BRUKER CORP - Quarter Report: 2008 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-Q

 

x

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

 

For the quarterly period ended September 30, 2008

 

o

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

 

Commission File Number 000-30833

 

BRUKER CORPORATION

(Exact name of registrant as specified in its charter)

 

 

40 Manning Road, Billerica, MA 01821
(Address of principal executive offices) (Zip Code)

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

 

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

 

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

 

	Large accelerated filer o	Accelerated filer x
	Non-accelerated filer o	Smaller reporting company o

 

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

 

As of November 6, 2008, there were 164,066,289 shares of the Registrant’s common stock outstanding.

 

 

Table of Contents

 

BRUKER CORPORATION

 

Quarterly Report on Form 10-Q

For the Quarter Ended September 30, 2008

 

Index

 

		Page
Part I	FINANCIAL INFORMATION	1
Item 1:	Unaudited Condensed Consolidated Financial Statements	1
	Unaudited Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007	1
	Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007	2
	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007	3
	Notes to Unaudited Condensed Consolidated Financial Statements	4
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4:	Controls and Procedures	36
Part II	OTHER INFORMATION	37
Item 1:	Legal Proceedings	37
Item 1A:	Risk Factors	37
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3:	Defaults Upon Senior Securities	38
Item 4:	Submission of Matters to a Vote of Security Holders	38
Item 5:	Other Information	38
Item 6:	Exhibits	38
	Signatures	39

 

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Part I              FINANCIAL INFORMATION

 

ITEM 1.          UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

BRUKER CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

		September 30,			December 31,
		2008			2007
ASSETS
Current assets:
Cash and cash equivalents		$	84,381		$	332,368
Short term investments and restricted cash		2,986			12,186
Accounts receivable, net		156,068			185,217
Inventories		456,814			447,688
Other current assets		71,473			57,238
Total current assets		771,722			1,034,697
Property, plant and equipment, net		219,317			207,588
Intangibles and other assets		86,471			69,346
Total assets		$	1,077,510		$	1,311,631
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings		$	44,276		$	35,591
Accounts payable		46,528			52,293
Customer advances		201,084			233,466
Other current liabilities		217,465			239,841
Total current liabilities		509,353			561,191
Long-term debt		169,703			8,605
Other long-term liabilities		103,274			105,445
Minority interest in consolidated subsidiaries		810			538
Commitments and contingencies (Note 16)
Shareholders’ Equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized, none issued or outstanding at September 30, 2008 or December 31, 2007		—			—
Common stock, $0.01 par value, 260,000,000 and 200,000,000 shares authorized, 164,076,221 and 163,251,890 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively		1,633			1,624
Treasury stock, at cost, 9,869 shares and 0 shares at September 30, 2008 and December 31, 2007, respectively		(115		)	—
Other shareholders’ equity		292,852			634,228
Total shareholders’ equity		294,370			635,852
Total liabilities and shareholders’ equity		$	1,077,510		$	1,311,631

 

The accompanying notes are an integral part of these statements.

 

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BRUKER CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2008			2007			2008			2007
Product revenue		$	209,936		$	215,838		$	695,820		$	607,624
Service revenue		30,638			24,848			92,328			77,605
Other revenue		1,490			1,074			3,817			2,409
Total revenue		242,064			241,760			791,965			687,638
Cost of product revenue		113,841			115,424			380,673			332,883
Cost of service revenue		18,153			15,228			59,455			49,184
Total cost of revenue		131,994			130,652			440,128			382,067
Gross profit		110,070			111,108			351,837			305,571
Operating expenses:
Sales and marketing		44,173			38,327			133,717			110,818
General and administrative		17,675			15,580			51,657			42,435
Research and development		33,089			26,841			100,808			80,462
Acquisition-related charges		—			544			6,153			544
Total operating expenses		94,937			81,292			292,335			234,259
Operating income		15,133			29,816			59,502			71,312
Interest and other income (expense), net		814			1,580			(7,848		)	4,544
Income before income tax provision and minority interest in consolidated subsidiaries		15,947			31,396			51,654			75,856
Income tax provision (benefit)		(1,966		)	4,616			12,500			16,923
Income before minority interest in consolidated subsidiaries		17,913			26,780			39,154			58,933
Minority interest in consolidated subsidiaries		73			109			313			255
Net income		$	17,840		$	26,671		$	38,841		$	58,678
Net income per common share:
Basic		$	0.11		$	0.16		$	0.24		$	0.36
Diluted		$	0.11		$	0.16		$	0.23		$	0.36
Weighted average common shares outstanding:
Basic		162,847			161,922			162,531			161,351
Diluted		165,918			164,224			165,606			164,029

 

The accompanying notes are an integral part of these statements.

