Bruker Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Bruker develops scientific instruments and analytical and diagnostic solutions. Its reportable segments are Bruker Scientific Instruments (BSI) and Bruker Energy & Supercon Technologies (BEST).
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $384.9 million | $375.4 million |
| Gross profit / margin | $176.4 million / 45.8% | $166.8 million / 44.4% |
| Operating income / margin | $37.6 million / 9.8% | $34.0 million / 9.1% |
| Net income attributable to Bruker | $21.6 million | $23.6 million |
| Diluted EPS | $0.13 | $0.14 |
| Operating cash flow | $32.6 million | $(14.0) million |
| Free cash flow, as defined by Bruker | $21.1 million | $(22.0) million |
- Revenue increased 2.5%, but organic revenue declined $2.9 million, or 0.8%, excluding currency and acquisitions. Acquisitions contributed approximately $19.7 million; currency translation reduced revenue by approximately $7.3 million.
- SG&A rose to $98.1 million from $92.7 million, and R&D rose to $37.6 million from $36.1 million. Interest and other expense was $6.0 million versus $5.6 million.
- Effective tax rate increased to 31.3% from 16.9%; management attributed the comparison primarily to discrete tax benefits in Q1 2016 that did not recur. The higher rate contributed to lower net income and diluted EPS.
- At March 31, cash and cash equivalents were $277.5 million and short-term investments were $187.0 million. Total current assets were $1,264.1 million versus current liabilities of $514.9 million.
- Total debt was $384.8 million, down from $411.7 million at year-end 2016. The company had $438.5 million available across revolving credit facilities and reported compliance with debt covenants; leverage and interest coverage ratios were 1.39 and 14.9, respectively.
- Cash, cash equivalents and short-term investments totaled $464.5 million, of which $424.7 million was held by foreign subsidiaries. Bruker states that existing cash and credit facilities are expected to meet operating and investing needs for at least the next 12 months.
Material changes and operating drivers
- BSI revenue declined 1.1% to $346.4 million; organic BSI revenue declined 1.2%, reflecting delayed European academic funding and weaker mass spectrometry demand. BSI operating income improved to $38.1 million from $33.0 million.
- BEST revenue rose 47.4% to $40.1 million, primarily from the 2016 acquisition of Oxford Instruments Superconducting Wire. BEST recorded an operating loss of $0.5 million versus break-even in Q1 2016.
- Gross margin improved on pricing and operational efficiencies in BioSpin and restructuring and outsourcing improvements in CALID and Nano. BSI aftermarket revenue increased to 29.2% of segment revenue from 25.9%.
- Operating cash flow improved from a use of cash to a source of cash, supported by improved receivables collections; inventory growth partly offset the improvement. Investing cash outflow increased to $71.3 million, including $39.8 million of net acquisition payments and net purchases of short-term investments. Financing cash outflow was $32.3 million, including debt repayments and dividends.
Outlook, risks and unusual items
- Management expects $14–$16 million of annualized savings from its CALID and Nano restructuring initiative, expected to take full effect in the second half of 2017. Total related restructuring and one-time charges are expected to be $14–$16 million; approximately 125 employee reductions are planned. Expenses were expected to be substantially complete by June 30, 2017.
- No full-year revenue or earnings guidance is provided in the filing. Management cautions that quarterly results can fluctuate with research budgets, order-to-acceptance timing, customer facility readiness and government licensing.
- Bruker acquired Hysitron in January for total consideration of $28.8 million, including $1.6 million estimated contingent consideration; additional Hysitron payments could reach $10 million subject to revenue targets. Purchase accounting remained provisional. Luxendo was acquired on May 5, 2017, after quarter-end, for $18.3 million plus potential revenue-based consideration.
- Foreign currency translation reduced Q1 2017 revenue by 2.0%. The company also identifies exposure to exchange rates, variable interest rates and commodity prices, particularly copper and niobium tin.
- Bruker disclosed a material weakness in internal control over income-tax accounting. Management said it did not cause a misstatement in the 2016 or Q1 2017 financial statements, but disclosure controls were not effective at a reasonable-assurance level as of March 31, 2017. Remediation steps were underway but the weakness was not yet considered fully remediated.
- Bruker Korea remains subject to overlapping government suspensions restricting bids and sales to Korean government agencies following a bidding investigation. A fine was approximately $15,000; the company said affected government sales were less than 1% of 2016 revenue and did not expect a material adverse financial effect.
- The company expects to adopt the new revenue standard on January 1, 2018 using the modified retrospective method. It anticipates changed timing for some project-based revenue but had not quantified the impact.
Key facts for investors to verify
- Whether organic growth and European academic demand improve, particularly in BSI, and how much growth is acquisition-driven.
- Delivery of the restructuring savings, associated remaining costs and the operating trajectory of BEST following the OST acquisition.
- Progress in remediating the income-tax control material weakness and any related changes to tax estimates or disclosures.
- Final purchase accounting and contingent consideration for Hysitron, and the financial contribution and terms of the Luxendo acquisition.
- Cash availability and potential tax cost if foreign-held funds are needed in the United States; covenant compliance and debt levels.
- The eventual impact of the 2018 revenue-recognition standard on project-based contracts and reported revenue timing.