Bruker Corporation
Notes to Consolidated Financial Statements
Note 1Description 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 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, biotechnology and proteomics companies, academic institutions, advanced
materials and semiconductor industries and government agencies.
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. Accordingly, the acquisition
of Bruker Optics, as it relates to the portion under common ownership (approximately 96%), was accounted for at historical carrying values at the date of the acquisition. The portion not under the
common ownership of the five affiliated stockholders (approximately 4%) has been accounted for as a minority interest. The portion not under common control primarily represented stock options to
purchase shares of common stock outstanding at the date of the acquisition. The excess purchase price of the interest not under common control over the fair value of the related net assets acquired
was accounted for as goodwill and intangible assets. The consolidated balance sheets, statements of operations, statements of cash flows and notes to the consolidated financial statements for all
periods presented herein have been restated by combining the historical consolidated financial statements of the Company with those of Bruker Optics.
Since
the integration of the Bruker Optics acquisition began, management of the Company has been changing the way the business is managed and considers the Company to be a provider of
instrumentation and solutions to life sciences and industrial businesses throughout the world. Management will continue to focus on addressing the markets we serve and the needs of our various
customers, including pharmaceutical, biotechnology, advanced and raw materials companies, and academic and governmental institutions, and less on selling individual products and technologies. As a
result of changes in the Company's business, the Company may change its segment reporting in the future. The Company currently reports financial results on the basis of the following three business
segments:
-
1.
-
Bruker Daltonics
is a leading developer and provider of 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
is a leading developer and provider of life science and advanced materials research tools based on X-ray
technology tools for advanced X-ray and OES-spark instrumentation used in non-destructive molecular materials and elemental analysis in academic, research and
industrial applications.
-
3.
-
Bruker Optics
is a leading developer and provider of research, analytical and process analysis instruments and solutions based on
infrared and Raman molecular spectroscopy technologies.
73
Note 2Summary of Significant Accounting Policies
Principles of Consolidation
The financial statements include the accounts of the Company and all majority and wholly-owned subsidiaries. All intercompany accounts and transactions have been
eliminated.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of highly liquid investments with original maturities of three months or less at the date of acquisition. Cash and
cash equivalents primarily include cash on hand, money market funds and time deposits. Time deposits represent amounts on deposit in banks and temporarily invested in instruments with maturities of
three months or less at the time of purchase. Certain of these investments represent deposits which are not insured by the FDIC or any other United States government agency. Cash and cash equivalents
are carried at cost, which approximates market value.
Restricted Cash
Certain customers require the Company to provide bank guarantees on customer advances. These amounts are considered restricted cash and are classified as
non-current. Generally, lines of credit facilitate this requirement. However, to the extent the required guarantee exceeds the available local line of credit, the Company maintains current
restricted cash balances. In addition, the Company is required to maintain a restricted cash balance as a guarantee for the lessor of the building located in Delft, Netherlands, throughout the lease
term, which has also been classified as non-current. As of December 31, 2007 and 2006, restricted cash balances were approximately $1.7 million and $1.1 million,
respectively.
Concentration of Credit Risk
Financial instruments which subject the Company to credit risk consist of cash and cash equivalents and accounts receivables. The risk with respect to cash and
cash equivalents is minimized by the Company's policy of investing in short-term financial instruments issued by highly-rated financial institutions. The risk with respect to accounts
receivables is minimized by the creditworthiness of the Company's customers. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require
collateral. Credit losses have been within management's expectations and the allowance for doubtful accounts totaled $1.9 million and $2.4 million as of
December 31, 2007 and 2006, respectively. For the years ended December 31, 2007, 2006 and 2005, no single customer exceed 10% of the Company's revenue or accounts receivable.
Inventories
Components of inventory include raw materials, work-in process, demonstration units and finished goods. Demonstration units include units which are
located in the Company's demonstration laboratories and at potential customer sites and are considered available for sale. Finished goods include in-transit systems that have been shipped
to the Company's customers, but not yet installed and accepted by the customer. All inventories are stated at the lower of cost or market, cost determined principally by the first-in,
first-out, ("FIFO") method for a majority of subsidiaries and by average-cost for one international location. The Company reduces the carrying value of its inventories for
differences between the cost and estimated net realizable value taking into consideration usage in the preceding twelve months, expected demand, technological obsolescence and other information
including the physical condition of demonstration and in-transit inventories. The Company records as a charge to cost of revenue for the amount required to reduce the carrying value of
inventory to net realizable value. Costs associated with the procurement and warehousing of inventories, such as inbound freight
74
charges
and purchasing and receiving costs, are also included in the cost of revenue line item within the statement of operations.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Major improvements are capitalized while expenditures for
maintenance, repairs and minor improvements are charged to expense. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are eliminated from the accounts
and any resulting gain or loss is reflected in the statement of operations. Depreciation and amortization are calculated on a straight-line basis over the estimated useful lives of the
assets as follows:
Buildings
|
|
25-39 years
|
Machinery and equipment
|
|
3-10 years
|
Computer equipment and software
|
|
3-5 years
|
Furniture and fixtures
|
|
3-10 years
|
Leasehold improvements
|
|
Lesser of 15 years or the remaining lease term
|
Depreciation
and amortization expense associated with property, plant and equipment for the years ended December 31, 2007, 2006 and 2005, was approximately $11.3 million,
$12.1 million and $10.0 million, respectively.
Goodwill and Intangible Assets
The Company accounts for goodwill and other intangible assets in accordance with Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standard ("SFAS") No. 142,
Goodwill and Other Intangible Assets
("SFAS No. 142"). SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives not be amortized. Instead, these assets are tested for impairment on a reportable operating segment basis annually, or on an interim basis when events or
changes in circumstances warrant. The impairment test consists of a comparison of the fair value of goodwill or an intangible asset with its carrying amount with any related impairment losses
recognized in earnings when incurred. The Company performs its annual test for indications of impairment as of December 31st each year. In accordance with SFAS No. 142, the
Company tested for impairment as of December 31, 2007 and 2006, and determined that goodwill and indefinite-lived intangible assets were not impaired.
Intangible
assets with a finite useful life are amortized on a straight-line basis over their estimated useful lives, with periods ranging from 4 to 10 years.
Impairment of Long-Lived Assets
Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the quoted market price, if
available, or the estimated undiscounted operating cash flows generated by those assets are less than the assets' carrying value. Impairment losses are charged to the statement of operations for the
difference between the fair value and carrying value of the asset. No impairment losses were recorded on long-lived assets during the years ended December 31, 2007, 2006 and 2005.
Warranty Costs and Deferred Revenue
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 accompanying balance sheets. The Company also offers to its customers extended warranty and service agreements
extending beyond the initial year of warranty for a
75
fee.
These fees are recorded as deferred revenue and amortized ratably into income over the life of the extended warranty contract.