 

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BRUKER CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

		Nine Months Ended
		September 30,
		2008			2007
Operating activities:
Net income		$	38,841		$	58,678
Adjustments to reconcile net income to cash flow from operating activities:
Depreciation and amortization		22,292			22,764
Stock-based compensation		3,115			1,497
Other noncash reconciling items, net		(7,295		)	(13,563		)
Changes in operating assets and liabilities:
Accounts receivable		41,776			(3,386		)
Inventories		(35,591		)	(34,905		)
Accounts payable		(14,658		)	6,297
Customer advances		(26,075		)	(13,855		)
Other changes in operating assets and liabilities, net		(3,403		)	9,354
Net cash provided by operating activities		19,002			32,881
Investing activities:
Purchases of property, plant and equipment		(39,793		)	(19,878		)
Acquisitions, net of cash acquired		(4,106		)	(2,855		)
Payments in connection with the acquistion of Bruker BioSpin		(6,478		)	—
Purchase of short-term investments		—			2,473
Proceeds from sale of short-term investments		9,609			—
Changes in restricted cash		(183		)	(323		)
Net cash used in investing activities		(40,951		)	(20,583		)
Financing activities:
Proceeds from (repayments of) short-term borrowings, net		3,794			(6,052		)
Proceeds from (repayments of) long-term debt, net		168,931			(5,638		)
Payments of deferred financing costs		(2,916		)	—
Proceeds from issuance of common stock, net of repurchases		3,678			18,772
Deemed dividend in connection with the acquistion of Bruker BioSpin		(385,963		)	—
Cash payments to shareholders		(23,416		)	(42,641		)
Net cash used in financing activities		(235,892		)	(35,559		)
Effect of exchange rate changes on cash and cash equivalents		9,854			19,743
Net change in cash and cash equivalents		(247,987		)	(3,518		)
Cash and cash equivalents at beginning of period		332,368			311,240
Cash and cash equivalents at end of period		$	84,381		$	307,722

 

The accompanying notes are an integral part of these statements.

 

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BRUKER CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Description of Business

 

Bruker Corporation and its wholly-owned subsidiaries (the “Company”) design, manufacture, service and market proprietary life science and materials research systems based on its core technology platforms, including X-ray technologies, magnetic resonance technologies, mass spectrometry technologies, and optical emission and infrared and Raman molecular spectroscopy technologies. The Company also sells a broad range of field analytical systems for chemical, biological, radiological and nuclear detection. The Company maintains major technical and manufacturing centers in Europe, North America and Japan and sales offices throughout the world. The Company’s diverse customer base includes pharmaceutical, biotechnology and proteomics companies, academic institutions, advanced materials and semiconductor industries and government agencies.

 

The financial statements represent the consolidated accounts of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements as of and for the three and nine months ended September 30, 2008 and 2007 have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission for Quarterly Reports on Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial information presented herein does not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of the results expected for the full year.

 

On February 26, 2008, the Company completed the acquisition of all of the Bruker BioSpin Group (“Bruker BioSpin”). Both the Company and Bruker BioSpin were majority owned by six affiliated stockholders prior to the acquisition. As a result, the acquisition of Bruker BioSpin was considered a combination of companies under common control and has been accounted for at historical carrying values at the date of the acquisition. The unaudited condensed consolidated balance sheets, statements of operations, statements of cash flows and notes to the unaudited condensed consolidated financial statements for all periods presented herein have been restated by combining the historical consolidated financial statements of the Company and Bruker BioSpin.

 

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

 

·                  BioScience. The operations of this segment include the design, manufacture and distribution of advanced instrumentation and automated solutions based on X-ray technology and optical emission spectroscopy, mass spectrometry technology and infrared and Raman molecular spectroscopy technology. Typical customers of the BioScience segment include pharmaceutical, biotechnology, proteomics and molecular diagnostic companies, academic institutions, government agencies, semiconductor companies, chemical, cement, metals and petroleum companies, raw material manufacturers and food, beverage and agricultural companies.

