and service sales for the comparable period in 2004. The increase in research and development expense as a percentage of product and service sales is primarily due to increased headcount during the first quarter of 2005 and higher consulting fees incurred on certain development projects.

Interest and Other Income (Expense), Net

        Interest and other income, net, during the three months ended March 31, 2005 increased by $0.2 million from the comparable period in 2004 to a net expense of $0.1 million. The increase is primarily attributable to an increase in losses on foreign currency transactions, partially offset by an increase in interest income.

Provision for Income Taxes

        The income tax provision for the three months ended March 31, 2005 was $1.9 million compared to $1.0 million for the comparable period in 2004. During the first quarter of 2005 and 2004, our effective tax rate was approximately 80% and 68%, respectively, and reflects our tax provision for non-U.S. entities only, since no benefit was recognized for losses incurred in the U.S. We will maintain a full valuation allowance for our U.S. net operating losses until such evidence exists that it is more likely than not that the loss carry-forward amounts will be utilized to offset U.S. taxable income. Our tax rate may change over time as the amount or mix of income and taxes outside the U.S. changes. Our effective tax rate is calculated using our projected annual pre-tax income or loss and is affected by research and development tax credits, the expected level of other tax benefits, 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.

Minority Interest in Consolidated Subsidiaries

        Minority interest in consolidated subsidiaries for the three months ended March 31, 2005 was $0.1 million compared to $11,000 in the comparable period of 2004. The minority interest in subsidiaries represents the minority shareholders' proportionate share of net income (loss) for the three

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months ended March 31, 2005 and 2004. For the three months ended March 31, 2005 and 2004, the minority interest relates to our two majority-owned subsidiaries, Incoatec GmbH and Baltic Scientific Instruments Ltd.

LIQUIDITY AND CAPITAL RESOURCES

        We currently anticipate that our existing capital resources will meet our operating and investing needs for at least the next twelve months. Cash requirements for periods beyond the next twelve months depend on our profitability, our ability to manage working capital requirements and our growth rate. Historically, we have financed our growth through a combination of debt financings and issuances of common stock. In the future, there can be no assurance that additional financing alternatives will be available to us if required, or if available, will be obtained with terms favorable to us.

        During the three months ended March 31, 2005, net cash provided by operating activities was $5.2 million compared to net cash used in operating activities of $4.1 million during the three months ended March 31, 2004. The increase in cash provided by operating activities was primarily attributable to changes in other current liabilities, primarily accrued expenses and customer deposits, a decrease in tax deposits and a decrease in inventories, partially offset by an increase in accounts receivable.

        During the three months ended March 31, 2005, investing activities used $0.5 million in cash compared to net cash used in investing activities of $1.9 million during the three months ended March 31, 2004. Cash used in investing activities during the three months ended March 31, 2005 was attributable primarily to approximately $0.5 million in capital expenditures. During the remainder of 2005, we expect to continue to make capital investments, focusing on enhancing the efficiency of our operations and supporting our anticipated growth.

        During the three months ended March 31, 2005, financing activities provided $4.1 million of cash compared to a $4.9 million during the three months ended March 31, 2004. The decrease in cash provided by financing activities during the three months ended March 31, 2005 is attributable to a reduction in net proceeds from short-term borrowing and an increase in the repayment of long-term debt.

        We have a demand revolving line of credit with Citizens Bank in the United States in the amount of $2.5 million. The line of credit, which is secured by portions of our inventory, receivables and equipment in the United States, is used to support our working capital requirements and expires in June 2005. As of March 31, 2005, the full amount of our U.S. line of credit was available. We also maintain revolving lines of credit totaling approximately $37.3 million with various German and Japanese banks. The German and Japanese lines of credits are unsecured. As of March 31, 2005, approximately $14.2 million was outstanding on our German and Japanese lines of credit.

        In addition to our lines of credit, we have both short-term and long-term notes payable with outstanding balances aggregating approximately $28 million as of March 31, 2005. The interest rates on these obligations range from 1.00% to 5.10%. We entered into an interest rate swap to hedge the variability of cash flows related to changes in interest rates on borrowings of variable debt obligations and pay a 4.6% fixed rate of interest and receive a variable rate of interest based on the Bond Market Association Municipal Swap Index. The interest rate swap has a notional value of $2.2 million which decreases in conjunction with the IRB payment schedule until the interest rate swap and IRB agreements terminate in December 2013.

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        The following table summarizes maturities for our significant financial obligations as of March 31, 2005 (in thousands):

        As of March 31, 2005 and December 31, 2004, the Company had outstanding approximately $26.3 million and $27.8 million, respectively, in long-term debt obligations. The maturities for these obligations as of March 31, 2005 approximate the maturities disclosed in our annual report on Form 10-K for the year ended December 31, 2004.

