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ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and notes to those statements, appearing elsewhere in this report. This report contains forward-looking statements reflecting our current expectations that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this report should be read as applying to all related forward-looking statements wherever they appear in this report. Our actual results may differ materially from those indicated in the forward-looking statements due to a number of factors, including those discussed in Item 1A, Risk Factors and elsewhere in this report.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, describes the principal factors affecting the results of our operations, financial condition and changes in financial condition, as well as our critical accounting policies and estimates. Our MD&A is organized as follows:

Non-GAAP Measures

Although our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP), we believe describing revenue and expenses, excluding the effects of foreign currency, acquisitions and divestitures, as well as certain other charges, net, provides meaningful supplemental information regarding our performance. We rely internally on certain measures that are not calculated according to GAAP. These measures are organic revenue, free cash flow, non-GAAP gross profit margin and non-GAAP operating margin. Our management believes that these financial measures provide relevant and useful information that is widely used by equity analysts, investors and competitors in our industry, as well as by our management, in assessing both consolidated and business unit performance. We define the term organic revenue as GAAP revenue excluding the effect of foreign currency translation changes and the effect of acquisitions and divestitures. We define the term non-GAAP gross profit margin as GAAP gross profit margin with certain non-GAAP measures excluded and non-GAAP operating margin as GAAP operating margin with certain non-GAAP measures excluded. These non-GAAP measures exclude costs related to restructuring actions, acquisition and related integration expenses, amortization of

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acquired intangible assets, costs associated with our global information technology transition initiative, and other non-operational costs and we believe these are useful measures to evaluate our continuing business.

We define free cash flow as net cash provided by operating activities less additions to property, plant, and equipment. We believe free cash flow is a useful measure to evaluate our business as it indicates the amount of cash generated after additions to property, plant, and equipment which is available for, among other things, investments in our business, acquisitions, share repurchases, dividends and repayment of debt. We regularly use these non-GAAP financial measures internally to understand, manage, and evaluate our business results and make operating decisions. We also measure our employees and compensate them, in part, based on such non-GAAP measures and use this information for our planning and forecasting activities. These measures may also be useful to investors in evaluating the underlying operating performance of our business. The presentation of these non-GAAP financial measures is not intended to be a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP and may be different from non-GAAP financial measures used by other companies, and therefore, may not be comparable among companies.

OVERVIEW

We are a developer, manufacturer and distributor of high-performance scientific instruments and analytical and diagnostic solutions that enable our customers to explore life and materials at microscopic, molecular and cellular levels. Our corporate headquarters are located in Billerica, Massachusetts. We maintain major technical and manufacturing centers in Europe, Asia and North America, we have sales offices located throughout the world. Bruker is organized into three reportable segments: the BSI Life Science Segment (comprised of the Bruker BioSpin Group and the Bruker CALID Group), the BSI NANO Segment and the Bruker Energy & Supercon Technologies (BEST) Segment.

Revenue for the year ended December 31, 2020 decreased by $85.1 million, or 4.1%, to $1,987.5 million, compared to $2,072.6 million for the comparable period in 2019. The decline in revenue was primarily related to the impact of the COVID-19 pandemic and the related economic slowdown. Included in revenue were increases of approximately $29.4 million in favorable impact of foreign currency translation and $10.5 million attributable to our recent acquisitions in the year ended December 31, 2020 compared to the year ended December 31, 2019. Excluding the effects of foreign currency translation and recent acquisitions, our organic revenue, a non-GAAP measure, decreased by $125.0 million, or 6.0%.

Our gross profit margin decreased to 47.3% for the year ended December 31, 2020 as compared to 48.0% during the year ended December 31, 2019. The decrease in gross margin was a result of lower volume and reduced productivity due to disruptions from the COVID-19 pandemic and the related economic slowdown, partially offset by certain cost reduction measures.

Our operating margin decreased to 12.5% for the year ended December 31, 2020 from 14.5% during the year ended December 31, 2019. The decrease in operating margin was due to lower revenue and gross profit during the COVID-19 pandemic and related economic slowdown, partially offset by cost control and cost reduction measures.

The income tax provision in the years ended December 31, 2020 and December 31, 2019 was $64.4 million and $82.4 million, respectively, representing effective tax rates of 28.5% and 29.4%, respectively. The decrease in our effective tax rate for the year ended December 31, 2020, compared to 2019, was primarily attributable to the change in jurisdictional income mix and decrease in foreign income inclusions due to electing the high tax exemption relating to Global Intangible Low-Taxed Income (“GILTI”), partially offset by an increase in the effective tax rate due to change in valuation allowance. Our tax rate may change over time as the amount and mix of jurisdictional income mix changes.

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Earnings per share decreased to $1.02 per diluted share for the year ended December 31, 2020 from $1.26 per diluted share for the year ended December 31, 2019. The decrease compared to the prior year was driven primarily by lower revenues during the COVID-19 pandemic and related economic slowdown, partially offset by our cost control and cost reduction measures.

The following table presents a reconciliation from net cash provided by operating activities, which is the most directly comparable GAAP operating financial measure, to free cash flow as used by management (in millions):

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Year Ended December 31,

Net cash provided by operating activities ​ $ 332.2 ​ $ 213.4 ​ $ 239.7

Less: purchases of property, plant and equipment ​ 97.2 ​ 73.0 ​ 49.2

​

For the year ended December 31, 2020, our free cash flow was 67% higher than the same period in 2019, primarily from an increase in customer advances and cash from receivables despite a decline in net income.

The following table presents a reconciliation from gross profit, which is the most directly comparable GAAP operating performance measure, to non-GAAP gross profit margin as used by management (in millions):

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended December 31,

Restructuring costs 3.8 ​ 5.2 ​ 2.6

Acquisition-related costs 0.8 ​ 12.2 ​ 3.9

Purchased intangible amortization 19.9 ​ 23.5 ​ 21.6

​

Our non-GAAP gross profit margin was 48.7%, 50.0% and 49.0% in the years ended December 31, 2020, 2019 and 2018, respectively. Our non-GAAP gross profit margin decreased in 2020, as compared to 2019 due to lower volume and reduced productivity, due to COVID-19 and the economic slowdown. Our non-GAAP gross profit margin increased in the year ended December 31, 2019, as compared to the same period in 2018, primarily due to operational improvements within our BSI Life Science Segment, accretive acquisitions and favorable foreign currency translation effects.

The following table presents a reconciliation from operating income, which is the most directly comparable GAAP operating performance measure, to non-GAAP operating income as used by management (in millions):

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended December 31,

Restructuring costs ​ 15.8 ​ 1.4 ​ 9.4

Acquisition-related costs ​ 3.2 ​ 16.8 ​ 7.3

Purchased intangible amortization ​ 35.7 ​ 38.3 ​ 28.9

​

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Our non-GAAP operating margin was 16.0%, 17.6% and 16.8% in the years ended December 31, 2020, 2019 and 2018, respectively. Our non-GAAP operating margin decreased in 2020, as compared to 2019 on lower revenues, partially offset by cost control and cost reduction measures.

We can experience quarter-to-quarter fluctuations in our operating results as a result of various factors, some of which are outside our control, such as:

● the timing of governmental stimulus programs and academic research budgets;

● foreign currency exchange rates;

● the time required to obtain governmental licenses.

Several of these factors have in the past affected the amount and timing of revenue recognized on sales of our products and receipt of related payments and will continue to do so in the future. Accordingly, our operating results in any particular quarter may not necessarily be an indication of any future quarter’s operating performance. The COVID-19 pandemic continues to present a challenging operating environment and we remain focused on four key priorities: the health and safety of our employees, customers and partners; maintaining business continuity and service levels for our customers; executing prudent temporary cost reductions; and delivering enabling research and diagnostic products to help fight the pandemic, and to support other essential priorities of our society.

Health and safety of our valued employees, customers and partners

While Bruker's businesses are essential, we have implemented strict social distancing, enhanced cleaning protocols and other preventative measures, such as temperature scanners and company-issued face coverings, in our major facilities. While many of our office colleagues are working remotely, we are placing enhanced focus on our service organization and factory employees for whom work from home is not feasible. Where customer sites are accessible and open, our field service organizations operate under social distancing protocols to ensure the safety of customer sites, when our employees need to be on site.

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Maintaining business continuity and service levels for our customers

Ensuring our ability to supply our enabling technologies and solutions and maintaining high service levels for our customers is another top priority for Bruker. In late March and during parts of April 2020, several of our manufacturing sites underwent temporary controlled shutdowns or were operating at reduced capacity to implement new safety protocols, comply with local rules, and manage cost and inventory levels. These sites thereafter ramped back up with expanding capacity and productivity levels. However, with any resurgence of the virus or the emergency of additional strains of the virus, we may need to consider further temporary controlled shutdowns or reduced capacity measures. In addition, we are continuing capital investments in production facilities for efficiencies and expansion and our supply chain remains resilient. We carry higher inventory levels to address supply chain risks related to the pandemic and do not currently anticipate being supply or capacity limited in the first quarter of 2021.

Executing prudent temporary cost reductions

In an effort to mitigate the negative impacts on our business of COVID-19, and the slowdown in the global economy, we implemented temporary cost control and cost reduction measures. These temporary measures included short-time work for many of our European operations, temporary tiered salary reductions for our board of directors, global leadership team and workforce, one-to two-week closures of select manufacturing locations, selective product manufacturing reductions, a hiring freeze, and curtailment of non-strategic discretionary spending. At the same time, we looked to minimize the disruption for our employees and preserve our ability to ramp up again with our highly trained and loyal work force. While pursuing cost savings throughout the business, we have maintained our important investments in key strategic initiatives. Many of the cost reduction measures have now been relaxed and our revenue is experiencing a recovery.