 

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

 

2.  Acquisition of Bruker BioSpin

 

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

 

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historical carrying values at the date of the acquisition. Historical unaudited condensed consolidated balance sheets, statements of operations, statements of cash flows and notes to the unaudited condensed consolidated financial statements have been restated by combining the historical consolidated financial statements of Bruker Corporation with those of Bruker BioSpin. In addition, because the transaction is accounted for as a combination of companies under common control, all one-time transaction costs have been expensed as incurred. With the addition of Bruker BioSpin, the Company enhanced its position as a leading supplier for life science and materials research, its distribution in the Americas, Europe and Asia, and its sales and service infrastructure.

 

Upon the completion of this acquisition, the Company paid an aggregate of $914.0 million of consideration to the shareholders of Bruker BioSpin, which was financed with 57,544,872 shares of unregistered common stock valued at $526.0 million, $351.0 million of cash obtained under a new credit facility, and the balance with cash on hand. The value of the shares of common stock in connection with the merger was determined using a trailing average of the closing market prices of the Company’s stock for a period of ten consecutive trading days ending two days prior to the signing of the various stock purchase agreements.

 

Under the stock purchase agreements, $98.8 million of the purchase price was paid into escrow accounts pending the resolution of indemnification obligations and working capital obligations of the sellers. The unused portion of the $92.0 million indemnity escrow will be released to the sellers at the later of (1) the 30^th day following the receipt by the Company of audited financial statements of the Company for the fiscal year ended December 31, 2008 or (2) the resolution of any claim for indemnification of which the sellers have received notice prior to the conclusion of the 30 day period described in (1) above. The $6.8 million working capital escrow was released to the sellers in May 2008 following the receipt by the Company of combined audited financial statements of Bruker BioSpin for the fiscal year ended December 31, 2007.

 

3.  Other Acquisitions

 

On August 14, 2008, the Company acquired S.I.S. Surface Imaging Systems GmbH (“S.I.S.”), a privately-held company located in Herzogenrath, Germany. S.I.S. develops, manufactures and distributes advanced atomic force/scanning probe microscopy for applications in materials research, including semiconductors, data storage, electronic materials, solar cells, polymers and catalysts. The results of S.I.S. have been included in the BioScience segment from the date of acquisition. The aggregate purchase price of S.I.S. was $2.8 million, of which $2.1 million was paid in cash and  $0.7 million was funded by the issuance of an aggregate of 59,342 restricted unregistered shares of the Company’s common stock, par value $0.01 per share, to certain of S.I.S.’s shareholders. The Company recorded $2.9 million of goodwill in connection with the acquisition of S.I.S. and assigned the goodwill to the BioScience segment. Proforma financial information reflecting the acquisition of S.I.S. has not been presented because the impact on revenues, net income and net income per common share would not have been material.

 

On January 31, 2008, the Company acquired JUWE Laborgeraete GmbH (“JUWE”), a privately-held company located in Viersen, Germany. JUWE develops, manufactures and distributes advanced combustion analysis systems for various carbon, hydrogen, nitrogen, oxygen and sulfur elemental applications. JUWE’s products are complementary to the Company’s optical emission spectroscopy products. The results of JUWE have been included in the BioScience segment from the date of acquisition. The aggregate purchase price of JUWE was $2.7 million, of which $1.2 million was paid in cash, $1.1 million was funded by the issuance of an aggregate of 111,000 restricted unregistered shares of the Company’s common stock, par value $0.01 per share, to JUWE’s shareholders and $0.4 million of net liabilities assumed by the Company. The Company recorded $2.2 million of goodwill in connection with the acquisition of JUWE and assigned the goodwill to the BioScience segment. Proforma financial information reflecting the acquisition of JUWE has not been presented because the impact on revenues, net income and net income per common share would not have been material.

 

4.  Provision (Benefit) for Income Taxes

 

The income tax provision (benefit) for the three months ended September 30, 2008 was $(2.0) million compared to an income tax provision (benefit) of $4.6 million for the three months ended September 30, 2007, representing effective tax rates of (12.3)% and 14.7%, respectively. The income tax provision (benefit) for the nine months ended September 30, 2008 was $12.5 million compared to an income tax provision (benefit) of $16.9 million for the nine months ended September 30, 2007, representing effective tax rates of 24.2% and 22.3%, respectively.

