Bruker Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Bruker designs and sells life-science and materials-research instruments and related products. Bruker Scientific Instruments (BSI) generated about 93% of quarterly revenue; the other reporting segment is Bruker Energy & Supercon Technologies (BEST). Comparisons are with Q1 2013 unless stated otherwise. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $423.7 million | $393.4 million |
| Gross profit / margin | $179.7 million / 42.4% | $174.5 million / 44.4% |
| Operating income / margin | $20.6 million / 4.9% | $12.2 million / 3.1% |
| Net income attributable to Bruker | $8.7 million | $5.4 million |
| Diluted EPS | $0.05 | $0.03 |
| Operating cash flow | $18.5 million provided | $18.2 million used |
| Capital expenditures, net | $8.6 million | $14.0 million |
Revenue rose 7.7%; excluding the stated acquisition and divestiture impact, growth was 6.6%. Product revenue was $366.1 million and service revenue $57.0 million. Gross margin declined, mainly reflecting foreign exchange effects, particularly the stronger U.S. dollar versus the yen. Excluding specified acquisition-related and restructuring charges, gross margin was 44.2%, versus 45.6%. The company reported an effective tax rate of 36.3%, up from 31.3%.
BSI revenue was $393.9 million, up 7.5%; BEST revenue was $34.8 million, up 11.5%. BSI operating income was $16.6 million, compared with $10.6 million; BEST operating income was $2.8 million, compared with $0.9 million.
Balance sheet, debt and liquidity
At March 31, 2014, cash and cash equivalents were $454.0 million, total assets $2,027.7 million, and total shareholders’ equity $868.3 million. Total debt was $354.8 million, including $112.5 million drawn on the revolving credit facility and $240.0 million of senior notes. The company reported $188.3 million available across revolving loan facilities, after borrowings and letters of credit. It was in compliance with debt covenants; reported leverage and interest coverage ratios were 1.3 and 14.0, respectively.
Operating cash flow improved from use of $18.2 million to generation of $18.5 million, mainly due to lower working-capital use than in the prior-year quarter. Inventory increased to $620.5 million from $589.8 million at year-end. Cash increased from $438.7 million at December 31, 2013. Management said existing cash and credit facilities should support operating and investing needs for at least the next 12 months.
Changes, outlook and notable items
- Revenue growth reflected higher sales of mass spectrometry products, including MALDI Biotyper, NMR and MRI products, Bruker Optics products and X-ray products. Semiconductor and microelectronics demand was weaker, including for atomic force microscopy products.
- Operating expenses were lower overall as a share of revenue, reflecting spending discipline and productivity initiatives. Reported operating income also benefited from higher revenue, although foreign exchange weighed on margins.
- The company expects $15–20 million of expenses in 2014 for outsourcing and other restructuring activities. It separately expects approximately $3–4 million of additional restructuring charges during the remainder of 2014 and 2015, and about $5 million of IT transformation expense during the remainder of 2014.
- Management cited quarter-to-quarter variability tied to customer facility readiness and approvals, semiconductor demand, market conditions and product demand. It was uncertain about the duration of recent market conditions and the effects of geopolitical instability in Russia; Russia represented about 2% of 2013 revenue.
- Foreign-exchange exposure affected results: Q1 2014 included $1.6 million of foreign-currency transaction losses, and the stronger dollar versus the yen pressured gross margin. The company uses foreign-exchange and copper contracts selectively.
Risks, contingencies and unusual items
- An internal investigation found evidence of improper payments benefiting employees or agents of government-owned enterprises in China and Hong Kong and policy violations by certain employees. The company has cooperated with the SEC, DOJ and Hong Kong authorities. It could not estimate the timing, outcome or possible loss; no provision was recorded. Adverse outcomes could materially affect future results.
- Unrecognized tax benefits were approximately $34.2 million at quarter-end, excluding penalties and interest. Tax examinations and uncertain tax positions could result in future charges or credits.
- Customer-advance bank guarantees totaled $162.0 million and reduce available credit capacity. Ordinary-course legal proceedings were described as not expected to have a material impact.
- Q1 2014 other charges included $2.2 million of investigation-related professional fees, $0.6 million of acquisition costs, $0.2 million of restructuring costs and $0.6 million of IT transformation costs. Restructuring costs also included $2.2 million recorded in cost of revenue.
- Management reported effective disclosure controls as of March 31, 2014, with no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Investor verification priorities
- Track whether revenue growth and demand across research, clinical, applied, semiconductor and microelectronics markets persist.
- Verify gross-margin trends, especially the impact of currency movements and product mix.
- Monitor working capital and inventory growth against order levels and operating cash generation.
- Compare actual restructuring and IT transformation costs with management’s stated expectations.
- Follow the China compliance inquiries and assess any eventual penalties, sanctions or business restrictions; the possible exposure was not estimable in this filing.
- Review foreign-cash deployment and potential tax consequences if foreign earnings are repatriated; management said it intended to reinvest those earnings abroad.