        In connection with some of our outstanding debt, we are required to maintain certain financial ratios and meet other financial criteria. Additionally, we are subject to a variety of restrictive covenants that require bank consent if not met. As of March 31, 2005, the latest measurement date, we were in compliance with all financial covenants.

Recent Accounting Pronouncements

        In December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share-Based Payment" ("SFAS No. 123R") that addresses the accounting for share-based payment transactions in which a Company receives employee services in exchange for (a) equity instruments of the Company or (b) liabilities that are based on the fair value of the Company's equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, "Accounting for Stock Issued to Employees," that was provided in Statement 123 as originally issued. As permitted by SFAS No. 123R, the Company currently accounts for share-based payments to employees using Opinion 25's intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123R fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123R in prior periods, the impact would have approximated the amounts calculated using SFAS No. 123 as described in the disclosure of pro forma net loss and net loss per share in Note 3 to our condensed consolidated financial statements.

ITEM 3: Quantitative and Qualitative Disclosures About Market Risk

        We are potentially exposed to market risk associated with changes in foreign exchange and interest rates for which we selectively use financial instruments to reduce related market risks. An instrument is treated as a hedge if it is effective in offsetting the impact of volatility in our underlying exposure. We have also entered into instruments which are not effective derivatives under the requirements of SFAS No. 133, and therefore such instruments are not designated as hedges. All transactions are authorized and executed pursuant to our policies and procedures. Analytical techniques used to manage and monitor foreign exchange and interest rate risk include market valuations and sensitivity analysis.

        The Company regularly invests excess cash in overnight repurchase agreements and interest-bearing investment-grade securities that we hold for the duration of the term of the respective instrument and are subject to changes in short-term interest rates. The Company believes that the market risk arising from holding these financial instruments is minimal.

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        The Company's exposure to market risks associated with changes in interest rates relates primarily to the increase or decrease in the amount of interest income earned on its investment portfolio. The Company ensures the safety and preservation of invested funds by limiting default risks, market risk and reinvestment risk. The Company mitigates default risk by investing in investment grade securities. Declines in interest rates over time will, however, reduce the Company's interest income.

Impact of Foreign Currencies

        We sell products in many countries, and a substantial portion of sales and expenses are denominated in foreign currencies, principally in the Euro. During the three months ended March 31, 2005, the U.S. dollar continued to weaken against the euro compared to the three months ended March 31, 2004. This increased our consolidated revenue growth by $2.4 million, or approximately 3.6%, expressed in U.S. dollars.

        While we may from time to time hedge specifically identified cash flows in foreign currencies using forward contracts, this foreign currency activity historically has not been material. The maturities of the forward exchange contracts generally coincide with the settlement dates of the related transactions. Realized and unrealized gains and losses on these contracts are recognized in the same period as gains and losses on the hedged items. As of March 31, 2005, there were no foreign currency forward contracts outstanding.

        Realized foreign exchange gains (losses) were approximately $(0.4) million and $0.4 million for the three months ended March 31, 2005 and 2004, respectively. As we continue to expand internationally, we evaluate currency risks and may continue to enter into foreign exchange contracts from time to time to mitigate foreign currency exposure.

        We have entered into foreign-denominated debt obligations. The currency effects of the debt obligations are reflected in interest and other income (expense), net, on the consolidated statement of operations. We also have foreign-denominated intercompany borrowing arrangements with our Bruker Daltonik GmbH subsidiary in Germany, our Bruker AXS GmbH subsidiary in Germany and our Bruker Nonius subsidiary in the Netherlands that affected accumulated other comprehensive income (loss). A 10% increase or decrease of the respective foreign exchange rate with our Bruker Daltonik GmbH subsidiary in Germany would result in a change in accumulated other comprehensive income (loss) of approximately $1.0 million. A 10% increase or decrease of the respective foreign exchange rate with our Bruker Nonius subsidiary in the Netherlands would result in a change in accumulated other comprehensive income (loss) of approximately $1.1 million or $(0.9) million, respectively. A 10% increase or decrease of the respective foreign exchange rate with our Bruker AXS GmbH subsidiary in Germany would result in a transaction gain (loss) of approximately $0.7 million or $(0.5) million, respectively.

Impact of Interest Rates

        Our exposure related to adverse movements in interest rates is derived primarily from outstanding floating rate debt instruments that are indexed to short-term market rates and cash equivalents. Our objective in managing our exposure to interest rates is to decrease the volatility that changes in interest rates might have on our earnings and cash flows. To achieve this objective, we use a fixed rate agreement to adjust a portion of our debt that is subject to variable interest rates.

        In the U.S., we have entered into an interest rate swap arrangement to limit the interest rate exposure on our $2.2 million industrial revenue bond to a fixed rate of 4.6%. We pay a 4.6% fixed rate of interest and receive a variable rate of interest based on the Bond Market Association Municipal Swap Index on a $2.2 million notional amount. Net interest payments or receipts are recorded as adjustments to interest expense. In addition, the instrument is recorded at fair market value on our balance sheet, and changes in the fair market value are recorded in current earnings. As of March 31,

21

2005, the fair value of the instrument was approximately $0.1 million, net of tax, and is recorded as a liability on the balance sheet.