 

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The Company’s effective tax rate reflects the tax provision (benefit) for non-U.S. entities only, since no benefit was recognized for cumulative losses incurred in the U.S. A full valuation allowance will be maintained for U.S. net operating losses until evidence exists that it is more likely than not that the loss carryforward amounts will be utilized to offset U.S. taxable income. The Company’s tax rate may change over time as the amount or mix of income and taxes outside the U.S. changes. The effective tax rate is calculated using projected annual pre-tax income or loss and is affected by research and development tax credits, the expected level of other tax benefits, the impact of changes to the valuation allowance, and changes in the mix of the Company’s pre-tax income and losses among jurisdictions with varying statutory tax rates and credits.

 

During the third quarter of 2008, two German subsidiaries in the BioSpin segment were merged into a third German subsidiary. As a result of the merger, the Company will be able to use certain net operating loss carryforwards that existed in the merged entities but had previously been fully reserved. The valuation allowance related to these net operating loss carryforwards was reversed in the third quarter of 2008 and resulted in a tax benefit of approximately $6.5 million.

 

Additionally, the Company established a profit and loss sharing agreement between two of the German subsidiaries of Bruker AXS Inc. during the third quarter of 2008. This agreement allows the losses of one entity to reduce the taxable income of the other entity. Prior to this agreement being put in place, certain deferred tax assets related to these entities had full valuation allowances. These valuation allowances were reversed during the third quarter of 2008, resulting in a tax benefit of approximately $1.2 million.

 

The Company received a $0.5 million refund of French taxes on inter-corporate dividends during the third quarter of 2008 which was recorded as a tax benefit. This refund related to withholding taxes paid in connection with dividends paid by a French subsidiary to its Swiss parent company in 2005 and 2006. At the end of 2007, as a result of a tax law change in France, the Company determined that a refund of these withholding taxes was uncertain and did not meet the more-likely-than-not threshold for recording a tax receivable. As such, the 2005, 2006 and 2007 taxes paid on dividends from the French subsidiary to its Swiss parent were expensed through the income tax provision with no corresponding tax receivable recorded. Because the facts and circumstances around the dividends and the withholding taxes were the same for all three years and the 2005 and 2006 withholding taxes were refunded by the French government, the Company concluded that it is more likely than not that the 2007 French withholding taxes would also be refunded. As such, the Company also recorded a tax benefit of approximately $2.7 million during the third quarter of 2008 for the 2007 withholding tax receivable.

 

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109 (“FIN No. 48”). Among other things, FIN No. 48 provides guidance to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing a minimum recognition threshold which income tax positions must achieve before being recognized in the financial statements. In connection with the adoption of FIN No. 48, the Company recorded a net reduction to retained earnings of $2.0 million as of January 1, 2007. The Company has unrecognized tax benefits of approximately $20.0 million as of September 30, 2008, of which $9.5 million, if recognized, would result in a reduction of the Company’s effective tax rate. One of the Company’s Swiss entities is currently being audited and the audit is expected to be completed during the fourth quarter of 2008. The audit covers tax years 2003-2006 and the Company cannot reasonably estimate the outcome of this audit. As of September 30, 2008, the Company does not expect any material changes, except for the Swiss tax audit mentioned previously, to unrecognized tax positions within the next twelve months.

 

The Company recognizes penalties and interest related to unrecognized tax benefits in the provision for income taxes. As of September 30, 2008, approximately $2.6 million of accrued interest and penalties related to uncertain tax positions was included in other current liabilities on the consolidated balance sheet, of which $0.2 million and $0.8 million was recorded during the three and nine months ended September 30, 2008.

 

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

 

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5. Stock-Based Compensation

 

In 2000, the Board of Directors adopted and the shareholders approved the 2000 Stock Option Plan. The 2000 Stock Option Plan allows a committee of the Board of Directors to grant incentive stock options, non-qualified stock options, stock appreciation rights and stock awards (including restricted stock and phantom shares). The committee has the authority to determine which employees will receive the awards, the amount of the awards and other terms and conditions of the awards. Awards granted by the committee typically vest over a period of three to five years.

 

In 2003, the Company’s shareholders approved an amendment and restatement of the 2000 Stock Option Plan to change the plan name and increase the number of shares available for issuance by 4,132,000 shares, from 2,188,000 shares to 6,320,000 shares. The name of the amended plan is the Bruker BioSciences Corporation Amended and Restated 2000 Stock Option Plan. In 2006, the Company’s shareholders approved an amendment and restatement of the Bruker BioSciences Corporation Amended and Restated 2000 Stock Option Plan to increase the number of shares available for issuance by 1,680,000 shares, from 6,320,000 shares to 8,000,000 shares. In January 2008, the Company’s shareholders approved another amendment and restatement of the Bruker BioSciences Corporation Amended and Restated 2000 Stock Option Plan to increase the number of shares available for issuance by 2,000,000 shares, from 8,000,000 shares to 10,000,000 shares.

