Bruker Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Bruker designs and manufactures scientific instruments and analytical and diagnostic solutions. Its reportable segments are Bruker Scientific Instruments (BSI) and Bruker Energy & Supercon Technologies (BEST); BSI generated about 92% of Q3 revenue.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $393.9 million | $396.1 million | $1,141.0 million | $1,145.6 million |
| Gross profit / margin | $185.2 million / 47.0% | $167.5 million / 42.3% | $522.1 million / 45.8% | $497.1 million / 43.4% |
| Operating income / margin | $45.9 million / 11.7% | $28.2 million / 7.1% | $100.3 million / 8.8% | $75.0 million / 6.5% |
| Net income attributable to Bruker | $46.5 million | $11.8 million | $84.6 million | $40.2 million |
| Diluted earnings per share | $0.29 | $0.07 | $0.52 | $0.24 |
| Operating cash flow | Not stated by quarter | $40.0 million | $79.6 million | |
| Free cash flow (non-GAAP) | Not stated by quarter | $14.0 million | $56.8 million |
Revenue declined 0.6% in Q3 and 0.4% for the first nine months year over year. Excluding foreign exchange and the Nano acquisition, organic revenue (non-GAAP) fell 2.4% and 2.3%, respectively. Management attributed weakness chiefly to European academic funding and industrial markets affecting CALID and Nano; BioSpin revenue benefited from pricing and, year to date, higher volume and a major NMR system sale. Q3 BEST revenue rose 7.9%, while nine-month BEST revenue was flat.
Gross-margin improvement reflected restructuring and outsourcing savings, pricing, acquisition effects, and a more favorable BioSpin mix. For the nine months, lower operating cash flow and free cash flow reflected higher inventory and other working-capital uses, including tax payments; inventory increased to $483.1 million from $422.0 million at year-end 2015.
Balance sheet, debt and capital allocation
At September 30, cash and cash equivalents were $278.7 million and short-term investments were $162.8 million, totaling $441.5 million. Total debt was $364.9 million, compared with $265.8 million at December 31, 2015, including $124.0 million drawn on the revolving credit line. The company reported $482.7 million available across its revolving facilities and other lines. It was compliant with debt covenants; leverage and interest coverage ratios were 1.4 and 15.7, against limits of 3.5 maximum and 2.5 minimum. A $20 million senior-note tranche is due January 2017.
Nine-month financing included $143.5 million of share repurchases and $19.4 million of dividends, partly offset by $99.0 million of revolving-credit borrowings. The repurchase program had $16.5 million remaining at September 30. The company targets annual dividends of $0.16 per share, subject to future Board approval.
Outlook, risks and unusual items
- Management said existing cash and credit facilities should support operating and investing needs for at least 12 months. It estimated a full-year 2016 effective tax rate of 16%–17%; no clear revenue or earnings guidance is provided in the filing text.
- A 2016 restructuring of CALID and Nano, prompted by weak demand, is expected to reduce about 125 jobs. Total 2016–2017 restructuring and one-time charges are estimated at $11–$13 million; annualized savings of about $10–$13 million are expected when completed, anticipated in Q2 2017.
- Q3 tax benefit of $4.0 million and the nine-month tax provision of $3.8 million reflected valuation-allowance releases and, year to date, recognition of tax benefits following audit closures and changes in earnings mix. These contributed to the earnings increase and may not recur at the same level.
- Other notable charges included $7.7 million of additional contingent consideration recorded in the first nine months, mainly from higher revenue forecasts for a Nano acquisition, and ongoing restructuring and IT-transformation costs. Q3 and nine-month operating results also benefited from lower acquisition-related, restructuring and other charges than in the prior-year comparisons.
- Controls: Management identified a material weakness in income-tax accounting controls, concluded disclosure controls were ineffective as of September 30, and said prior conclusions for year-end 2015 and Q1/Q2 2016 would be amended. Prior-period errors were described as immaterial and no restatement had been required. Remediation was underway but not yet considered complete.
- Legal contingency: In September 2016, Korea’s Fair Trade Commission fined Bruker Korea about $15,000 over alleged improper X-ray-system bidding and referred the matter for criminal prosecution. Further penalties or restrictions on government sales are possible; timing and outcome were not assessable. Korean customers represented about 2% of 2015 revenue.
- Risks include weak academic and industrial demand, uneven order and customer-acceptance timing, foreign-exchange exposure, commodity costs, and possible additional U.S. taxes if foreign earnings are repatriated. The company reported no material impact from inflation in the periods presented.
Most important facts for investors to verify
- Progress and testing of the income-tax control remediation, and whether the planned amendments to earlier filings were completed.
- Whether weak European academic funding and industrial demand persist, and how organic revenue and BSI/BEST margins develop.
- Inventory conversion, working-capital trends, and recovery in operating and free cash flow.
- Repayment or refinancing of the $20 million note due January 2017, debt levels, and continued covenant compliance.
- Final costs and savings from the CALID/Nano restructuring, as well as the outcome and potential consequences of the Korean proceedings.
- Durability of the unusually low 2016 tax expense and the company’s stated full-year tax-rate estimate.