Minority Interest in Consolidated Subsidiaries
Minority interest on the statement of operations of $299,000, $8,000 and $40,000 for the years ended December 31, 2007, 2006 and 2005, respectively,
represents the minority common shareholders' proportionate share of the net loss of InCoaTec GmbH and Bruker Baltic Ltd.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes
("SFAS
No. 109"). SFAS No. 109 requires the asset and liability approach to account for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences
of differences between the financial statement basis and the tax basis of assets and liabilities, calculated using enacted tax rates in effect for the year in which the differences are expected to be
reflected in the tax return.
The Company records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized.
On
January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in
Income Taxesan interpretation of FASB Statement No. 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 an income tax position must achieve before being recognized in the
financial statements. In addition, FIN No. 48 requires expanded annual disclosures, including a rollforward of the beginning and ending aggregate unrecognized tax benefits as well as specific
detail related to tax uncertainties for which it is reasonably possible the amount of unrecognized tax benefit will significantly increase or decrease within twelve months. In connection with the
adoption of FIN No. 48 the Company recorded a reduction to retained earnings of $0.8 million as of January 1, 2007. The Company had unrecognized tax benefits of approximately
$5.7 million as of January 1, 2007, of which $2.0 million, if recognized, would result in a reduction of the Company's effective tax rate.
Customer Advances
The Company typically requires an advance deposit under the terms and conditions of contracts with customers. These deposits are recorded as a liability until
revenue is recognized on the specific contract.
Other Comprehensive Income (Loss)
Other 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 are excluded from net income (loss) as these amounts are recorded directly as an adjustment to stockholders' equity, net of tax. The
Company's other comprehensive income (loss) is composed primarily of foreign currency translation adjustments.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, amounts due from/to affiliated
companies and long-term debt. The carrying amounts of the Company's cash and cash equivalents, accounts receivable, accounts payable and amounts due from/to affiliated companies
approximate fair value due to their short-term nature. The fair value of long-term debt is estimated based on current interest rates offered to the Company
76
for
financing arrangements with similar maturities. The recorded value of these financial instruments approximates their fair value at December 31, 2007 and 2006.
Derivative Financial Instruments
The Company accounts for derivative financial instruments in accordance with SFAS No. 133,
Accounting for Derivative Instruments
and Hedging Activities
, ("SFAS No. 133") as amended. All derivatives, whether designated in hedging relations or not, are recorded on the balance sheet at fair value. If
the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in the results of operations.
If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in accumulated other comprehensive income and are recognized in
the results of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in the results of operations. For derivative
instruments not designated as hedging instruments, changes in fair value are recognized in the results of operations in the current period.
Foreign Currency Translation
Assets and liabilities of the Company's foreign subsidiaries, where the functional currency is the local currency, are translated into U.S. dollars using
year-end exchange rates. Revenues and expenses of foreign subsidiaries are translated at the average exchange rates in effect during the year. Adjustments resulting from financial
statement translations are included as a separate component of stockholders' equity. Gains and (losses) resulting from foreign currency transactions are reported in the statement of operations under
the caption interest and other income (expense), net, for all periods presented.
Revenue Recognition
The Company recognizes 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 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 the Company's 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, the Company recognizes the system as revenue when the product has been shipped and title and risk of loss has been transferred. The Company's 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, the Company recognizes revenue for each element based on the fair
value of the element provided when 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 the Company's ability to establish the fair value for each element in multiple element arrangements could affect
the timing of revenue recognition.
Revenue
from the sale of accessories and parts is recognized upon shipment and service revenue is recognized as the services are performed.
Grant
revenue is earned from the governments of Germany and the United States for various early-stage research & development projects. Grant revenue is recognized when the Company
completes the services required under the grant.
77
Shipping and Handling Costs
The Company records costs incurred in connection with shipping and handling products as cost of revenue. Amounts billed to customers in connection with these
costs are included in revenues and are not material for any of the periods presented in the accompanying financial statements.
Research and Development
Research and development costs are expensed as incurred.
Software Costs
Purchased software is capitalized at cost and is amortized over the estimated useful life, generally three years. Software developed for use in the Company's
products is expensed as incurred until technological feasibility is reasonably assured and is classified as research and development expense. Subsequent to the achievement of technological
feasibility, amounts are capitalizable, however, to date such amounts have not been material.
Advertising
The Company expenses advertising costs as incurred. Advertising expenses were $3.5 million, $2.7 million and $2.3 million during the years
ended December 31, 2007, 2006 and 2005, respectively.
Contingencies
The Company is subject to proceedings, lawsuits and other claims related to patents, product and other matters. The Company assesses the likelihood of any adverse
judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies are made after careful
analysis of each individual issue. The required reserves may change in the future due to new developments in each situation or changes in settlement strategy in dealing with these matters.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
Share-Based Payment
,
("SFAS No. 123(R)"), using the modified prospective method whereby prior periods are not restated for comparability. SFAS No. 123(R) requires recognition of stock-based compensation
expense in the
statement of operations over the vesting period based on the fair value of the award at the grant date. Previously, the Company used the intrinsic value method under Accounting Principles Board
Opinion No. 25,
Accounting for Stock Issued to Employees
("APB 25"), as amended by related interpretations of the Financial Accounting
Standards Board. Under APB 25, no compensation cost was recognized for stock options because the quoted market price of the stock at the grant date was equal to the amount per share the
employee had to pay to acquire the stock after fulfilling the vesting period. SFAS No. 123(R) supersedes APB 25 as well as SFAS No. 123,
Accounting for
Stock-Based Compensation
, which permitted pro forma footnote disclosures to report the difference between the fair value method and the intrinsic value method.
78
The
Company's primary types of share-based compensation are stock options and restricted stock. The Company recorded stock-based compensation expense for the years ended
December 31, 2007 and 2006, as follows (in thousands):
|
|
2007
|
|
2006
|
Stock options
|
|
$
|
1,556
|
|
$
|
1,090
|
Restricted stock
|
|
|
605
|
|
|
384
|
|
|
|
|
|
Total stock-based compensation, pre-tax
|
|
|
2,161
|
|
|
1,474
|
Tax benefit
|
|
|
608
|
|
|
387
|
|
|
|
|
|
Total stock-based compensation, net of tax
|
|
$
|
1,553
|
|
$
|
1,087
|
|
|
|
|
|
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:
|
|
2007
|
|
2006
|
|
Risk-free interest rate
|
|
3.48%-5.21
|
%
|
4.30
|
%
|
Expected life
|
|
6.5 years
|
|
5 years
|
|
Volatility
|
|
82.0
|
%
|
82.0
|
%
|
Expected dividend yield
|
|
0
|
%
|
0
|
%
|
Had
compensation expense for the Company's stock option plans during the year ended December 31, 2005, been determined based on the fair value at the grant date, consistent with
the methodology prescribed by SFAS No. 148,
Accounting for Stock-Based CompensationTransition and Disclosure
, the Company's net
income and net income per common share for the year ended December 31, 2005, would have approximated the following pro forma amounts (in thousands, except per share data):
|
|
2005
|
|
Net income, as reported
|
|
$
|
9,747
|
|
Deduct:
|
|
|
|
|
|
Total stock-based compensation expense determined using fair value based method for all awards, net of taxes
|
|
|
(4,278
|
)
|
|
|
|
|
Net income, pro forma
|
|
$
|
5,469
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
Basic and diluted, as reported
|
|
$
|
0.10
|
|
|
Basic and diluted, pro forma
|
|
$
|
0.05
|
|
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:
|
|
2005
|
|
Risk-free interest rate
|
|
4.25%-4.30
|
%
|
Expected life of option
|
|
4-5 years
|
|
Volatility
|
|
40.0%-80.0
|
%
|
Expected dividend yield
|
|
0
|
%
|
79
Earnings Per Share
Net income per share is calculated by dividing net income by the weighted-average shares outstanding during the period. The diluted net income 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.