Delivering enabling research and diagnostic products to help fight the pandemic and to support other essential priorities of our society

Bruker is providing critical technologies and solutions to help combat the COVID-19 crisis, most notably our Microbiology and infectious disease diagnostics portfolio, to which we have added SARS-COV-2 PCR tests, and our nuclear magnetic resonance and mass spectrometry systems which are used in critical disease, therapeutic and vaccine research.

The COVID-19 global pandemic has driven volatility and uncertainty in global markets and has affected our operations significantly. We continue to work to manage the impact of COVID-19 on our operations; however, the full extent to which any resurgence of the virus or the emergence of any new strains of the virus will impact our business, directly or indirectly, cannot accurately be predicted at this time. In 2020, the COVID-19 pandemic affected productivity at our manufacturing facilities and caused disruptions and delays in certain of our shipments to customers who closed facilities during the pandemic. We continue to monitor the impact of COVID-19 on our business and respond accordingly. For additional information on the various risks posed by the COVID-19 pandemic, refer to Item 1A. Risk Factors included in this report.

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RESULTS OF OPERATIONS

Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019

Consolidated Results

The following table presents our results for the years ended December 31, 2020 and 2019 (in millions, except per share data):

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended ​ ​

​ ​ December 31, ​ ​ ​ ​ Percentage ​

Operating expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​

Selling, general and administrative ​ 468.6 ​ 500.2 ​ (31.6) ​ (6.3) ​

Interest and other income (expense), net ​ (22.5) ​ (20.5) ​ (2.0) ​ 9.8 ​

Net income per common share attributable to ​ ​ ​ ​ ​

Bruker Corporation shareholders: ​ ​ ​ ​ ​

Weighted average common shares outstanding: ​ ​ ​ ​ ​ ​ ​ ​ ​

​

Revenue

The decline in revenue was primarily related to the impact of the COVID-19 pandemic on our customers as well as certain of our operations and lower global instrumentation and superconductor demand due to the pandemic and related economic slowdown.

Gross Profit

The decline in gross profit was a result of lower revenue volume and reduced productivity, given the impact of the pandemic and economic slowdown, partially offset by cost control and cost reduction measures.

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Selling, General and Administrative

Our selling, general and administrative expenses in year ended December 31, 2020 decreased to 23.6% of total revenue from 24.1% of total revenue for the comparable period in 2019. The decrease as a percentage of total revenue, and in dollars, was a result of the cost control and cost reduction measures implemented during the COVID-19 pandemic in 2020.

Research and Development

Our research and development expenses for the year ended December 31, 2020 increased to 10.0% of total revenue from 9.1% of total revenue for the comparable period in 2019. The increase as a percentage of revenue, and in dollars, was a result of higher research and development spending, as we continued to fund certain growth investments, in comparison to lower revenue in 2020.

Other Charges, Net

Other charges, net was $24.9 million for the year ended December 31, 2020. The charges consisted primarily of $12.0 million of restructuring costs related to closing facilities and implementing outsourcing and other restructuring initiatives, $5.9 million related to professional fees, $2.5 million of costs associated with our global IT transformation initiative, $2.4 million of acquisition-related charges related to acquisitions completed in 2020 and 2019 and $2.1 million related to long-lived asset impairments.

Other charges, net was $6.5 million for the year ended December 31, 2019. The charges consisted primarily of $(3.9) million of restructuring costs related to closing facilities and implementing outsourcing and other restructuring initiatives, $4.6 million of acquisition-related charges related to acquisitions completed in 2019 and 2018, $3.7 million of costs associated with our global IT transformation initiative, and $2.1 million related to professional fees. The restructuring charges included a gain on the sale of a building of $7.7 million.

Operating Income

The decrease in operating income was due to lower revenue and gross profit during the COVID-19 pandemic and related economic slowdown, partially offset by cost control and cost reduction measures.

Interest and Other Income (Expense), Net

The primary components within interest and other income (expense), net for the year ended December 31, 2020 were net interest expense of $11.2 million, realized and unrealized losses on foreign currency denominated transactions of $8.0 million and $3.3 million related to pension plan. During the year ended December 31, 2019, the primary components were net interest expense of $14.7 million, realized and unrealized losses on foreign currency denominated transactions of $3.4 million, $2.5 million related to pension plan expenses and $0.1 million related to other income.

Income Tax Provision

The effective tax rates for years ended 2020 and 2019 were 28.5% and 29.4%, respectively. The decrease in our effective tax rate for the year ended December 31, 2020, compared to 2019, was primarily attributable to the change in jurisdictional income mix and decrease in foreign income inclusions due to electing the high tax exemption relating to GILTI, partially offset by an increase in the effective tax rate due to change in valuation allowance. Our tax rate may change over time as the amount and mix of jurisdictional income changes.

Net Income Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interest

The net income attributable to noncontrolling interests represented the minority shareholders' proportionate share of the net income recorded by our majority-owned subsidiaries. In January 2020, we acquired the remaining interest in our redeemable noncontrolling interest.

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Net Income Attributable to Bruker Corporation

The decrease in net income and earnings per diluted share was primarily driven by the decline in revenue, gross profit and operating profit as a result of reduced demand during the COVID-19 pandemic and the related economic slowdown.

Segment Results

Revenue

The following table presents revenue, change in revenue, and revenue growth by reportable segment for the years ended December 31, 2020 and 2019 (dollars in millions):

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ Percentage

​ ​ 2020 ​ 2019 ​ Dollar Change ​ Change ​

Eliminations (a) ​ (12.0) ​ (14.9) ​ 2.9 ​ ​

(a) Represents product and service revenue between reportable segments.

For financial reporting purposes, we aggregate Bruker BioSpin Group and Bruker CALID Group as the BSI Life Science Segment. This aggregation reflects the similar economic characteristics, production processes, customer services provided, types and classes of customers, methods of distribution and regulatory environments.

BSI Life Science Segment revenue was approximately flat year over year from a decline in BioSpin systems and FTIR/NIR molecular spectroscopy revenues, due to the COVID-19 pandemic, which was offset by strong demand for our CALID microbiology and infectious disease diagnostics offering and for certain of CALID’s mass spectrometry systems. The decline in revenues for the BSI NANO Segment was due primarily to the impact of the COVID-19 pandemic and the related economic slowdown with reduced academic, industrial and industrial research demand. The decline in revenue for the BEST Segment was due to lower superconductor demand during 2020.

Operating Income

The following table presents operating income and operating margins on revenue by reportable segment for the years ended December 31, 2020 and 2019 (dollars in millions):

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ Percentage of ​ ​ ​ ​ Percentage of

​ ​ Operating ​ Segment ​ Operating ​ Segment ​

​ Income Revenue Income Revenue

Corporate, eliminations and other (a) ​ (55.3) ​ ​ (46.2) ​ ​

The operating margin decline in the BSI Life Science segment was due to higher operating expenses in 2020 as compared to 2019. The decline in operating margin for the BSI NANO segment was due to lower revenue and gross profit, partially offset by cost reduction measures. The decline in the operating margin for the BEST

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segment was due to lower revenue, unfavorable mix and charges related to planned restructuring actions, partially offset by reduced operating expenses.

Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018

Consolidated Results

The following table presents our results for the years ended December 31, 2019 and 2018 (in millions, except per share data):

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended ​ ​ ​ ​ ​ ​

​ ​ December 31, ​ ​ ​ ​ Percentage ​

Cost of other revenue ​ 0.5 ​ 1.1 ​ (0.6) ​ (54.5) ​

Operating expenses: ​ ​ ​ ​ ​ ​ ​

Interest and other income (expense), net ​ (20.5) ​ (17.7) ​ (2.8) ​ (15.8) ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net income per common share attributable to ​ ​ ​ ​ ​

Bruker Corporation shareholders: ​ ​ ​ ​ ​

Weighted average common shares outstanding: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

Revenue

The increase in revenue in the year ended December 31, 2019 compared to the year ended December 31, 2018 included $118.4 million attributable to our recent acquisitions and a decrease of approximately $50.3 million from the impact of foreign currency translation. Excluding the effects of foreign currency translation and our recent acquisitions, our organic revenue, a non-GAAP measure, increased by $108.9 million, or 5.7%.

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Gross Profit

Our gross profit margin was 48.0% for the year ended December 31, 2019, compared to 47.5% for the year ended December 31, 2018. Included in gross profit were various charges for amortization of acquisition-related intangible assets and other acquisition-related costs and restructuring costs totaling $41.7 million and $28.7 million for the years ended December 31, 2019 and 2018, respectively. Our gross profit margin increased in the year ended December 31, 2019 primarily due to operational improvements within our BSI Life Science Segment, accretive acquisitions and favorable foreign currency translation effects.

Selling, General and Administrative

Our selling, general and administrative expense was 24.1% and 23.5% of revenue in 2019 and 2018, respectively. The increase was primarily caused by the addition of recent acquisitions and select investments in strategic growth areas, partially offset by favorable foreign currency translation effects.

Research and Development

Our research and development expense was 9.1% of revenue in 2019 and 2018. The dollar increase in research and development was driven primarily by the addition of recent acquisitions, partially offset by favorable foreign currency translation effects.

