Bruker Corporation — Q2 2016 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and six months ended June 30, 2016. Bruker designs and manufactures scientific instruments and analytical and diagnostic solutions. Bruker Scientific Instruments (BSI) generated about 93% of revenue; Bruker Energy & Supercon Technologies (BEST) generated the remainder.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $371.7 million | $396.0 million | $747.1 million | $749.5 million |
| Gross profit / margin | $170.1 million / 45.8% | $169.4 million / 42.8% | $336.9 million / 45.1% | $329.6 million / 44.0% |
| Operating income / margin | $20.4 million / 5.5% | $31.6 million / 8.0% | $54.4 million / 7.3% | $46.8 million / 6.2% |
| Net income attributable to Bruker | $14.5 million | $21.9 million | $38.1 million | $28.4 million |
| Diluted EPS | $0.09 | $0.13 | $0.23 | $0.17 |
- Cash flow: Six-month operating cash flow was $4.1 million, versus $25.5 million in 2015. Capital expenditures were $17.2 million; company-defined free cash flow was negative $13.1 million. Cash and cash equivalents declined to $232.5 million from $267.1 million at year-end.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $420.4 million at June 30, including $187.9 million of short-term investments. Total debt was $343.0 million, up from $265.8 million at year-end; $102.0 million was drawn on the revolving facility. The company reported $505.7 million available under revolving credit lines and compliance with debt covenants (leverage ratio 1.3; interest coverage 15.2).
- Margins: Q2 GAAP gross margin rose 3.0 percentage points year over year, while operating margin fell 2.5 points. Six-month gross and operating margins improved by 1.1 points each.
Changes versus the prior comparable periods
- Q2 revenue fell 6.1%; excluding foreign currency and the Nano acquisition, organic revenue declined 9.2%. Six-month revenue was down 0.3%, with organic revenue down 2.2%.
- Management cited delays in European academic funding, weak industrial markets, and lower MALDI Biotyper sales in China and the U.S. as pressures. Six-month BSI revenue increased 0.3%, but BEST revenue declined 4.5%.
- Service revenue increased in both reported periods, while product revenue declined. BSI aftermarket revenue grew, but system revenue was lower.
- Q2 net income and EPS declined, primarily due to weaker revenue and higher acquisition-related contingent consideration. Six-month net income and EPS increased, supported by improved gross margins, operating improvements, a lower effective tax rate and share repurchases.
- Six-month inventory increased to $471.0 million from $422.0 million at year-end. The company attributed cash use in part to inventory purchases for second-half production, timing of customer advances and system acceptance, and tax payments.
Outlook, commentary, risks and unusual items
- Management expected demand weakness to continue for the remainder of 2016, particularly in Europe, and planned to accelerate restructuring and right-sizing initiatives. Plans were expected to be finalized in Q3 2016; actions could include facility consolidation, outsourcing, product-line consolidation and other cost reductions.
- A Bruker BioSpin restructuring initiative was substantially complete by June 30. Cumulative restructuring and other one-time charges were $19.5 million; management expected approximately $10 million in annualized savings. Some savings from planned actions may be reinvested in sales, marketing, product management and strategic growth.
- Q2 other charges, net were $12.0 million, including $7.9 million of acquisition-related charges, primarily a $7.7 million increase in contingent consideration following higher forecast revenue for an acquired Nano business. The liability rose to $12.8 million from $4.6 million at year-end.
- The company reported that existing cash and credit facilities should support operating and investing needs for at least the next 12 months. It cautioned that future financing may not be available on favorable terms and that foreign cash repatriation could result in additional U.S. taxes.
- The Board’s new dividend policy targets $0.16 per share annually, subject to Board discretion. The company paid $13.0 million in dividends in the first half and repurchased $117.6 million of shares, leaving $42.4 million of authorization under the $225 million program.
- The Korea Fair Trade Commission was investigating alleged improper bidding involving Bruker Korea and X-ray system bids in 2010 and 2012. The company could not assess the timing or outcome; potential consequences include fines or restrictions on government sales. Korean customers represented about 2% of 2015 revenue.
- Other disclosed exposures include foreign-exchange and commodity-price movements, variable-rate debt, and contingent obligations. Management said there were no material changes to previously disclosed risk factors. Disclosure controls were concluded effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether demand, particularly in Europe and industrial markets, improves and whether organic revenue stabilizes.
- Whether inventory converts to revenue and cash as planned, and whether operating cash flow and free cash flow recover.
- Execution, costs and realized savings from the announced restructuring actions, alongside any reinvestment of savings.
- Assumptions behind the acquired business’s revenue forecasts and the resulting contingent-consideration liability.
- Developments in the Korean bidding investigation and any financial or operating consequences.
- Debt levels, covenant headroom, capital returns and the tax implications of accessing foreign-held funds.
Note: The cash flow statement reports $4.1 million of operating cash provided; one sentence in the liquidity discussion calls this amount “used,” while other filing disclosures also describe it as a source of cash.