The
following table sets forth the computation of basic and diluted average shares outstanding for the years ended December 31, 2007, 2006 and 2005, (in thousands):
|
|
2007
|
|
2006
|
|
2005
|
|
Net income, as reported
|
|
$
|
31,529
|
|
$
|
18,481
|
|
$
|
9,747
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstandingbasic
|
|
|
103,702
|
|
|
101,512
|
|
|
100,823
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
3,067
|
|
|
1,049
|
|
|
307
|
|
|
|
|
|
|
|
|
Weighted average shares outstandingdiluted
|
|
|
106,769
|
|
|
102,561
|
|
|
101,130
|
|
|
|
|
|
|
|
|
Net income per sharebasic and diluted
|
|
$
|
0.30
|
|
$
|
0.18
|
|
$
|
0.10
|
Stock
options to purchase 583,000 shares, 1,056,000 shares and 2,624,000 shares were excluded from the computation of diluted earnings per share in the years ended December 31,
2007, 2006 and 2005, 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.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ from such estimates.
Note 3Acquisition of Bruker Optics
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 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 at
historical carrying value. The acquisition of the shares of the non-affiliated shareholders (approximately 4%) was accounted for 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. The fair value of the consideration
paid for the acquisition of the minority interest was approximately $5.2 million, including cash of $4.8 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 the Company'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.
80
The Company engaged RSM McGladrey, Inc., a third party valuation firm, to assist management in appraising the fair value of certain assets acquired. The appraisal was completed in
the second quarter of 2007. 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
|
|
|
53,846
|
|
Other assets
|
|
|
72
|
|
|
|
|
|
|
Total assets acquired
|
|
|
109,479
|
|
|
|
|
|
Current liabilities
|
|
|
34,488
|
|
Long-term debt
|
|
|
3,463
|
|
Other long-term liabilities
|
|
|
2,074
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
40,025
|
|
|
|
|
|
Net assets
|
|
|
69,454
|
|
Minority interest percentage
|
|
|
4.1
|
%
|
|
|
|
|
Net assets acquired
|
|
|
2,848
|
|
Goodwill
|
|
|
2,294
|
|
|
|
|
|
|
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 $2.2 million and are being amortized over four years. In
addition, approximately $2.7 million of acquired intangible assets were assigned to in-process research and development projects of which the 4.1% minority interest, or
approximately $0.1 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
$2.3 million of goodwill acquired from Bruker Optics in connection with the merger was assigned to the Company's direct wholly-owned subsidiary Bruker Optics Inc., and
will not be deductible for tax purposes since the merger was a tax-free merger.
Note 4Other Acquisitions
On June 30, 2007, the Company acquired Analys-Konsult AB ("AKAB"), a distributor and service provider of scientific instrumentation based in Sweden. The
results of AKAB have been included in the Bruker AXS segment from the date of acquisition. The aggregate purchase price of AKAB was approximately $0.8 million, of which approximately
$0.5 million was paid in cash and approximately $0.3 million was funded by the issuance of an aggregate of 29,740 restricted unregistered shares of the Company's common stock, par value
$0.01 per share, to AKAB's shareholders.
On
January 1, 2007, the Company acquired all of the assets of Keca Metal Products, Ltd. ("Keca"), a Texas partnership located in Spring, Texas. The results of Keca have
been included in the Bruker Optics segment from the date of acquisition. Keca provides specialized machining services, primarily to Bruker Optics. In addition, on November 26, 2007, the Company
acquired all of the assets of Micron Optical Systems, Inc. ("Micron"). The results of Micron have been included in the Bruker Optics segment from the date of acquisition. The aggregate purchase
price for Keca and Micron was $0.6 million and $0.8 million, respectively, and was funded primarily with cash on hand.
81
The
Company recorded $1.6 million of goodwill in connection with the acquisition of AKAB, Keca and Micron in 2007. The goodwill related to AKAB was assigned to the Bruker AXS
segment. The goodwill related to the asset acquisitions of Keca and Micron were assigned to the Bruker Optics segment.
Pro
forma financial information reflecting the AKAB acquisition has not been presented as the impact on revenues, 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, an OES-spark company based in Germany ("Quantron"). The results of
Quantron have been included in the Bruker AXS segment from the date of acquisition. In accordance with the stock purchase agreement, at the closing, the Company paid an aggregate of approximately
$6.5 million of consideration to the Sellers, of which approximately $5.2 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 $4.9 million of additional cash consideration may be paid through 2009 based on future performance of Quantron, which will be treated as additional
purchase price. No additional consideration has been earned as of December 31, 2007.
On
July 18, 2006, the Company acquired all of the capital stock of KeyMaster Technologies, Inc. ("KeyMaster"), a Delaware corporation located in Kennewick, Washington. The
results of KeyMaster have been included in the Bruker AXS segment from the date of acquisition. The aggregate purchase price for KeyMaster was $10.0 million and was funded by incurring
additional debt.
On
January 17, 2006, the Company acquired Socabim SAS ("Socabim"), a privately-held company focused on advanced X-ray analysis software for materials
research based in France. The results of Socabim have been included in the Bruker AXS segment from the date of acquisition. The initial aggregate purchase price of approximately $8.6 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 $7.3 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. As of December 31, 2007,
$0.4 million of additional consideration has been earned. 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
Company recorded $19.5 million of goodwill in connection with the acquisition of Quantron, KeyMaster and Socabim in 2006 and assigned the goodwill to each individual
subsidiary. The valuation of the net assets acquired in connection with certain of these acquisitions was finalized in 2007 and did not result in any material adjustments to goodwill.
Pro
forma information to reflect the Quantron, KeyMaster and Socabim acquisitions has not been presented as the impact on revenues, net income and net income per common share would not
have been material.