Other Charges, Net

Other charges, net for 2019 consisted primarily of a net gain of $3.9 million of restructuring costs related to closing facilities and implementing outsourcing and other restructuring initiatives, $4.6 million of acquisition-related charges related to acquisitions completed in 2019 and 2018, $3.7 million of costs associated with our global IT transformation initiative, and $2.1 million related to professional fees. The restructuring charges included a gain on the sale of a building of $7.7 million.

Other charges, net in 2018 consisted primarily of $6.8 million of restructuring costs related to closing facilities and implementing outsourcing and other restructuring initiatives, $3.4 million of acquisition-related charges related to acquisitions completed in 2018 and 2017, $4.8 million of costs associated with our global information technology (IT) transformation initiative and $4.5 million related to professional fees.

At December 31, 2019 and 2018, we performed our annual goodwill and indefinite-lived intangible impairment evaluation and concluded the fair values of each of our reporting units were significantly greater than their carrying amounts, and therefore, no additional impairment is required.

Operating Income

Operating margin increased to 14.5% in 2019, as compared to 13.8% for the year ended December 31, 2018. Included in operating income were various charges for amortization of acquisition-related intangible assets and other acquisition-related costs and restructuring costs totaling $63.1 million and $55.5 million for the years ended December 31, 2019 and 2018, respectively. The increase in GAAP operating margin was due primarily to volume and operational improvements within our BSI Life Science Segment, accretive acquisitions and the positive impact of foreign currency translation.

Interest and Other Income (Expense), Net

The increase in net interest expense in 2019, as compared to 2018, was primarily attributable to higher outstanding debt balances in 2019 compared to 2018 being marginally offset by interest income from the new 2019 U.S. Dollar-to-Euro and U.S. Dollar to Swiss Franc interest rate cross-currency swap agreements.

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During the year ended December 31, 2019, the major components within interest and other income (expense), net were net interest expense of $14.7 million, realized and unrealized losses on foreign currency denominated transactions of $3.3 million, and $2.5 million related to pension plan expenses.

During the year ended December 31, 2018, the major components within interest and other income (expense), net were net interest expense of $11.4 million, realized and unrealized losses on foreign currency denominated transactions of $3.0 million, and $3.9 million related to pension plan expenses.

Income Tax Provision

The effective tax rate was 29.4% and 26.0% for the years ended December 31, 2019 and 2018, respectively. The increase in our effective tax rate for the year ended December 31, 2019, compared to 2018, was primarily attributable to a benefit recorded in 2018 associated with the reversal of state and foreign withholding taxes on unremitted earnings that did not recur in 2019 and additional tax reserves for uncertain tax positions in Europe in 2019.

Net Income Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interest

Net income attributable to noncontrolling interests and redeemable noncontrolling interest decreased in 2019 as a result of the minority shareholders’ proportionate share of the net income recorded by our majority-owned indirect subsidiaries, as compared to 2018.

Net Income Attributable to Bruker Corporation

For the year ended December 31, 2019 our diluted earnings per share was $1.26, compared to $1.14 per diluted share for 2018. The increase in net income attributable to Bruker Corporation in 2019, as compared to the prior year, was driven primarily by revenue growth, higher gross and operating profit offset by an increase in the effective tax rate for the year ended December 31, 2019.

Segment Results

Revenue

The following table presents revenue, change in revenue, and revenue growth by reportable segment for the years ended December 31, 2019 and 2018 (dollars in millions):

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Percentage ​

Eliminations (a) ​ (14.9) ​ (6.2) ​ (8.7) ​

(a) Represents product and service revenue between reportable segments.

BSI Life Science Segment revenue increased by $106.0 million to $1,244.9 million for the year ended December 31, 2019, compared to $1,138.9 million for the year ended December 31, 2018. The Bruker BioSpin Group revenue increase was primarily due to growth in the system revenue, which included the revenue recognition of three GHz class systems, as well as aftermarket revenue and a small contribution from recent software acquisitions. The increase in Bruker CALID Group revenue was a result of continued strong demand for life science mass spectrometry and microbiology products, growth in molecular spectroscopy FT-IR and NIR products and contributions from an acquisition.

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BSI NANO Segment revenue increase was primarily the result of acquisitions as well as continued demand for advanced X-Ray and nano analysis products, partially offset by a sharp decline in demand for semiconductor metrology products and unfavorable foreign currency translation.

BEST Segment revenue increase was primarily from shipments of superconductors for healthcare applications offset in part by the impact of unfavorable foreign currency translation.

Operating Income

The following table presents operating income and operating margins on revenue by reportable segment for the years ended December 31, 2019 and 2018 (dollars in millions):

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ Percentage of ​ ​ ​ ​ Percentage of

​ Operating Segment Operating Segment

​ ​ Income ​ Revenue ​ Income ​ Revenue ​

Corporate, eliminations and other (a) ​ (46.2) ​ ​ (44.5) ​ ​

The operating margin expansion for BSI Life Science and BEST was primarily due to positive operating leverage on higher sales mix and operational improvements as well as favorable foreign currency translation for the BSI Life Science Segment. The decline in operating margin for the BSI NANO Segment was due to a decline in semiconductor metrology demand, softness in industrial research markets in the second half of 2019 and the impact of costs related to a recent acquisition.

LIQUIDITY AND CAPITAL RESOURCES

We anticipate that our existing cash and cash equivalents and credit facilities will be sufficient to support our operating and investing needs for at least the next twelve months. Our future cash requirements could be affected by acquisitions that we may complete, repurchases of our common stock, or the payment of dividends in the future. In addition, our ability to access capital and maintain liquidity may be impacted by the volatile market conditions caused by the COVID-19 pandemic. Historically, we have financed our growth and liquidity needs through cash flow generation and a combination of debt financings and issuances of common stock. In the future, there are no assurances that we will continue to generate cash flow from operations or that additional financing alternatives will be available to us, if required, or if available, will be obtained on terms favorable to us.

Cash, cash equivalents and short-term investments at December 31, 2020 and 2019 totaled $731.8 million and $684.9 million, respectively, of which $514.9 million and $301.1 million, respectively, related to cash, cash equivalents and short-term investments held outside of the U.S. in our foreign subsidiaries, most significantly in the Netherlands, Switzerland and Hong Kong.

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The following table presents our cash flows from operating activities, investing activities and financing activities for the periods presented (in millions):

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended December 31,

Net cash provided by operating activities $ 332.2 $ 213.4 $ 239.7

Net cash used in investing activities ​ (192.7) ​ (158.4) ​ (123.4)

Net cash (used in) provided by financing activities ​ (161.6) ​ 300.0 ​ (112.4)

Effect of exchange rates on cash and cash equivalents ​ 25.7 ​ 0.6 ​ (6.5)

​

Operating Activities

During the year ended December 31, 2020, net cash provided by operating activities resulted primarily from consolidated net income adjusted for non-cash items of $262.6 million, in addition to a net increase in operating assets and liabilities, net of acquisitions and divestitures, of $69.6 million. The increase in operating assets and liabilities, net of acquisitions and divestitures, for the year ended December 31, 2020 was primarily caused by a decrease in accounts receivable due to increased cash collections, increased customer advances related to COVID-19 order increases late in 2020 offset by a strategic inventory build for 2021 orders and supply chain management.

During the year ended December 31, 2019, net cash provided by operating activities resulted primarily from consolidated net income adjusted for non-cash items of $287.9 million, offset by a net decrease in operating assets and liabilities, net of acquisitions and divestitures, of $74.5 million. The decrease in operating assets and liabilities, net of acquisitions and divestitures, for the year ended December 31, 2019 was primarily caused by an increase in inventory build for 2020 orders.

During the year ended December 31, 2018, net cash provided by operating activities resulted primarily from consolidated net income adjusted for non-cash items of $281.9 million, offset by a net decrease in operating assets and liabilities, net of acquisitions and divestitures, of $42.2 million. The decrease in operating assets and liabilities, net of acquisitions and divestitures, for the year ended December 31, 2018 was primarily caused by an increase in accounts receivable caused by proportionately higher sales late in the fourth quarter of 2018 and inventory build for 2019 orders, which were offset in part by cash received from customer advances.

Investing Activities

During the year ended December 31, 2020, the increase in net cash used in investing activities during the year ended December 31, 2020 was primarily attributable to net capital expenditures of $97.2 million, net cash paid for acquisitions of $59.2 million and purchases of short-term investments, net of maturities of $43.9 million.

During the year ended December 31, 2019, the increase in net cash used in investing activities was primarily attributable to net cash paid for acquisitions of $90.0 million, net capital expenditures of $62.0 million and the purchase of short-term investments of $6.4 million.

During the year ended December 31, 2018, the increase in net cash used in investing activities was primarily attributable to net cash paid for acquisitions of $191.6 million and net capital expenditures of $48.8 million. These activities were offset, in part, by net cash proceeds of short-term investments of $117.0 million.

We expect capital expenditures in 2021 to be approximately $100.0 million.

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Financing Activities

During the year ended December 31, 2020, the net cash used in financing activities was primarily caused by $123.2 million used for the purchase of common stock under our repurchase program, $24.6 million used for the payment of dividends, $7.6 million in net payments of borrowings under the 2019 Revolving Credit Agreement and $7.5 million payment of contingent consideration.

