U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

	(Mark One)
	x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
		SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
	o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
		SECURITIES EXCHANGE ACT OF 1934
		FOR THE TRANSITION PERIOD FROM                      TO

 

Commission File Number  000-30833

Bruker BioSciences Corporation

(Exact name of registrant as specified in its charter)

 

40 Manning Park

Billerica, MA  01821

(Address of principal executive offices)

(978) 663-3660

(Registrant’s telephone number, including area code)

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.  Yes  x  No  o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Large accelerated filer  o  Accelerated filer  x  Non-accelerated filer o

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

As of November 7, 2006, there were 102,225,996 shares of the Registrant’s common stock outstanding.

Bruker BioSciences Corporation

Form 10-Q

For the Quarter Ended September 30, 2006

Index

		PAGE NUMBER
PART I	FINANCIAL INFORMATION	3
ITEM 1:	Financial Statements:	3
	Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and 2005	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005	5
	Notes to Condensed Consolidated Financial Statements	6
ITEM 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
ITEM 3:	Quantitative and Qualitative Disclosures about Market Risk	31
ITEM 4:	Controls and Procedures	33
PART II	OTHER INFORMATION	35
ITEM 1:	Legal Proceedings	35
ITEM 1A:	Risk Factors	35
ITEM 2:	Unregistered Sales of Equity Securities and Use of Proceeds	37
ITEM 3:	Defaults Upon Senior Securities	37
ITEM 4:	Submission of Matters to a Vote of Security Holders	37
ITEM 5:	Other Information	37
ITEM 6:	Exhibits	37
	SIGNATURES	38

 

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PART I   FINANCIAL INFORMATION

ITEM 1:  Financial Statements

Bruker BioSciences Corporation

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

		September 30,			December 31,
		2006			2005
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	44,151		$	62,632
Short-term investments		—			46,419
Accounts receivable, net		71,912			67,913
Due from affiliated companies		4,624			6,464
Inventories		133,347			117,655
Other current assets		17,428			13,721
Total current assets		271,462			314,804
Property, plant and equipment, net		87,908			85,313
Intangibles and other assets		49,997			22,978
Total assets		$	409,367		$	423,095
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings		$	29,377		$	9,564
Accounts payable		21,112			17,211
Due to affiliated companies		7,746			6,175
Customer advances		42,403			38,175
Other current liabilities		76,948			76,884
Total current liabilities		177,586			148,009
Long-term debt		27,022			25,070
Other long-term liabilities		28,288			20,426
Commitments and contingencies (Note 13)
Preferred stock, $0.01 par value, 5,000,000 shares authorized, none issued or outstanding at September 30, 2006 or December 31, 2005		—			—
Common stock, $0.01 par value, 200,000,000 and 150,000,000 shares authorized, 102,225,996 and 100,854,320 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively		1,017			898
Other stockholders’ equity		175,454			228,692
Total shareholders’ equity		176,471			229,590
Total liabilities and shareholders’ equity		$	409,367		$	423,095

 

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)

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2006			2005			2006			2005
Product revenue		$	91,928		$	75,053		$	264,104		$	233,310
Service revenue		12,625			9,877			34,895			30,116
Other revenue		317			954			1,210			2,050
Total revenue		104,870			85,884			300,209			265,476
Cost of product revenue		50,659			41,151			143,414			127,657
Cost of service revenue		8,028			6,024			20,633			19,214
Total cost of revenue		58,687			47,175			164,047			146,871
Gross profit		46,183			38,709			136,162			118,605
Operating expenses:
Sales and marketing		19,063			15,860			58,795			50,436
General and administrative		7,239			6,385			20,319			18,889
Research and development		11,936			11,529			36,495			36,554
Acquisition related charges		961			—			5,829			—
Total operating expenses		39,199			33,774			121,438			105,879
Operating income		6,984			4,935			14,724			12,726
Interest and other income (expense), net		(491		)	213			3,522			(282		)
Income before income tax provision and minority interest in consolidated subsidiaries		6,493			5,148			18,246			12,444
Income tax provision		3,535			3,036			9,398			7,466
Income before minority interest in consolidated subsidiaries		2,958			2,112			8,848			4,978
Minority interest in consolidated subsidiaries		(18		)	28			75			131
Net income		$	2,976		$	2,084		$	8,773		$	4,847
Net income per common share - basic and diluted		$	0.03		$	0.02		$	0.09		$	0.05
Weighted average common shares outstanding:
Basic		102,038			100,851			101,635			100,848
Diluted		102,704			101,044			102,090			100,995

 

See the accompanying notes to financial statements.

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Bruker BioSciences Corporation

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

		Nine Months Ended
		September 30,
		2006			2005
Operating activities:
Net cash provided by operating activities		$	17,835		$	29,885
Investing activities:
Purchases of property and equipment		(5,037		)	(3,614		)
Sales of short-term investments		46,460			420
Acquisitions, net of cash acquired		(27,642		)	—
Changes in restricted cash		(76		)	(142		)
Net cash provided by (used in) investing activities		13,705			(3,336		)
Financing activities:
Proceeds from (payments of) short-term borrowings, net		19,521			(2,169		)
Proceeds from (payments of) long-term debt, net		899			(5,023		)
Proceeds from issuance of common stock		418			213
Payments to shareholders		(74,021		)	—
Net cash used in financing activities		(53,183		)	(6,979		)
Effect of exchange rate changes on cash		3,162			(3,361		)
Net change in cash and cash equivalents		(18,481		)	16,209
Cash and cash equivalents at beginning of period		62,632			41,421
Cash and cash equivalents at end of period		$	44,151		$	57,630
Non-Cash Financing Activities
Issuance of common stock related to acquisitions		58,463			—

 

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 and materials research systems based on mass spectrometry core technology platforms, X-ray technologies, optical emission spectroscopy (OES), and infrared and Raman molecular spectroscopy technology. The Company also sells a broad range of field analytical systems for chemical, biological, radiological and nuclear (CBRN) 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 and biotechnology companies, advanced materials and semiconductor industries, various other industrial companies, academic institutions, medical research institutions and government agencies.

The financial statements represent the consolidated accounts of the Company 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 and nine months ended September 30, 2006 and 2005 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. 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.

On July 1, 2006, the Company completed its acquisition of Bruker Optics, Inc. (“Bruker Optics”).  Both the Company and Bruker Optics were majority owned by five affiliated stockholders prior to the acquisition. As a result, the acquisition of Bruker Optics by the Company is considered a business combination of companies under common control, and has been accounted for in a manner similar to a pooling-of-interests. Accordingly, the acquisition of Bruker Optics, as it relates to the portion under common ownership (approximately 96%), has been accounted for at historical carrying values. The portion not under the common ownership of the five affiliated stockholders (approximately 4%) has been accounted for using the purchase method of accounting (at fair value) on a pro rata basis. Any excess purchase price of the interest not under common control over the fair value of the related net assets acquired has been accounted for as goodwill and intangible assets. Because this acquisition was essentially considered a pooling of interests, all one-time transaction costs have been expensed as incurred rather than being added to goodwill. During the nine months ended September 30, 2006, the Company incurred and expensed acquisition related charges totaling $5.8 million, which consisted of investment banking, legal and accounting fees, compensation earned by the special committee of the Company’s Board of Directors and antitrust regulation filing fees. The consolidated balance sheets, statements of operations, statements of cash flows and notes to the financial statements presented in this Quarterly Report on Form 10-Q includes Bruker Optics because the acquisition was completed on July 1, 2006 and under pooling accounting all historical financial statements have been presented as if the companies had always been combined.