82
Note 5Accounts Receivable
The following is a summary of trade accounts receivable at December 31, (in thousands):
|
|
2007
|
|
2006
|
|
Gross accounts receivable
|
|
$
|
116,828
|
|
$
|
82,014
|
|
Allowance for doubtful accounts
|
|
|
(1,890
|
)
|
|
(2,410
|
)
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
114,938
|
|
$
|
79,604
|
|
|
|
|
|
|
|
Note 6Inventories
Inventories consisted of the following as of December 31, (in thousands):
|
|
2007
|
|
2006
|
Raw materials
|
|
$
|
54,743
|
|
$
|
45,361
|
Work-in process
|
|
|
50,634
|
|
|
42,269
|
Demonstration units
|
|
|
19,801
|
|
|
14,678
|
Finished goods
|
|
|
46,154
|
|
|
32,196
|
|
|
|
|
|
Total inventories
|
|
$
|
171,332
|
|
$
|
134,504
|
|
|
|
|
|
Demonstration
units include systems located in the Company's demonstration laboratories and at potential customer sites and are considered available for sale. Finished goods include
in-transit systems that have been shipped to the Company's customers but not yet installed and accepted by the customer. As of December 31, 2007 and 2006,
inventory-in-transit was $34.4 million and $24.1 million, respectively.
Note 7Property, Plant and Equipment
The following is a summary of property, plant and equipment by major class of asset as of December 31, (in thousands):
|
|
2007
|
|
2006
|
|
Land
|
|
$
|
12,173
|
|
$
|
10,437
|
|
Building and leasehold improvements
|
|
|
104,587
|
|
|
88,530
|
|
Machinery and equipment
|
|
|
85,164
|
|
|
72,967
|
|
|
|
|
|
|
|
|
|
|
201,924
|
|
|
171,934
|
|
Less accumulated depreciation and amortization
|
|
|
(98,824
|
)
|
|
(81,585
|
)
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
103,100
|
|
$
|
90,349
|
|
|
|
|
|
|
|
83
Note 8Goodwill and Other Intangible Assets
The following is a summary of other intangible assets subject to amortization as of December 31, (in thousands):
|
|
|
|
2007
|
|
2006
|
|
|
Useful
Lives
in Years
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Existing technology and related patents
|
|
4-5
|
|
$
|
6,249
|
|
$
|
(3,022
|
)
|
$
|
3,227
|
|
$
|
6,172
|
|
$
|
(1,916
|
)
|
$
|
4,256
|
Customer relationships
|
|
5
|
|
|
1,115
|
|
|
(477
|
)
|
|
638
|
|
|
1,108
|
|
|
(288
|
)
|
|
820
|
Trade names
|
|
5-10
|
|
|
439
|
|
|
(176
|
)
|
|
263
|
|
|
718
|
|
|
(215
|
)
|
|
503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets
|
|
|
|
$
|
7,803
|
|
$
|
(3,675
|
)
|
$
|
4,128
|
|
$
|
7,998
|
|
$
|
(2,419
|
)
|
$
|
5,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the years ended December 31, 2007, 2006 and 2005, the Company recorded amortization expense of approximately $1.3 million, $1.2 million and $0.5 million,
respectively, related to other amortizable intangible assets.
The
estimated future amortization expense related to amortizable intangible assets over the next five years is as follows (in thousands):
2008
|
|
$
|
1,228
|
2009
|
|
|
1,177
|
2010
|
|
|
1,109
|
2011
|
|
|
565
|
2012
|
|
|
49
|
|
|
|
Total
|
|
$
|
4,128
|
|
|
|
The
carrying amount of goodwill as of December 31, 2007 and 2006, was $40.8 million and $39.8 million, respectively. 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, 2007 and 2006, and determined that
goodwill was not impaired at that time.
Note 9Other Current Liabilities
The following is a summary of accrued and other current liabilities as of December 31, (in thousands):
|
|
2007
|
|
2006
|
Accrued compensation
|
|
$
|
29,722
|
|
$
|
24,449
|
Deferred revenue
|
|
|
24,416
|
|
|
16,661
|
Accrued warranty
|
|
|
13,994
|
|
|
13,274
|
Current portion of deferred tax liability
|
|
|
7,293
|
|
|
12,563
|
Income taxes payable
|
|
|
18,949
|
|
|
7,010
|
Accrued professional services
|
|
|
5,827
|
|
|
4,213
|
Accrued VAT and sales and use taxes
|
|
|
185
|
|
|
4,199
|
Accrued expenses
|
|
|
24,086
|
|
|
12,438
|
|
|
|
|
|
Total other current liabilities
|
|
$
|
124,472
|
|
$
|
94,807
|
|
|
|
|
|
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
84
recorded
as deferred revenue and amortized into income over the life of the extended warranty contract.
Warranty accrual at December 31, 2005
|
|
$
|
9,326
|
|
Accruals for warranties issued during the period
|
|
|
12,145
|
|
Settlements of warranty claims
|
|
|
(9,019
|
)
|
Foreign currency impact
|
|
|
822
|
|
|
|
|
|
Warranty accrual at December 31, 2006
|
|
|
13,274
|
|
Accruals for warranties issued during the period
|
|
|
9,200
|
|
Settlements of warranty claims
|
|
|
(9,428
|
)
|
Foreign currency impact
|
|
|
948
|
|
|
|
|
|
Warranty accrual at December 31, 2007
|
|
$
|
13,994
|
|
|
|
|
|
Note 10Debt
The Company's debt obligations consist of the following as of December 31, (in thousands):
|
|
2007
|
|
2006
|
|
Two Euro bank loans at fixed rate of 4.65%, collateralized by land and buildings of Bruker Daltonik GmbH, monthly interest payments, due and payable through 2008
|
|
$
|
11,192
|
|
$
|
10,115
|
|
Euro bank loan at fixed rate of 3.05%, collateralized by land and buildings of Bruker Daltonik GmbH, monthly interest payments, due and payable through 2008
|
|
|
5,107
|
|
|
4,616
|
|
Euro bank loan at fixed rate of 2.95%, collateralized by land and buildings of Bruker Daltonik GmbH, monthly principal and interest payments due and payable through 2010
|
|
|
1,786
|
|
|
2,282
|
|
Euro mortgage loan at 6-month European Interbank Offered Rate (EURIBOR) (4.71% at December 31, 2007) plus 1.00%, collateralized by a building located in Karlsruhe, Germany, biannual principal and interest payments due and payable through October
2012
|
|
|
2,918
|
|
|
3,033
|
|
Two Euro bank loans at fixed rate of 4.65% and 8.01%, respectively, collateralized by certain Bruker AXS accounts receivables, biannual principal payments and quarterly interest payments, due and payable through March 2013
|
|
|
308
|
|
|
299
|
|
Euro mortgage loan at 6-month European Interbank Offered Rate (EURIBOR) (4.71% at December 31, 2007) plus 0.75%, collateralized by a building located in Ettlingen, Germany, biannual principal and interest payments due and payable through October
2011
|
|
|
|
|
|
422
|
|
State of Wisconsin industrial revenue bonds at variable interest rate based on the Securities Industry and Financial Markets Association Municipal Swap Index (3.42% at December 31, 2007), collateralized by an irrevocable letter of credit, annual
principal payments and monthly interest payments, due and payable through December 2013
|
|
|
1,460
|
|
|
1,660
|
|
Japanese Yen bank loan at a fixed rate of 1.8%, uncollateralized, quarterly principal and interest payments due and payable through 2009
|
|
|
403
|
|
|
629
|
|
Japanese Yen bank loan at a fixed rate of 2.03%, uncollateralized, quarterly principal and interest payments due and payable through 2011
|
|
|
1,878
|
|
|
2,268
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
25,052
|
|
|
25,324
|
|
Less: current portion of long-term debt
|
|
|
(18,658
|
)
|
|
(2,461
|
)
|
|
|
|
|
|
|
Total long-term debt, less current portion
|
|
$
|
6,394
|
|
$
|
22,863
|
|
|
|
|
|
|
|
85
Annual
maturities of long-term debt are as follows (in thousands):
2008
|
|
$
|
18,658
|
2009
|
|
|
2,235
|
2010
|
|
|
1,688
|
2011
|
|
|
1,170
|
2012
|
|
|
963
|
Thereafter
|
|
|
338
|
|
|
|
Total
|
|
$
|
25,052
|
|
|
|
The
State of Wisconsin industrial revenue bonds (IRB) were entered into in 1999 in connection with the construction of Bruker AXS' building in Madison, Wisconsin. Bruker AXS has an
interest rate swap associated with the IRB which is not designated as a hedge. Bruker AXS pays a 4.60% fixed rate of interest and receives a variable rate of interest based on the Securities Industry
and Financial Markets Municipal Swap Index. The contract has a $1.7 million notional value which decreases in conjunction with the IRB payment schedule until the swap and IRB agreements
terminate in December 2013. The fair value of the swap, obtained from dealer quotes, resulted in a loss of $0.1 million during each of the years ended December 31, 2007 and 2006.