 

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

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
Stock options		$	1,213		$	557		$	2,714		$	1,031
Restricted stock		116			143			401			466
Total stock-based compensation, pre-tax		1,329			700			3,115			1,497
Tax benefit		(200		)	(196		)	(555		)	(419		)
Total stock-based compensation, net of tax		$	1,129		$	504		$	2,560		$	1,078

 

Restricted shares of the Company’s common stock are periodically awarded to executive officers and certain key employees of the Company subject to a service restriction which expires ratably over a period of three to five years. The restricted shares of common stock may not be sold or transferred during the restriction period. Stock compensation for restricted stock is recorded based on the stock price on the grant date and charged to expense ratably through the restriction period. The following table summarizes information about restricted stock activity during the nine months ended September 30, 2008:

 

				Weighted
		Shares		Average
		Subject to		Grant Date
		Restriction		Fair Value
Outstanding at December 31, 2007		569,402		$	5.74
Granted		—		—
Vested		(131,370	)	5.39
Forfeited		(6,180	)	6.39
Outstanding at September 30, 2008		431,852		$	5.77

 

Unrecognized pretax expense of $1.5 million related to restricted stock awards is expected to be recognized over the weighted average remaining service period of 2.6 years for awards outstanding at September 30, 2008.

 

Stock options of the Company’s common stock are periodically awarded to executive officers and other

 

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

 

		2008		2007
Risk-free interest rate		2.71% - 3.95%		3.48% - 5.21%
Expected life		6.5 years		6.5 years
Volatility		72.0%		82.0%
Expected dividend yield		0%		0%

 

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

 

				Weighted			Weighted
				Average			Average		Aggregate
		Shares		Option			Remaining		Intrinsic
		Subject to		Price Per			Contractual		Value
		Options		Share			Term (in years)		($ ’s in 000’s)
Outstanding at December 31, 2007		4,423,712		$	6.87
Granted		1,621,500		12.09
Exercised		(652,791	)	5.63
Forfeited		(107,298	)	9.22
Outstanding at September 30, 2008		5,285,123		$	8.57		4.6		$	25,819
Exercisable at September 30, 2008		2,223,356		$	6.97		3.9		$	14,811

 

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

 

		Options Outstanding										Options Exercisable
				Weighted		Weighted								Weighted		Weighted
				Average		Average			Aggregate					Average		Average			Aggregate
				Remaining		Option			Intrinsic					Remaining		Option			Intrinsic
Range of		Number		Contractual		Price Per			Value			Number		Contractual		Price Per			Value
Exercise Prices		Outstanding		Term (in years)		Share			($’s in 000’s)			Exercisable		Term (in years)		Share			($’s in 000’s)
$2.12 to $4.00		556,185		3.0		$	3.20		$	5,636		498,585		3.0		$	3.19		$	5,055
$4.01 to $6.00		1,168,669		3.9		5.14			9,568			770,379		3.8		5.09			6,345
$6.01 to $10.00		1,431,165		6.6		7.71			8,047			488,246		6.4		7.26			2,965
$10.01 to $13.00		1,741,604		7.5		11.86			2,556			186,146		3.5		10.94			446
$13.01 and above		387,500		2.6		15.01			12			280,000		2.6		15.68			—
		5,285,123		4.6		$	8.57		$	25,819		2,223,356		3.9		$	6.97		$	14,811

 

The intrinsic values above are based on the Company’s closing stock price of $13.33 on September 30, 2008. The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2008 was $12.09. Unrecognized pretax expense of $19.5 million related to stock options is expected to be recognized over the weighted average remaining service period of 3.6 years for awards outstanding at September 30, 2008.

 

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6. Fair Value of Financial Instruments

 

In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, Fair Value Measurements  (“SFAS No. 157”), which is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS No. 157 as of January 1, 2008.

 

As permitted by FASB Staff Position (“FSP”) SFAS No. 157-2, Effective Date of FASB Statement No. 157 (“FSP SFAS No. 157-2”), the Company elected to defer the adoption of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis until January 1, 2009. There was no cumulative effect of adoption related to SFAS No. 157 and the adoption did not have an impact on the Company’s financial position, results of operations, or cash flows. The Company is studying SFAS No. 157 with respect to non-financial assets and non-financial liabilities falling under the scope of FSP SFAS No. 157-2 and has not yet determined the expected impact on the Company’s financial position, results of operations, or cash flows.

