Bruker Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Amounts are in U.S. dollars; financial statements are unaudited. Bruker designs and manufactures scientific instruments and superconducting materials and devices, reported in Scientific Instruments and Energy & Supercon Technologies.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $447.8 million | $418.4 million | $1,274.1 million | $1,176.6 million |
| Gross profit / margin | $210.6 million / 47.0% | $189.4 million / 45.3% | $589.2 million / 46.2% | $534.8 million / 45.5% |
| Operating income / margin | $60.3 million / 13.5% | $37.5 million / 9.0% | $116.8 million / 9.2% | $101.9 million / 8.7% |
| Net income attributable to Bruker | $39.7 million | $19.8 million | $64.7 million | $53.2 million |
| Diluted EPS | $0.24 | $0.12 | $0.39 | $0.32 |
| Operating cash flow | Not separately provided for the quarter | $42.2 million | $(4.4) million |
Q3 revenue rose 7.0% year over year; excluding currency effects and acquisitions, management reported growth of 13.8%. For the first nine months, reported revenue rose 8.3%, or 12.6% excluding those effects. Foreign exchange reduced revenue by approximately $33.3 million in Q3 and $66.9 million year to date. Management attributed underlying growth to Scientific Instruments and Energy & Supercon Technologies.
Q3 gross margin improvement reflected $16.4 million of license revenue from a technology sale in Energy & Supercon Technologies, which had minimal cost of revenue, and sales of newer, higher-margin products. Management’s adjusted gross margins, excluding specified acquisition-related, amortization and restructuring charges, were 48.3% in Q3 and 47.6% year to date; these are non-GAAP measures. Reported Q3 net income also benefited from a lower effective tax rate than in the prior-year quarter.
Segments and material changes
- Scientific Instruments: Revenue was $408.9 million in Q3, up 3.6% reported and 9.5% excluding currency and acquisitions. Nine-month revenue was $1,184.0 million, up 6.8% reported and 10.6% on the same adjusted basis. Q3 operating income increased to $48.0 million from $41.3 million; nine-month operating income declined slightly to $106.3 million from $107.3 million.
- Energy & Supercon Technologies: Q3 revenue was $42.4 million, up 53.1% reported; nine-month revenue was $98.4 million, up 23.3%. The segment recognized $16.4 million of license revenue in Q3. Operating income was $14.4 million in Q3 and $13.4 million year to date, versus losses in the comparable 2011 periods.
- Q3 reported operating margin improved year over year, while nine-month adjusted operating margin was 11.5% versus 11.6% in 2011. Management cited pricing pressure, product mix and higher operating expenses as offsets to growth.
- SG&A and R&D combined increased to $147.8 million in Q3 from $145.6 million and to $462.9 million year to date from $422.1 million, reflecting acquisition-related and planned hiring and product-development investment.
Cash, liquidity and debt
- Cash and cash equivalents were $242.1 million at September 30, 2012, versus $246.0 million at year-end 2011. Approximately $231.2 million was held by foreign subsidiaries. Management stated existing cash and credit facilities were expected to support operating and investing needs for at least the next 12 months.
- Year-to-date operating cash flow was $42.2 million, compared with cash use of $4.4 million in 2011. The 2012 result included a $93.3 million working-capital increase, mainly from inventory build, partly offset by lower receivables. Inventory rose to $632.8 million from $576.2 million at year-end.
- Investing cash use was $65.7 million, including $47.3 million of net capital expenditures and $21.7 million for acquisitions. Financing cash provided was $33.2 million, including $240.0 million of senior-note proceeds, partly offset by revolving-credit repayments and other debt repayments.
- Total debt was $336.9 million, versus $303.1 million at December 31, 2011. It included $240.0 million of senior notes, $37.5 million of term debt and $55.0 million drawn on the amended revolving facility. The senior notes carry fixed rates of 3.16%–4.46% and mature from 2017 to 2024. Available revolving capacity was reported as $253.0 million, including other facilities and after letters of credit.
- Bruker reported compliance with its debt covenants at September 30, 2012. Its amended credit agreement includes leverage and interest-coverage requirements and other restrictions.
Outlook, risks and unusual items
- Management reported softening demand beginning late in Q2, continuing in Q3, particularly in Europe, and weakening in global industrial and applied markets and semiconductor and data-storage metrology. The duration and effects were uncertain. The filing provides no numerical revenue or earnings guidance.
- The $16.4 million Q3 technology-license revenue was a significant contributor to segment growth and margins; investors should distinguish it from recurring product and service revenue.
- Bruker disclosed an internal investigation concerning alleged improper payments benefiting employees or agents of government-owned enterprises in China and Hong Kong. The investigation was completed in Q1 2012 and found evidence of improper payments and policy violations. The company reported personnel actions, ended certain agent relationships, enhanced compliance and controls, and continued cooperating with the SEC, DOJ and Hong Kong authorities. Potential penalties or other sanctions could be material; the company could not estimate a loss range and recorded no provision.
- Unrecognized tax benefits were approximately $37.3 million, including $28.6 million that would reduce the effective tax rate if recognized. Swiss and German tax audits were ongoing, with completion expected in Q4 2012. The company maintained a full valuation allowance against U.S. deferred tax assets.
- Other notable costs included $8.2 million of year-to-date professional fees for the internal investigation and $1.4 million of factory relocation costs. The company also recorded $22.6 million of demonstration-inventory write-downs in the first nine months.
- Currency exposure is material: the stronger U.S. dollar reduced nine-month revenue by about 5.7%, and the company reported foreign-exchange transaction losses. Copper and niobium price increases could pressure superconducting-product profitability. The company uses derivatives to manage some currency, interest-rate and copper-price exposure.
Most important facts for investors to verify
- Whether demand weakness in Europe, industrial and applied markets, and semiconductor and data-storage metrology continued after quarter-end.
- How much future growth and profitability depends on nonrecurring technology-license revenue versus recurring instrument, wire and aftermarket sales.
- Developments in SEC, DOJ and Hong Kong inquiries, including any potential sanctions, penalties or material financial impact.
- Inventory levels, working-capital conversion and operating cash flow, given the inventory build and relatively modest cash generation compared with reported earnings.
- Debt, covenant headroom, refinancing needs and the availability of committed revolving facilities.
- Tax-audit outcomes, realization of deferred tax assets and the effect of foreign earnings and potential repatriation on future tax rates.