During the year ended December 31, 2019, the increase in net cash provided by financing activities was primarily caused by $597.9 million of new debt borrowings, described below, offset in part by $361.9 million of repayments under revolving lines of credit. Other cash uses were $142.3 million used for the repurchase of common shares, $25.0 million for the payment of dividends and $15.0 million repayment on the 2012 Note Purchase Agreement. Other cash sources borrowings of $250.6 million under the revolving lines of credit and $10.9 million of proceeds from the issuance of common stock in connection with stock option exercises.

During the year ended December 31, 2018, the decrease in net cash used in financing activities was primarily caused by $218.1 million of repayments under revolving lines of credit and $25.1 million used for the payment of dividends. These cash uses were partially offset by borrowings of $129.4 million under the revolving lines of credit and $9.4 million of proceeds from the issuance of common stock in connection with stock option exercises.

Share Repurchase Program

In May 2019, our Board of Directors approved a share repurchase program which authorizes the purchase of our common stock in the amount of up to $300.0 million from time to time, in amounts, at prices, and at such times as management deems appropriate, subject to market conditions, legal requirements and other considerations. We repurchased a total of 2,711,952 shares at an aggregate cost of $123.2 million for the year ended December 31, 2020. We repurchased a total of 3,323,104 shares at an aggregate cost of $142.3 million for the year ended December 31, 2019. The remaining authorization as of February 25, 2021 is $5.3 million and this Repurchase Program expires on May 13, 2021. We intend to fund any future purchases from cash on hand, future cash flows from operations and available borrowings under the revolving credit facility.

Income Taxes

At December 31, 2020 and in accordance with the 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”), we recorded state and foreign withholding taxes, as well as subsequent foreign currency translations on these withholding taxes as they are an obligation of the parent company, on the cash and liquid assets portion of the unremitted earnings and profits (E&P) of foreign subsidiaries expected to be repatriated from our foreign subsidiaries to the United States. We continue to be indefinitely reinvested in the amount of $436 million of non-cash E&P that is subject to the 2017 Tax Act deemed repatriation. If this E&P is ultimately distributed to the United States in the form of dividends or otherwise, we would likely be subject to additional withholding tax. We will continue to evaluate our assertions on the cumulative historical outside basis differences in our foreign subsidiaries as of December 31, 2020. The amount of unrecognized deferred withholding taxes on the undistributed E&P was $63 million at December 31, 2020.

As of December 31, 2020, we had approximately $65.2 million of net operating loss carryforwards available to reduce state taxable income that are expected to expire at various times beginning in 2021; approximately $108.4 million of net operating losses available to reduce German federal income and trade taxes that are carried forward indefinitely and $18.5 million of other foreign net operating losses that are expected to expire at various times beginning in 2021. We also had U.S. state research and development tax credit carryforward of $7.1 million. Utilization of these credits and state net operating losses may be subject to annual limitations due to the ownership percentage change limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended (“Code”) and similar state provisions. In the event of a deemed change in control under Code Section 382, an annual limitation on the utilization of net operating losses and credits may result in the expiration of all or a portion of the net operating loss and credit carryforwards.

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Uncertain tax contingencies are positions taken or expected to be taken on an income tax return that may result in additional payments to tax authorities. If a tax authority agrees with the tax position taken or expected to be taken or the applicable statute of limitations expires, then additional payments will not be necessary.

Credit Facilities

On December 11, 2019, we entered into (1) a new revolving credit agreement to establish a new revolving credit facility in the aggregate principal amount of $600 million; (2) a term loan agreement to establish a new term loan facility in the aggregate principal amount of $300 million; and (3) a note purchase agreement to issue and sell CHF 297 million aggregate principal amount of 1.01% senior notes due December 11, 2029. Floating interest rates under the term loan were simultaneously fixed through cross-currency and interest rate swap agreements into Euro ($150 million) and Swiss Franc ($150 million) rates carrying average effective interest rates of 0.94% and hedge our net investment in our Euro and Swiss Franc denominated net assets. The new revolving credit agreement replaced our $500 million five-year revolving credit agreement established on October 27, 2015, that was terminated on December 11, 2019.

In addition, we designated our CHF 297 million senior notes as a hedge in our net investment in our Swiss Franc denominated net assets. Proceeds from this financing were used to repay the outstanding borrowings under our prior 2015 revolving credit facility and we intend to use the remaining proceeds for general corporate purposes and to support corporate strategic objectives. During December 2019, we entered into U.S. Dollar to Euro cross-currency swaps on our existing 2012 private placement notes of $105 million 4.31% Series 2012A Senior Notes, Tranche C, due January 18, 2022, and the existing $100 million 4.46% Series 2012A Senior Notes, Tranche D, due January 18, 2024, resulting in an average effective interest rate of 2.25% on these instruments. The cross-currency swaps hedge our net investment in our Euro denominated net assets.

As of December 31, 2020, we have entered into several cross-currency and interest rate swap agreements with a notional value of $150 million of U.S. Dollar to Swiss Franc and a notional value of $355 million of U.S. Dollar to Euro to hedge the variability in the movement of foreign currency exchange rates on portions of our Euro and Swiss Franc denominated net asset investments. As a result of entering into these agreements, we lowered our net interest expense by $7.2 million and $0.6 million during the year ended December 31, 2020 and 2019, respectively. We anticipate these swap agreements will lower net interest expense by approximately $8.8 million in 2021 and $4.8 million in 2022.

We had the following debt outstanding (in millions):

​

​ ​ ​ ​ ​ ​ ​

US Dollar notes under the 2012 Note Purchase Agreement ​ $ 205.0 $ 205.0

CHF notes (in dollars) under the 2019 Note Purchase Agreement ​ ​ 335.5 ​ 306.8

Unamortized debt issuance costs ​ ​ (2.4) ​ (2.6)

Capital lease obligations and other loans ​ ​ 6.4 ​ 4.1

Current portion of long-term debt ​ ​ (2.2) ​ (0.5)

Total long-term debt, less current portion ​ $ 842.3 ​ $ 812.8

​

There was no amount outstanding under the 2019 Credit Agreement as of December 31, 2020 or 2019.

As of December 31, 2020, we had no off-balance sheet arrangements and we were in compliance with the financial covenants of these debt arrangements.

The following is a summary of the maximum commitments and the net amounts available to us under the 2019 Credit Agreement and other banking working capital lines and guarantees of credit with various financial

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institutions located primarily in Germany and Switzerland that are unsecured and typically due upon demand at December 31, 2020 (dollars in millions):

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Weighted ​ Total Amount ​ Total Amount ​ ​ ​ ​ Outstanding ​ Total Committed

​ ​ Average ​ Committed ​ Uncommitted ​ Outstanding ​ Letters ​ and Uncommitted

​ Interest Rate by Lenders by Lenders Borrowings of Credit Amounts Available

​

As of December 31, 2020, we were in compliance with the covenants of all debt agreements.

Other Liquidity Matters

The following table summarizes maturities for our significant financial obligations as of December 31, 2020 (in millions):

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Unconditional purchase commitments (2) ​ 313.9 ​ 281.9 ​ 31.2 ​ 0.8 ​ —

Acquisition-related contingent consideration (3) ​ 4.3 ​ 2.7 ​ 1.6 ​ — ​ —

Finance lease obligations ​ 3.5 ​ 1.2 ​ 1.8 ​ 0.5 ​ —

(1) Interest payable on long-term debt is net of the impact of our cross-currency and interest rate swap agreements.

(2) Unconditional purchase commitments include agreements to purchase goods, services, or fixed assets that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase commitments exclude agreements that are cancellable at any time without penalty.

(3) Acquisition-related contingent consideration represents the estimated fair value of future payments to the former shareholders of applicable acquired companies based on achieving annual revenue and gross margin targets in certain years as specified in the purchase and sale agreements.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

This 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, or U.S. GAAP. 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; stock-based compensation expense; restructuring and other related charges; income taxes, including the recoverability of deferred tax assets; allowances for doubtful accounts; inventory reductions for excess and obsolete inventories; estimated fair values of long-lived assets used to measure the recoverability of long-lived assets; intangible assets and goodwill; expected future cash flows used to measure the recoverability of intangible assets and long-lived assets; warranty costs; derivative financial instruments; and contingent liabilities. We base our estimates and judgments on our historical experience, current market and economic conditions, 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 and estimates to be both those most important to the portrayal of our financial position and results of operations and those that require the most estimation and subjective judgment.

Revenue recognition

We recognize revenue in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers (ASC 606). The key elements of ASC 606 are: 1) identifying a contract with the customer; 2) identifying the performance obligations in the contract; 3) determining the transaction price; 4) allocating the transaction price to the performance obligations in the contract; and 5) recognizing revenue when (or as) each performance obligation is satisfied.

We recognize revenue from systems sales upon transfer of control in an amount that reflects the consideration we expect to receive. Transfer of control generally occurs upon shipment, or for certain systems, based upon customer acceptance for a system once delivered and installed at a customer facility. For systems that include customer-specific acceptance criteria, we are required to assess when it can demonstrate the acceptance criteria has been met, which generally is upon successful factory acceptance testing or customer acceptance and evidence of installation. For systems that require installation and where system revenue is recognized upon shipment, the standalone selling price of installation is deferred until customer acceptance.

When products are sold through an independent distributor or a strategic distribution partner, we recognize the system sale upon transfer of control which is typically on shipment. When we are responsible for installation, the standalone selling price of installation is deferred until customer acceptance. Our distributors do not have price protection rights or rights of return; however, our products are typically warranted to be free from defect for a period of one year.