As a result of the Bruker Optics acquisition, management is currently reevaluating the internal reporting structure which may require a change to our segment reporting. This evaluation is expected to be completed in the fourth quarter of 2006. The Company currently reports financial results on the basis of the following three business segments:

1.                Bruker Daltonics Inc. (“Bruker Daltonics”) is a leading developer and provider of innovative life science tools based on mass spectrometry and also develops and provides a broad range of field analytical systems for CBRN detection.

2.                Bruker AXS Inc. (“Bruker AXS”) is a leading developer and provider of life science and advanced materials research tools for advanced X-ray and spark-OES instrumentation used in non-destructive molecular and elemental analysis in academic, research and industrial applications.

3.                Bruker Optics is a leading developer, manufacturer and provider of research, analytical and process analysis instruments and solutions based on infrared and Raman molecular spectroscopy technology.

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2.  Acquisition

 On July 1, 2006, the Company completed the acquisition of all of the outstanding stock of Bruker Optics in accordance with the terms of the stock purchase agreement dated as of April 17, 2006.  The acquisition of Bruker Optics represented a business combination of companies under common control due to the majority ownership of both companies by five related individuals as an affiliated shareholder group. As a result, the acquisition, as it related to the shares owned by these affiliated shareholders (approximately 96%), was accounted for in a manner similar to a pooling-of-interest, or at historical carrying value. The acquisition of the shares of the non-affiliated shareholders (approximately 4%) was accounted for using the purchase method of accounting, or at fair value, in a manner similar to the acquisition of a minority interest. The excess purchase price of the interest not under common control over the fair value of the related net assets was recorded as intangible assets and goodwill.

Upon completion of the acquisition, the Company paid an aggregate of $135 million of consideration to the Bruker Optics stockholders and holders of Bruker Optics stock options, of which approximately $79 million was paid in cash and approximately $56 million was paid in restricted unregistered shares of Company common stock.  $13.5 million of the cash payment to the Bruker Optics stockholders will be held in escrow until the later of (x) the thirtieth day following receipt by the Company of Bruker Optics’ audited financial statements for the fiscal year ended December 31, 2006, or (y) the resolution of any indemnification claim pending as of the receipt of such audited financial statements. In addition, $1 million of the cash payment to the Bruker Optics stockholders will be held in escrow until the later of (x) the twentieth day after the Company delivers a closing balance sheet to the Bruker Optics stockholders, which balance sheet is to be delivered within 90 days of the closing of the acquisition, or (y) the resolution of any objections to the balance sheet.

The fair value of the consideration paid for the acquisition of the minority interest was approximately $5.1 million, including cash of $4.7 million and common stock valued at $0.4 million. The value of the shares of common stock issued to the non-affiliated shareholder in connection with the merger was determined using a trailing average of the closing market prices of Bruker BioScience’s stock for a period of ten consecutive trading days ending three days prior to the closing of the acquisition, which occurred on July 1, 2006.

The Company is currently in the process of completing the valuation of the fair value of cetain assets acquired. All information presented below is subject to change upon completion of the valuation in the fourth quarter of 2006. The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition of the minority interest (in thousands):

Current assets		$	42,387
Property, plant and equipment		13,174
Intangible assets		20,047
Other assets		72
Total assets		75,680
Current liabilities		34,485
Long-term debt		3,463
Other liabilities		2,075
Total liabilities assumed		40,023
Net assets		35,657
Minority interest percentage		4.1		%
Net assets acquired		1,462
Goodwill		3,680
Total purchase price		$	5,142

 

The purchase price for the 4.1% minority interest acquired was allocated to the net assets acquired on a pro rata basis in accordance with SFAS No. 141, Business Combinations. Accordingly, estimated acquisition related intangibles total $0.8 million and are being amortized over fours years. In addition, approximately $5.3 million of acquired intangible assets were assigned to in-process research and development projects of which the 4.1% minority interest, or approximately $0.2 million, was written off at the date of acquisition in accordance with FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method.  The projects that were estimated to qualify as acquired in-process research and development projects were those that had not yet reached technology feasibility and for which no future alternative uses existed. The value assigned to the in-process research and development projects was

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determined using estimates based on historical acquisitions since the valuation was not complete as of September 30, 2006.

The $3.7 million of goodwill acquired from Bruker Optics in connection with the merger was assigned to the Company’s Bruker Optics subsidiary, currently a reportable operating segment, and will not be deductible for tax purposes since the merger was a tax-free merger.

The incremental effect, which represents the contribution from Bruker Optics, of the change in reporting entity for all periods presented is as follows (in thousands except per share data):

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2006			2005			2006			2005
Income before income tax provision and
minority interest in consolidatd subsidiaries		$	5,070		$	1,645		$	12,405		$	5,022
Net income		3,350			1,007			7,715			3,041
Net income per share - basic and diluted		$	0.03		$	0.01		$	0.08		$	0.03

 

On July 18, 2006, the Company acquired all of the capital stock of KeyMaster Technologies, Inc. (“KeyMaster”), a Delaware corporation located in Kennewick, Washington.  In accordance with the stock purchase agreement, the Company paid an aggregate of $10 million of cash consideration to the stockholders of KeyMaster, of which $1 million will be held in escrow until the later of (x) July 18, 2007, or (y) the resolution of any indemnification claim pending as July 18, 2007. The results of KeyMaster have been included in the Bruker AXS segment from the date of acquisition. Pro forma information to reflect the KeyMaster acquisition has not been presented as the impact on revenues and net income, and net income per common share would not have been material.

On September 6, 2006, the Company acquired all of the capital stock of Quantron GmbH, a spark-OES company based in Kleve, Germany (“Quantron”).  In accordance with the stock purchase agreement, at the closing, the Company paid an aggregate of approximately $6.3 million of consideration to the Sellers, of which approximately $5.0 million was paid in cash and approximately $1.3 million was paid in the issuance of an aggregate of 202,223 restricted unregistered shares of the Company’s common stock, par value $0.01 per share, to Quantron’s two largest shareholders. Pursuant to the earn-out provisions of the stock purchase agreement, up to an aggregate of $4.7 million of additional cash consideration may be paid through 2009 based on future performance of Quantron. The Company is currently evaluating whether the additional payments will be treated as additional purchase price or compensation. The results of Quantron have been included in the Bruker AXS segment from the date of acquisition. Pro forma information to reflect the Quantron acquisition has not been presented as the impact on revenues and net income, and net income per common share would not have been material.

