Bruker Corporation — Q3 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2014, compared with the same 2013 periods. Bruker designs and sells scientific instruments and related products and services. Its Bruker Scientific Instruments (BSI) segment generated about 92% of revenue year to date; the other reporting segment is Bruker Energy & Supercon Technologies (BEST). Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $419.8 | $439.0 | $1,300.9 | $1,287.3 |
| Gross profit / margin | $167.3 / 39.9% | $193.2 / 44.0% | $547.5 / 42.1% | $569.3 / 44.2% |
| Operating income / margin | $4.9 / 1.2% | $31.5 / 7.2% | $60.9 / 4.7% | $87.2 / 6.8% |
| Net income attributable to Bruker | $5.5 | $16.6 | $30.6 | $44.9 |
| Diluted earnings per share | $0.03 | $0.10 | $0.18 | $0.27 |
| Operating cash flow | Not separately presented | Not separately presented | $45.0 | $13.6 |
- Q3 revenue fell 4.4%; product revenue declined while service revenue increased. Excluding foreign exchange and acquisitions, revenue declined 4.8%.
- For the first nine months, reported revenue grew 1.1%, but declined 0.4% excluding foreign exchange, acquisitions and divestitures.
- Q3 BSI revenue declined 6.6% to $383.4; BEST revenue rose 23.1% to $40.0. Year-to-date BSI revenue was essentially flat at $1,198.8, while BEST increased 15.3% to $116.2.
- Q3 gross and operating margins weakened amid lower sales, product mix, currency effects and restructuring-related costs. Excluding specified charges, Q3 gross margin was 44.2% versus 45.1%, and operating margin was 8.6% versus 10.8%. These are company-presented non-GAAP measures.
- Year-to-date net income declined despite a smaller net interest and other expense; lower gross profit and a higher effective tax rate were principal factors. The nine-month effective tax rate was 42.7%, versus 35.2%.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $329.2 and short-term investments were $113.1. Cash, cash equivalents and short-term investments totaled $442.3, including $415.8 held outside the United States.
- Total debt was $355.2, comprising $240.0 of senior notes, $112.5 drawn on the revolving credit agreement and $2.7 of leases and other loans. Debt was broadly unchanged from year-end 2013.
- The company reported $252.1 available across revolving loans and lines, after borrowings and letters of credit. It was in compliance with debt covenants; reported leverage and interest coverage ratios were 1.3 and 13.2.
- Year-to-date operating cash flow of $45.0 reflected $112.5 of income and non-cash adjustments, partly offset by a $67.5 working-capital increase, including inventory investment and lower customer advances. Investing cash outflow was $135.7, primarily reflecting $120.8 of short-term investment purchases and $23.8 of net capital expenditures. Cash decreased $109.5, including a $25.0 adverse foreign-exchange effect.
- Management stated existing cash and credit facilities should support operating and investing needs for at least the next 12 months. Repatriating foreign subsidiary funds could create additional U.S. taxes; the company said it intends to reinvest those earnings abroad.
Material changes, outlook and risks
- Management attributed Q3 weakness to reduced NMR orders from government and academic customers, soft semiconductor, data-storage and microelectronics markets, Japanese competitors’ currency-related pricing advantage, export-license delays, and geopolitical uncertainty affecting Russian demand. Russia represented about 1% of year-to-date revenue.
- In July, the board approved divestitures and restructuring in the CAM division after concluding it was unlikely to achieve acceptable financial performance over the next two years. Actions were expected to reduce headcount by about 200. Related restructuring and other one-time charges through the first half of 2015 were estimated at $25–$30, including $8–$11 for employee separation and facility exits and $17–$19 for inventory write-downs and asset impairments. Q3 included $13.1 of plan-related restructuring costs and $6.9 of impairments.
- Bruker sold its ICP-MS product-line assets in September, recording an $8.7 gain. Certain additional CAM assets were divested in October; the company said the transaction’s assets and gain or loss were not material.
- The company recorded a $2.4 accrual in Q3 for its estimate of probable loss related to the ongoing China compliance investigation. The ICAC said it would take no action; discussions with SEC staff continued, and the company continued cooperating with U.S. authorities. Potential penalties and resolution remained uncertain.
- Foreign-exchange translation reduced nine-month comprehensive income: Bruker reported a $50.3 comprehensive loss, primarily reflecting $84.7 of currency translation losses. The company also reported a $9.5 year-to-date net loss on unrealized derivative instruments.
- Management said it would take additional restructuring measures following the Q3 revenue decline, but the filing provides no specific revenue or earnings guidance. It cautioned that restructuring benefits may be delayed or fail to materialize and costs could exceed expectations. Other exposures include foreign exchange, interest rates, commodity prices, and uncertain tax positions; unrecognized tax benefits were approximately $31.7.
Important facts for investors to verify
- Whether the CAM divestitures and approximately $25–$30 of expected charges deliver the anticipated operating and cash-flow improvements, and whether further restructuring is needed.
- Whether weak demand in NMR, semiconductor-related markets and Russia, and export-license delays persist; also monitor the recovery of BSI margins.
- Progress and potential financial consequences of the SEC/DOJ China investigation and the adequacy of the $2.4 accrual.
- Cash conversion and working-capital trends, foreign cash availability and potential tax costs of repatriation.
- Currency movements, including their impact on Japanese-market competitiveness and reported comprehensive income, as well as compliance with debt covenants.