For contracts that include multiple performance obligations, the transaction price is allocated to each distinct performance obligation based on the relative standalone selling prices of the goods and services being provided to the customer. Our best evidence of standalone selling price is its normal selling pricing and discounting practices for the specific product or service when sold on a standalone basis. Alternatively, we may determine standalone selling price using an expected cost plus a margin approach.

We analyze our selling prices used in the allocation of the transaction price, at a minimum, on an annual basis. Selling prices will be analyzed more frequently if a significant change in our business or other factors necessitate more frequent analysis or we experience significant variances in our selling prices.

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Revenue from accessories and parts is generally recognized based on shipment. Service revenue is recognized as the services are performed or ratably over the contractual obligation and includes maintenance contracts, extended warranties, training, application support and on-demand services.

For performance obligations recognized over time, revenue is measured by progress toward completion of the performance obligation that reflects the transfer of control. In particular, we have certain contracts recognized over time for which we apply the cost-to-cost method based on costs incurred to date relative to the total estimated costs for the contract upon completion. Application of the cost-to-cost method requires us to make reasonable estimates of the extent of progress toward completion and the total costs we will incur. Losses are recorded immediately when we estimate that contracts will ultimately result in a loss. Changes in the estimates could affect the timing of revenue recognition.

We include costs incurred in connection with shipping and handling of products within selling, general and administrative costs. Amounts billed to customers in connection with these costs are included in total revenues. When control of the goods transfers prior to the completion of our obligation to ship the products to our customers, we have elected the practical expedient to account for the shipping services as a fulfillment cost. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period is one year or less or the amount is immaterial. We exclude from the transaction price all taxes assessed by a governmental authority on revenue-producing transactions that are collected by us from a customer.

We require an advance deposit based on the terms and conditions of contracts with customers for many of our contracts. Typically, revenue is recognized within one year of receiving an advance deposit. We do not have any material payment terms that extend beyond one year. For contracts where an advance payment is received greater than one year from expected revenue recognition, or a portion of the payment due extends beyond one year, we determined it does not constitute a significant financing component. There is minimal variable consideration included in the transaction price of our contracts.

Other revenues are primarily comprised of development arrangements recognized on a cost-plus-fixed-fee basis and licensing arrangements recognized either when the licenses are provided or ratably over the contract term depending on the nature of the arrangement.

Contract Assets and Liabilities

Contract assets represent unbilled receivables when revenue recognized exceeds the amount billed to the customer, and the right to payment is not just subject to the passage of time. Contract assets typically result from system revenue recorded where a portion of the transaction price is not billable until a future event, such as customer acceptance, or from contracts recognized on a cost-to-cost or cost-plus-fixed-fee basis as revenue exceeds the amount billed to the customer. Amounts may not exceed their net realizable value. Contract assets are generally classified as current.

Contract liabilities consist of customer advances, deferred revenue and billings in excess of revenue from contracts recognized on a cost-to-cost or cost-plus-fixed-fee basis. Contract liabilities are classified as current or long-term based on the timing of when we expect to recognize revenue. Contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period.

Income taxes

The determination of income tax expense requires us to make certain estimates and judgments concerning the annual effective tax rate, the calculation of deferred tax assets and liabilities, the forecasted profitability of our subsidiaries in certain geographic jurisdictions, as well as the deductions, carryforwards and credits that are available to reduce taxable income. Deferred tax assets and liabilities arise from differences in the timing of the recognition of revenue and expenses for financial statement and tax purposes. Deferred tax assets and liabilities are measured using the tax rates in effect for the year in which these temporary differences are expected to be settled. We estimate the degree to which tax assets and loss carryforwards will result in a benefit based on expected profitability by tax jurisdiction, and we provide a valuation allowance for tax assets and loss

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carryforwards that we believe will more likely than not go unused. If it becomes more likely than not that a tax asset or loss carryforward will be used for which a valuation allowance 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 a valuation allowance may be necessary. In addition, we only recognize benefits for tax positions that we believe are more likely than not of being sustained upon review by a taxing authority with knowledge of all relevant information. We reevaluate our uncertain tax positions on a quarterly basis and any changes to these positions as a result of tax audits, tax laws or other facts and circumstances could result in additional charges or credits to operations. The expiration of statutes of limitations affecting estimates made for uncertain tax positions can cause higher earnings.

On December 22, 2017 (Enactment Date), former President Trump signed the 2017 Tax Act, which enacted a wide range of changes to the U.S. corporate income tax system, many of which differ significantly from the provisions of the previous U.S. tax law. We have completed the assessment of the tax effects associated with the enactment of the 2017 Tax Act. Changes in the tax rates and laws are accounted for in the period of enactment.

Inventories

Inventories are stated at the lower of cost and net realizable value, with costs determined by the first-in, first-out method for a majority of subsidiaries and by average cost for certain other subsidiaries. We record provisions to account for excess and obsolete inventory to reflect the expected non-saleable or non-refundable inventory based on an evaluation of slow-moving products or products no longer offered for sale. Inventories also include demonstration units located in our demonstration laboratories or installed at the sites of potential customers. We consider our demonstration units to be available for sale and have a history of selling these demonstration units. We reduce the carrying value of demonstration inventories for differences between 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 the unit. If ultimate usage or demand varies significantly from expected usage or demand, additional write-downs may be required, resulting in additional charges to operations.

Goodwill, other intangible assets and other long-lived assets

We evaluate goodwill and other indefinite lived intangible assets for impairment annually and when events occur or circumstances change. We test goodwill for impairment at the reporting unit level, which is the operating segment or one level below an operating segment. We have the option of performing a qualitative assessment to determine whether further impairment testing is necessary before performing the quantitative assessment. If as a result of the qualitative assessment, it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, a quantitative impairment test will be required. Otherwise, no further testing will be required. If a quantitative impairment test is performed, we compare the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. We determine fair value of reporting units using a weighting of both the market and the income methodologies. Estimating the fair value of the reporting units requires significant judgment by management. If the carrying amount of a reporting unit exceeds the fair value of the reporting unit, an impairment charge is recognized for the amount by which the carrying value amount exceeds the reporting unit’s fair value up to the total amount of goodwill allocated to the reporting unit.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new standard simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. The adoption of this ASU on January 1, 2020 did not have a material impact on our consolidated financial statements.

We also review definite-lived intangible assets and other long-lived assets when indications of potential impairment exist. Should the fair value of our long-lived assets decline because of reduced operating performance, market declines or other indicators of an impairment, a charge to operations for impairment may be necessary.

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Business Combinations

We account for business combinations under the acquisition method of accounting. Accordingly, at the date of each acquisition, we measure the fair value of all identifiable assets acquired (including intangible assets), liabilities assumed and any remaining noncontrolling interests and allocates the amounts paid to all items measured. The fair value of identifiable intangible assets acquired is based on valuations that use information and assumptions determined by management and which consider management’s best estimates of inputs and assumptions that a market participant would use.

RECENT ACCOUNTING PRONOUNCEMENTS

Information regarding recently issued accounting pronouncements may be found in Note 3 to our consolidated financial statements included in this Annual Report on Form 10-K.

​

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are potentially exposed to market risks associated with changes in foreign currency translation rates, interest rates and commodity prices. We selectively use financial instruments to reduce these risks. All transactions related to risk management techniques are authorized and executed pursuant to our policies and procedures. Analytical techniques used to manage and monitor foreign currency translation and interest rate risk include market valuations and sensitivity analysis.

We have estimated our market risk exposure using sensitivity analysis. To test the sensitivity of our market risk exposure, we have estimated the changes in fair value of market risk sensitive instruments assuming a hypothetical 10 percent adverse change in market prices or rates. The results of the sensitivity analyses are summarized below.

Foreign Currency Risk

We generate a substantial portion of our revenues in international markets, principally Germany and other countries in the European Union, Switzerland and Japan, which exposes our operations to the risk of exchange rate fluctuations. The impact of currency exchange rate movement can be positive or negative in any period. Our costs related to sales in foreign currencies are largely denominated in the same respective currencies, reducing our transaction risk exposure. However, for foreign currency denominated sales in certain regions, such as Japan, where we do not incur significant costs denominated in Japanese Yen, we are more exposed to the impact of foreign currency fluctuations.

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For sales not denominated in U.S. dollars, if there is an increase in the rate at which a foreign currency is exchanged for U.S. dollars, it will require more of the foreign currency to equal a specified amount of U.S. dollars than before the rate increase. In such cases, if we price our products in the foreign currency, we will receive less in U.S. dollars than we would have received before the rate increase went into effect. If we price our products in U.S. dollars and competitors price their products in local currency, an increase in the relative strength of the U.S. dollar could result in our prices not being competitive in a market where business is transacted in the local currency. For example, if the U.S. dollar strengthened against the Japanese Yen, our Japanese-based competitors would have a greater pricing advantage over us. Our revenue by geography was as follows (dollars in millions):

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ Percentage of ​ ​ ​ ​ Percentage of ​ ​ ​ Percentage of

​ Revenue Revenue Revenue Revenue Revenue Revenue

​

Changes in foreign currency exchange rates increased our revenue by approximately 1.4% in the year ended December 31, 2020 and decreased our revenue by approximately 2.7% in the year ended December 31, 2019.