Interest payments receivable and payable under the terms of the swap are accrued over the period and are treated as an adjustment to interest expense. The letter of credit is renewable upon mutual
agreement of Bruker AXS and the financial institution. If the letter of credit is not renewed and Bruker AXS is unable to obtain a similar letter of credit with another financial institution, the IRB
may be callable at the option of the bond trustee. The Company's outstanding letter of credit expires in December 2008 and is collateralized by substantially all of the assets of Bruker AXS. The
letter of credit contains various financial and other covenants. As of December 31, 2007, the latest measurement date, the Company was in compliance with the required debt service coverage
ratio associated with the IRB.
The
Company maintains lines of credit at financial institutions in the United States, Germany, Japan and France with an aggregate maximum credit amount of approximately
$121.0 million and $75.3 million at December 31, 2007 and 2006, respectively. As of December 31, 2007 and 2006, the Company had outstanding borrowings of approximately
$13.1 million and $19.4 million, respectively. Taking outstanding letters of credit into consideration, the Company had availability of approximately $94.7 million and
$46.8 million at December 31, 2007 and 2006, respectively. For the line of credit in the United States, the Company issued a demand promissory note to Citizens Bank for
$40 million in July 2006, which was increased to $75 million in September 2007. 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. As of December 31, 2007, $75 million of the United States line of credit was
available. For the lines of credit in Germany, which are unsecured, interest is paid monthly on outstanding borrowings based on the banks' variable interest rates, which were between
4.94%-9.75% at December 31, 2007. For the lines of credit in Japan, the interest rates were between 1.50% and 1.79% at December 31, 2007, and these lines of credit have no
maturity date and are uncollateralized. For the line of credit in France, which is unsecured, interest is paid monthly on outstanding borrowings based on the floating rate used by French institutions
(TMM) of TMM plus 0.75%, which was 4.69% at December 31, 2007.
Interest
expense for the years ended December 31, 2007, 2006 and 2005, was $1.8 million, $2.2 million and $2.1 million, respectively.
86
Note 11Derivative Instruments and Hedging Activities
Interest Rate Risk Management
The Company is party to interest rate swaps and cross currency rate swaps in order to minimize the volatility that changes in interest rates might have on
earnings and cash flows.
In
1999, the Company entered into an interest rate swap arrangement to pay a 4.60% fixed rate of interest and receive a variable rate of interest based on the Securities Industry and
Financial Markets Municipal Swap Index through December 2013. The notional amount of the interest rate swap arrangement was $1.7 million at December 31, 2007 and 2006, respectively.
Effective January 1, 2003, the Company determined that the interest rate swap was no longer an effective hedge as defined by SFAS No. 133 in offsetting the change in interest cash flows
being hedged and, accordingly, the changes in the swap's fair value are being recorded in current earnings in interest and other income (expense), net in the consolidated statements of operations. The
Company obtains third-party verification of fair value at the end of each reporting period. As of December 31, 2007 and 2006, this interest rate swap had a fair value of $(0.1) million and is
recorded in other current liabilities.
In
2002, the Company entered into a cross currency interest rate swap arrangement under which the Company receives semiannual interest payments in EUROs based on a variable interest rate
equal to the six-month EURIBOR rate in exchange for semiannual payments in Swiss francs at a fixed rate of 4.97% through December 2011. The notional amount of this interest rate swap
arrangement was €5.0 million. The instrument was considered a speculative derivative financial instrument, and as such, did not qualify for hedge accounting under SFAS
No. 133. Accordingly, the changes in the fair value of the swap are being recorded in current earnings in interest and other income (expense), net in the consolidated statements of operations.
The Company obtains third-party verification of fair value at the end of each reporting period. As of December 31, 2007 and 2006, this interest rate swap had a fair value of $0.6 million
and $0.2 million, respectively, and was recorded in other current assets.
In
addition, the Company entered into a second interest rate swap arrangement during 2002 that reduced the 6-month EURIBOR rate by 1.80% through January 2007. The notional
amount of this interest rate swap arrangement was €3.0 million. The instrument was also considered a speculative derivative financial instrument, and as such, did not qualify
for hedge accounting under SFAS No. 133. As of December 31, 2006, this interest rate swap had a fair value of less than $(0.1) million.
Foreign Exchange Rate Risk Management
The Company generates a substantial portion of its revenues and expenses in international markets, principally Europe and Japan, which subjects its operations to
the exposure of exchange rate fluctuations. The impact of currency exchange rate movement can be positive or negative in any period. The Company, from time to time, has entered into foreign exchange
rate contracts in order to minimize the volatility that fluctuations in currency exchange rates will have on the Company's cash flows related to purchases and sales denominated in foreign currencies.
At
December 31, 2007 and 2006, the Company had option and forward currency exchange contracts, with notional amounts aggregating $15.0 million and $14.4 million,
respectively. The contracts involved the purchase of EURO currency at fixed U.S. dollar amounts on specified dates and had maturities of less than twelve months. The notional amounts of the contracts
are intended to hedge receivables in U.S. dollars. However, these transactions do not qualify for hedge accounting under SFAS No. 133. Accordingly, the instruments are
marked-to-market with the corresponding gains and losses recorded in other income (expense), net in the consolidated statements of operations. The Company obtains third-party
verification of fair value at the end of each reporting period. As of December 31, 2007 and 2006, the currency exchange contracts had a fair value of less than $0.1 million and
$1.0 million, respectively, and are recorded in other current assets.
