BRUKER CORP quarterly report, Q3 FY2017

Bruker Corporation — Q3 2017 Form 10-Q

Reporting period: Three and nine months ended September 30, 2017. Bruker develops scientific instruments and analytical and diagnostic solutions. Its reportable segments are Bruker Scientific Instruments (BSI) and Bruker Energy & Supercon Technologies (BEST). Financial statements are unaudited and prepared under U.S. GAAP.

Financial performance

Q3 revenue grew 10.6%; acquisitions contributed approximately $19.1m and favorable currency approximately $9.0m. Organic revenue, a company-defined non-GAAP measure, grew 3.4%. For the nine months, revenue grew 8.3%; acquisitions added approximately $60.4m, while currency reduced revenue by approximately $5.1m. Organic revenue grew 3.4%.

Growth reflected improved academic, government and industrial research demand, semiconductor metrology, and industrial quality control. Q3 BSI revenue rose 8.0% to $390.6m; BEST revenue rose 29.9% to $46.1m, primarily reflecting the OST acquisition. Nine-month BSI revenue increased 4.0% and BEST revenue increased 53.7%. The OST acquisition and lower BEST margins weighed on consolidated gross margin. A weaker U.S. dollar against the euro and Swiss franc also increased costs at significant European manufacturing operations.

Cash flow, balance sheet and capital allocation

For the nine months, operating cash flow was $50.7m versus $40.0m in 2016. Capital expenditures were $31.3m, leaving company-defined free cash flow of $19.4m versus $14.0m. Working-capital demands included higher inventory and lower customer advances. Investing activities used $74.7m, including $65.8m net cash paid for acquisitions. Financing activities used $69.5m; the company repurchased $131.8m of stock and paid $19.1m of dividends, partly offset by revolving-credit borrowings.

At September 30, cash and cash equivalents were $263.9m and short-term investments were $165.3m, totaling $429.2m, compared with $500.3m at year-end 2016. Total debt was $480.5m, up from $411.7m; it included $260.0m drawn on the $500m revolving facility and $220.0m of senior notes, net of issuance costs, plus other debt. Revolver availability under the 2015 Credit Agreement and other credit lines totaled $370.7m, subject to facility terms and letters of credit. The company reported compliance with debt covenants; its defined leverage ratio was 1.61 and interest coverage ratio 14.8. Management said existing cash and credit facilities should support operating and investing needs for at least the next 12 months after filing.

Outlook, risks and unusual items

• The filing provides no specific full-year revenue or earnings guidance. Management cited continuing demand improvement in several research and industrial markets, but noted that China order-entry momentum had moderated and Japan remained soft.
• Management said quarterly results may fluctuate with academic and government funding, order-to-acceptance timing, customer facility readiness, customs and export requirements, and licensing. Foreign-exchange and raw-material price movements are additional risks.
• The company recorded a $9.8m Q3 tax provision versus a $4.0m benefit in Q3 2016; nine-month effective tax rates were 23.7% versus 4.3%. The prior-year periods benefited from discrete tax items, including valuation-allowance releases and resolved tax audits; their nonrecurrence reduced 2017 net income and EPS.
• Restructuring, acquisition-related and IT transformation costs remained material. The 2016 CALID/Nano restructuring initiative had incurred $16.3m through September 30, 2017, with total 2016–2017 charges estimated at $17m–$19m.
• Disclosure controls were deemed ineffective because of a material weakness in controls over income-tax accounting. Management said the weakness did not cause a misstatement in the 2017 interim statements and described remediation efforts, but said the weakness was not yet fully remediated.
• On October 19, 2017, the SEC issued an investigation notice and subpoena covering, among other matters, revenue recognition, restructuring, financial reporting, the tax-control weakness and certain non-employee travel payments. Bruker said it would cooperate; the duration, scope and outcome were uncertain.
• The company adopted the restricted-cash cash-flow standard in 2017. It planned to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method; preliminary analysis identified possible timing effects for certain BEST project orders and CALID CBRNE orders, though management did not expect a material overall impact.
• The Korean government matter concerning bidding was reported resolved: the criminal case was not pursued, suspensions had lapsed, and no further payments were accrued. The company said ordinary-course litigation was not expected to have a material impact.

Most important facts for investors to verify

• Progress and independent validation of remediation of the material weakness in income-tax controls, and any changes arising from the SEC investigation.
• Whether organic growth and order momentum persist, particularly in China, Japan, academic/government markets and industrial end markets.
• Whether BEST/OST integration improves margins and whether currency and product/geographic mix continue to pressure gross profit.
• Cash conversion and working-capital trends, especially inventory and customer advances, alongside acquisition spending and share repurchases.
• Debt levels, revolver capacity and covenant headroom as capital returns and investment needs continue.
• The actual revenue-recognition effects of the 2018 standard on relevant project-based and CBRNE contracts.