Assets and liabilities of our foreign subsidiaries, where the functional currency is the local currency, are translated into U.S. dollars using period end exchange rates, or historical rates, as appropriate. 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 shareholders’ equity. In the years ended December 31, 2020 and 2019, we recorded net gains of $22.0 million and net losses of $20.0 million, respectively, from currency translation adjustments. A 10% depreciation in functional currencies, relative to the U.S. dollar, at December 31, 2020, would have resulted in a reduction of shareholders’ equity of approximately $170.1 million. Gains and losses resulting from foreign currency transactions are reported in interest and other income (expense), net in the consolidated statements of income and comprehensive income. Our foreign currency translation gain (loss), net were net losses of $7.9 million and $3.3 million for years ended December 31, 2020 and 2019, respectively.

The impact of currency exchange rate movement can be positive or negative in any period. We periodically enter into foreign currency contracts in order to minimize the volatility that fluctuations in currency translation have on our monetary transactions. Under these arrangements, we typically agree to purchase a fixed amount of a foreign currency in exchange for a fixed amount of U.S. Dollars or other currencies on specified dates with maturities of less than twelve months, with some agreements extending to longer periods. These transactions do not qualify for hedge accounting and, accordingly, the instrument is recorded at fair value with the corresponding gains and losses recorded in the consolidated statements of income and comprehensive income.

At December 31, 2020 and 2019, we have entered into several cross-currency and interest rate swap agreements with a notional value of $150 million of U.S. dollar to Swiss Franc and a notional value of $355 million of U.S. dollar to Euro hedge the variability in the movement of foreign currency exchange rates on portions of our Euro and Swiss Franc denominated net asset investments. Under the U.S. GAAP hedge accounting guidance, changes in fair value of the derivative that relates to changes in the foreign currency spot rate are recorded in the currency translation adjustment in comprehensive income (loss) and remain in accumulated comprehensive income (loss) in stockholders’ equity until the sale or substantial liquidation of the foreign operation. The difference between the interest rate received and paid under the interest rate cross-currency swap derivative agreement is recorded in interest income in the statement of income.

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From time to time, we have entered into forward currency contracts designed to minimize the volatility that fluctuations in foreign currency have on our cash flows related to purchases and sales denominated in foreign currencies. Under these arrangements, we agree to purchase a fixed amount of a foreign currency in exchange for a fixed amount of U.S. Dollars or other currencies on specified dates typically with maturities of less than twelve months with some agreements extending to longer periods. These transactions are recorded at fair value with the corresponding gains and losses recorded in interest and other income (expense), net in the unaudited condensed consolidated statements of income and comprehensive income. At December 31, 2020 and 2019, we had forward currency contracts with notional amounts aggregating $278.3 million and $74.4 million, respectively. We will continue to evaluate our currency risks, and in the future, may utilize foreign currency contracts more frequently.

Interest Rate Risk

We regularly invest excess cash in short-term investments that are subject to changes in interest rates. We believe that the market risk arising from holding these financial instruments is minimal because of our policy of investing in short-term financial instruments issued by highly rated financial institutions.

Our exposure related to adverse movements in interest rates is derived primarily from outstanding floating rate debt instruments that are indexed to short-term market rates. We currently have a higher level of fixed rate debt than variable rate debt, which limits the exposure to adverse movements in interest rates.

Commodity Price Risk

We are exposed to certain commodity risks associated with prices for various raw materials. The prices of copper and certain other raw materials, particularly niobium-tin, used to manufacture superconductors have increased significantly over the last decade. Copper and niobium-tin are the main components of low temperature superconductors and continued commodity price increases for copper and niobium, as well as other raw materials, may negatively affect our profitability. We have arrangements with certain customers under which it has a firm committment to deliver copper based on superconductor wire at a fixed price. In order to minimize the volatility that fluctuations in the price of copper have on our sales of these commodities, we enter into commodity hedge contracts. At December 31, 2020 and 2019, we had fixed price commodity contracts with notional amounts aggregating $8.8 million and $5.6 million, respectively. The fair value of the fixed price commodity contracts at December 31, 2020 and 2019 was $3.1 million and $0.3 million, respectively. As commodity contracts settle, gains (losses) as a result of changes in fair values are adjusted to the contracts with the customers through revenues. We will continue to evaluate our commodity risks and may utilize commodity forward purchase contracts more frequently in the future.

Inflation Risk

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

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ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index of Consolidated Financial Statements

​ ​

​ Page

Report of Independent Registered Public Accounting Firm ​ 66

​ ​ ​

Consolidated Balance Sheets as of December 31, 2020 and 2019 ​ 69

​ ​ ​

​ ​ ​

​ ​ ​

​ ​ ​

Notes to Consolidated Financial Statements ​ 73

​

​

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Bruker Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Bruker Corporation and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income and comprehensive income, of redeemable noncontrolling interest and shareholders’ equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Canopy Biosciences, LLC and SmartTip B.V. from its assessment of internal control over financial

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reporting as of December 31, 2020 because they were acquired by the Company in purchase business combinations during 2020. We have also excluded Canopy Biosciences, LLC and SmartTip B.V. from our audit of internal control over financial reporting. Canopy Biosciences, LLC and SmartTip B.V. are wholly-owned subsidiaries whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting collectively represent 0.2% and 0.1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2020.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Goodwill Impairment Assessment – Reporting Unit in Bruker Scientific Instruments(BSI) NANO Segment

As described in Notes 2 and 9 to the consolidated financial statements, the Company’s consolidated goodwill balance was $320.4 million as of December 31, 2020, $228.0 million of which relates to the BSI NANO segment. Management evaluates goodwill for impairment on an annual basis, or on an interim basis when events or changes in circumstances indicate that the carrying value may not be recoverable. Management tests goodwill for impairment at the reporting unit level, which is the operating segment or one level below an operating segment. Management determines fair value of reporting units using a weighting of both the market and the income methodologies. In assessing the recoverability of goodwill, management must make assumptions regarding the estimated future cash flows, including the forecasted revenue growth and the discount rate to determine the fair value. If the carrying amount of a reporting unit exceeds the fair value of the reporting unit, management recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value up to the total amount of goodwill allocated to the reporting unit.

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of a reporting unit in the BSI NANO segment is a critical audit matter are the significant judgment by management when developing the fair value measurement of the reporting unit. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s

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siginificant assumptions related to the forecasted revenue growth and the discount rate. The audit effort also involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s reporting unit. These procedures also included, among others, testing management’s process for developing the fair value estimate of the reporting unit; evaluating the appropriateness of using a weighting of both the market and income methodologies; testing the completeness, accuracy, and relevance of underlying data used in the methodologies; and evaluating the significant assumptions used by management related to the forecasted revenue growth and the discount rate. Evaluating management’s assumptions related to the forecasted revenue growth and the discount rate involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s methodologies and discount rate assumption.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

March 1, 2021

We have served as the Company’s auditor since 2016.

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BRUKER CORPORATION

CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share data)

​ ​ ​ ​ ​ ​ ​

​ ​ December 31,

ASSETS ​ ​ ​ ​ ​ ​

Current assets: ​ ​ ​ ​ ​ ​

Cash and cash equivalents ​ $ 681.8 ​ $ 678.3

Short-term investments ​ ​ 50.0 ​ ​ 6.6

Accounts receivable, net ​ ​ 335.3 ​ 362.2

​ ​ ​ ​ ​ ​ ​

Property, plant and equipment, net ​ 395.5 ​ 306.1

Operating lease assets ​ ​ 67.4 ​ ​ 65.6

Deferred tax assets ​ 72.0 ​ 60.5

Other long-term assets ​ 39.6 ​ 16.8

Current liabilities: ​ ​ ​ ​ ​ ​

Current portion of long-term debt ​ $ 2.2 ​ $ 0.5

Other current liabilities ​ ​ 465.9 ​ 388.8

Total current liabilities ​ 791.9 ​ 645.6

Long-term deferred revenue ​ ​ 50.9 ​ 42.8

Deferred tax liabilities ​ ​ 43.1 ​ 48.8

Operating lease liabilities ​ ​ 47.0 ​ ​ 47.0

Other long-term liabilities ​ ​ 176.1 ​ 113.9

​ ​ ​ ​ ​ ​ ​

Commitments and contingencies (Note 17) ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​

Redeemable noncontrolling interest ​ ​ — ​ ​ 21.1

​ ​ ​ ​ ​ ​ ​

Shareholders’ equity: ​ ​ ​ ​ ​ ​

Additional paid-in capital ​ 216.3 ​ 199.7

Accumulated other comprehensive (loss) income ​ 3.7 ​ (25.5)

Total shareholders’ equity attributable to Bruker Corporation ​ 961.2 ​ 906.8

Noncontrolling interest in consolidated subsidiaries ​ 13.1 ​ 10.3

Total shareholders’ equity ​ 974.3 ​ 917.1

​

The accompanying notes are an integral part of these consolidated financial statements.

​

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BRUKER CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(in millions, except per share data)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended December 31,

Other revenue ​ ​ 6.0 ​ 5.5 ​ 7.3

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Cost of other revenue ​ ​ 1.0 ​ ​ 0.5 ​ ​ 1.1

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Operating expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Interest and other income (expense), net ​ (22.5) ​ (20.5) ​ (17.7)

Net income attributable to Bruker Corporation ​ $ 157.8 ​ $ 197.2 ​ $ 179.7

Net income per common share attributable to ​ ​ ​ ​ ​ ​ ​ ​ ​

Bruker Corporation shareholders: ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Weighted average common shares outstanding: ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

The accompanying notes are an integral part of these consolidated financial statements.

