Bruker Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; filed August 9, 2011. Bruker designs and manufactures scientific instruments and superconducting materials and systems, reported through Scientific Instruments and Energy & Supercon Technologies.
Financial performance
| Metric | Q2 2011 | Q2 2010 | H1 2011 | H1 2010 |
|---|---|---|---|---|
| Revenue | $401.2m | $300.9m | $758.2m | $578.6m |
| Gross profit / margin | $183.6m / 45.8% | $135.3m / 45.0% | $345.4m / 45.6% | $261.4m / 45.2% |
| Operating income / margin | $38.7m / 9.6% | $37.9m / 12.6% | $64.4m / 8.5% | $64.8m / 11.2% |
| Net income attributable to Bruker | $22.1m | $22.6m | $33.4m | $38.7m |
| Diluted EPS | $0.13 | $0.14 | $0.20 | $0.23 |
Q2 revenue rose 33.3%; management attributed about $37.1m to foreign exchange and $40.7m to acquisitions. Excluding those effects, revenue increased 7.5%. H1 revenue rose 31.0%, including about $43.3m from foreign exchange and $101.3m from acquisitions; adjusted growth was 6.0%. Growth reflected demand across key instrument lines and higher superconducting-wire sales.
Reported gross margin improved modestly, but operating margins declined as SG&A and R&D rose faster than sales, reflecting acquisition-related headcount, planned growth investment, commissions and currency effects. Management reported adjusted operating margins, excluding specified inventory, acquisition, amortization and investigation-related charges, of 12.5% for Q2 and 11.4% for H1, versus 13.5% and 11.9% a year earlier. Q2 and H1 net income and EPS were lower year over year. H1 interest and other expense increased to $10.7m from $4.5m, mainly due to foreign-exchange losses.
Cash flow, liquidity and debt
- H1 operating cash flow was negative $25.6m, versus positive $53.1m in H1 2010, primarily because working capital increased $105.5m, particularly inventory built to support anticipated growth.
- H1 investing cash outflow was $32.5m, including $31.2m of capital expenditures; financing cash outflow was $14.0m. Cash and cash equivalents fell $60.6m to $169.8m from year-end 2010.
- At June 30, total debt was $287.8m: $185.5m revolving borrowings, $97.5m term loan and $4.8m capital leases. Debt was $301.0m at December 31, 2010. The company reported $119.4m available across revolving facilities, after outstanding letters of credit.
- A May 2011 amended credit agreement increased revolving commitments to $250m and extended maturity to May 2016. Bruker said it was covenant-compliant at quarter-end and expected existing cash and facilities to support needs for at least 12 months, subject to profitability and working-capital management.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance was provided. Management was optimistic about industrial-market improvement and expected research funding to remain stable or grow in key European markets, while noting government-spending uncertainty. It planned a partial hiring freeze and other cost-saving measures in H2 2011 to improve operating margins.
- Bruker was considering long-term financing alternatives to replace revolving borrowings and expected an agreement in H2 2011; absent favorable financing, it expected to rely on cash and future cash flow. Planned 2011 capital spending was $45m–$50m.
- An ongoing internal investigation into alleged improper conduct in Bruker Optics’ China operations found evidence of payments that improperly benefited employees or agents of government-owned enterprises. Bruker notified the SEC and Department of Justice and said it intended to cooperate. Potential penalties or sanctions could not be estimated; no provision was recorded. China operations represented less than 2.5% of 2010 consolidated sales and less than 1.0% of assets.
- Q2 included $4.9m of inventory allowances for specialty magnets requiring rework; H1 also included $4.2m of acquired-inventory fair-value charges. H1 other charges included $1.2m of FCPA-investigation professional fees. A German intellectual-property lawsuit remained unresolved after an expert opinion suggested findings that may support some allegations. Tax audits in Switzerland and Germany were expected to conclude in H2 2011; unrecognized tax benefits were about $28.2m.
- The company completed the Michrom Bioresources acquisition on April 1 for $3.8m of consideration, including $2.9m in stock; purchase-price allocation remained incomplete. Bruker had also announced plans for an IPO of a minority interest in its BEST subsidiary.
Most important facts for investors to verify
- Whether working capital, especially inventory, converts to operating cash flow and whether cash balances remain adequate.
- Progress and terms of refinancing revolving borrowings, and continued compliance with debt covenants.
- Whether cost controls improve operating margins without impairing growth or product development.
- Developments, potential financial exposure and regulatory outcomes from the China FCPA investigation and the RAA litigation.
- Completion of acquisition accounting and the status, timing and terms of the proposed BEST minority IPO.