Bruker Corporation — Q1 2018 Form 10-Q
Business context and period: Bruker develops and sells scientific instruments and analytical and diagnostic solutions. This unaudited report covers the three months ended March 31, 2018, compared with the same period in 2017. Its two reportable segments are Bruker Scientific Instruments (BSI) and Bruker Energy & Supercon Technologies (BEST).
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $431.7 | $384.9 |
| Gross profit / margin | $199.4 / 46.2% | $176.4 / 45.8% |
| Operating income / margin | $38.1 / 8.8% | $37.6 / 9.8% |
| Net income attributable to Bruker | $27.0 | $21.6 |
| Diluted earnings per share | $0.17 | $0.13 |
| Operating cash flow | $43.8 | $32.6 |
| Free cash flow (non-GAAP) | $35.3 | $21.1 |
- Revenue rose 12.2%; management attributed $29.5 million of the increase to favorable foreign currency translation and $2.0 million to acquisitions. Organic revenue, a non-GAAP measure, increased 4.0%.
- BSI revenue was $387.0 million, up 11.7%; BEST revenue was $45.6 million, up 13.7%. BSI operating income declined to $35.7 million from $38.1 million; BEST improved to $2.2 million of operating income from a $0.5 million loss.
- Gross margin improved 0.4 percentage point, while operating margin fell 1.0 point. Management cited foreign currency effects as a drag on operating margins, more than offsetting volume growth and operational improvements.
- Cash, cash equivalents and short-term investments totaled $283.9 million at March 31, versus $439.2 million at December 31, 2017. The company had no short-term investments at quarter-end. Cash flow included $117.0 million from investment maturities and $195.0 million of revolving-credit repayments. Cash, cash equivalents and restricted cash at quarter-end were $287.8 million.
- Total debt was $220.6 million, down from $415.6 million at year-end; it included $220.0 million of senior notes. No borrowings were outstanding under the $500 million revolving credit agreement. Total available revolving lines, net of letters of credit, were $624.8 million. The company reported compliance with debt covenants, a 0.69 leverage ratio and 15.8 interest coverage ratio.
- Current assets were $1,240.5 million and current liabilities $558.7 million. Inventories increased to $518.0 million from $486.2 million at year-end.
Changes, outlook and notable items
- Revenue growth was led organically by CALID, continued growth in Nano and BEST, and demand in academic and government, biopharmaceutical, applied, industrial research and clinical microbiology markets. Organic growth was strong in Europe and the Americas, partly offset by a slight decline in Asia Pacific.
- Operating expenses rose, including other charges of $7.8 million versus $3.1 million a year earlier. Q1 2018 charges included $3.3 million for restructuring, $2.0 million of professional fees, $1.5 million for the multi-year IT transformation, and $1.0 million of acquisition-related costs.
- The effective tax rate declined to 23.5% from 31.3%, primarily because Q1 2017 included unfavorable non-recurring discrete tax items. The company said its estimates related to the 2017 Tax Act remained provisional and expected to finalize its assessment before year-end 2018.
- Bruker adopted ASC 606 on January 1, 2018 using the modified retrospective method. Adoption increased beginning retained earnings by $8.2 million, partly offset by a $2.1 million tax impact; management said the financial statement impact was not material.
- Management expects existing cash and credit facilities to support operating and investing needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance. Results may fluctuate with government and academic budgets, customer order and acceptance timing, import/export requirements, facility readiness and licensing.
- Risks include foreign-exchange movements, economic or political changes affecting customer spending, and commodity-price exposure. Foreign currency translation increased revenue by 7.7% in Q1; derivative instruments produced a $4.9 million net loss in interest and other income (expense).
- The SEC is investigating matters relating to a former employee, revenue recognition and restructuring accounting and disclosures since 2013, a previously identified tax-accounting internal-control weakness, and certain non-employee travel payments. Bruker said it is cooperating and cannot predict the investigation’s duration, scope or outcome. No material contingency accruals were recorded; management did not expect pending ordinary-course proceedings to materially affect the financial statements.
- After quarter-end, on April 8, 2018, Bruker acquired Anasys Instruments. The company also expects the lease accounting standard, effective for it in 2019, to materially increase balance-sheet assets and liabilities.
Important facts for investors to verify
- Track organic revenue and segment operating performance separately from favorable currency translation and acquisition contributions.
- Monitor whether operating-margin pressure, including foreign-exchange effects and higher operating charges, persists.
- Assess inventory growth, cash conversion and liquidity after the substantial repayment of revolving debt and the maturity of short-term investments.
- Follow developments in the SEC investigation and any updates to the company’s tax estimates or internal-control disclosures.
- Review the performance and financial impact of the Anasys acquisition, and the expected balance-sheet effect of lease-standard adoption.