​

​

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BRUKER CORPORATION

CONSOLIDATED STATEMENTS OF REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY

(in millions, except share data)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Shareholders’ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

The accompanying notes are an integral part of these consolidated financial statements.

​

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BRUKER CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended December 31,

Cash flows from operating activities: ​ ​ ​ ​ ​ ​ ​ ​ ​

Depreciation and amortization ​ ​ 80.4 ​ ​ 75.6 ​ ​ 64.9

Stock-based compensation expense ​ ​ 16.0 ​ ​ 9.6 ​ ​ 11.3

Deferred income taxes ​ ​ (22.5) ​ ​ (5.4) ​ ​ (15.1)

Impairment and other non-cash expenses, net ​ ​ 27.3 ​ ​ 10.1 ​ ​ 39.8

Accounts receivable ​ ​ 40.8 ​ ​ (5.0) ​ ​ (30.5)

Accounts payable and accrued expenses ​ ​ (2.4) ​ ​ 15.9 ​ ​ 5.0

Income taxes payable ​ ​ 42.9 ​ ​ 13.1 ​ ​ 4.0

Deferred revenue ​ ​ 16.9 ​ ​ 7.3 ​ ​ 7.1

Customer advances ​ ​ 51.7 ​ ​ 4.2 ​ ​ 3.5

Other changes in operating assets and liabilities ​ ​ 11.3 ​ ​ (49.8) ​ ​ 4.2

Net cash provided by operating activities ​ 332.2 ​ ​ 213.4 ​ ​ 239.7

Cash flows from investing activities: ​ ​ ​ ​ ​ ​ ​ ​ ​

Purchase of short-term investments ​ ​ (150.0) ​ ​ (6.4) ​ ​ —

Maturity of short-term investments ​ ​ 106.1 ​ ​ — ​ ​ 117.0

Purchase of available for sale debt securities ​ ​ (1.2) ​ ​ — ​ ​ —

Cash paid for acquisitions, net of cash acquired ​ (59.2) ​ ​ (90.0) ​ ​ (191.6)

Purchases of property, plant and equipment ​ (97.2) ​ ​ (73.0) ​ ​ (49.2)

Proceeds from sales of property, plant and equipment ​ 0.2 ​ ​ 11.0 ​ ​ 0.4

Net proceeds from cross-currency swap agreements ​ ​ 8.6 ​ ​ — ​ ​ —

Net cash used in investing activities ​ (192.7) ​ ​ (158.4) ​ ​ (123.4)

Cash flows from financing activities: ​ ​ ​ ​ ​ ​ ​ ​ ​

Proceeds from 2019 Note Purchase Agreement ​ ​ — ​ ​ 297.9 ​ ​ —

Proceeds from 2019 Term Loan Agreement ​ ​ — ​ ​ 300.0 ​ ​ —

Repayments of revolving lines of credit ​ ​ (305.1) ​ ​ (361.9) ​ ​ (218.1)

Proceeds from revolving lines of credit ​ ​ 297.5 ​ ​ 250.6 ​ ​ 129.4

Repayment of 2012 Note Purchase Agreement ​ ​ — ​ ​ (15.0) ​ ​ —

Repayment of other debt, net ​ ​ (0.7) ​ ​ (4.6) ​ ​ (4.8)

Payment of deferred financing costs ​ ​ (0.1) ​ ​ (4.4) ​ ​ —

Proceeds from issuance of common stock, net ​ ​ 3.3 ​ ​ 10.9 ​ ​ 9.4

Payment of contingent consideration ​ ​ (7.5) ​ ​ (6.2) ​ ​ (2.3)

Payment of dividends to common stockholders ​ ​ (24.6) ​ ​ (25.0) ​ ​ (25.1)

Repurchase of common stock ​ ​ (123.2) ​ ​ (142.3) ​ ​ —

Cash payments to noncontrolling interests ​ ​ (1.2) ​ ​ — ​ ​ (0.9)

Supplemental cash flow information: ​ ​ ​ ​ ​ ​ ​ ​ ​

Cash paid for interest ​ $ 28.7 ​ $ 16.0 ​ $ 11.7

Cash paid for taxes ​ $ 43.0 ​ $ 61.3 ​ $ 60.5

Restricted cash period beginning balance ​ $ 3.6 ​ $ 3.9 ​ $ 3.9

Restricted cash period ending balance ​ $ 3.7 ​ $ 3.6 ​ $ 3.9

​

The accompanying notes are an integral part of these consolidated financial statements.

​

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

Bruker Corporation, together with its consolidated subsidiaries (Bruker or the Company), develops, manufactures and distributes high-performance scientific instruments and analytical and diagnostic solutions that enable its customers to explore life and materials at microscopic, molecular and cellular levels. Many of the Company’s products are used to detect, measure and visualize structural characteristics of chemical, biological and industrial material samples. The Company’s products address the rapidly evolving needs of a diverse array of customers in life science research, pharmaceuticals, biotechnology, applied markets, cell biology, clinical research, microbiology, in-vitro diagnostics, nanotechnology and materials science research.

The Company has four operating segments, Bruker BioSpin Group, Bruker CALID Group, Bruker Scientific Instruments (BSI) Nano Segment and Bruker Energy & Supercon Technologies (BEST). The Company has three reportable segments, BSI Life Science Segment, BSI NANO Segment and BEST.

For financial reporting purposes, the Bruker BioSpin Group and Bruker CALID Group operating segments are aggregated into the reportable BSI Life Science Segment because each has similar economic characteristics, production processes, service offerings, types and classes of customers, methods of distribution and regulatory environments.

Bruker BioSpin - The Bruker BioSpin Group designs, manufactures and distributes enabling life science tools based on magnetic resonance technology. Bruker BioSpin Group’s revenues are generated by academic and government research customers, pharmaceutical and biotechnology companies and nonprofit laboratories, as well as chemical, food and beverage, clinical and other industrial companies.

Bruker CALID(Chemicals, Applied Markets, Life Science, In-Vitro Diagnostics, Detection) -The Bruker CALID Group designs, manufactures and distributes life science mass spectrometry and ion mobility spectrometry solutions, analytical and process analysis instruments and solutions based on infrared and Raman molecular spectroscopy technologies and radiological/nuclear detectors for Chemical, Biological, Radiological, Nuclear and Explosive (CBRNE) detection. Customers of the Bruker CALID Group include academic institutions and medical schools; pharmaceutical, biotechnology and diagnostics companies; contract research organizations; nonprofit and for-profit forensics laboratories; agriculture, food and beverage safety laboratories; environmental and clinical microbiology laboratories; hospitals and government departments and agencies.

The BSI NANO Segment designs, manufactures and distributes advanced X-ray instruments; atomic force microscopy instrumentation; advanced fluorescence optical microscopy instruments; analytical tools for electron microscopes and X-ray metrology; defect-detection equipment for semiconductor process control; handheld, portable and mobile X-ray fluorescence spectrometry instruments; and spark optical emission spectroscopy systems. Customers of the BSI NANO Segment include academic institutions, governmental customers, nanotechnology companies, semiconductor companies, raw material manufacturers, industrial companies, biotechnology and pharmaceutical companies and other businesses involved in materials analysis.

The BEST reportable segment develops and manufactures superconducting and non-superconducting materials and devices for use in renewable energy, energy infrastructure, healthcare and “big science” research. The segment focuses on metallic low temperature superconductors for use in magnetic resonance imaging, nuclear magnetic resonance, fusion energy research and other applications.

​

2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and all majority and wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.

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Noncontrolling Interests

Noncontrolling interests represents the minority shareholders’ proportionate share of the Company’s majority-owned subsidiaries. The portion of net income or net loss attributable to non-controlling interests is presented as net income attributable to noncontrolling interests in consolidated subsidiaries in the consolidated statements of income and comprehensive income, and the portion of other comprehensive income of these subsidiaries is presented in the consolidated statements of shareholders’ equity.

Redeemable Noncontrolling Interests

The Company had an agreement with noncontrolling interest holders that provided the Company with the right to purchase, and the noncontrolling interest holders with the right to sell, their remaining minority interest at a contractually defined redemption value. These rights were accelerated in certain events. As the redemption is contingently redeemable at the option of the noncontrolling interest shareholders, the Company classified the carrying amount of the redeemable noncontrolling interest in the mezzanine section on the consolidated balance sheet, which is presented above the equity section and below liabilities. Subsequent to the acquisition, the redeemable noncontrolling interest is measured at the greater of the amount that would be paid if settlement occurred as of the balance sheet date based on the contractually defined redemption value and its carrying amount adjusted for net income (loss) attributable to the noncontrolling interest. Adjustments to the carrying value of the redeemable noncontrolling interest were recorded through retained earnings. The Company exercised its option to purchase the remainder of the entity during 2020. The carrying value of the noncontrolling interest was accreted to the redemption value through retained earnings and then reclassified to additional paid in capital. At December 31, 2020, there were no redeemable noncontrolling interests.

Business Combinations

The Company accounts for business combinations under the acquisition method of accounting. Accordingly, at the date of each acquisition, the Company measures the fair value of all identifiable assets acquired (including intangible assets), liabilities assumed and any remaining noncontrolling interests and allocates the amounts paid to all items measured. The fair value of identifiable intangible assets acquired is based on valuations that use information and assumptions determined by management and which consider management’s best estimates of inputs and assumptions that a market participant would use.

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.