87
Note 12Income Taxes
The domestic and foreign components of income (loss) before income taxes are as follows for the years ended December 31, (in thousands):
|
|
2007
|
|
2006
|
|
2005
|
|
Domestic
|
|
$
|
(2,103
|
)
|
$
|
(5,712
|
)
|
$
|
(5,850
|
)
|
Foreign
|
|
|
50,715
|
|
|
40,132
|
|
|
27,492
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,612
|
|
$
|
34,420
|
|
$
|
21,642
|
|
|
|
|
|
|
|
|
|
The
components of the income tax provision are as follows for the years ended December 31, (in thousands):
|
|
2007
|
|
2006
|
|
2005
|
|
Current income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
$
|
(656
|
)
|
$
|
130
|
|
|
State
|
|
|
488
|
|
|
350
|
|
|
81
|
|
|
Foreign
|
|
|
18,325
|
|
|
14,825
|
|
|
12,959
|
|
|
|
|
|
|
|
|
|
|
|
Total current income tax expense
|
|
|
18,813
|
|
|
14,519
|
|
|
13,170
|
|
Deferred income tax (benefit) expense
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
83
|
|
|
(316
|
)
|
|
State
|
|
|
|
|
|
14
|
|
|
(93
|
)
|
|
Foreign
|
|
|
(2,029
|
)
|
|
1,315
|
|
|
(906
|
)
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(2,029
|
)
|
|
1,412
|
|
|
(1,315
|
)
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
16,784
|
|
$
|
15,931
|
|
$
|
11,855
|
|
|
|
|
|
|
|
|
|
A
reconciliation of the United States federal statutory tax rate to the effective income tax rate is as follows for the years ended December 31:
|
|
2007
|
|
2006
|
|
2005
|
|
Statutory tax rate
|
|
34.0
|
%
|
34.0
|
%
|
34.0
|
%
|
Tax contingencies
|
|
2.3
|
|
|
|
0.5
|
|
State income taxes, net of federal benefit
|
|
0.7
|
|
0.6
|
|
(0.3
|
)
|
Change in German tax rate
|
|
(7.6
|
)
|
|
|
|
|
Foreign tax rate differential
|
|
(0.1
|
)
|
10.3
|
|
6.2
|
|
Foreign subsidiary dividends
|
|
|
|
1.8
|
|
3.6
|
|
Research and development credits
|
|
|
|
(4.5
|
)
|
(3.9
|
)
|
Other
|
|
(0.3
|
)
|
0.8
|
|
0.3
|
|
|
|
|
|
|
|
|
|
Effective tax rate before valuation allowance
|
|
29.0
|
|
43.0
|
|
40.4
|
|
Change in valuation allowance for unbenefited losses
|
|
5.5
|
|
3.3
|
|
14.4
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
34.5
|
%
|
46.3
|
%
|
54.8
|
%
|
|
|
|
|
|
|
|
|
88
The
tax effects of temporary items that give rise to significant portions of the deferred tax assets and liabilities are as follows as of December 31, (in thousands):
|
|
2007
|
|
2006
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
|
|
$
|
277
|
|
|
Inventory
|
|
|
6,328
|
|
|
5,802
|
|
|
Compensation
|
|
|
1,860
|
|
|
2,002
|
|
|
Investments
|
|
|
9,104
|
|
|
1,467
|
|
|
Warranty reserve
|
|
|
1,434
|
|
|
1,135
|
|
|
Purchase accounting intangibles
|
|
|
216
|
|
|
|
|
|
R&D and other tax credit carryforwards
|
|
|
11,056
|
|
|
13,511
|
|
|
Net operating loss carryforwards
|
|
|
7,931
|
|
|
4,611
|
|
|
Capital loss carryforwards
|
|
|
3,652
|
|
|
5,300
|
|
|
Accrued expenses
|
|
|
1,448
|
|
|
117
|
|
|
Other
|
|
|
4,661
|
|
|
1,907
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
47,690
|
|
|
36,129
|
|
|
Less valuation allowance
|
|
|
(34,000
|
)
|
|
(28,095
|
)
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
13,690
|
|
|
8,034
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Foreign statutory reserves
|
|
|
(9,852
|
)
|
|
(12,304
|
)
|
|
Excess tax over book depreciation
|
|
|
(2,787
|
)
|
|
(3,234
|
)
|
|
Purchase accounting intangibles
|
|
|
|
|
|
(450
|
)
|
|
Accounts receivable
|
|
|
(570
|
)
|
|
|
|
|
Inventory
|
|
|
(2,303
|
)
|
|
|
|
|
Other
|
|
|
(1,125
|
)
|
|
(1,763
|
)
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(16,637
|
)
|
|
(17,751
|
)
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(2,947
|
)
|
$
|
(9,717
|
)
|
|
|
|
|
|
|
The
valuation allowance was determined in accordance with the provision of SFAS No. 109, which requires an assessment of both positive and negative evidence when determining
whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. The Company fully reserved all
U.S. net deferred tax assets, which are predominantly net operating losses and tax credit carryforwards. Cumulative losses incurred in the U.S. jurisdiction as of December 31, 2005, 2006 and
2007, represented sufficient negative evidence to record a valuation allowance under SFAS No. 109. The Company intends to maintain a full valuation allowance until sufficient positive evidence
exists to support the reversal of the valuation allowance.
As
of December 31, 2007, the Company has approximately $18.9 million of U.S. net operating loss carryforward available to reduce future taxable income; which expire at
various times through the year 2027. The Company claimed a capital loss on their 2006 U.S. tax return of approximately $9.1 million which can be carried forward 5 years. The Company also
has tax credits of approximately $11.1 million available to offset future tax liabilities that expire at various dates. These credits include foreign tax credits of $8.0 million expiring
in year 2017 and research and development tax credits of $3.1 million expiring in year 2025. These operating losses and tax credit carryforward may be subject to limitations under provisions of
the Internal Revenue Code.
On
August 14, 2007, the German Business Tax Reform 2008 was signed by the Federal President and the legislative process was finalized on August 17, 2007, with the official
publication of the law. This new legislation changes the German Federal Corporate Tax Rate from 25% to 15%. In addition,
89
German
Trade Tax is no longer deductible from the Corporate Income Tax. This law change, due to the benefit of revaluing our deferred tax assets and liabilities, reduced the Company's effective tax
rate by 7.6%
The
Company has permanently reinvested the earnings of its subsidiaries in the cumulative amount of approximately $104.8 million as of December 31, 2007, and has not
provided for U.S. income taxes that could result from the distribution of these earnings to the U.S. parent. If these earnings were ultimately distributed to the U.S. in the form of dividends or
otherwise, or if the shares of the subsidiaries were sold or transferred, the Company would likely be subject to additional U.S. income taxes, net of the impact of any available foreign tax credits.