 

In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (“FSP SFAS No. 157-3”). FSP SFAS No. 157-3 clarifies the application of SFAS No. 157 for markets that are not active and provides an example to illustrate the key considerations in determining fair value when the market for a financial asset is not active. FSP SFAS No. 157-3 was effective upon being issued, including prior periods for which financial statements have not been issued. The adoption of this position did not have an effect on the Company’s financial position, results of operations, or cash flows.

 

SFAS No. 157 establishes a three-level valuation hierarchy for measuring fair value and expands financial statement disclosures about fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

 

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

 

Level 2: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

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

 

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

 

		Total			Quoted Prices in  Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents		$	16,547		$	16,547		$	—		$	—
Short-term investments and restricted cash		2,986			2,986			—			—
Long-term restricted cash (a)		1,739			1,739			—			—
Total assets recorded at fair value		$	21,272		$	21,272		$	—		$	—
Liabilities:
Interest rate swaps		$	137		$	—		$	137		$	—
Total liabilities recorded at fair value		$	137		$	—		$	137		$	—

 

(a) Long-term restricted cash is recorded as a component of intangibles and other assets in the unaudited condensed consolidated balance sheets.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities

 

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to choose to measure many financial instruments and certain other items at fair value and is effective for fiscal years beginning after November 15, 2007. The Company has elected not to apply the fair value option to any of its assets and liabilities.

 

7.  Inventories

 

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

 

		September 30,			December 31,
		2008			2007
Raw materials		$	120,709		$	116,883
Work-in process		147,886			137,959
Demonstration units		38,701			37,195
Finished goods		149,518			155,651
Total inventories		$	456,814		$	447,688

 

Finished goods include in-transit systems that have been shipped to the Company’s customers but not yet installed and accepted by the customer. At September 30, 2008 and December 31, 2007, inventory in-transit was $79.9 million and $92.0 million, respectively.

 

8.  Goodwill and Other Intangible Assets

 

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

 

				September 30, 2008									December 31, 2007
		Useful		Gross						Net			Gross						Net
		Lives		Carrying			Accumulated			Carrying			Carrying			Accumulated			Carrying
		in Years		Amount			Amortization			Amount			Amount			Amortization			Amount
Existing technology and related patents		3 to 10		$	13,973		$	(8,714	)	$	5,259		$	13,292		$	(7,937	)	$	5,355
Customer relationships		5		1,158			(643		)	515			1,115			(477		)	638
Trade names		5 to 10		439			(212		)	227			439			(176		)	263
Total amortizable intangible assets				$	15,570		$	(9,569	)	$	6,001		$	14,846		$	(8,590	)	$	6,256

 

For the three months ended September 30, 2008 and 2007, the Company recorded amortization expense of $0.4 million and $0.4 million, respectively, related to other amortizable intangible assets. For the nine months ended September 30, 2008 and 2007, the Company recorded amortization expense of $1.2 million and $1.8 million, respectively, related to other amortizable intangible assets.

 

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

 

For the year ending December 31,
2008 (a)		$	562
2009		1,764
2010		1,599
2011		951
2012		396
Thereafter		729
Total		$	6,001

 

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

 

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The carrying amount of goodwill was $48.1 million and $40.8 million as of September 30, 2008 and December 31, 2007, respectively, and is included in the BioScience segment. The Company performs its annual test for indications of impairment as of December 31each year. The Company completed its annual test for impairment as of December 31, 2007 and determined that goodwill was not impaired at that time. The Company has not identified any indicators of impairment as of September 30, 2008.

 

9.  Warranty Costs

 

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

 

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

 

Warranty accrual at December 31, 2007		$	27,181
Accruals for warranties issued during the period		21,782
Settlements of warranty claims		(24,446		)
Foreign currency impact		765
Warranty accrual at September 30, 2008		$	25,282

 

10.  Debt

 

In connection with the acquisition of Bruker BioSpin, the Company entered into a credit agreement with a syndication of lenders, which is referred to as the Credit Agreement, that provides for a revolving credit line with a maximum commitment of $230.0 million and a term facility of $150.0 million. The outstanding principal under the term loan is payable in quarterly installments through December 2012. Borrowings under the Credit Agreement bear interest, at the Company’s option, at either (i) the higher of the prime rate or the federal funds rate plus 0.50%, or (ii) adjusted LIBOR, plus margins ranging from 0.40% to 1.25% and a facility fee ranging from 0.10% to 0.20%. As of September 30, 2008, the weighted average interest rate of borrowings under the Credit Agreement was approximately 3.5%.

