BRUKER CORP quarterly report, Q3 FY2019

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Bruker Corporation — Q3 2019 Form 10-Q

Business context and period. Bruker develops and sells scientific instruments and analytical and diagnostic solutions. Its two reportable segments are Bruker Scientific Instruments (BSI) and Bruker Energy & Supercon Technologies (BEST). This unaudited report covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods.

Financial performance

  • Revenue: Q3 revenue was $521.1 million, up 11.7%; nine-month revenue was $1,472.7 million, up 9.7%. Management reported organic growth of 7.6% in Q3 and 6.0% year to date, excluding acquisitions and currency effects. Acquisitions added $29.9 million to Q3 growth and $94.4 million year to date; currency translation reduced revenue by $10.7 million and $43.8 million, respectively.
  • Segments: Q3 BSI revenue rose 13.1% to $471.8 million; BEST revenue rose 3.1% to $52.5 million. Nine-month BSI revenue increased 10.3% to $1,331.0 million and BEST revenue increased 9.3% to $152.2 million. Management cited demand across BSI groups and healthcare-related superconductor shipments for BEST.
  • Profit and margins: Q3 gross profit was $253.9 million (48.7% margin, versus 47.7%); operating income was $87.8 million (16.8% margin, versus 14.8%); and net income attributable to Bruker was $61.3 million, or $0.39 diluted EPS, versus $43.4 million, or $0.28. For nine months, gross profit was $699.0 million (47.5% margin), operating income $183.2 million (12.4% margin), and attributable net income $128.6 million, or $0.82 diluted EPS, compared with $627.2 million, 46.7%, $156.0 million, 11.6%, and $101.6 million, or $0.65, respectively.
  • Cash flow: Nine-month operating cash flow was $77.2 million, down from $107.4 million. Free cash flow, a non-GAAP measure defined as operating cash flow less capital expenditures, was $32.4 million versus $78.5 million. Inventory growth was a major use of operating cash; capital expenditures were $44.8 million.
  • Liquidity and debt: At September 30, cash and cash equivalents were $296.3 million and short-term investments $6.1 million. Total debt was $518.8 million, up from $341.1 million at year-end 2018, principally reflecting increased revolving-credit borrowings. The company reported $188.5 million available under its $500 million main revolver and $298.8 million available across revolving lines in total. It was in compliance with debt covenants and expects cash and credit facilities to meet operating and investing needs for at least 12 months.
  • Other metrics: Inventories increased to $586.7 million from $509.6 million at year-end. The quarterly dividend remained $0.04 per share. The company repurchased $142.3 million of stock in the first nine months under a $300 million authorization.

Material changes and management commentary

  • Management attributed margin expansion to operating improvements, accretive acquisitions and favorable currency translation. Q3 and nine-month effective tax rates fell to 26.1% and 23.6%, respectively, from 32.4% and 28.7%; management cited favorable discrete tax items, including updates related to the Tax Act toll charge.
  • Q3 other operating charges were a net gain of $5.3 million, including a $7.8 million gain on the sale of a Leipzig building. Nine-month other charges were $4.9 million. Acquisition-related amortization and other acquisition and restructuring charges affected reported margins; management also presents non-GAAP measures that exclude specified items.
  • Acquisition cash payments were $79.0 million year to date. Acquisitions included Rave, Arxspan, Ampegon PPT and PMOD Technologies; management said the combined impact of acquisitions on revenue, net income and assets was not material.
  • The company adopted lease accounting in 2019, recognizing operating lease assets of $68.9 million and operating lease liabilities of $71.1 million at September 30. Management said adoption did not significantly affect results of operations.

Outlook, risks and contingencies

  • The filing provides no quantified revenue or earnings guidance. Management noted that results can fluctuate with research budgets, customer order-to-acceptance timing, facility readiness, customs and export requirements, and government licensing.
  • Risks include foreign-exchange movements, variable-rate debt exposure, raw-material prices, acquisition integration, product development and acceptance, competition, government funding and regulation, and litigation. The stronger U.S. dollar reduced nine-month revenue by 3.3%.
  • Two German patent-infringement complaints were filed in September 2019: one concerning a Luxendo product category and one concerning the timsTOF product line. Bruker said it intends to defend both; no material accruals were recorded, and management did not expect pending proceedings to materially affect the financial statements.
  • The SEC staff concluded its investigation and notified Bruker it did not intend to recommend enforcement action. A separate Korea Fair Trade Commission matter resulted in an approximately $20,000 fine against Bruker Korea and no criminal liability.
  • After quarter-end, Bruker acquired Magnettech’s EPR business for approximately $9.3 million. It also signed an October 31 agreement to purchase two Billerica properties for $12.3 million from trusts controlled equally by the CEO and his half-brother; closing was expected in Q1 2020, subject to due diligence and customary conditions.

Investor verification priorities

  1. Assess whether revenue growth and margin improvement persist after separating organic performance, acquisition effects, currency, and the Leipzig property-sale gain.
  2. Monitor cash conversion, particularly the $80.9 million cash use from inventory growth, and the decline in operating and free cash flow.
  3. Review the higher debt balance, revolver utilization, covenant headroom, and the October 2020 maturity of the main revolving credit agreement.
  4. Track integration and returns from recent acquisitions, and the final purchase accounting for Rave and Magnettech.
  5. Follow the two patent disputes and the related-party Billerica property purchase, including final terms and closing.