It is not practical to estimate the amount of unrecognized deferred U.S. income taxes on these undistributed earnings.
The
Company has unrecognized tax benefits of approximately $7.3 million as of December 31, 2007, of which $3.1 million, if recognized, would result in a reduction of
the Company's effective tax rate. As of December 31, 2007, the Company does not expect any material changes to unrecognized tax positions within the next twelve months. A tabular reconciliation
of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Gross unrecognized tax benefits at January 1, 2007
|
|
$
|
5,741
|
|
|
Gross increasestax positions in prior periods
|
|
|
|
|
|
Gross decreasestax positions in prior periods
|
|
|
|
|
|
Gross increasescurrent period tax positions
|
|
|
1,519
|
|
|
Settlements
|
|
|
|
|
|
Lapse of statute of limitations
|
|
|
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits at December 31, 2007
|
|
$
|
7,260
|
|
|
|
|
|
|
|
The
Company recognizes penalties and interest related to unrecognized tax benefits in the provision for income taxes. As of December 31, 2007, we had approximately
$0.6 million of accrued interest related to uncertain tax positions included in the liability on the consolidated balance sheet, of which $0.2 million was recorded during the twelve
months ended December 31, 2007.
The
Company considers its significant tax jurisdictions to include Germany and the United States. The tax years 2003 to 2007 are open tax years in these major taxing jurisdictions. The
Company files returns in many foreign and state jurisdictions with varying statutes of limitations.
On
October 22, 2004, the American Jobs Creation Act (AJCA) was signed into law and includes a deduction of 85% of certain foreign earnings that are repatriated, as defined in the
AJCA. Bruker Optics repatriated approximately $1.2 million in 2005 and recognized a related tax expense of $0.1 million in 2005.
The
Company acquired $1.4 million of net operating losses with its acquisition of Roentec in 2005. A full valuation allowance was provided for in the purchase price allocation as
the utilization of the net operating loss could not be assured. If this tax benefit is subsequently realized, it will be recorded as an adjustment to goodwill.
Note 13Employee Benefit Plans
The Company maintains or sponsors various defined contribution plans and a defined benefit retirement plan that cover certain domestic and international
employees. The Company may make contributions to these plans at its discretion. Retirement benefits earned are generally based on years of service and compensation during active employment.
Eligibility is generally determined in accordance with local statutory requirements. However, the level of benefits and terms of vesting may vary among plans. The Company contributed approximately
$1.6 million, $1.6 million and $1.3 million to such plans in 2007, 2006 and 2005, respectively.
90
Substantially
all of the Bruker AXS GmbH employees, who were employed by the Company on September 30, 1997, participate in a defined benefit pension plan. The plan provides
pension benefits based upon average salary and years of service. The Company has elected to recognize the impact on the projected benefit obligation when actual experience differs from actuarial
assumptions on an
immediate basis. The Company did not recognize any actuarial losses (gains) during the years ended December 31, 2007, 2006 and 2005, respectively.
The
changes in benefit obligations and plan assets under the defined benefit pension plans, accumulated benefit obligations and funded status of the plan were as follows at
December 31, (in thousands):
|
|
2007
|
|
2006
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
11,116
|
|
$
|
8,689
|
|
Service cost
|
|
|
983
|
|
|
686
|
|
Interest cost
|
|
|
517
|
|
|
381
|
|
Benefits paid
|
|
|
(144
|
)
|
|
(116
|
)
|
Actuarial loss (gain)
|
|
|
(760
|
)
|
|
370
|
|
Currency translation adjustment and other
|
|
|
1,221
|
|
|
1,106
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
12,933
|
|
|
11,116
|
|
Change in plan assets
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
|
|
|
|
|
Employer contribution
|
|
|
144
|
|
|
116
|
|
Benefits paid
|
|
|
(144
|
)
|
|
(116
|
)
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(12,933
|
)
|
$
|
(11,116
|
)
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
(12,637
|
)
|
$
|
(10,926
|
)
|
|
|
|
|
|
|
Weighted-average
assumptions used to determine the projected benefit obligations for the years ended December 31, 2007, 2006 and 2005, are as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
Discount rate
|
|
5.50
|
%
|
4.50
|
%
|
4.25
|
%
|
Expected return on assets
|
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
Rate of compensation increase
|
|
4.00
|
%
|
2.50
|
%
|
2.50
|
%
|
The
net periodic pension benefit cost includes the following components for the years ended December 31, 2007, 2006 and 2005, (in thousands):
|
|
2007
|
|
2006
|
|
2005
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
983
|
|
$
|
686
|
|
$
|
632
|
|
Interest cost
|
|
|
517
|
|
|
381
|
|
|
381
|
|
Amortization
|
|
|
(17
|
)
|
|
(15
|
)
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
1,483
|
|
$
|
1,052
|
|
$
|
998
|
|
|
|
|
|
|
|
|
|
91
To
date, the Company has not funded the plan and is not required to make contributions during 2008. The Company expects to pay the following in benefits under the plan (in thousands):
2008
|
|
$
|
155
|
2009
|
|
|
276
|
2010
|
|
|
427
|
2011
|
|
|
653
|
2012
|
|
|
651
|
Thereafter
|
|
|
10,771
|
|
|
|
Total
|
|
$
|
12,933
|
|
|
|
Note 14Commitments and Contingencies
Operating Leases
Certain vehicles, office equipment and buildings are leased under agreements that are accounted for as operating leases. Total rental expense under operating
leases was $4.6 million, $3.2 million and $2.6 million during the years ended December 31, 2007, 2006 and 2005, respectively. Future minimum lease payments under
non-cancelable operating leases at December 31, 2007, for each of the next five years and thereafter are as follows (in thousands):
2008
|
|
$
|
4,902
|
2009
|
|
|
4,604
|
2010
|
|
|
3,670
|
2011
|
|
|
3,441
|
2012
|
|
|
3,465
|
Thereafter
|
|
|
1,284
|
|
|
|
Total minimum lease payments
|
|
$
|
21,366
|
|
|
|
License Agreements
The Company has entered into license agreements allowing it to utilize certain patents. If these patents are used in connection with a commercial product sale,
the Company pays royalties ranging from 0.15% to 5.00% on the related product revenues. Licensing fees for the years ended December 31, 2007, 2006 and 2005, were approximately
$1.2 million, $1.6 million and $1.0 million, respectively.
Grants
The Company's indirect subsidiary, Bruker Daltonik GmbH, is the recipient of grants from German government authorities. The grants were made in connection
with the Company's development of specific spectrometers and components of spectrometers. Total grants awarded to date amount to $10.6 million and the agreements under which these grants were
awarded expire in 2008. Amounts received under these grants during 2007, 2006 and 2005, totaled $0.6 million, $0.7 million and $2.0 million, respectively, and are classified in
other revenue. Total expenditures related to these grants were approximately $1.5 million, $2.1 million and $3.9 million in 2007, 2006 and 2005, respectively.
