Bruker Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Bruker develops and sells scientific instruments and analytical and diagnostic solutions. Its two reportable segments are Bruker Scientific Instruments (BSI) and Bruker Energy & Supercon Technologies (BEST). Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 2018 | Q3 2017 | First 9 months 2018 | First 9 months 2017 |
|---|---|---|---|---|
| Revenue | $466.6 | $435.6 | $1,342.0 | $1,235.4 |
| Gross profit / margin | $222.6 / 47.7% | $198.9 / 45.7% | $627.2 / 46.7% | $559.8 / 45.3% |
| Operating income / margin | $69.1 / 14.8% | $51.3 / 11.8% | $156.0 / 11.6% | $124.2 / 10.1% |
| Net income attributable to Bruker | $43.4 | $37.0 | $101.6 | $82.0 |
| Diluted EPS | $0.28 | $0.23 | $0.65 | $0.51 |
| Operating cash flow | — | — | $107.4 | $50.7 |
| Free cash flow (non-GAAP) | — | — | $78.5 | $19.4 |
- Q3 revenue grew 7.1%; management reported organic growth of 7.0% excluding acquisitions and currency effects. Nine-month revenue grew 8.6%, with organic growth of 4.7%. Currency added $37.6 to nine-month revenue but reduced Q3 revenue by $5.8.
- Q3 BSI revenue rose 6.8% to $417.1; BEST rose 10.4% to $50.9, largely reflecting shipment timing and project completion. For the first nine months, BSI revenue rose 9.7% to $1,206.5, while BEST declined 0.7% to $139.2.
- Management attributed margin expansion mainly to higher volumes, favorable product mix and operational improvements. Nine-month results also faced an offset from unfavorable currency translation.
- The effective tax rate was 32.4% in Q3 and 28.7% for the first nine months, versus 20.7% and 23.7%, respectively, in 2017. The increase primarily reflected refinements to the one-time tax on deemed repatriation under the 2017 Tax Act.
Balance sheet, cash flow and debt
- At September 30, cash and cash equivalents were $270.1, versus $325.0 at year-end 2017; short-term investments were nil versus $114.2. Cash, cash equivalents and short-term investments together were $270.1, down from $439.2.
- Total debt was $240.6, down from $415.6 at December 31, 2017, principally following repayment of revolving-credit borrowings. Debt included $220.0 of notes and $20.0 drawn on the $500.0 revolving credit facility. Total available revolving-line capacity was $610.1, including other credit lines.
- Bruker reported compliance with debt covenants; its defined leverage ratio was 0.68 and interest coverage ratio 20.9. Management said existing cash and credit facilities should support operating and investing needs for at least the next 12 months.
- Nine-month operating cash flow improved to $107.4. Inventory growth was a significant cash use, including a $55.3 increase in the cash-flow statement. Capital expenditures were $28.9. Financing cash outflow of $189.0 included $202.5 of revolving-credit repayments and $18.8 of dividends.
Changes, outlook, risks and unusual items
- Bruker adopted ASC 606 revenue recognition on January 1, 2018; the adoption increased opening retained earnings by $8.2, partly offset by a $2.1 tax impact. Remaining performance obligations were approximately $1,044.1, with about 81.2% expected to be recognized within 12 months.
- In 2018, Bruker acquired Anasys and JPK, adding nanoscale infrared and cellular imaging capabilities to BSI. A subsequent event: on October 15, Bruker acquired an 80% interest in Hain Lifescience for approximately $76.4, with an option to acquire the remaining 20% in or after 2022.
- No specific earnings or revenue guidance was provided in the filing. Management described demand growth across BSI groups and BEST in Q3, but noted European revenue was below the prior-year quarter and BEST had an organic decline for the nine-month period.
- Management warned that additional Chinese tariffs could raise product costs or reduce competitiveness; Bruker was taking steps to mitigate potential effects. It also cited exposure to foreign exchange, interest rates and raw-material prices, and quarter-to-quarter variability from customer acceptance, budgets, shipping and permitting.
- Bruker disclosed a Korea Fair Trade Commission investigation into public tender bidding involving Bruker Korea and other instrument companies. Separately, the SEC is investigating matters including revenue recognition, restructuring, tax controls and certain travel payments; an internal investigation into practices of certain China business partners and former employees was disclosed to the SEC and Department of Justice. Outcomes and timing were not predictable, and no material accruals had been recorded for these matters.
- The company continued to refine its 2017 Tax Act estimates. It reported approximately $740.0 of non-cash foreign earnings intended to remain indefinitely reinvested and estimated unrecognized deferred withholding taxes of approximately $27.0 at year-end 2017. It expected to finalize the tax analysis during the measurement period.
- Other notable items included $15.2 of nine-month “other charges,” including restructuring, professional fees, IT transformation and acquisition costs. Bruker also expected adoption of the new lease standard on January 1, 2019 to materially increase reported assets and liabilities.
Important facts for investors to verify
- Progress and potential financial consequences of the SEC, DOJ-related and Korea Fair Trade Commission investigations; the filing does not provide a clear estimate of possible exposure.
- Whether organic growth and margin gains persist, particularly given currency effects, the nine-month BEST decline and timing-sensitive project shipments.
- Inventory levels and cash conversion, including whether inventory built for orders converts to shipments and collections.
- Final purchase accounting and performance of Anasys, JPK and Hain, including contingent consideration and Hain’s purchase accounting.
- Final tax effects under the 2017 Tax Act and the impact of lease-standard adoption on the balance sheet.