        In April 2002, we entered into two derivative financial instruments: a cross currency interest rate swap and an interest rate swap. The cross currency interest rate swap of 2 million Euro secures a fixed interest rate of 1.75% per annum until January 4, 2012. The interest rate swap of 3 million Euro reduces the 6-month EURIBOR rate by 1.80% per annum until January 4, 2007. We entered into the financial instruments to manage our exposure to interest rates and foreign exchange risk. During the year ended December 31, 1999, we entered into three financial instruments: an interest rate cap, an interest rate swap and a cross currency interest rate swap. By entering into these financial instruments, we obtained the right to borrow money at lower rates of interest. We continue to hold these financial instruments until we elect to exercise the options to borrow the money. Until the instruments become an effective hedge, the instruments are considered speculative and are marked-to-market through interest and other income (expense), net, in the consolidated statement of operations. The change in the fair value of these instruments was not material for any period presented. As of March 31, 2005, the fair value of these instruments was approximately $0.2, net of tax, and is recorded as a liability on the balance sheet.

        A 10% increase or decrease in the average cost of our variable rate debt would not result in a material change in pre-tax interest expense.

Inflation

        We do not believe inflation had a material impact on our business or operating results during the periods presented.

ITEM 4: Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

        The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"). The rules refer to the controls and other procedures designed to ensure that information required to be disclosed in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified. The Company's management, including the Company's chief executive officer and chief financial officer, performed an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of March 31, 2005. Based on that evaluation and due to the material weaknesses in our internal control over financial reporting identified and disclosed in our Annual Report on Form 10-K, for the year ended December 31, 2004, we concluded that the Company's disclosure controls and procedures were not effective as of March 31, 2005.

(b) Changes in Internal Controls over Financial Reporting

        In our Annual Report on Form 10-K, for the year ended December 31, 2004, we identified and disclosed material weaknesses in our internal control over financial reporting at one significant subsidiary whose operations and financial condition are significant to the Company's consolidated financial statements. In response to these material weaknesses identified, we have taken steps to strengthen our internal controls over financial reporting. These steps have included the following:

•

We evaluated and continue to evaluate the roles and functions within the significant subsidiary's accounting department and added additional resources to support the controls surrounding inventory costing and the financial statement close process. Temporary staff has been used to perform additional control procedures while management continues to evaluate permanent resources and systems. Permanent personnel resources are intended to be in place by the end of

22

the second quarter of 2005. The additional resources together with the current accounting staff will improve existing policies and procedures to enable proper financial reporting.

•

In addition to augmenting the Company's accounting personnel, management's long-term goal is to automate and establish certain preventative controls through the implementation of Materials Resource Planning (MRP) system. Management has been evaluating MRP systems and expects that the complete implementation of such an MRP system will require approximately 12-15 months.

        Management believes that the above measures, when implemented, will address the material weaknesses described in our Annual Report on Form 10-K, for the year ended December 31, 2004, in the near and long-term. The Audit Committee and management will continue to monitor the effectiveness of our internal controls and procedures on an ongoing basis and will take further action, as appropriate.

        During the three month period ended March 31, 2005, there were no other significant changes in the Company's internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company will continue to include reports on its progress in these areas in its quarterly filings with the SEC.

        It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

        The statements contained in Exhibits 31.1 and 31.2 should be considered in light of, and read together with, the information set forth in this Item 4.

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PART II OTHER INFORMATION

ITEM 1: Legal Proceedings

General

        The Company may, from time to time, be involved in legal proceedings in the ordinary course of business. The Company is not currently involved in any pending legal proceedings that, either individually or taken as a whole, are reasonably likely in management's judgment to materially harm our business, prospects, results of operations or financial condition, nor have any such legal proceedings been threatened.

ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds

        The following table sets forth all purchases made by or on behalf of the Company or any "affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Exchange Act, of shares of our common stock during each month in the first quarter of 2005.

(1)

All share repurchases were open-market purchases by the Company's Chief Executive Officer and were effected in accordance with the Safe Harbor Provisions of Rule 10b-18 of the Securities and Exchange Act and were previously disclosed by the affiliated purchaser on Form 4.

ITEM 3: Defaults Upon Senior Securities

        None.

ITEM 4: Submission of Matters to a Vote of Security Holders

        None

ITEM 5: Other Information

        None.

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ITEM 6: Exhibits

(1)

Filed herewith.

(2)

Furnished herewith.

+

Confidential treatment requested as to certain portions, which portions have been omitted and filed separately with the Commission.

25

SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

26

EXHIBIT INDEX

(1)

Filed herewith.

(2)

Furnished herewith.

+

Confidential treatment requested as to certain portions, which portions have been omitted and filed separately with the Commission.