 

Borrowings under the Credit Agreement are secured by the pledge to the banks of 100% of the capital stock of each of the Company’s wholly-owned domestic subsidiaries and 65% of the capital stock of certain of the Company’s direct or indirect wholly-owned foreign subsidiaries. The Credit Agreement also requires the Company to maintain certain financial ratios related to maximum leverage and minimum interest coverage as defined in the Credit Agreement. In addition to the financial ratios, the Credit Agreement restricts, among other things, the Company’s ability to do the following: make certain payments; incur additional debt; incur certain liens; make certain investments, including derivative agreements; merge, consolidate, sell or transfer all or substantially all of the Company’s assets; and enter into certain transactions with affiliates.

 

At September 30, 2008, the Company had outstanding debt totaling $214.0 million consisting of $170.6 million outstanding under the Credit Agreement, $30.5 million outstanding under other long-term debt arrangements, $10.6 million outstanding under other revolving lines of credit and $2.3 million under capital lease obligations. At December 31, 2007, the Company had outstanding debt totaling $44.2 million consisting of $28.0 million outstanding under other long-term debt arrangements, $13.2 million outstanding under other revolving lines of credit and $3.0 million under capital lease obligations.

 

Amounts outstanding under other long-term debt arrangements at September 30, 2008 include both collateralized and uncollateralized arrangements with various financial institutions in Germany and Japan. The terms of these arrangements also include fixed and variable interest rates ranging from 1.8% to 8.0% at September 30, 2008.

 

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The Company’s other revolving lines of credit are with various financial institutions in Germany, Switzerland, Japan and France and have aggregate maximum borrowing amounts of approximately $76.2 million and $145.5 million at September 30, 2008 and December 31, 2007, respectively. Effective February 26, 2008, the Company terminated a $75.0 million line of credit in the United States and replaced it with the revolving credit available under the Credit Agreement. With consideration to outstanding letters of credit drawn under revolving lines of credit, the Company had availability of approximately $51.3 million and $119.0 million under other revolving lines of credit at September 30, 2008 and December 31, 2007, respectively. The Company’s revolving lines of credit are generally uncollateralized and bear interest at variable rates ranging from 1.5% to 9.8% at September 30, 2008.

 

11.  Derivative Instruments and Hedging Activities

 

The Company accounts for derivative financial instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, (“SFAS No. 133”). In April 2008, the Company entered into an interest rate swap arrangement to manage its exposure to interest rate movements and the related effect on its variable rate debt. Under this interest rate swap arrangement, the Company will pay a fixed rate of 3.8% and receive a variable rate based on three month LIBOR. The initial notional amount of this interest rate swap was $90.0 million and it amortizes in proportion to the term debt component of the Credit Agreement through December 2012. At September 30, 2008, the notional amount of this interest rate swap was $87.8 million. The Company concluded that this swap met the criteria to qualify as an effective hedge of the variability of cash flows of the interest payments and accounts for the hedge as a cash flow hedge under SFAS No. 133. Accordingly, the Company reflected all changes in the fair value of this interest rate swap in accumulated other comprehensive income, a component of shareholders’ equity. As of September 30, 2008, the Company recorded a liability of $0.1 million related to the fair value of the interest rate swap.

 

12.  Employee Benefit Plans

 

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

 

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

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
Components of net periodic benefit cost
Service cost		$	1,321		$	943		$	3,416		$	2,704
Interest cost		1,320			760			3,441			2,257
Expected return on plan assets		(995		)	(718		)	(3,029		)	(2,135		)
Amortization and actuarial gains and losses		(11		)	—			(19		)	—
Net periodic benefit cost		$	1,635		$	985		$	3,809		$	2,826

 

The Company made contributions of $1.9 million to its defined benefit plans during the nine months ended September 30, 2008 and estimates contributions of $0.5 million during the remainder of 2008.

 

13.  Earnings Per Share

 

Basic earnings per share is calculated by dividing net earnings by the weighted average number of common shares outstanding during the period.  Restricted stock is not included in the calculation of basic EPS until the time-based restriction has lapsed. Except where the result would be anti-dilutive, the diluted earnings per share computation includes the effect of potential shares, shares which would be issuable upon the exercise of outstanding stock options or outstanding restricted stock issuable when the restrictions lapse, reduced by the number of shares which are assumed to be purchased by the Company from the resulting proceeds at the average market price during the period.

