Bruker Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Financial statements are unaudited. Bruker develops scientific instruments and analytical and diagnostic solutions. Its Bruker Scientific Instruments (BSI) segment generated about 91% of Q2 revenue; Bruker Energy & Supercon Technologies (BEST) generated the remainder.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $443.7 million | $414.9 million | $875.4 million | $799.8 million |
| Gross profit / margin | $205.2 million / 46.2% | $184.5 million / 44.5% | $404.6 million / 46.2% | $360.9 million / 45.1% |
| Operating income / margin | $48.8 million / 11.0% | $35.3 million / 8.5% | $86.9 million / 9.9% | $72.9 million / 9.1% |
| Net income attributable to Bruker | $31.2 million | $23.4 million | $58.2 million | $45.0 million |
| Diluted EPS | $0.20 | $0.15 | $0.37 | $0.28 |
Q2 revenue increased 6.9%; management reported organic growth of 2.9%, excluding acquisitions and favorable foreign-exchange effects. First-half revenue rose 9.5%, with organic growth of 3.4%. Favorable currency translation contributed $13.9 million in Q2 and $43.4 million in the first half. Gross and operating margin expansion reflected higher volumes, favorable mix and operational improvements, partly offset by foreign currency effects. Q2 comprehensive income attributable to Bruker was a loss of $5.2 million, primarily reflecting a $39.4 million foreign-currency translation loss.
BSI revenue grew 11.0% in Q2 and 11.4% in the first half, supported across its BioSpin, CALID and Nano groups. BEST revenue declined 20.9% in Q2 and 6.2% in the first half; management cited delivery and project timing, and in Q2 comparison with unusually high prior-year revenue. BSI operating margin rose to 11.7% in Q2 from 8.9%; BEST margin fell to 4.0% from 5.6% in Q2, but first-half BEST margin improved to 4.4% from 2.7%.
Cash flow, balance sheet and debt
- First-half operating cash flow was $79.9 million, versus $15.4 million a year earlier. Capital expenditures were $17.5 million; reported free cash flow was $62.4 million, versus negative $5.7 million.
- Cash and cash equivalents were $258.7 million at June 30, 2018, down from $325.0 million at year-end 2017; short-term investments fell from $114.2 million to zero, primarily reflecting maturities. Cash, cash equivalents and restricted cash at period-end were $262.5 million.
- Total debt was $220.6 million, down from $415.6 million at December 31, 2017, principally following repayment of $202.5 million of revolving borrowings. No revolver borrowings were outstanding at June 30; reported availability under revolving lines was $626.0 million, including the impact of letters of credit.
- Management stated existing cash and credit facilities should support operating and investing needs for at least the next 12 months. The company reported compliance with debt covenants; leverage ratio was 0.66 and interest coverage ratio was 18.1.
- Current assets were $1,182.0 million and current liabilities were $531.5 million. Inventories increased to $509.4 million from $486.2 million at year-end.
Outlook, notable items and risks
- The filing provides no specific revenue or earnings guidance. Remaining performance obligations were approximately $1,025.6 million; Bruker expected to recognize about 77.9% within 12 months.
- Bruker adopted ASC 606 revenue recognition in January 2018 using the modified retrospective method; the reported opening retained-earnings increase was $8.2 million, partly offset by a $2.1 million tax impact. Management said adoption had no material effect on the financial statements.
- Q2 income tax expense was $11.8 million, an effective rate of 27.3%, versus 20.5% a year earlier; management attributed the increase mainly to unfavorable non-recurring discrete items. The company had not completed its assessment of the 2017 U.S. tax law and expected to finalize provisional estimates by year-end 2018.
- Q2 other charges were $2.2 million and first-half charges were $10.0 million, including restructuring, professional fees, IT transformation and acquisition-related costs. Anasys Instruments was acquired in April for $27.0 million cash plus contingent consideration; JPK Instruments was acquired after quarter-end in July for $15.0 million plus potential additional consideration.
- The SEC is investigating matters including revenue recognition, restructuring, financial reporting, a previously identified tax-controls weakness and certain travel payments. Bruker is cooperating. The Audit Committee is also investigating concerns involving business partners and former employees in China, including potential Foreign Corrupt Practices Act issues; Bruker voluntarily disclosed the matter to the SEC and Department of Justice. The duration, scope and outcome are uncertain.
- Other risks include foreign-currency volatility, economic and government-research spending conditions, commodity prices, and timing of customer acceptance and deliveries. The company reported no material changes to the risk factors in its 2017 Form 10-K. It expects the new lease standard, effective for Bruker in 2019, to materially increase balance-sheet assets and liabilities.
Important facts for investors to verify
- Progress and any financial or legal consequences of the SEC and China-related investigations, and the status of remediation of the previously identified tax-controls weakness.
- Whether organic growth and margin gains persist once favorable currency translation and acquisition contributions are separated, especially given BEST’s revenue decline.
- Cash-flow sustainability and inventory levels, including the effect of customer acceptance and delivery timing on revenue and working capital.
- Final tax-reform accounting and potential withholding taxes on undistributed foreign earnings.
- Acquisition earnouts and integration, the timing and conversion of remaining performance obligations, and the balance-sheet impact of lease adoption.