On January 17, 2006, the Company acquired Socabim SAS, a privately-held company focused on advanced X-ray analysis software for materials research based in Paris, France. The initial aggregate purchase price of approximately $8.8 million was paid through the issuance of 267,302 restricted shares of common stock of the Company to Socabim’s two largest shareholders, which had an aggregate value of approximately $1.3 million as of the date of issuance, and an aggregate of $7.5 million was paid to all of the Socabim selling shareholders from cash on hand. Additional cash consideration, in the amount of approximately $1.5 million in total, may be paid through 2009 based on the future performance of Socabim, which will be accounted for as additional purchase price. Prior to the acquisition, the Company licensed from Socabim software that is used in various Bruker AXS systems. Bruker AXS was Socabim’s principal customer before the acquisition which required the Company to evaluate the preexisting relationship with Socabim in accordance with Emerging Issues Task Force No. 04-1, “Accounting for Preexisting Relationships between the Parties to a Business Combination.”  EITF 04-1 requires an analysis to be performed to determine whether there has been an effective settlement of a preexisting executory contract that was either favorable or unfavorable to the acquirer. To the extent there was an executory contract that was either favorable or unfavorable to the acquirer, a gain or loss is recognized. Management determined there was no settlement of a preexisting executory contract in the acquisition of Socabim and, accordingly, no gain or loss was recognized. The results of Socabim have been included in the Bruker AXS segment from the date of acquisition. Pro forma information to reflect the Socabim acquisition has not been presented as the impact on revenues and net income, and net income per common share would not have been material.

3.  Equity-Based Compensation

In 2000, the Board of Directors adopted and the stockholders approved the 2000 Stock Option Plan. The 2000 Stock Option Plan provided for the issuance of up to 2,200,000 shares of common stock in connection with awards under the Plan. The 2000 Stock Option Plan allows a committee of the Board of Directors to grant incentive stock options, non-qualified

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stock options, stock appreciation rights and stock awards (including the use of 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 award. Awards granted by the committee typically vest over a period of three-to-five years.

On July 1, 2003, the Company’s stockholders 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. The name of the amended plan is the Bruker BioSciences Corporation Amended and Restated 2000 Stock Option Plan. The amendment authorized 4,132,000 additional shares of common stock of the Company issuable pursuant to the plan. On June 29, 2006, the Company’s stockholders approved an increase in the number of shares available for issuance under the plan from 6,320,000 shares to 8,000,000 shares, an increase of 1,680,000 shares.

The total number of shares issuable under the plan is 8,000,000, all of which have been registered on Form S-8 (Reg. No. 333-47836, 333-107924 and 333-137090).

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment.  This standard revised the measurement, valuation and recognition of financial accounting and reporting standards for equity-based compensation plans contained in SFAS No. 123, Accounting for Stock Based Compensation. The new standard requires companies to expense the value of employee stock options and similar equity-based compensation awards based on fair value recognition provisions determined on the date of grant.

The Company adopted SFAS No. 123(R) using the modified prospective transition method, which required the application of the accounting standard on January 1, 2006, the effective date of the standard for the Company. In accordance with the modified prospective transition method, the Company’s consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). The Company will continue to include tabular, pro forma disclosures in accordance with SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, for all periods prior to January 1, 2006.

As of September 30, 2006, the Company’s primary types of share-based compensation were stock options and restricted stock. The Company recorded stock-based compensation expense for the three and nine months ended September 30, 2006 as follows (in thousands):

		Three months ended			Nine months ended
		September 30, 2006			September 30, 2006
Stock options		$	277		$	736
Restricted stock		155			229
Total stock-based compensation, pre-tax		432			965
Tax benefit		121			266
Total stock-based compensation, net of tax		$	311		$	699

 

Restricted Stock

Restricted shares of the Company’s common stock are periodically awarded to executive officers, directors and certain key employees of the Company subject to a service restriction which expires ratably over a period of 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, 2006:

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				Weighted
		Shares		Average
		Subject to		Grant Date
		Restriction		Fair Value
Outstanding at December 31, 2005		—		$	—
Granted		630,550		5.23
Vested		—		—
Forfeited		(4,700	)	5.00
Outstanding at September 30, 2006		625,850		$	5.23

 

Unrecognized pretax expense of $2.8 million related to restricted stock awards is expected to be recognized over the weighted average remaining service period of 4.5 years for awards outstanding at September 30, 2006.

Stock Options

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. Assumptions regarding volatility, expected 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 option award’s expected life. The assumptions for volatility, expected life, dividend yield and risk-free interest rate are presented in the table below:

		2006
Risk-free interest rate		3.80	%
Expected life		5 years
Volatility		105.0	%
Expected dividend yield		0	%

 

All stock options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Stock option activity for the nine months ended September 30, 2006 was as follows:

							Weighted
				Weighted			Average		Aggregate
		Shares		Average			Remaining		Intrinsic
		Subject to		Option			Contractual		Value
		Options		Price			Term (Yrs)		($’s in 000’s)
Outstanding at December 31, 2005		3,576,868		$	6.43
Granted		695,250		5.23
Exercised		(77,354	)	4.05
Forfeited		(190,047	)	7.05
Outstanding at September 30, 2006		4,004,717		$	6.23		5.1		$	7,310
Exercisable at September 30, 2006		3,038,869		$	6.72		4.8		$	5,089

 

The following table summarizes information about stock options outstanding and exercisable at September 30, 2006:

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		Options Outstanding										Options Exercisable
				Weighted
				Average		Weighted			Aggregate					Weighted			Aggregate
				Remaining		Average			Intrinsic					Average			Intrinsic
Range of		Number		Contractual		Exercise			Value			Number		Exercise			Value
Exercise Prices		Outstanding		Term (Yrs)		Price			($’s in 000’s)			Exercisable		Price			($’s in 000’s)
$2.12 to $4.00		857,959		5.0		$	3.20		$	3,265		599,637		$	3.14		$	2,319
$4.01 to $6.00		2,020,204		5.5		5.14			3,769			1,312,678		5.11			2,494
$6.01 to $10.00		530,455		4.5		6.69			276			530,455		6.69			276
$10.01 to $13.00		227,849		5.4		11.05			—			227,849		11.05			—
$13.01 and above		368,250		4.6		15.64			—			368,250		15.64			—
		4,004,717		5.1		$	6.23		$	7,310		3,038,869		$	6.72		$	5,089

 

The intrinsic values above are based on the Company’s closing stock price of $7.01 on September 29, 2006. The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2006 was $5.23. Unrecognized pretax expense of $2.8 million related to stock options is expected to be recognized over the weighted average remaining service period of 1.6 years for awards outstanding at September 30, 2006.

