Business context and reporting period
Bruker Corporation (Nasdaq: BRKR) filed this unaudited Form 10-Q for the quarter ended September 30, 2020. It develops and sells scientific instruments and analytical and diagnostic solutions through BSI Life Science, BSI NANO and BEST. The period’s results reflect the ongoing COVID-19 pandemic and related economic disruption.
Financial performance and position
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $511.4 | $521.1 | $1,360.0 | $1,472.7 |
| Gross profit / margin | $248.3 / 48.6% | $253.9 / 48.7% | $626.8 / 46.1% | $699.0 / 47.5% |
| Operating income / margin | $81.2 / 15.9% | $87.8 / 16.8% | $135.5 / 10.0% | $183.2 / 12.4% |
| Net income attributable to Bruker | $54.3 | $61.3 | $88.9 | $128.6 |
| Diluted EPS | $0.35 | $0.39 | $0.57 | $0.82 |
- Q3 product revenue fell 4.8% to $419.6; service revenue rose 14.2% to $90.0. Management reported Q3 organic revenue down 4.6%, excluding currency and acquisitions. Nine-month organic revenue declined 8.3%.
- Q3 segment revenue: Life Science $323.4, up 7.1%; NANO $147.1, down 13.4%; BEST $43.8, down 16.6%. For the nine months, revenue declined 3.1%, 14.9% and 11.4%, respectively.
- Nine-month operating cash flow was $129.2, compared with $77.2; capital spending was $68.4, yielding company-defined free cash flow of $60.8 versus $32.4. Inventory purchases were a significant operating cash use.
- At September 30, cash and cash equivalents were $567.1 and short-term investments $50.0, totaling $617.1. Debt was $829.9, including $828.2 long-term. The $600 million revolving facility had no borrowings and $599.8 available; total reported availability under revolving lines and guarantees was $715.2. The company was in compliance with debt covenants.
- Current assets were $1,826.1 and current liabilities $683.2. Inventory increased to $695.9 from $577.2 at year-end 2019.
Material changes versus prior comparable periods
- Revenue, profit and diluted EPS declined year over year, with the nine-month reductions more pronounced. Management attributed this mainly to pandemic-related disruption, weaker instrument demand and lower superconductor demand.
- Q3 gross margin was nearly flat year over year, but nine-month gross margin fell 1.4 percentage points. Cost controls helped reduce SG&A, while lower volume and productivity weighed on gross and operating margins.
- Q3 Life Science growth, including microbiology and infectious-disease diagnostics, partly offset weaker NANO and BEST performance. The company added a SARS-CoV-2 PCR test to its diagnostics portfolio.
- Operating cash flow and free cash flow improved year over year for the first nine months. Cash and short-term investments declined from $684.9 at December 31, 2019.
- Bruker acquired the remaining 20% of Hain for approximately $22.2 and acquired Canopy Biosciences in September for consideration of approximately $24.7, including contingent consideration. Other 2020 acquisitions included SmartTip and Integrated Proteomics Applications.
- Nine-month share repurchases were $55.0, below the $142.3 reported for the prior-year period. The company paid $18.5 in dividends and had $97.7 remaining under its repurchase authorization as of October 30, 2020.
Outlook, management commentary, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management said it could not reliably predict the pandemic’s full impact. It expected existing cash and credit facilities to support operating and investing needs for at least 12 months.
- Management expected cost-control measures to have a more limited effect in Q4 2020 than in Q3 and Q2. It did not anticipate supply or capacity constraints in Q4 absent renewed broad lockdowns or significant deterioration in operating conditions. Temporary measures, including short-time work in some European operations, continued through Q4.
- COVID-19 risks included customer and supplier closures, reduced customer budgets, delays in shipments and installations, restricted travel, lower facility productivity and possible renewed shutdowns. The company also cited remote-work productivity and cybersecurity risks.
- Remaining performance obligations were approximately $1,910.2; the company expected to recognize about 62% within 12 months. Contract liabilities increased to $371.7 from $312.5 at year-end, primarily because COVID-related customer closures or reduced operations delayed installations.
- Other charges were $12.2 for the first nine months, including $4.8 of investigation-related professional fees, $4.4 of restructuring costs, $1.9 of long-lived asset impairments and $1.8 of IT transformation costs. The prior-year period included a $7.8 gain from a building sale.
- Bruker disclosed unresolved patent suits involving Luxendo and its timsTOF product line; it said it intended to defend the claims and had recorded no material accrual. Korean tender investigations resulted in small fines; a possible procurement suspension related to the second matter had no hearing date disclosed.
- Disclosure controls were deemed ineffective due to previously identified material weaknesses in the control environment, income-tax accounting and revenue recognition at a U.S. subsidiary. Management reported remediation actions underway, but the weaknesses were not yet considered remediated.
Important facts for investors to verify
- Whether demand, customer site access and instrument installations recover, and how this affects revenue, contract liabilities and inventory.
- Whether cost reductions and improved productivity can sustain margins as temporary pandemic measures ease.
- Cash conversion and capital needs, including elevated inventory, planned facility investment, acquisitions, dividends and remaining share repurchase activity.
- Debt, swap valuations and foreign-exchange exposure; the filing reported $29.2 of liabilities on designated cross-currency and interest-rate swaps.
- Progress and testing of remediation controls, and any developments in the patent litigation, Korean procurement matter or tax contingencies.