 

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The following table sets forth the computation of basic and diluted average shares outstanding for the three and nine months ended September 30, 2008 and 2007 (in thousands, except per share data):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
Net income, as reported		$	17,840		$	26,671		$	38,841		$	58,678
Weighted average shares outstanding:
Weighted average shares outstanding - basic		162,847			161,922			162,531			161,351
Effect of dilutive securities:
Stock options and restricted stock		3,071			2,302			3,075			2,678
Weighted average shares outstanding - diluted		165,918			164,224			165,606			164,029
Net income per common share:
Basic		$	0.11		$	0.16		$	0.24		$	0.36
Diluted		$	0.11		$	0.16		$	0.23		$	0.36

 

Stock options to purchase approximately 100,000 shares and 640,000 shares were excluded from the computation of diluted earnings per share in the three months ended September 30, 2008 and 2007 respectively, and approximately 390,000 shares and 640,000 shares were excluded from the computation of diluted earnings per share in the nine months ended September 30, 2008 and 2007, respectively, because the exercise price of the stock options exceeded the average market price of the Company’s common stock and, as a result, would have had an anti-dilutive effect.

 

14. Interest and Other Income (Expense), Net

 

The components of interest and other income (expense), net, were as follows for the three and nine months ended September 30, 2008 and 2007 (in thousands):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
Interest income		$	677		$	3,315		$	4,294		$	7,803
Interest expense		(3,384		)	(965		)	(9,060		)	(2,415		)
Exchange gains (losses) on foreign currency transactions		3,177			(2,928		)	(5,864		)	(2,436		)
Other		344			2,158			2,782			1,592
Interest and other income (expense), net		$	814		$	1,580		$	(7,848	)	$	4,544

 

15. Comprehensive Income

 

Comprehensive income refers to revenues, expenses, gains and losses that under GAAP are included in other comprehensive income, but excluded from net income as these amounts are recorded directly as an adjustment to shareholders’ equity, net of tax. The following is a summary of comprehensive income for the three and nine months ended September 30, 2008 and 2007 (in thousands):

 

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		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
Net income		$	17,840		$	26,671		$	38,841		$	58,678
Foreign currency translation adjustments		(35,794		)	27,537			(612		)	34,963
Unrealized gains (losses) on interest rate swap:
Unrealized holding gains (losses) arising during the period		(126		)	—			219			—
Less reclassification adjustments for settlements included in the determination of net income		(234		)	—			(356		)	—
Unrealized gains on available for sales securities:
Unrealized holding gains (losses) arising during the period		—			(362		)	(71		)	336
Less reclassification adjustments for gains included in the determination of net income		—			—			(1,335		)	—
Pension liability adjustments		(478		)	(21		)	(872		)	—
Total comprehensive income (loss)		$	(18,792	)	$	53,825		$	35,814		$	93,977

 

16. Commitments and Contingencies

 

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

 

17. Letters of Credit and Guarantees

 

As of September 30, 2008 and December 31, 2007, the Company had letters of credit and bank guarantees of $65.1 million and $67.7 million, respectively, for its customer advances. Certain of these letters of credit and bank guarantees affect the availability of the Company’s lines of credit.

 

18. Business Segment Information

 

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments in annual financial statements of public business enterprises. It also establishes standards for related disclosures about products and service, geographic areas and major customers. Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker for the purpose of allocating resources and assessing performance.

 

In February 2008, the Company completed its acquisition of Bruker BioSpin and, as a result, management reevaluated the way the Company is managed and its internal reporting structure. The Company determined that it had four operating segments, representing each of its four divisions; Bruker AXS, Bruker Daltonics, Bruker Optics and Bruker BioSpin. Bruker AXS is in the business of manufacturing and distributing advanced X-ray and OES-spark instrumentation used in non-destructive molecular and elemental analysis. Bruker Daltonics is in the business of manufacturing and distributing mass spectrometry instruments that can be integrated and used along with other analytical instruments. Bruker Optics is in the business of manufacturing and distributing research, analytical and process analysis instruments and solutions based on infrared and Raman molecular spectroscopy technologies. Bruker BioSpin is in the business of manufacturing and distributing enabling life science tools based on magnetic resonance technology, as well as the development and manufacturing of low temperature superconductor and high temperature superconductor wires for use in advanced magnet technology and energy applications.

 

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

 

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