Prior Year Equity Compensation Expense

Prior to January 1, 2006, the Company applied the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for stock options. The exercise price of each option issued under the Plan equaled the closing market price of the Company’s stock on the date of grant and, therefore, the Company took no charges to the statement of operations with respect to stock options prior to January 1, 2006. The following table illustrates the effect on net income (loss) and net income (loss) per common share for the three and nine months ended September 30, 2005 had the Company applied the fair value recognition provisions of SFAS No. 123,  Accounting for Stock Based Compensation,  to equity-based compensation (in thousands, except per-share data):

		Three months ended			Nine months ended
		September 30, 2005			September 30, 2005
Net income, as reported		$	2,084		$	4,847
Deduct:
Total stock-based compensation expense determined using fair value based method for all awards, net of taxes		(641		)	(1,917		)
Net income, pro forma		$	1,443		$	2,930
Net income per common share:
Basic and diluted, as reported		$	0.02		$	0.05
Basic and diluted, pro forma		$	0.01		$	0.03

 

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:

Risk-free interest rate		3.83	%
Expected life		5 years
Volatility		67.7	%
Expected dividend yield		0	%

 

4.  Inventories

Inventories consisted of the following as of September 30, 2006 and December 31, 2005 (in thousands):

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		September 30,			December 31,
		2006			2005
Raw materials		$	35,722		$	34,916
Work-in process		44,991			33,368
Demonstration units		15,277			18,450
Finished goods		37,357			30,921
Total inventories		$	133,347		$	117,655

 

5.  Goodwill and Other Intangible Assets

The following is a summary of other intangible assets subject to amortization as of September 30, 2006 and December 31, 2005 (in thousands):

							September 30, 2006									December 31, 2005
		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		4-5		$	5,227		$	(1,451	)	$	3,776		$	2,095		$	(950	)	$	1,145
Customer relationships		5		310			(202		)	108			310			(156		)	154
Trade names		10		310			(100		)	210			310			(76		)	234
Total amortizable intangible assets				$	5,847		$	(1,753	)	$	4,094		$	2,715		$	(1,182	)	$	1,533

 

For the three months ended September 30, 2006 and 2005, the Company recorded amortization expense of approximately $0.3 million and $0.1 million, respectively, related to other amortizable intangible assets.  For the nine months ended September 30, 2006 and 2005, the Company recorded amortization expense of approximately $0.6 million and $0.4 million, respectively, related to other amortizable intangible assets.

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

For the year ending December 31,		(in thousands)
2006 (a)		$	464
2007		1,171
2008		952
2009		919
2010		496
Thereafter		92
Total		$	4,094

 

(a)  Amount represents estimated amortization expense for the remaining three months ending December 31, 2006.

The carrying amount of goodwill as of September 30, 2006 and December 31, 2005 was $40.6 million and $17.5 million, respectively, and is primarily included in the Bruker AXS segment. The Company performs its annual test for indications of impairment as of December 31st each year. The Company completed its annual test for impairment as of December 31, 2005 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.

Changes in the Company’s accrued warranty liability during the nine months ended September 30, 2006 were as follows

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(in thousands):

Warranty accrual at December 31, 2005		$	9,326
Accruals for warranties issued during the period		9,104
Settlements of warranty claims		(7,801		)
Foreign currency impact		452
Warranty accrual at September 30, 2006		$	11,081

 

7.  Line of Credit

On July 5, 2006, the Company issued a demand promissory note for a $40.0 million line of credit in the United States. The Company initially borrowed $20 million to finance a portion of the Bruker Optics purchase price; on July 18, 2006 the Company borrowed an additional $10 million to finance the acquisition of KeyMaster. As of September 30, 2006, the Company had $20 million of borrowings outstanding on the line of credit. The note bears interest at the bank’s prime rate, LIBOR plus 1%, or a LIBOR advantage rate plus 1% at the request of the Company.  All of the Company’s obligations under the line of credit are secured by the pledge to the bank of 100% of the capital stock of each of the Company’s wholly-owned domestic subsidiaries, each of which also pledged a portion of the stock of certain of their foreign subsidiaries.

8.  Provision for Income Taxes

For the three months ended September 30, 2006, the Company recorded an income tax provision of $3.5 million compared with an income tax provision of $3.0 million for the three months ended September 30, 2005.  For the nine months ended September 30, 2006, the Company recorded an income tax provision of $9.4 million compared with an income tax provision of $7.5 million for the nine months ended September 30, 2005.  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.

9.  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 as of 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 and nine months ended September 30, 2006 and 2005 (in thousands):

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2006			2005			2006			2005
Components of net periodic benefit cost
Service cost		$	177		$	154		$	522		$	480
Interest cost		98			93			290			288
Recognized actuarial loss		—			—			—			197
Amortization		(4		)	(9		)	(12		)	(23		)
Net periodic benefit cost		$	271		$	238		$	800		$	942

 

To date, the Company has not funded the defined benefit plan and is not required to make contributions during the remainder of 2006.

10.  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 and nine months ended September 30, 2006 and 2005 (in thousands):

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2006			2005			2006			2005
Net income, as reported		$	2,976		$	2,084		$	8,773		$	4,847
Weighted average shares outstanding:
Weighted average shares outstanding - basic		102,038			100,851			101,635			100,848
Net effect of dilutive stock options - based on treasury stock method		666			193			455			147
Weighted average shares outstanding - diluted		102,704			101,044			102,090			100,995
Net income per share - basic and diluted		$	0.03		$	0.02		$	0.09		$	0.05

 

11. 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, 2006 and 2005 (in thousands):

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2006			2005			2006			2005
Interest income		$	294		$	1,013		$	1,939		$	2,480
Interest expense		(762		)	(592		)	(1,556		)	(1,546		)
Exchange (losses) gains on foreign currency transactions		(68		)	102			(1,165		)	661
Appreciation (depreciation) of the fair value of derivative financial instruments		118			(337		)	3,893			(1,879		)
Other expense		(73		)	27			411			2
Interest and other income (expense), net		$	(491	)	$	213		$	3,522		$	(282	)

 

12.  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 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 and nine months ended September 30, 2006 and 2005 (in thousands):

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2006			2005			2006			2005
Net income		$	2,976		$	2,084		$	8,773		$	4,847
Foreign currency translation adjustments		(249		)	(514		)	8,265			(14,608		)
Total comprehensive income (loss)		$	2,727		$	1,570		$	17,038		$	(9,761	)

 

13.  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.

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14.  Letters of Credit and Guarantees

As of September 30, 2006 and December 31, 2005, the Company had bank guarantees of $7.4 million and $8.3 million, respectively, for its customer advances. These bank guarantees affect the availability of the Company’s lines of credit.

15.  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. Management is currently reevaluating the internal reporting structure due to the recent acquisition of Bruker Optics, which may require a change to our segment reporting.  This evaluation is expected to be completed in the fourth quarter of 2006. The Company reports financial results on the basis of three reportable segments: Bruker Daltonics, Bruker AXS and Bruker Optics. 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 and spark-OES tools used in non-destructive molecular and elemental analysis in academic, research and industrial applications.  Bruker Optics manufactures and distributes infrared and Raman molecular spectroscopy instruments and solutions that can be used in analytical and research applications. Bruker BioSciences Corporation, the parent company of Bruker Daltonics, Bruker AXS and Bruker Optics, is the corporate entity that principally incurs certain public company costs.