The
Company's wholly-owned direct subsidiary, Bruker Daltonics Inc., is the recipient of a grant from an agency of the United States government. The grant was made in direct
connection with the Company's development of a standalone monitor for chemical agents. Total grants awarded to date amount to $1.0 million and the agreement under which this grant was awarded
has been extended to 2010. Amounts received under this grant during 2007, 2006 and 2005, totaled $0.1 million, $0.4 million
92
and
$0.5 million, respectively, and are classified as other revenue. Total expenditures related to this grant approximate grant revenues received.
The
Company's wholly-owned indirect subsidiary, Bruker Optik GmbH, is the recipient of certain grants from the German government. The grants were made in connection with the
Company's development of specific advanced vibrational spectroscopy equipment. Total awards granted to date total $1.7 million. Amounts received under these grants during 2007, 2006 and 2005,
totaled $0.2 million, $0.1 million and $0.3 million, respectively, and are classified in other revenue. Total expenditures related to these grants approximated the grant revenues
received.
Legal
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. As of December 31, 2007 and 2006, no accruals have been
recorded for such potential contingencies.
Letters of Credit and Guarantees
At December 31, 2007 and 2006, the Company had bank guarantees of $13.2 million and $9.1 million, respectively, for its customer advances.
These guarantees affect the availability of its lines of credit.
Indemnifications
The Company enters into standard indemnification arrangements in the Company's ordinary course of business. Pursuant to these arrangements, the Company
indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, generally our business partners or customers, in connection with
any patent, or any copyright or other intellectual property infringement claim by any third party with respect to our products. The term of these indemnification agreements is generally perpetual
anytime after the execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these agreements is unlimited. The Company has never incurred
costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal.
The
Company has entered into indemnification agreements with its directors and officers that may require the Company to: indemnify its directors and officers against liabilities that may
arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of a culpable nature; advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified; and obtain directors' and officers' insurance if available on reasonable terms, which the Company currently has in place.
Note 15Shareholders' Equity
Public Offerings of Common Stock
On February 12, 2007, the Company and a group of selling stockholders completed a public offering of 11,960,000 shares of its common stock, of which
2,530,000 were sold by the Company and 9,430,000 were sold by four selling stockholders, at $7.10 per share, generating net proceeds of approximately $16.9 million to the Company and
approximately $63.2 million to the selling stockholders, in the aggregate.
93
Issuance of Restricted Stock
In November 2007, the Company issued 8,753 shares of restricted stock in connection with the acquisition of certain assets of Micron. The restrictions are time
based and will expire after 90 days.
In
June 2007, the Company issued 29,740 shares of restricted stock in connection with the acquisition of Analys-Konsult. The restrictions are time based and will expire ratably as the
shares vest over a period of three years.
In
September 2006, the Company issued 202,223 shares of restricted stock in connection with the acquisition of Quantron. The restrictions are time based and will expire ratably as the
shares vest over a period of three years.
In
January 2006, the Company issued 267,302 shares of restricted stock in connection with the acquisition of Socabim SAS. The restrictions are time based and will expire ratably as the
shares vest over a period of three years.
In
November 2005, the Company issued 209,271 shares of restricted stock in connection with the acquisition of Roentec AG. The restrictions are time based and will expire ratably as the
shares vest over a period of three years.
Restricted
shares of the Company's common stock are periodically awarded to executive officers, directors and certain key employees of the Company under the Company's Amended and
Restated 2000 Stock Option Plan. See the section "Stock Plans" for information about restricted stock awarded during the year ended December 31, 2007.
Blank Check Preferred Stock
As of December 31, 2007, 5,000,000 shares of Blank Check Preferred Stock with a stated par value of $0.01 per share have been authorized, none of which
have been issued.
Dividends
The terms of some of the Company's indebtedness restrict its ability to pay dividends to its shareholders.
Stock Plans
In 2000, the Board of Directors adopted and the stockholders approved the 2000 Stock Option Plan. The 2000 Stock Option Plan provides 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 (the "Committee") to grant incentive stock options,
non-qualified 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 rewards, 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 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.
94
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 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 years ended December 31, 2007 and 2006:
|
|
Shares Subject to Restriction
|
|
Weighted Average Grant Date Fair Value
|
Outstanding at December 31, 2005
|
|
|
|
$
|
|
|
Granted
|
|
632,900
|
|
|
5.28
|
|
Vested
|
|
|
|
|
|
|
Forfeited
|
|
(4,700
|
)
|
|
5.00
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
628,200
|
|
$
|
5.29
|
|
Granted
|
|
81,352
|
|
|
8.68
|
|
Vested
|
|
(130,480
|
)
|
|
5.34
|
|
Forfeited
|
|
(9,670
|
)
|
|
6.60
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
569,402
|
|
$
|
5.74
|
|
|
|
|
|
Unrecognized
pre-tax expense of $2.4 million related to restricted stock awards is expected to be recognized over the weighted average remaining service period of 3.4 years
for awards outstanding at December 31, 2007.
Stock
option activity for the years ended December 31, 2007, 2006 and 2005, was as follows:
|
|
Shares Subject to Options
|
|
Weighted Average Option Price
|
|
Weighted Average Remaining Contractual Term (Yrs)
|
|
Aggregate Intrinsic Value
($'s in 000's)
|
Outstanding, December 31, 2004
|
|
3,779,245
|
|
$
|
6.39
|
|
|
|
|
|
|
Granted
|
|
18,250
|
|
|
3.83
|
|
|
|
|
|
|
Exercised
|
|
(124,121
|
)
|
|
3.04
|
|
|
|
|
|
|
Forfeited
|
|
(96,506
|
)
|
|
6.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2005
|
|
3,576,868
|
|
|
6.43
|
|
|
|
|
|
|
Granted
|
|
696,250
|
|
|
5.23
|
|
|
|
|
|
|
Exercised
|
|
(290,224
|
)
|
|
4.57
|
|
|
|
|
|
|
Forfeited
|
|
(311,469
|
)
|
|
7.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2006
|
|
3,671,425
|
|
|
6.25
|
|
|
|
|
|
|
Granted
|
|
1,308,679
|
|
|
8.06
|
|
|
|
|
|
|
Exercised
|
|
(501,051
|
)
|
|
5.10
|
|
|
|
|
|
|
Forfeited
|
|
(55,341
|
)
|
|
10.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2007
|
|
4,423,712
|
|
$
|
6.87
|
|
4.6
|
|
$
|
29,216
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
2,511,174
|
|
$
|
6.78
|
|
4.0
|
|
$
|
17,135
|
|
|
|
|
|
|
|
|
|
95
The
following table summarizes information about stock options outstanding and exercisable at December 31, 2007: