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

FORM 10-Q

Commission File Number 000-30833

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

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

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

        As of August 9, 2004, there were 89,463,924 shares of the Registrant's common stock outstanding.

Bruker BioSciences Corporation
Form 10-Q
For the Quarter Ended June 30, 2004
Index

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PART I FINANCIAL INFORMATION

ITEM 1: Financial Statements

Bruker BioSciences Corporation

Condensed Consolidated Balance Sheets

(in thousands, except share data)

See the accompanying notes to financial statements.

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Bruker BioSciences Corporation

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)

See the accompanying notes to financial statements.

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Bruker BioSciences Corporation

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

See the accompanying notes to financial statements.

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Bruker BioSciences Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Description of Business

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

        On July 1, 2003, the Company merged with Bruker AXS Inc. (Bruker AXS), with the Company surviving the merger. The consolidated financial statements and share data for the three and six months ended June 30, 2003 include the retroactive effects of the merger with Bruker AXS. The consolidated financial statements have been restated by combining the historical consolidated financial statements of Bruker BioSciences Corporation with those of Bruker AXS for each of the periods presented. In connection with the merger, the Company formed two operating subsidiaries, Bruker Daltonics Inc. (Bruker Daltonics) and Bruker AXS, into which it transferred substantially all of the respective assets and liabilities, except cash and cash equivalents, which remained with the parent company, Bruker BioSciences Corporation. Bruker Daltonics and Bruker AXS are reportable segments of the Company. Included in the consolidated statements of operations for the three and six months ended June 30, 2003 are charges totaling $3.0 million and $6.2 million, respectively, of investment banking, legal, audit and other fees associated with the merger.

        The financial statements represent the consolidated accounts of Bruker BioSciences Corporation and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements as of and for the three and six months ended June 30, 2004 and 2003 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with Article 10 of Regulation S-X. The December 31, 2003 balance sheet is the balance sheet included in the audited financial statements as shown in the Company's 2003 Annual Report on Form 10-K. Accordingly, the financial information presented herein does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of the results to be expected for the full year.

        During the second quarter of 2004, the Company reclassified certain costs within sales and marketing expense to cost of product revenue to conform to the Company's global accounting policy for such costs. For the three months ended June 30, 2004 and 2003, $0.9 million and $0.9 million, respectively, in costs were reclassified. For the six months ended June 30, 2004 and 2003, $2.5 million and $1.5 million, respectively, in costs were reclassified.

        For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.

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2. Public Offering of Common Stock

        On April 28, 2004, the Company and a group of selling stockholders completed a public offering of 17,250,000 shares of its common stock, of which 3,450,000, including 457,200 shares of treasury stock, were sold by the Company and 13,800,000 were sold by four selling stockholders, at $4.50 per share, generating net proceeds of approximately $14.5 million to the Company and approximately $58.2 million to the selling stockholders, in the aggregate.

3. Mergers and Acquisitions

Bruker AXS Inc. Merger

        On April 4, 2003, the Company and Bruker AXS entered into a definitive merger agreement pursuant to which the Company acquired all of the outstanding shares of Bruker AXS. The merger was intended to form a leading tools supplier for life science and materials research, with an emphasis on advancing proteomics. The agreement was signed following the unanimous approval of the Board of Directors of each company as well as the unanimous recommendations of independent Special Committees of both companies' boards.

        On June 27, 2003, the merger was approved by shareholders of both Bruker AXS and the Company and the official closing of the merger occurred on July 1, 2003. Upon closing of the merger, each outstanding share of common stock of Bruker AXS was converted into the right to receive, at the election of the holder, either 0.63 of a share of the Company's common stock or consideration intended to be of substantially equivalent value, payable 75% in the Company's common stock and 25% in cash.

        The merger represents 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 merger, as it relates to the shares owned by these affiliated shareholders (approximately 69%), 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 31%) 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 goodwill.

        The fair value of the consideration paid for the acquisition of the minority interest was approximately $38.1 million, including cash of $5.4 million, common stock valued at $28.5 million, stock options valued at $3.0 million and merger transaction costs of $1.2 million. The value of the 9.66 million shares of common stock issued to non-affiliated shareholders in connection with the merger was determined using the closing market price of Bruker Daltonics' stock on the date the terms of the merger were agreed to and announced. The fair value of each stock option issued was determined using the Black-Scholes option-pricing model.

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        The Company engaged a third party valuation firm to independently appraise the fair value of certain assets acquired. The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition of the minority interest (dollars in thousands):

        The purchase price for the 31% minority interest acquired has been allocated to the net assets acquired on a pro rata basis in accordance with Financial Accounting Standards Board (FASB) Statement No. 141, "Business Combinations." Accordingly, intangible assets acquired were allocated as follows: $1.5 million to existing technology and related patents which have an estimated weighted-average useful life of four years, $0.3 million to customer relationships which have a weighted-average useful life of five years and $0.3 million to trade names which have a weighted-average useful life of ten years. In addition, $2.5 million of acquired intangible assets was assigned to in-process research and development projects that were 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 qualify as acquired in-process research and development projects represent those that have 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 determined using a discounted probable future cash flow analysis. Financial assumptions used to estimate the future cash flows were based on pricing, margins and expense levels from those historically realized by Bruker AXS. A discount rate of 45% was utilized to discount the net cash flows generated from the acquired in-process research and development. The estimates used in valuing the acquired in-process research and development were based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. As of June 30, 2004, these projects were substantially complete.

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        The $10.7 million of goodwill acquired from Bruker AXS in connection with the merger was assigned to the Company's Bruker AXS subsidiary, a reportable operating segment, and will not be deductible for tax purposes since the merger was a tax-free merger.

        In conjunction with the merger, the Company formulated a plan to consolidate production and exit certain activities in its life science X-ray business. The production capacity for the life science X-ray systems produced at the Bruker Nonius facility in Delft, Netherlands, has been outsourced or absorbed within other facilities throughout the Company. As a result of these restructuring activities, upon closing of the merger the Company recorded approximately $2.2 million in purchase accounting liabilities and reserves. Approximately, $1.5 million, or 69%, of the purchase accounting liabilities and reserves were charged to operations and the remaining $0.7 million, or 31%, was included in the allocation of the purchase price as goodwill. The purchase accounting liabilities and reserves included $0.8 million of severance costs for approximately 19 employees, $1.0 million as a reserve for inventory that will no longer be used in production, and $0.4 million of costs to upgrade X-ray systems that will no longer be produced and other miscellaneous restructuring costs.

        Charges against the purchase accounting liabilities and reserves recorded in connection with these activities during the six months ended June 30, 2004 were as follows (in thousands):

        In addition, upon closing the merger the Company wrote-off the remaining balance of goodwill of $1.5 million and trade names and trademarks of $0.2 million associated with the Bruker Nonius entity. Approximately, $1.2 million, or 69%, of the write-off of goodwill and trade names and trademarks was charged to operations upon closing of the merger and the remaining $0.5 million, or 31%, was included in the allocation of the purchase price as goodwill.

Baltic Scientific Instruments Ltd. Acquisition

        On April 2, 2003, Bruker AXS acquired 51% of the outstanding common shares of Baltic Scientific Instruments Ltd. ("BSI"), a Riga, Latvia-based company. BSI focuses on solid state X-ray detector technology for materials research and elemental composition and was a supplier to Bruker AXS since 2001. The BSI acquisition provided the Company with the opportunity to explore additional research and development projects. The aggregate purchase price for BSI was approximately $0.3 million and was funded with cash on hand for total assets acquired of $0.9 million and total liabilities assumed of $0.6 million. In May 2003, BSI issued additional shares to Bruker AXS which increased the Company's

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ownership to 75.5%. BSI's minority shareholders did not receive additional shares in May 2003. The results of BSI have been included in the Bruker AXS segment from the date of acquisition.

        Pro forma information to reflect the BSI acquisition has not been presented as the impact on net sales and net loss and net loss per common share would not have been material.

4. Inventories

        The following is a summary of inventories by major category (in thousands):

5. Goodwill and Other Intangible Assets

        The following is a summary of other intangible assets subject to amortization as of June 30, 2004 and December 31, 2003 (in thousands):

        For the three and six months ended June 30, 2004, the Company recorded amortization expense of approximately $0.1 million and $0.2 million, respectively, related to other amortizable intangible assets. For the three and six months ended June 30, 2003, no amortization expense was recorded as these assets relate to the merger with Bruker AXS (Note 3) which closed on July 1, 2003.

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

(a)

Amount represents estimated amortization expense for the remaining six months ending December 31, 2004.

        The carrying amount of goodwill as of June 30, 2004 and December 31, 2003 was $10.7 million and is included in the Bruker AXS segment.

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 customer's 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 six months ended June 30, 2004 were as follows (in thousands):

7. Provision for Income Taxes

        For the three and six months ended June 30, 2004, the Company recorded an income tax benefit of $1.6 million and $0.6 million, respectively, compared with an income tax benefit of $0.6 million for the three months ended June 30, 2003 and an income tax expense of $0.3 million for the six months ended June 30, 2003. In the U.S., 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

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the valuation allowance which was established in the third quarter of 2003. Prior to the third quarter of 2003, the Company had recorded income tax benefits for pre-tax losses in the U.S.

        During the second quarter of 2004, the Company completed the transfer of certain proprietary technologies, equipment and inventories between the Bruker Daltonics German and Swiss subsidiaries, resulting in an income tax benefit of approximately $1.1 million. The income tax benefit resulted from the release of a valuation allowance previously established in the Bruker Daltonics Swiss subsidiary, and the effect on deferred tax assets for the different statutory income tax rates between Germany and Switzerland.

8. Restructuring Charges

Bruker BioSciences 2003 Restructuring Plan

        See Note 3 "Mergers and Acquisitions" for a description of the Company's restructuring activities undertaken as a result of the merger with Bruker AXS.

Bruker AXS 2002 Restructuring Plan

        In September 2002, Bruker AXS implemented a restructuring program focused on reducing costs and improving productivity by eliminating redundant positions, streamlining production and initiating cost reduction programs in several operating areas. As a result, the Company recorded a restructuring charge of approximately $1.8 million ($1.1 million, net of tax) in the third quarter of 2002. During the six months ended June 30, 2004, there were no payments under the restructuring program. As of June 30, 2004, the remaining restructuring accrual balance of approximately $0.5 million relates to severance benefits of certain of the Company's terminated German employees, which due to the impact of certain regulatory requirements, will not be fully paid until 2008.

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 on September 30, 1997. The plan provides pension benefits based upon final average salary and years of service.

        The net periodic pension benefit cost includes the following components during the three and six months ended June 30, 2004 and 2003 (in thousands):

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        To date, the Company has not funded the defined benefit plan and is not required to make contributions during the remainder of 2004.

10. Stock Compensation Arrangements

        The Company measures compensation expense for its stock-based employee compensation plans using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation." The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure", an amendment of FASB Statement No. 123 (SFAS 148). Had compensation expense for the Company's stock option plans been determined based on the fair value at the grant date, consistent with the methodology prescribed by SFAS 148, the Company's net loss and net loss per common share for the three and six months ended June 30, 2004 and 2003 would have approximated the following pro forma amounts (in thousands, except per share data):

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

11. 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 six months ended June 30, 2004 and 2003 (in thousands):

(a)

Stock options to purchase shares of common stock for all periods presented were anti-dilutive and were excluded in the computation of diluted earnings per share due to losses generated during each of the periods.

12. Interest and Other Income (Expense), Net

        The components of interest and other income (expense), net, were as follows for the three and six months ended June 30, 2004 and 2003 (in thousands):

13. Comprehensive Income (Loss)

        Comprehensive income (loss) refers to revenues, expenses, gains and losses that under accounting principles generally accepted in the United States of America are included in other comprehensive income (loss), but excluded from net income (loss) as these amounts are recorded directly as an

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adjustment to stockholders' equity, net of tax. The following is a summary of comprehensive income (loss) for the three and six months ended June 30, 2004 and 2003 (in thousands):

14. Commitments and Contingencies

        The Company incurred a special charge during the fourth quarter of 2002 in connection with a contract its German and Swiss subsidiaries have with the U.K. Ministry of Defense (the "MOD"). The special charge consisted of an additional reserve in the amount of $0.7 million, which represented the projected additional costs for rework and retesting on the contract due to various technical problems associated with meeting contractual requirements. The Company previously incurred a charge on this contract in the fourth quarter of 2000, as the Company was required to make considerable design changes to the product at that time, and this increased the cost of contract performance.

        In addition, during the third quarter of 2001, the Company established a reserve of $1.7 million for liquidated damages pursuant to this contract with the MOD. During the second quarter of 2003, the Company's German and Swiss subsidiaries delivered product to the MOD which met the specifications of the contract. Upon delivery of the product, the Company reached an understanding with the MOD such that the MOD would not pursue any further claims for liquidated damages, other than those previously paid pursuant to the contract, and that the Company would not pursue any claims for the recovery of additional research and development expenses incurred in connection with the contract. As a result, the remaining reserves associated with the MOD contract in the amount of $1.9 million were reversed during the second quarter of 2003.

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

Letters of Credit and Guarantees

        As of June 30, 2004 and December 31, 2003, the Company had bank guarantees of $4.5 million and $8.2 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. The Company reports financial

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results on the basis of two reportable segments: Bruker Daltonics and Bruker AXS. Bruker Daltonics manufactures and distributes mass spectrometry instruments that can be integrated and used along with other analytical instruments. Bruker AXS manufactures and distributes advanced X-ray instrumentation used in non-destructive molecular and elemental analysis in academic, research and industrial applications. Bruker BioSciences Corporation, the parent company of Bruker Daltonics and Bruker AXS, is the corporate entity whose activities principally consist of investing excess cash and short-term investments and managing certain public company costs.

        Selected reportable segment financial information for the three and six months ended June 30, 2004 and 2003 is presented below (in thousands):

16. Recent Accounting Pronouncements

        In December 2003, the FASB issued Statement of Financial Accounting Standards No. 132 (Revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits," ("SFAS 132(R)"). SFAS 132(R) requires additional disclosures relating to the description of the types of plan assets, investment strategy, measurement dates, plan obligations, cash flows, and components of net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans recognized during interim periods. These disclosure requirements are effective immediately and have been provided in this quarterly report on Form 10-Q.

        In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Initially, FIN 46 was to be effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 initially were to be applied for the first interim or annual period beginning after June 15, 2003. However, in October 2003, the FASB deferred the effective date of FIN 46 to the end of the first interim or annual period ending after December 15, 2003 for those arrangements involving special purpose entities entered into prior to February 1, 2003. All other arrangements within the scope of FIN 46 are subject to its provisions beginning in 2004. The Company adopted FIN 46, as required, with no material impact to its consolidated financial position or results of operations.

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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, 2003.

        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, 2003.

OVERVIEW

Bruker BioSciences

        We are the parent company of Bruker Daltonics Inc. (Bruker Daltonics) and Bruker AXS Inc. (Bruker AXS). In July 2003, we merged with Bruker AXS, a company under common control, and we were the surviving corporation in that merger. The consolidated financial statements have been restated by combining the historical consolidated financial statements of Bruker BioSciences Corporation with those of Bruker AXS for all periods presented. Bruker Daltonics is a leading developer and provider of innovative life science tools based on mass spectrometry. Bruker AXS is a leading developer and provider of life science and advanced materials research tools based on X-ray technology. We maintain major technical centers in Europe, North America and Japan and our diverse customer base includes pharmaceutical, biotechnology and proteomics companies, academic institutions, semiconductor industries and government agencies. Our business strategy includes focusing on innovative product and solution development, while continuing to expand our global distribution and customer support capabilities.

        As a result of significant new product introductions during the first half of 2004, we recently began experiencing a lengthening in the time from order booking to customer acceptance, which has caused our order bookings growth to outpace revenue growth. In addition, the mix of new orders in the first half of 2004 delayed the conversion of these orders into revenue as an increasing amount of these order bookings were for product lines with longer lead times. During the second quarter of 2004, we were also impacted by unforeseen customer site preparation delays and order bookings activity weighted toward the end of the second quarter, which did not allow us to deliver and install certain products before quarter end. The combination of these factors impacted our top and bottom-line performance and resulted in lower gross margins from under-utilization of production capacity and additional quality costs related to our new product introductions, as well as higher sales and marketing costs from additional commissions on the increased order bookings. In the first half of 2004, new order bookings grew more than 15% when compared to the first half of 2003. In addition, as of June 30, 2004, our backlog increased more than 20% when compared to June 30, 2003. We believe that as these new order bookings are converted into revenues, gross margins will improve as production capacity becomes more fully utilized, operating margins will improve due to gross margin improvements and fixed-cost leverage, and operating cash flows should improve resulting in increased financial flexibility.

Bruker Daltonics

        The performance of our Bruker Daltonics business is driven by its product lines in life-science mass spectrometry and NBC detection. Our most significant revenue growth drivers during the six

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months ended June 30, 2004 were within our FTMS and NBC product lines. Bruker Daltonics also experienced favorable customer reception for our new benchtop ESI-TOF system, as well as for our ClinProt™ solution for biomarker discovery and clinical proteomics. However, revenue growth during the second quarter was partially offset by delays in shipments and installations of new products including the Apex QE FTMS and HCTplus ion trap. Further, new order bookings have been weighted toward longer lead time products such as FTMS and NBC detection systems. These units take one to two quarters longer to reach revenue recognition than a typical MALDI-TOF or ion trap mass spec system. These factors may impact revenue growth in subsequent quarters.

Bruker AXS

        The analytical X-Ray performance of the Bruker AXS business is driven by its product lines in SCD, XRD, XRF as well as thermal analyzers. During 2003 and the first half of 2004, Bruker AXS experienced softness in X-ray system sales, primarily in life sciences or SCD sales due to weak market conditions as well as intense competitive pressures, but recently the elemental composition XRF and thermal analyzer sales, as well as aftermarket sales, contributed to the growth of the Bruker AXS business.

        Bruker AXS recently introduced a series of new products in the life sciences SCD and materials research XRD businesses in order to regain growth in the market. In life sciences SCD, we introduced the MICROSTAR™ high brilliancy X-Ray source and in materials research XRD we introduced our new D8 SuperSpeed™ solutions with integrated, high-power X-Ray source technology and our new Vantec-1™ X-Ray detector technology to provide higher speed and sensitivity compared to other available products on the market. Although these products have taken longer than expected to reach the market, we expect that all of our new products will begin to ship in the second half of this year and will drive revenue growth.

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.

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Revenue recognition.  We recognize revenue from system sales, including hardware with embedded software, 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

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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 shipped and title and risk of loss has been transferred. Our distributors do not have price protection rights or rights to return; however, our products are warranted to be free from defect for a period of one year. For arrangements with multiple elements, we recognize revenue for each element based on the fair value of the element provided 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 our ability to establish the fair value for each element in multiple element arrangements could affect the timing of revenue recognition. Revenue from accessories and parts is recognized upon shipment and service revenue is recognized as the services are performed.

•

Allowance for doubtful accounts.  We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to pay amounts due. If the financial condition of our customers were to deteriorate, reducing their ability to make payments, additional allowances would be required, resulting in a charge to operations.



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



•

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



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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.



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Income taxes.  We estimate the degree to which tax assets and loss carry-forwards will result in a benefit based on expected profitability by tax jurisdiction, and provide a valuation allowance for tax assets and loss carry-forwards that we believe will more likely than not go unused. If it becomes more likely than not that a tax asset or loss carry-forward 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.

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•

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



•

Restructuring.  We have recorded restructuring reserves for severance, inventory obsolescence, contractual obligations and other exit activity costs based on estimates of each of these expenses. Should actual cash flows associated with restructuring costs differ from estimated amounts, adjustments may be required.

Results of Operations

Three months ended June 30, 2004 compared to the three months ended June 30, 2003

Net Revenue

        The following table presents net revenue, change in net revenue and net revenue growth by reportable segment for the three months ended June 30, 2004 and 2003 (dollars in thousands):

(a)

Includes other revenue of $0.3 million in 2004 related to grant revenue received for research and development projects.

        Bruker Daltonics' net revenue increased by $0.5 million, or 1.3%, to $34.9 million for the three months ended June 30, 2004 compared to $34.4 million for the comparable period in 2003. Of this increase, approximately $1.3 million, or 3.7%, resulted from the impact of foreign exchange. The net decrease of 2.4% in revenue excluding the effect of foreign exchange is a result of a decline in our NBC detection business due to long lead times and aftermarket business of consumables and service contracts, partially offset by increased sales in our life sciences product line. We also experienced an increase in grant revenue of $0.3 million, which is the result of the timing of receipts from various projects for early-stage research and development projects funded by the German government. Life science systems revenue, NBC detection systems revenue and aftermarket revenue as a percentage of Bruker Daltonics' product revenue were as follows during the three months ended June 30, 2004 and 2003:

        Bruker AXS' net revenue increased by $2.8 million, or 10.5%, to $29.3 million for the three months ended June 30, 2004 compared to $26.5 million for the comparable period in 2003. Of this increase, approximately $1.4 million, or 5.2%, resulted from the impact of foreign exchange. The net increase of 5.3% in revenue excluding the effect of foreign exchange is driven by increased sales of XRF and thermal analyzer systems as well as continued strong aftermarket revenues. X-ray systems and

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aftermarket revenues as a percentage of Bruker AXS' product revenue were as follows during the three months ended June 30, 2004 and 2003:

Cost of Product Revenue

        The following table presents cost of product revenue and cost of product revenue as a percentage of product revenue by reportable segment for the three months ended June 30, 2004 and 2003 (dollars in thousands):

(b)

Certain service costs historically classified in sales and marketing expense have been reclassified to cost of product revenue in the following amounts: $0.9 million and $0.9 million for the three months ended June 30, 2004 and 2003, respectively.

        Bruker Daltonics' cost of product revenue for the three months ended June 30, 2004 was $19.8 million, or 57.4% of product revenue, compared to $19.2 million, or 55.9% of product revenue for the comparable period in 2003. The increase in cost of product revenue as a percentage of product revenue is primarily due to lower than anticipated revenues resulting in the under-absorption of fixed costs.

        Bruker AXS' cost of product revenue for the three months ended June 30, 2004 was $18.3 million, or 62.4% of product revenue, compared to $15.8 million, or 59.8% of product revenue for the comparable period in 2003. The increase in cost of revenue as a percentage of product revenue is primarily due to lower than expected XRD sales, resulting in lower than expected capacity utilization. In addition, Bruker AXS incurred higher than expected product quality costs due to shipments of multiple new products during the second quarter of 2004.

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Sales and Marketing

        The following table presents sales and marketing expense and sales and marketing expense as a percentage of product revenue by reportable segment for the three months ended June 30, 2004 and 2003 (dollars in thousands):

(c)

Certain service costs historically classified in sales and marketing expense have been reclassified to cost of product revenue in the following amounts: $0.9 million and $0.9 million for the three months ended June 30, 2004 and 2003, respectively.

        Bruker Daltonics' sales and marketing expense for the three months ended June 30, 2004 increased to $7.5 million, or 21.6% of product revenue, from $7.1 million, or 20.6% of product revenue for the comparable period in 2003. The increase in sales and marketing as a percentage of product revenue is primarily attributable to increased bookings during the second quarter of 2004 compared to 2003 resulting in higher commission costs and an increase in amortization expense associated with our demonstration inventory.

        Bruker AXS' sales and marketing expense for the three months ended June 30, 2004 increased to $7.8 million, or 26.7% of product revenue, from $6.6 million, or 24.8% of product revenue for the comparable period in 2003. The increase in sales and marketing as a percentage of product revenue is primarily attributable to strong bookings during the second quarter of 2004 compared to 2003 resulting in higher commission costs. In addition, during the first quarter of 2004 Bruker AXS increased the sales and marketing personnel in Japan and opened a new sales subsidiary in Austria resulting in incremental costs when compared to the second quarter of 2003.

General and Administrative

        The following table presents general and administrative expense and general and administrative expense as a percentage of product revenue by reportable segment for the three months ended June 30, 2004 and 2003 (dollars in thousands):

        Bruker Daltonics' general and administrative expense for the three months ended June 30, 2004 decreased to $1.8 million, or 5.3% of product revenue, from $2.2 million, or 6.4% of product revenue for the comparable period in 2003. The decrease in general and administrative expenses as a percentage of product revenue is primarily due to synergies resulting from the merger of Bruker Daltonics and Bruker AXS and improved cost controls established during the second half of 2003.

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        Bruker AXS' general and administrative expense for the three months ended June 30, 2004 increased to $2.4 million, or 8.3% of product revenue, from $2.1 million, or 7.9% of product revenue for the comparable period in 2003. The increase in general and administrative expense as a percentage of product revenue is primarily due to an increase in personnel at certain of our international locations and the amortization of merger related intangible assets.

        Corporate general and administrative expense for the three months ended June 30, 2004 was $0.9 million, and represents expenses associated with being a public company not allocated to our reportable segments, including legal fees, audit and consulting fees and filing fees.

Research and Development

        The following table presents research and development expense and research and development expense as a percentage of product revenue by reportable segment for the three months ended June 30, 2004 and 2003 (dollars in thousands):

        Bruker Daltonics' research and development expense for the three months ended June 30, 2004 increased to $7.6 million, or 21.9% of product revenue, from $6.6 million, or 19.1% of product revenue for the comparable period in 2003. The increase in research and development expense as a percentage of product revenue is primarily attributable to increased investments in research and development projects which we expect to result in new product introductions later in 2004 and 2005. A significant research and development project, which is being funded in part by a research and development grant in Germany, also contributed to the increase. Bruker Daltonics receives income for 50% of the actual expenses incurred on behalf of this grant, which is recorded in other revenue in the Consolidated Statements of Operations. The grant is expected to continue throughout the remainder of 2004. Netting the grant revenue received during the second quarter of 2004 against total research and development expense for the quarter, research and development expense as a percent of product revenue would have been 21.1%.

        Bruker AXS' research and development expenses for the three months ended June 30, 2004 increased to $3.4 million, or 11.5% of product revenue, from $3.2 million, or 12.0% of product revenue for the comparable period in 2003. The decrease in research and development expense as a percentage of product revenue is primarily due to the timing of research and development material purchases.

Reversal of Liability Accrual

        During the fourth quarter of 2002, Bruker Daltonics established a reserve in the amount of $0.7 million in connection with a contract its German and Swiss subsidiaries have with the U.K. Ministry of Defense (the "MOD"). The special charge represented the projected additional costs for rework and retesting on the contract due to various technical problems associated with meeting contractual requirements. During the third quarter of 2001, Bruker Daltonics established an additional reserve of $1.9 million for the probable imposition of liquidated damages pursuant to the contract with the MOD. During the second quarter of 2003, our Swiss and German subsidiaries delivered product to the MOD which met the specifications of the contract. Upon delivery of the product, the MOD agreed not to pursue any further claims for liquidated damages, other than those previously paid pursuant to the contract, and we agreed not to pursue any claims for the recovery of additional research and

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development expenses incurred in connection with the contract. As a result, the remaining reserves associated with the MOD contract of $1.9 million were reversed during the second quarter of 2003.

Other Special Charges

        During the three months ended June 30, 2003, we incurred charges totaling $3.0 million in connection with the proposed merger of Bruker Daltonics and Bruker AXS, which was completed on July 1, 2003. These costs included investment banking, legal, audit and other fees associated with the merger.

Interest and Other Income (Expense), Net

        Interest and other income, net, during the three months ended June 30, 2004 increased by $1.2 million from the comparable period in 2003 to a net expense of $1.0 million. The increase in expense is attributable to the write-off of an investment in the amount of $0.7 million during the second quarter of 2004, lower interest earned on our cash and short-term investments, an increase in interest expense and a decline in the fair value of derivative financial instruments which are marked-to-market through the results of operations.

Provision for Income Taxes

        The income tax benefit for the three months ended June 30, 2004 was $1.6 million compared to $0.6 million for the comparable period in 2003. During the third quarter of 2003, we established a valuation allowance of $8.7 million for deferred tax assets in the U.S. We intend to maintain a full valuation allowance on the U.S. deferred tax assets until sufficient positive evidence exists to support reversing the valuation allowance. During the second quarter of 2004, our effective tax rate was 25.3%. This tax rate primarily reflects our tax provision (benefit) for non-U.S. entities only, since U.S. related income taxes continue to be recorded as decreases and increases to the valuation allowance. Included in the income tax benefit for the three months ended June 30, 2004 is an income tax benefit of approximately $1.1 million which resulted from the transfer of certain proprietary technologies, equipment and inventories between the Bruker Daltonics German and Swiss subsidiaries. The income tax benefit resulted from the release of a valuation allowance previously established in the Bruker Daltonics Swiss subsidiary, and the effect on deferred tax assets for the different statutory income tax rates between Germany and Switzerland. Our tax rate may change over time as the amount or mix of income and taxes outside the U.S. changes. Our effective tax rate is calculated using our projected annual pre-tax income or loss and is affected by research and development tax credits, the expected level of other tax benefits, the impact of changes to the valuation allowance as well as changes in the mix of our pre-tax income and losses among jurisdictions with varying statutory rates.

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Minority Interest in Consolidated Subsidiaries

        Minority interest in consolidated subsidiaries for the three months ended June 30, 2004 was a loss of $19,000 compared to income of $0.7 million in the comparable period of 2003. The minority interest in subsidiaries represents the minority shareholders' proportionate share of net income (loss) for the three months ended June 30, 2004 and 2003. For the three months ended June 30, 2004, the minority interest relates to our two majority-owned subsidiaries, Incoatec GmbH and Baltic Scientific Instruments Ltd. For the three months ended June 30, 2003, the minority interest relates to our majority-owned subsidiary, Incoatec GmbH as well as 31% of the net loss in Bruker AXS.

Six months ended June 30, 2004 compared to the six months ended June 30, 2003

Net Revenue

        The following table presents net revenue, change in net revenue and net revenue growth by reportable segment for the six months ended June 30, 2004 and 2003 (dollars in thousands):

(d)

Includes other revenue of $0.6 million and $0.1 million in 2004 and 2003, respectively, related to grant revenue received for research and development projects.

        Bruker Daltonics' net revenue increased by $5.2 million, or 7.6%, to $73.7 million for the six months ended June 30, 2004 compared to $68.5 million for the comparable period in 2003. Of this increase, approximately $5.5 million, or 8.0%, resulted from the impact of foreign exchange. The net decline of 0.4% in revenue excluding the effect of foreign exchange is a result of a decrease in sales from our life sciences product line of approximately 2% and aftermarket business of consumables and service contracts of approximately 4%, partially offset by a 7% increase in sales from our NBC detection business. We also experienced an increase in grant revenue of $0.5 million, which is the result of the timing of receipts from various projects for early-stage research and development projects funded by the German government. Life science systems revenue, NBC detection systems revenue and aftermarket revenue as a percentage of Bruker Daltonics' product revenue were as follows during the six months ended June 30, 2004 and 2003 (dollars in thousands):

        Bruker AXS' net revenue increased by $3.2 million, or 5.7%, to $58.6 million for the six months ended June 30, 2004 compared to $55.4 million for the comparable period in 2003. Of this increase, approximately $4.2 million, or 7.5%, resulted from the impact of foreign exchange. The net decline of 1.8% in revenue excluding the effect of foreign exchange is driven by lower sales of certain our life science x-ray systems, partially offset by increased sales of XRF and thermal analyzer systems and continued strong aftermarket revenues. X-ray systems and aftermarket revenues as a percentage of

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Bruker AXS' product revenue were as follows during the three months ended June 30, 2004 and 2003 (dollars in thousands):

Cost of Product Revenue

        The following table presents cost of product revenue and cost of product revenue as a percentage of product revenue by reportable segment for the six months ended June 30, 2004 and 2003 (dollars in thousands):

(e)

Certain service costs historically classified in sales and marketing expense have been reclassified to cost of product revenue in the following amounts: $2.5 million and $1.5 million for the six months ended June 30, 2004 and 2003, respectively.

        Bruker Daltonics' cost of product revenue for the six months ended June 30, 2004 was $39.9 million, or 54.5% of product revenue compared to $36.7 million, or 53.6% of product revenue for the comparable period in 2003. The increase in cost of product revenue as a percentage of product revenue is due to lower than anticipated sales in the in the second quarter resulting in the under-absorption of fixed costs, partially offset by increased sales of certain of our high-end instrumentation during the first quarter and a change in mix of sales to third party customers and distributors.

        Bruker AXS' cost of product revenue for the six months ended June 30, 2004 was $35.5 million, or 60.6% of product revenue compared to $33.1 million, or 59.8% of product revenue for the comparable period in 2003. The increase in cost of revenue as a percentage of product revenue is primarily due to lower than expected utilization in our materials research product line and higher than anticipated quality costs, partially offset by improvements in capacity utilization in our life sciences systems line due to a restructuring of the business.

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Sales and Marketing

        The following table presents sales and marketing expense and sales and marketing expense as a percentage of product revenue by reportable segment for the six months ended June 30, 2004 and 2003 (dollars in thousands):

(f)

Certain service costs historically classified in sales and marketing expense have been reclassified to cost of product revenue in the following amounts: $2.5 million and $1.5 million for the six months ended June 30, 2004 and 2003, respectively.

        Bruker Daltonics' sales and marketing expense for the six months ended June 30, 2004 increased to $14.6 million, or 20.0% of product revenue, from $14.2 million, or 20.7% of product revenue for the comparable period in 2003. The decrease in sales and marketing expense as a percentage of product revenue is due to the benefits realized from certain cost control initiatives implemented during early 2004 partially offset by an increase in amortization expense associated with our demonstration inventory.

        Bruker AXS' sales and marketing expense for the six months ended June 30, 2004 increased to $15.1 million, or 25.8% of product revenue, from $13.1 million, or 23.6% of product revenue for the comparable period in 2003. The increase in sales and marketing expense as a percentage of product revenue is primarily attributable to strong bookings during the first half of 2004 as compared to the comparable period in 2003 resulting in higher commission costs. In addition, during the first quarter of 2004 Bruker AXS increased headcount in Japan and opened a new sales subsidiary in Austria.

General and Administrative

        The following table presents general and administrative expense and general and administrative expense as a percentage of product revenue by reportable segment for the six months ended June 30, 2004 and 2003 (dollars in thousands):

        Bruker Daltonics' general and administrative expense for the six months ended June 30, 2004 decreased to $3.6 million, or 5.0% of product revenue, from $4.0 million, or 5.9% of product revenue for the comparable period in 2003. The decrease in general and administrative expenses as a percentage of product revenue is primarily due to synergies resulting from the merger of Bruker Daltonics and Bruker AXS and improved cost controls established during 2003.

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        Bruker AXS' general and administrative expense for the six months ended June 30, 2004 increased to $4.5 million, or 7.6% of product revenue, from $4.0 million, or 7.2% of product revenue for the comparable period in 2003. The increase in general and administrative expense as a percentage of product revenue is primarily due to an increase in personnel at certain of our international locations and the amortization of merger related intangible assets.

        Corporate general and administrative expense for the six months ended June 30, 2004 was $1.1 million, and represents expenses associated with being a public company not allocated to our reportable segments, including legal fees, audit and consulting fees and filing fees.

Research and Development

        The following table presents research and development expense and research and development expense as a percentage of product revenue by reportable segment for the six months ended June 30, 2004 and 2003 (dollars in thousands):

        Bruker Daltonics' research and development expense for the six months ended June 30, 2004 increased to $15.1 million, or 20.6% of product revenue, from $12.9 million, or 18.8% of product revenue for the comparable period in 2003. The increase in research and development expense as a percentage of product revenue is primarily attributable to increased investments in research and development projects which we expect to result in new product introductions later in 2004 and 2005. A significant research and development project, which is being funded in part by a research and development grant in Germany, also contributed to the increase. Bruker Daltonics receives income for 50% of the actual expenses incurred on behalf of this grant which is recorded in other revenue in the Consolidated Statement of Operations. The grant is expected to continue throughout the remainder of 2004. Netting the grant revenue received during the six months ended June 30, 2004 against total research and development expense for the quarter, research and development expense as a percent of product revenue would have been 19.9%.

        Bruker AXS' research and development expenses for the six months ended June 30, 2004 increased to $6.3 million, or 10.7% of product revenue, from $5.7 million, or 10.3% of product revenue for the comparable period in 2003. The increase in research and development expense as a percentage of product revenue is primarily due to additional headcount from the acquisition of Baltic Scientific Instruments in the second quarter of 2003, partially offset by the timing of research and development material purchases in the second quarter of 2004.

Reversal of Liability Accrual

        During the fourth quarter of 2002, Bruker Daltonics established a reserve in the amount of $0.7 million in connection with a contract its German and Swiss subsidiaries have with the U.K. Ministry of Defense (the "MOD"). The special charge represented the projected additional costs for rework and retesting on the contract due to various technical problems associated with meeting contractual requirements. During the third quarter of 2001, Bruker Daltonics established an additional reserve of $1.9 million for the probable imposition of liquidated damages pursuant to the contract with the MOD. During the second quarter of 2003, our Swiss and German subsidiaries delivered product to the MOD which met the specifications of the contract. Upon delivery of the product, the MOD agreed

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not to pursue any further claims for liquidated damages, other than those previously paid pursuant to the contract, and we agreed not to pursue any claims for the recovery of additional research and development expenses incurred in connection with the contract. As a result, the remaining reserves associated with the MOD contract of $1.9 million were reversed during the second quarter of 2003.

Other Special Charges

        During the six months ended June 30, 2003, we incurred charges totaling $6.2 million in connection with the proposed merger of Bruker Daltonics and Bruker AXS, which was completed on July 1, 2003. These costs included investment banking, legal, audit and other fees associated with the merger.

Interest and Other Income (Expense), Net