Selected reportable segment financial information for the three and nine months ended September 30, 2006 and 2005 is presented below (in thousands):

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2006			2005			2006			2005
Revenue:
Bruker Daltonics		$	36,301		$	36,949		$	113,660		$	116,954
Bruker AXS		47,015			33,938			123,985			100,520
Bruker Optics		24,517			16,085			69,373			51,134
Eliminations (a)		(2,963		)	(1,088		)	(6,809		)	(3,132		)
Total		$	104,870		$	85,884		$	300,209		$	265,476
Operating income (loss):
Bruker Daltonics		$	1,242		$	2,945		$	5,707		$	6,894
Bruker AXS		2,836			594			5,496			1,836
Bruker Optics		5,083			2,008			9,526			6,304
Eliminations (a)		459			—			100			43
Corporate		(2,636		)	(612		)	(6,105		)	(2,351		)
Total		$	6,984		$	4,935		$	14,724		$	12,726

 

(a)          represents transactions between segments which is eliminated in consolidation.

16.  Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes. This Interpretation sets forth a recognition threshold and valuation method to recognize and measure an income tax position taken, or expected to be taken, in a tax return. The evaluation is based on a two-step approach. The first step requires an entity to evaluate whether the tax position would “more likely than not,” based upon its technical merits, be sustained upon examination by the appropriate taxing authority. The second step requires the tax position to be measured at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement. In addition, previously recognized benefits from tax positions that no longer meet the new criteria would no longer be recognized. The application of this Interpretation will be considered a change in accounting principle with the cumulative effect of the change recorded to the opening balance of retained earnings in the period of adoption. This Interpretation will be effective for the Company on January 1, 2007. The Company is currently evaluating the Interpretation and the impact it may have on its results of operations and financial condition.

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In September 2006, the FASB issued SFAS No. 158 Employers Accounting for Defined Benefit Pension and Other Postretirement Plans – which amends SFAS No. 87 Employers’ Accounting for Pensions, SFAS No. 88 Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, SFAS No. 106 Employers Accounting for Postretirement Benefits Other Than Pensions and SFAS No. 132(R) Employers’ Disclosures about Pensions and Other Postretirement Benefits. This Statement requires an employer to recognize the overfunded or underfunded status of defined benefit pension and other post-retirement defined benefit plans, previously disclosed in the footnotes to the financial statements, as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This Statement also requires an employer to measure the funded status of a plan as of the date of its year end statement of financial position. In addition, this Statement will require disclosure of the effects of the unrecognized gains or losses, prior service costs and transition asset or obligation on the next fiscal year’s net periodic benefit cost. This Statement is effective for all financial statements issued for fiscal years ending after December 15, 2006 and retrospective application of this Statement is not permitted. The Company is in the process of evaluating the impact the adoption of SFAS No. 158 may have on its results of operations and financial position.

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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, 2005.

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, 2005.

OVERVIEW

The following management’s discussion and analysis of financial condition and results of operations (MD&A) describes the principal factors affecting the results of our operations, financial condition, and changes in financial condition, as well as our critical accounting policies and estimates. MD&A is organized as follows:

·                  Executive overview. This section provides a general description and history of our business, a brief discussion of our reportable segments and significant recent developments in our business.

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

·                  Results of operations. This section provides our analysis of the significant line items in our consolidated statement of operations for the three and nine months ended September 30, 2006 compared to the three and nine months ended September 30, 2005.

·                  Liquidity and capital resources. This section provides an analysis of our liquidity and cash flow and a discussion of our outstanding debt and commitments.

EXECUTIVE OVERVIEW

On July 1, 2006, the Company completed its acquisition of Bruker Optics.  Both the Company and Bruker Optics were majority owned by five affiliated stockholders prior to the acquisition. As a result, the acquisition of Bruker Optics by the Company is considered a business combination of companies under common control, and has been accounted for in a manner similar to a pooling-of-interests. Accordingly, the acquisition of Bruker Optics, as it relates to the portion under common ownership (approximately 96%), has been accounted for at historical carrying values. The portion not under the common ownership of the five affiliated stockholders (approximately 4%) has been accounted for using the purchase method of accounting (at fair value) on a pro rata basis. Any excess purchase price of the interest not under common control over the fair value of the related net assets acquired has been accounted for as goodwill and intangible assets. Because this acquisition was essentially considered a pooling of interests, all one-time transaction costs have been expensed as incurred rather than being added to goodwill. During the nine months ended September 30, 2006, the Company incurred and expensed acquisition related charges totaling $5.8 million, which consisted of investment banking, legal and accounting fees, compensation earned by the special committee of the Company’s Board of Directors and antitrust regulation filing fees.  The historical financial statements within MD&A have been presented as if the companies had always been combined.

Bruker BioSciences and its wholly-owned subsidiaries design, manufacture, market and service proprietary life science and materials research systems based on mass spectrometry core technology platforms, X-ray technologies, optical emission spectroscopy (OES), and molecular spectroscopy technologies. We also manufacture and distribute a broad range of field analytical systems for chemical, biological, radiological and nuclear, or CBRN, detection. We currently report financial results on the basis of three reportable segments: Bruker Daltonics, Bruker AXS and Bruker Optics. As a result of the Bruker Optics acquisition, management is currently reevaluating the internal reporting structure which may require a change to our segment reporting. This evaluation is expected to be completed in the fourth quarter of 2006. Bruker Daltonics is a leading manufacturer of innovative mass spectrometry-based instruments and accessories used by pharmaceutical, biotechnology, proteomics and molecular diagnostics companies, academic institutions, and government agencies in their research that can

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also be integrated and used along with other analytical instruments. Bruker Daltonics also manufactures and distributes a broad range of field analytical systems for CBRN detection. Bruker AXS primarily engages in the business of manufacturing and distributing advanced instrumentation and automated solutions based on X-ray technology and spark-OES with the purpose of addressing the needs of our customers in the discovery of new drugs, drug targets and advanced materials, as well as industrial QA/QC applications. Typical customers of Bruker AXS’ products and solutions include biotechnology and pharmaceutical companies, semiconductor industries, chemical, cement, metals and petroleum companies, raw material manufacturers, and academic and government research institutions. Bruker Optics is a leading developer, manufacturer and provider of research, analytical and process analysis instruments and solutions based on infrared and Raman molecular spectroscopy technology. Typical customers of Bruker Optics’ products and solutions include pharmaceutical and biotechnology companies, cement and petroleum companies, food, beverage and agricultural industries, and academic and government research institutions.

We maintain major technical and manufacturing centers in Europe, North America and Japan, we have sales offices located throughout the world and our corporate headquarters is located in Billerica, Massachusetts. Our business strategy is to capitalize on our proven ability to innovate and generate rapid revenue growth, both organically and through acquisitions. Our revenue growth strategy, combined with continued improvements to our gross profit margins and increased leverage on our research and development, sales and marketing and distribution investments and general and administrative expenses, are expected to enhance our operating margins and improve our earnings in the future.

