Bruker Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Unaudited results; amounts below are in millions of dollars except per-share data.
Business context
Bruker designs, manufactures and services scientific and materials-research instruments, along with superconducting materials and devices. It reports two segments: Scientific Instruments and Energy & Supercon Technologies. Recent acquisitions, notably Veeco Metrology in 2010, contributed materially to year-over-year growth.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $418.4 | $310.2 | $1,176.6 | $888.8 |
| Gross profit | $189.4 | $146.5 | $534.8 | $407.9 |
| Gross margin | 45.3% | 47.2% | 45.5% | 45.9% |
| Operating income | $37.5 | $39.3 | $101.9 | $104.1 |
| Operating margin | 9.0% | 12.7% | 8.7% | 11.7% |
| Net income attributable to Bruker | $19.8 | $27.4 | $53.2 | $66.1 |
| Diluted EPS | $0.12 | $0.17 | $0.32 | $0.40 |
Q3 revenue rose 34.9%; management attributed approximately $28.7 to currency and $45.7 to acquisitions, with 10.9% growth excluding both. Nine-month revenue rose 32.4%, including approximately $72.0 from currency and $147.0 from acquisitions; growth excluding both was 7.7%. Management cited demand across several instrument categories and stronger low-temperature superconducting-wire sales.
Profitability weakened despite higher revenue: Q3 operating income declined, while net income fell year over year. Management cited product mix, higher operating expenses, acquisition-related costs, and foreign-exchange effects. Selling, general and administrative expense and R&D together were 34.6% of Q3 revenue, versus 33.8% a year earlier. The effective tax rate was 49.0% for Q3 and 41.6% for the nine-month period, up from 27.0% and 32.2%, respectively.
For the nine months, operating cash flow was negative $4.4, versus positive $62.7 in 2010, primarily reflecting a $134.2 increase in working capital, especially inventories. Investing cash flow was negative $39.7, including $38.4 of capital expenditures. Financing cash flow was positive $10.5. Cash and cash equivalents were $195.8 at September 30, down from $230.4 at year-end 2010; inventory increased to $601.4 from $511.0.
Total debt was $311.4, compared with $301.0 at year-end 2010. This included $216.5 drawn on the amended revolving facility, $90.0 of term debt, $0.5 of other revolving borrowings and $4.4 of capital leases. Revolving facilities had $108.7 of stated availability, after outstanding letters of credit. The current ratio, calculated from reported balance-sheet totals, was approximately 1.27. The company reported compliance with debt covenants.
Material changes and notable items
- Scientific Instruments revenue increased 35.8% in Q3, while segment operating margin fell to 10.5% from 13.9%. Energy & Supercon Technologies revenue increased 23.7%, but the segment recorded a $3.3 operating loss.
- Inventory write-downs and acquisition-related amortization increased costs. Cash-flow adjustments included a $30.4 inventory write-down for the nine-month period; the filing also describes specialty-magnet rework provisions and demonstration-unit write-downs.
- A $3.4 write-off of deferred offering costs related to a planned minority IPO of BEST was recorded because the offering’s timing was uncertain. BEST remained in registration.
- Bruker acquired Michrom Bioresources on April 1 for reported consideration of $3.8. After quarter-end, on October 12, it acquired Center for Tribology for $13.0 in cash.
- Q3 comprehensive loss attributable to Bruker was $29.7, principally reflecting $52.0 of foreign-currency translation losses, despite positive net income.
Outlook, risks and contingencies
Management expected existing cash and credit facilities to support operating and investing needs for at least the next 12 months, subject to profitability and working-capital management. It was considering longer-term financing to replace borrowings under the revolving facility and expected an agreement during the first half of 2012; it cautioned that alternative financing might not be available on favorable terms. No specific revenue or earnings guidance is provided in the filing.
The Audit Committee’s investigation into allegations concerning Bruker Optics’ China operations remained ongoing. The investigation found evidence of payments that improperly benefited employees or agents of Chinese government-owned enterprises. Bruker notified U.S. authorities and Hong Kong authorities and stated it would cooperate. Potential penalties or sanctions could not be reasonably estimated, and no provision for them was recorded.
Other exposures include $31.4 of unrecognized tax benefits, ongoing tax audits (with $2.5 of additional reserves recorded in Q3), foreign-exchange and commodity-price risks, and a German intellectual-property lawsuit for which approximately $0.3 was accrued. Customer-advance letters of credit and bank guarantees totaled $106.8. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track operating margins and whether revenue growth excluding acquisitions and currency continues; validate management’s explanation of product mix and expense increases.
- Assess working-capital conversion, especially inventory levels, inventory-in-transit, and the return to positive operating cash flow.
- Monitor the $216.5 revolving-facility draw, refinancing plans, available borrowing capacity, and covenant compliance.
- Follow the China investigation, potential government inquiries or sanctions, and related legal and professional costs.
- Review tax-audit outcomes and the possible cash and earnings effects of uncertain tax positions.
- Confirm acquisition integration and returns, and the timing or status of the proposed BEST offering.