Significant estimates and judgments made by management in preparing these financial statements include revenue recognition, allowances for doubtful accounts, write-downs for excess and obsolete inventory, estimated fair values used to record impairment charges related to intangible assets, goodwill, and other long-lived assets, amortization periods, expected future cash flows used to evaluate the recoverability of long-lived assets and to record intangible assets in business combinations, stock-based compensation expense, warranty allowances, restructuring and other related charges, contingent liabilities and the recoverability of the Company’s net deferred tax assets.

Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from management’s estimates if these results differ from historical experience or other assumptions prove not to be substantially accurate, even if such assumptions were reasonable when made.

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Subsequent Events Considerations

The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated as required. The Company has evaluated all subsequent events and determined that, other than as reported herein, there are no material recognized or unrecognized subsequent events.

Cash and Cash Equivalents

Cash and cash equivalents primarily include cash on hand, money market funds and time deposits with original maturities of three months or less at the date of acquisition. 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 government agency. Cash equivalents are carried at cost, which approximates fair value.

Short-term Investments

Short-term investments represent time and call deposits with original maturities of greater than three months at the date of acquisition. Short-term investments are classified as available-for-sale and are reported at fair value. There were no unrealized gains (losses) recorded as of December 31, 2020, 2019 and 2018, as cost approximates current fair value. There were no short-term investments held by the Company as of December 31, 2018.

Restricted Cash

Restricted cash is included as a component of cash, cash equivalents, and restricted cash on the Company’s consolidated statement of cash flows. The Company has certain subsidiaries that are required by local laws and regulations to maintain restricted cash balances to cover future employee benefit payments. Restricted cash balances are classified as non-current unless, under the terms of the applicable agreements, the funds will be released from restrictions within one year from the balance sheet date. The current and non-current portion of restricted cash is recorded within other current assets and other long-term assets, respectively, in the accompanying consolidated balance sheets.

Accounts Receivable, net

Accounts receivable have been reduced by an allowance for doubtful accounts. The allowance for doubtful accounts represents the Company’s best estimate of the amount of probable credit losses in our accounts receivable. The Company’s allowance is based on a number of factors, including an evaluation of customer credit worthiness, the age of the outstanding receivable, economic trends and historical experience. Provisions for doubtful accounts are recorded in selling, general and administrative expenses in the accompanying consolidated statements of income and comprehensive income.

​

Derivative Financial Instruments and Hedging Activities

All derivatives, whether designated in a hedging relationship or not, are recorded on the consolidated balance sheets at fair value. The accounting for changes in fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, the Company must designate the hedging instrument, based on the exposure being hedged, as a fair value hedge, cash flow hedge, foreign currency hedge or a hedge of a net investment in a foreign operation. If a derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of the hedged item through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Derivatives that are not designated as hedges are recorded at fair value through earnings. The Company presents the cross-currency swap periodic settlements in investing activities and the interest rate swap periodic settlements in operating activities in the statement of cash flows.

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Fair Value of Financial Instruments

The Company applies the following hierarchy to determine the fair value of financial instruments, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The levels in the hierarchy are defined as follows:

The valuation techniques that may be used by the Company to determine the fair value of Level 2 and Level 3 financial instruments are the market approach, the income approach and the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value based on current market expectations about those future amounts, including present value techniques, option-pricing models and the excess earnings method. The cost approach is based on the amount that would be required to replace the service capacity of an asset (replacement cost).

The Company’s financial instruments consist primarily of cash equivalents, short-term investments, restricted cash, derivative instruments consisting of forward foreign exchange contracts, cross-currency interest rate swap agreements, commodity contracts, derivatives embedded in certain purchase and sale contracts, derivatives embedded within noncontrolling interests, accounts receivable, accounts payable, contingent consideration and long-term debt. The carrying amounts of the Company’s cash equivalents, short-term investments and restricted cash, accounts receivable, borrowings under a revolving credit agreement and accounts payable approximate fair value because of their short-term nature. Derivative assets and liabilities are measured at fair value on a recurring basis. The Company’s long-term debt consists principally of a note purchase agreement entered into in 2012 and a revolving credit agreement, long term loan agreement and note purchase agreement entered into in 2019.

The Company has evaluated the estimated fair value of financial instruments using available market information and management’s estimates. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts.

Concentration of Credit Risk

Financial instruments that subject the Company to credit risk consist of cash, cash equivalents, short-term investments, derivative instruments, accounts receivables and restricted cash. The risk with respect to cash, cash equivalents and short-term investments 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 derivative instruments is minimized by the Company’s policy of entering into arrangements with highly rated financial institutions. The risk with respect to accounts receivables is minimized by the creditworthiness and diversity of the Company’s customers. The Company performs periodic credit evaluations of its customers’ financial condition and generally requires an advanced deposit for a portion of the purchase price. Credit losses have been within management’s expectations and the allowance for doubtful accounts totaled $3.0 million and $3.4 million at December 31, 2020 and 2019, respectively. At December 31, 2020 and 2019, no single customer represented 10% or more of the Company’s accounts receivable. For the years ended December 31, 2020, 2019 and 2018, no single customer represented 10% or more of the Company’s total revenue.

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Inventories

Components of inventory include raw materials, work-in-process, demonstration units and finished goods. Demonstration units include systems which are located in the Company’s demonstration laboratories or installed at the sites of potential customers 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 and net realizable value. Cost is determined principally by the first-in, first-out method for a majority of subsidiaries and by average-cost for certain other subsidiaries. The Company reduces the carrying value of its inventories for differences between 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 inventories. The Company records a charge to cost of product revenue for the amount required to reduce the carrying value of inventory to net realizable value. Costs associated with the procurement of inventories, such as inbound freight charges and purchasing and receiving costs, are capitalized as part of inventory and are also included in the cost of product revenue line item within the consolidated statements of income and comprehensive income.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Major improvements that extend the useful lives are capitalized while expenditures for maintenance, repairs and minor improvements are charged to expense as incurred. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation and amortization are eliminated from the accounts and any resulting gain or loss is reflected in the consolidated statements of income and comprehensive income. Depreciation and amortization are calculated on a straight-line basis over the estimated useful lives of the assets as follows:

​

​ ​ ​

​ ​ Estimated Useful Life

Buildings 25 to 40 years

Machinery and equipment ​ 3 to 10 years

Computer equipment and software ​ 3 to 5 years

Furniture and fixtures ​ 3 to 10 years

Leasehold improvements ​ Lesser of 15 years or the remaining lease term

​

Goodwill and Intangible Assets

Goodwill and indefinite-lived intangible assets are not amortized, but are evaluated for impairment on an annual basis, or on an interim basis when events or changes in circumstances indicate that the carrying value may not be recoverable. In assessing the recoverability of goodwill and indefinite-lived intangible assets, the Company must make assumptions regarding the estimated future cash flows, including forecasted revenue growth and the discount rate to determine the fair value of these assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges against these assets in the reporting period in which the impairment is determined.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new standard simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. The adoption of this ASU on January 1, 2020 did not have a material impact on the Company's consolidated financial statements.

The Company tests goodwill for impairment at the reporting unit level, which is the operating segment or one level below an operating segment. The Company has the option of performing a qualitative assessment to determine whether further impairment testing is necessary before performing the quantitative assessment. If as a result of the qualitative assessment, it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, a quantitative impairment test will be required. Otherwise, no further testing will be required. If a quantitative impairment test is performed, the Company compares the fair values of the applicable reporting

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units with their aggregate carrying values, including goodwill. The Company determines fair value of reporting units using a weighting of both the market and the income methodologies. Estimating the fair value of the reporting units requires significant judgment by management. If the carrying amount of a reporting unit exceeds the fair value of the reporting unit, an impairment charge is recognized for the amount by which the carrying value amount exceeds the reporting unit’s fair value up to the total amount of goodwill allocated to the reporting unit.

In process research and development, or IPR&D, acquired as part of business combinations under the acquisition method represents ongoing development work associated with enhancements to existing products, as well as the development of next generation products. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment on an annual basis, or when indicators of impairment are identified. When the IPR&D project is complete, it is reclassified as a finite-lived intangible asset and is amortized over its estimated useful life. If an IPR&D project is abandoned before completion or is otherwise determined to be impaired, the value of the asset or the amount of the impairment is charged to the consolidated statements of income and comprehensive income in the period the project is abandoned or impaired. At December 31, 2020 and 2019, the Company did not have any IPR&D.

Intangible assets with a finite useful life are amortized on a straight-line basis over their estimated useful lives as follows:

​

​ ​ ​

​ ​ Estimated Useful Life

Existing technology and related patents 3 to 15 years

Customer and distributor relationships ​ 5 to 15 years

Trade names ​ 5 to 15 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 fair value of those assets are less than the assets’ carrying value and are not recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their fair values. Impairment losses are charged to the consolidated statements of income and comprehensive income for the difference between the fair value and carrying value of the asset.

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 warranty is accrued upon recognition of the sale and is included as a current liability on the accompanying consolidated balance sheets. The Company’s warranty reserve reflects estimated material and labor costs for potential product issues for which the Company expects to incur an obligation. The Company’s estimates of anticipated rates of warranty claims and costs are primarily based on historical information. The Company assesses the adequacy of the warranty reserve on a quarterly basis and adjusts the amount as necessary. If the historical data used to calculate the adequacy of the warranty reserve is not indicative of future requirements, additional or reduced warranty reserves may be required.

The Company also offers to its customers extended warranty and service agreements extending beyond the initial warranty for a fee. These fees are recorded as deferred revenue and recognized ratably into income over the life of the extended warranty contract or service agreement.