For the nine months ended September 30, 2006, excluding the effect of foreign currency translation, our revenues grew by 15.0% to $300.2 million. Of this revenue growth, 5.6% was related to acquisitions and 9.4% was organic.   We continue to focus on improving our profitability and our gross profit margins for product and service revenues improved from 44.2% during the nine months ended September 30, 2005 to 45.1% for the nine months ended September 30, 2006, reflecting improvements realized from ongoing gross profit margin improvement programs and contributions from our recent acquisitions.  We continue to invest in sales and marketing initiatives, primarily headcount increases, which has resulted in our sales and marketing expenses as a percentage of product and service revenue to increase year-over-year.  We expect these investments to result in increased revenues in future periods.  Our ongoing cost control initiatives resulted in decreases in both general and administrative and research and development expenses as a percentage of product and service revenue during the first nine months of 2006 compared to the first nine months of 2005.

With the addition of Bruker Optics, we increased and diversified our market presence, technology base, product line, global distribution and customer support capabilities.  We believe the addition of Bruker Optics will help increase our ‘critical mass’ in many of the markets we serve, create revenue synergies, diversify our customer and revenue base and expand our product and service offerings, all of which should provide us with revenue growth opportunities and accelerate our drive to improve our margins, net income and operating cash flow. The acquisition of Bruker Optics also provides us access to new market segments and applications, particularly in pharmaceutical process analytical technologies and pharma-forensics, as well as in food and beverage and feed and agricultural analysis.

On July 18, 2006, we acquired KeyMaster which will provide us with access to the fast growing handheld and portable X-ray analysis market.  We believe the technologies KeyMaster has developed, and the markets it serves, are highly complimentary to our core businesses.

On September 6, 2006, we acquired Quantron which will complement our existing stationary X-ray fluorescence (XRF) systems for metal foundries, as well as our new handheld XRF product line.  We believe Quantron’s spark-OES systems and technology will further strengthen the industrial analysis business of Bruker AXS.

On January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment. This standard revised the measurement, valuation and recognition of financial accounting and reporting standards for equity-based compensation plans contained in SFAS No. 123, Accounting for Stock Based Compensation. The new standard required companies to expense the value of employee stock options and similar equity-based compensation awards based on fair value recognition provisions determined on the date of grant.

We adopted SFAS No. 123(R) using the modified prospective transition method, which required the application of the accounting standard on January 1, 2006, the effective date of the standard for us. In accordance with the modified prospective transition method, our consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). The effect of implementing SFAS No. 123 (R) was not typically material to the overall results of operations or specific line items within the consolidated statement of operations, and as a result was not referenced often within the discussions on results of operations in the accompanying MD&A. For the nine months ended September 30, 2006, the $0.7 million, net of tax, in stock-based compensation expense was allocated as follows (in thousands):

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		Nine months ended
		September 30, 2006
Production and Logistics		$	48
Sales and Marketing		326
General and Administrative		217
Research and Development		108
Total stock-based compensation expense		$	699

 

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 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 have 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. Revenue is deferred until cash is received when a significant portion of the fee is due over one year after delivery, installation and acceptance of a system. For arrangements with multiple elements, we recognize revenue for each element based on the 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.

·                  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.

·                  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.

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·                  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.

·                  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.

·                  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 differs from estimates, additional allowances or reversals of reserves may be necessary.

Results of Operations

Three months ended September 30, 2006 compared to the three months ended September 30, 2005

Revenue

The following table presents revenue, change in revenue and revenue growth by reportable segment for the three months ended September 30, 2006 and 2005 (dollars in thousands):

											Percentage
		2006			2005			$ Change			Change
Bruker Daltonics		$	36,301		$	36,949		$	(648	)	-1.8	%
Bruker AXS		47,015			33,938			13,077			38.5	%
Bruker Optics		24,517			16,085			8,432			52.4	%
Eliminations (a)		(2,963		)	(1,088		)	(1,875		)
Total Revenue		$	104,870		$	85,884		$	18,986		22.1	%

 

(a)          represents revenue recorded on transactions between segments which is eliminated in consolidation.

Bruker Daltonics’ revenue decreased by $0.6 million, or 1.8%, to $36.3 million for the three months ended September 30, 2006 compared to $36.9 million for the comparable period in 2005. Included in this change in revenue is approximately $0.8 million from the impact of foreign exchange. Excluding the effect of the foreign exchange benefit, revenue decreased by 4.1%. The decrease in revenue excluding the effect of foreign exchange is a result of slight declines in life science systems and CBRN detection systems revenue year-over-year and substantially reduced grant revenue partially offset by improved aftermarket sales in the third quarter of 2006 compared to the third quarter of 2005.  Aftermarket revenues include accessory sales, consumables, training and services. Included in other revenue during the three months ended September 30, 2006 and 2005 are grant revenues from various projects for early-stage research and development projects funded by the German and United States governments. Life science systems, CBRN detection systems and aftermarket revenue as a percentage of Bruker Daltonics’ product and service revenue were as follows during the three months ended September 2006 and 2005:

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		2006					2005
					Percentage of					Percentage of
					Segment Product					Segment Product
		Revenue			and Service Revenue		Revenue			and Service Revenue
Life Science Systems		$	26,381		73.2	%	$	26,580		73.8	%
CBRN Detection Systems		2,175			6.0	%	2,287			6.3	%
Bruker Daltonics Aftermarket		7,487			20.8	%	7,154			19.9	%
Product and Service Revenue		36,043			100	%	36,021			100	%
Grant Revenue		258					928
Total Revenue		$	36,301				$	36,949

 

Bruker AXS’ revenue increased by $13.1 million, or 38.5%, to $47.0 million for the three months ended September 30, 2006 compared to $33.9 million for the comparable period in 2005. Included in this change in revenue is approximately $0.8 million from the impact of foreign exchange. Excluding the effect of foreign exchange, revenue increased by 36.1%. The increase in revenue is attributable to the businesses acquired over the last four quarters, which represented approximately 14% of the revenue growth, and an increase in materials research system sales, other systems revenue and aftermarket revenue. Other system revenue relates primarily to the distribution of products not manufactured by Bruker AXS. X-ray systems, other systems and aftermarket revenue as a percentage of Bruker AXS’ product and service revenue were as follows during the three months ended September 30, 2006 and 2005:

		2006					2005
					Percentage of					Percentage of
					Segment Product					Segment Product
		Revenue			and Service Revenue		Revenue			and Service Revenue
X-Ray Systems		$	32,129		68.3	%	$	23,072		68.0	%
Other System Revenue		3,534			7.5	%	2,290			6.7	%
Bruker AXS Aftermarket		11,352			24.1	%	8,576			25.3	%
Total Product and Service Revenue		$	47,015		100	%	$	33,938		100	%

 

