Bruker Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Bruker designs and sells scientific instruments and related services. Its reporting segments are Bruker Scientific Instruments (BSI) and Bruker Energy & Supercon Technologies (BEST); BSI accounted for about 93% of first-half revenue.
Financial results
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $457.4 million | $454.9 million | $881.1 million | $848.3 million |
| Gross profit / margin | $200.5 million / 43.8% | $201.6 million / 44.3% | $380.2 million / 43.2% | $376.1 million / 44.3% |
| Operating income / margin | $35.4 million / 7.7% | $43.5 million / 9.6% | $56.0 million / 6.4% | $55.7 million / 6.6% |
| Net income attributable to Bruker | $16.4 million | $22.9 million | $25.1 million | $28.3 million |
| Diluted EPS | $0.10 | $0.14 | $0.15 | $0.17 |
| Operating cash flow | Not separately provided for the quarter | $31.5 million | $(24.9) million |
- Q2 revenue increased 0.5%; first-half revenue increased 3.9%. Excluding foreign exchange and acquisition effects, Q2 revenue declined 2.2%, while first-half revenue grew 1.9% excluding foreign exchange and acquisition/divestiture effects.
- Q2 gross margin fell 0.5 percentage points and operating margin fell 1.9 points year over year. First-half gross margin fell 1.1 points and operating margin fell 0.2 points.
- Q2 net income declined mainly because of higher operating expenses and a higher effective tax rate. First-half net income declined primarily due to the higher tax rate, partly offset by revenue growth.
- Effective tax rates were 49.2% in Q2 and 45.1% for the first half, compared with 34.7% and 34.1%, respectively, in 2013. The increase was primarily attributed to expected unbenefited losses associated with planned CAM actions.
- First-half operating cash flow was $31.5 million, versus cash used of $24.9 million in 2013. Working capital increased by $47.0 million, mainly reflecting higher inventory and lower customer advances. Investing activities used $82.8 million, including $67.8 million for short-term investments and $16.8 million for capital expenditures. Financing activities provided $3.2 million.
- At June 30, cash and cash equivalents were $389.8 million and short-term investments were $67.8 million. Total debt was $355.7 million, including $112.5 million drawn on the revolving credit facility and $240.0 million of senior notes. Revolver capacity available, net of borrowings and letters of credit, was $130.1 million under the main facility; total availability across listed revolving facilities was $274.3 million. The company reported covenant compliance.
Material changes and management commentary
- First-half growth came from both segments: BSI revenue rose 3.5% to $815.4 million and BEST revenue rose 11.6% to $76.2 million. BEST growth included higher cavity-device and superconducting-wire sales; 2013 comparisons included technology-license revenue with no associated cost.
- Management cited stronger demand in research, applied and clinical markets, especially in Europe and Asia, partly offset by weakness in semiconductor and microelectronics markets, particularly in Asia. It said recent market conditions and their effects remain uncertain.
- Q2 results included a 21 Tesla high-field magnet sale. Currency movements and a recent acquisition increased reported Q2 revenue by approximately $10.3 million and $2.1 million, respectively. The filing notes that revenue timing can vary with large system orders, customer facility readiness, government budgets and licenses, and semiconductor demand.
- First-half restructuring charges were $13.1 million, compared with $5.0 million in 2013. Demonstration-inventory write-downs were $15.2 million for the first half, compared with $16.0 million.
Outlook, risks, contingencies and unusual items
- CAM plan: On July 18, 2014, the board approved divestitures of certain assets and a restructuring of the Chemical & Applied Markets division, which generated about $100 million of 2013 revenue. Management concluded the business was unlikely to achieve acceptable financial performance over the next two years. Actions are expected to reduce headcount by about 200–250 and generate $35–$40 million of charges in the second half of 2014 and first half of 2015. Of this, $10–$13 million is expected to be future cash costs and $25–$27 million inventory write-downs and asset impairments. The company expected about $50 million of 2014 expenses for restructuring and outsourcing initiatives overall. No specific revenue or EPS guidance is provided in the filing.
- The company said existing cash and credit facilities should support operating and investing needs for at least 12 months. About $420.3 million of cash, cash equivalents and short-term investments was held abroad; repatriation could result in additional U.S. taxes. Management currently intends to reinvest foreign earnings indefinitely.
- Bruker continued cooperating with the SEC and DOJ regarding a prior internal investigation into alleged improper payments involving its China and Hong Kong operations. The Hong Kong ICAC completed its review and did not plan action against the company. Potential U.S. penalties or other sanctions remain possible; the company could not estimate a loss range and recorded no provision.
- Other risks include foreign-exchange exposure, raw-material price increases, demand variability, and uncertainty over whether restructuring and margin-improvement initiatives will deliver expected benefits. The company also noted that divestiture proceeds, if any, could not yet be estimated.
- Disclosure controls were reported effective as of June 30, 2014, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track the CAM divestitures, headcount reductions, timing and actual cash versus noncash charges against management’s estimates.
- Reconcile reported growth with underlying performance, including currency, acquisition/divestiture effects, and large or license-related sales.
- Monitor gross and operating margins, restructuring and demonstration-inventory charges, and the elevated effective tax rate.
- Assess working-capital trends, especially inventory and customer advances, alongside operating cash conversion and available credit capacity.
- Follow the SEC and DOJ inquiries, potential outcomes, and any later change to the company’s inability to estimate exposure.