Bruker Optics’ revenue increased by $8.4 million, or 52.4%, to $24.5 million for the three months ended September 30, 2006 compared to $16.1 million for the comparable period in 2005. Included in this change in revenue is approximately $0.9 million from the impact of foreign exchange. Excluding the effect of foreign exchange, revenue increased by 47.0%. The increase in revenue excluding the effect of foreign exchange is a result of an increase in infrared (“IR”) systems revenue, especially in Europe and the Pacific Rim, as well as $2.4 million of revenue under a contract with the Chinese State Food and Drug Administration (the “Chinese SFDA”).  The strong IR systems revenue growth year-over-year is partially due to the implementation of SAP in our Germany factory in the third quarter of 2005 which delayed certain system shipments until the fourth quarter of 2006.  Aftermarket revenues include accessory sales, consumables, training and services. Other system revenue relates primarily to the distribution of products not manufactured by Bruker Optics. IR systems, other systems and aftermarket revenue as a percentage of Bruker Optics’ product and service revenue were as follows during the three months ended September 30, 2006 and 2005:

		2006					2005
					Percentage of					Percentage of
					Segment Product					Segment Product
		Revenue			and Service Revenue		Revenue			and Service Revenue
IR Systems		$	18,694		76.2	%	$	11,445		71.2	%
Other System Revenue		1,524			6.2	%	1,767			11.0	%
Bruker Optics Aftermarket		4,299			17.5	%	2,873			17.9	%
Total Product and Service Revenue		$	24,517		100	%	$	16,085		100	%

 

Cost of Revenue

The following table presents cost of product and service revenue and gross profit margins on product and service revenue by reportable segment for the three months ended September 30, 2006 and 2005 (dollars in thousands):

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		2006					2005
		Cost of			Gross Profit		Cost of			Gross Profit
		Revenue			Margin		Revenue			Margin
Bruker Daltonics		$	21,441		40.5	%	$	19,434		46.0	%
Bruker AXS		28,944			38.4	%	21,034			38.0	%
Bruker Optics		11,244			54.0	%	7,795			51.5	%
Eliminations (a)		(2,942		)			(1,088		)
Total Cost of Revenue		$	58,687		43.9	%	$	47,175		44.5	%

 

(a)          represents the cost of revenues between segments which is eliminated in consolidation.

Bruker Daltonics’ cost of product and service revenue for the three months ended September 30, 2006 was $21.4 million, resulting in a gross profit margin of 40.5%, compared to cost of product and service revenue of $19.4 million, or a gross profit margin of 46.0% for the comparable period in 2005. The decrease in gross profit margin is primarily attributable to lower CBRN detection system revenues year-over-year and pricing pressures due to increased competition.

Bruker AXS’ cost of product and service revenue for the three months ended September 30, 2006 was $28.9 million, resulting in a gross profit margin of 38.4%, compared to cost of product and service revenue of $21.0 million, or a gross profit margin of 38.0% for the comparable period in 2005. The increase in gross profit margin is primarily attributable to the higher margin businesses acquired over the past four quarters, the realization of benefits from various ongoing gross profit margin improvement programs and better capacity utilization as a result of increased revenues year-over-year, partially offset by lower gross profit margins realized on other system revenue and sales of certain life science systems.

Bruker Optics’ cost of product and service revenue for the three months ended September 30, 2006 was $11.2 million, resulting in a gross profit margin of 54.0%, compared to cost of product and service revenue of $7.8 million, or a gross profit margin of 51.5% for the comparable period in 2005. The increase in gross profit margin is primarily attributable to higher margins realized on the Chinese SFDA systems and improved capacity utilization as a result of increased revenues year-over-year.

Sales and Marketing

The following table presents sales and marketing expense and sales and marketing expense as a percentage of product and service revenue by reportable segment for the three months ended September 30, 2006 and 2005 (dollars in thousands):

		2006					2005
					Percentage of					Percentage of
		Sales and			Segment Product		Sales and			Segment Product
		Marketing			and Service Revenue		Marketing			and Service Revenue
Bruker Daltonics		$	5,795		16.1	%	$	5,582		15.5	%
Bruker AXS		7,956			16.9	%	6,263			18.5	%
Bruker Optics		5,312			21.7	%	4,015			25.0	%
Total Sales and Marketing		$	19,063		18.2	%	$	15,860		18.7	%

 

Bruker Daltonics’ sales and marketing expense for the three months ended September 30, 2006 increased to $5.8 million, or 16.1% of product and service revenue, from $5.6 million, or 15.5% of product and service revenue for the comparable period in 2005. The increase in sales and marketing expense is attributable to incremental investments in various sales and marketing initiatives, primarily related to an increase in applications resources.

Bruker AXS’ sales and marketing expense for the three months ended September 30, 2006 increased to $8.0 million, or 16.9% of product and service revenue, from $6.3 million, or 18.5% of product and service revenue for the comparable period in 2005. The increase in sales and marketing expense is primarily attributable to increased headcount related to the acquisitions completed over the last four quarters.

Bruker Optics’ sales and marketing expense for the three months ended September 30, 2006 increased to $5.3 million, or 21.7% of product and service revenue, from $4.0 million, or 25.0% of product and service revenue for the comparable

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period in 2005. The increase in sales and marketing expense is primarily attributable to higher commissions on increased revenues year-over-year.  The decrease in sales and marketing expense as a percentage of product and service revenue is attributable to the leveraging of our sales and marketing infrastructure.

General and Administrative

The following table presents general and administrative expense and general and administrative expense as a percentage of product and service revenue by reportable segment for the three months ended September 30, 2006 and 2005 (dollars in thousands):

		2006					2005
					Percentage of					Percentage of
		General and			Segment Product		General and			Segment Product
		Administrative			and Service Revenue		Administrative			and Service Revenue
Bruker Daltonics		$	2,048		5.7	%	$	2,285		6.3	%
Bruker AXS		3,309			7.0	%	2,780			8.2	%
Bruker Optics		1,104			4.5	%	708			4.4	%
Corporate		778					612
Total General and Administrative		$	7,239		6.9	%	$	6,385		7.5	%

 

Bruker Daltonics’ general and administrative expense for the three months ended September 30, 2006 decreased to $2.0 million, or 5.7% of product and service revenue, from $2.3 million, or 6.3% of product and service revenue for the comparable period of 2005. The decrease in general and administrative expenses is primarily attributable to lower bad debt expense year-over-year and benefits from ongoing cost reduction initiatives.

Bruker AXS’ general and administrative expenses for the three months ended September 30, 2006 increased to $3.3 million, or 7.0% of product and service revenue, from $2.8 million, or 8.2% of product and service revenue for the comparable period in 2005. The increase in general and administrative expenses is primarily due to increased headcount and intangible asset amortization associated with the acquisitions completed over the past four quarters.

Bruker Optics’ general and administrative expenses for the three months ended September 30, 2006 increased to $1.1 million, or 4.5% of product and service revenue, from $0.7 million, or 4.4% of product and service revenue for the comparable period of 2005. The increase in general and administrative expenses is primarily attributable to the allocated corporate general and administrative expenses associated with a public company.

Corporate general and administrative expense for the three months ended September 30, 2006 increased to $0.8 million from $0.6 million for the comparable period in 2005. 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, salaries and filing fees. The increase in expenses is primarily attributable to stock-based compensation charges in the third quarter of 2006 not recorded in the third quarter of 2005.

Research and Development

The following table presents research and development expense and research and development expense as a percentage of product and service revenue by reportable segment for the three months ended September 30, 2006 and 2005 (dollars in thousands):

		2006					2005
					Percentage of					Percentage of
		Research and			Segment Product		Research and			Segment Product
		Development			and Service Revenue		Development			and Service Revenue
Bruker Daltonics		$	5,921		16.4	%	$	6,703		18.6	%
Bruker AXS		4,100			8.7	%	$	3,266		9.6	%
Bruker Optics		1,915			7.8	%	1,560			9.7	%
Total Research and Development		$	11,936		11.4	%	$	11,529		13.6	%

 

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Bruker Daltonics’ research and development expense for the three months ended September 30, 2006 decreased to $5.9 million, or 16.4% of product and service revenue, from $6.7 million, or 18.6% of product and service revenue for the comparable period in 2005. The decrease in research and development expense is primarily attributable to a decrease in material purchases during the third quarter of 2006 compared to the third quarter of 2005 and to a reduction in headcount year-over-year.

Bruker AXS’ research and development expense for the three months ended September 30, 2006 increased to $4.1 million, or 8.7% of product and service revenue, from $3.3 million, or 9.6% of product and service revenue for the comparable period in 2005. The increase in research and development expense is primarily attributable to an increase in headcount resulting from the acquisitions completed over the past four quarters.

Bruker Optics’ research and development expense for the three months ended September 30, 2006 increased to $1.9 million, or 7.8% of product and service revenue, from $1.6 million, or 9.7% of product and service revenue for the comparable period in 2005. The increase in research and development expense is primarily attributable to an increase in material purchases and headcount during the third quarter of 2006 compared to the third quarter of 2005.

Acquisition Related Charges

On April 18, 2006, the Company announced that it had entered into a definitive agreement to acquire all of the stock of molecular spectroscopy company Bruker Optics.  The acquisition of Bruker Optics was approved by the Company’s shareholders on June 29, 2006 and was subsequently completed on July 1, 2006. Since this acquisition represented a business combination of companies under common control due to a majority ownership by individuals in both the Company and Bruker Optics, this acquisition has been accounted for in a manner similar to a pooling-of-interest. As a result, transaction costs have been expensed as incurred rather than being included in a purchase price allocation. During the third quarter of 2006, the Company incurred acquisition related charges totaling $1.0 million, which consisted primarily of investment banking and legal fees.

Interest and Other Income (Expense), Net

Interest and other income (expense), net, during the three months ended September 30, 2006 was $(0.5) million, compared to $0.2 million during the three months ended September 30, 2005. During the three months ended September 30, 2006, the major components within interest and other income (expense), net, were net interest expense of $(0.5) million, losses on foreign currency transactions of $(0.1) million and the appreciation of the fair value of derivative financial instruments of $0.1 million. During the three months ended September 30, 2005, the major components within interest and other income (expense), net, were net interest income of $0.4 million, gains on foreign currency transactions of $0.1 million and depreciation of the fair value of derivative financial instruments of $(0.3) million.

Provision for Income Taxes

The income tax provision for the three months ended September 30, 2006 was $3.5 million compared to an income tax provision of $3.0 million for the three months ended September 30, 2005, representing effective tax rates of 54% and 59%, respectively. Our effective tax rate 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 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, and the impact of changes to the valuation allowance, as well as changes in the mix of our pre-tax income and losses among jurisdictions with varying statutory tax rates and credits.

Minority Interest in Consolidated Subsidiaries

Minority interest in consolidated subsidiaries for the three months ended September 30, 2006 was ($18,000) compared to $28,000 in the comparable period of 2005. The minority interest in subsidiaries represents the minority shareholders’ proportionate share of net income of those subsidiaries for the three months ended September 30, 2006 and 2005. For the three months ended September 30, 2006 and 2005, the minority interest relates to our two majority-owned subsidiaries, Incoatec GmbH and Baltic Scientific Instruments Ltd.

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Nine months ended September 30, 2006 compared to the nine months ended September 30, 2005

Revenue

The following table presents revenue, change in revenue and revenue growth by reportable segment for the nine months ended September 30, 2006 and 2005 (dollars in thousands):

											Percentage
		2006			2005			$ Change			Change
Bruker Daltonics		$	113,660		$	116,954		$	(3,294	)	-2.8	%
Bruker AXS		123,985			100,520			23,465			23.3	%
Bruker Optics		69,373			51,134			18,239			35.7	%
Eliminations (a)		(6,809		)	(3,132		)	(3,677		)
Total Revenue		$	300,209		$	265,476		$	34,733		13.1	%

 

(a)          represents revenue recorded on transactions between segments which is eliminated in consolidation.

Bruker Daltonics’ revenue decreased by $3.3 million, or 2.8%, to $113.7 million for the nine months ended September 30, 2006 compared to $117.0 million for the comparable period in 2005. Included in this change in revenue is approximately $2.3 million from the impact of foreign exchange. Excluding the effect of foreign exchange, revenue decreased by 0.9%. The decrease in revenue excluding the effect of foreign exchange is a result of higher life science system revenues year-over-year, offset by lower aftermarket revenues, which includes accessory sales, consumables, training and services, by lower sales of CBRN systems during the first nine months of 2006 compared to the first nine months of 2005 and by pricing pressures from increased competition.  Included in other revenue for the nine months ended September 30, 2006 and 2005 are grant revenues from various projects for early-stage research and development projects funded by the German and United States governments. Life science systems, CBRN detection systems and aftermarket revenue as a percentage of Bruker Daltonics’ product and service revenue were as follows during the nine months ended September 30, 2006 and 2005.

		2006					2005
					Percentage of					Percentage of
					Segment Product					Segment Product
		Revenue			and Service Revenue		Revenue			and Service Revenue
Life Science Systems		$	85,982		76.4	%	$	81,243		70.6	%
CBRN Detection Systems		5,591			5.0	%	10,962			9.5	%
Bruker Daltonics Aftermarket		20,952			18.6	%	22,821			19.9	%
Product and Service Revenue		112,525			100	%	115,026			100	%
Grant Revenue		1,135					1,928
Total Revenue		$	113,660				$	116,954

 

Bruker AXS’ revenue increased by $23.5 million, or 23.3%, to $124.0 million for the nine months ended September 30, 2006 compared to $100.5 million for the comparable period in 2005. Included in this change in revenue is approximately $1.8 million from the impact of foreign exchange. Excluding the effect of foreign exchange, revenue increased by 25.1%. The increase in revenue is attributable to the businesses acquired over the last four quarters, which represented approximately 9% of the revenue growth, and an increase in materials research system sales, other systems and aftermarket revenue. Other system revenue relates primarily to the distribution of products not manufactured by Bruker AXS. X-ray systems, other systems and aftermarket revenue as a percentage of Bruker AXS’ product and service revenue were as follows during the nine months ended September 30, 2006 and 2005:

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