Bruker Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited, compared with Q1 2018. Amounts are in U.S. dollars unless stated otherwise.
Business context
Bruker develops and sells scientific instruments and analytical and diagnostic solutions. Its two reportable segments are Bruker Scientific Instruments (BSI), which generated about 90% of revenue, and Bruker Energy & Supercon Technologies (BEST).
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $461.4 million | $431.7 million | +6.9% |
| Gross profit / margin | $214.7 million / 46.5% | $199.4 million / 46.2% | Margin +0.3 percentage points |
| Operating income / margin | $41.9 million / 9.1% | $38.1 million / 8.8% | Margin +0.3 percentage points |
| Net income attributable to Bruker | $30.8 million | $27.0 million | +14.1% |
| Diluted EPS | $0.20 | $0.17 | +$0.03 |
| Operating cash flow | $14.2 million | $43.8 million | Down $29.6 million |
| Free cash flow | $3.6 million | $35.3 million | Down $31.7 million |
Management reported non-GAAP gross margin of 48.9% versus 47.5% and non-GAAP operating margin of 13.5% versus 12.3%, excluding specified acquisition, restructuring, amortization, IT-transformation and other costs. These are company-defined non-GAAP measures, not substitutes for GAAP results.
Revenue growth included approximately $26.0 million from acquisitions and was reduced by $19.8 million from unfavorable currency translation. Organic revenue growth was 5.5%; constant-currency growth was 11.5%.
Segments and material changes
- BSI: Revenue increased 7.7% to $416.8 million; organic growth was 5.5%. CALID and Nano grew, while BioSpin revenue declined, primarily due to currency translation.
- BEST: Revenue increased 4.8% to $47.8 million, primarily reflecting shipment timing and project completion. Operating margin rose to 6.5% from 4.8%.
- Asia Pacific and the Americas grew; Europe revenue was below the prior-year quarter. Product revenue rose to $383.0 million, while service revenue was essentially flat at $77.4 million.
- Gross and operating margins improved, which management attributed to volume, product mix, operational improvements and favorable currency effects. SG&A and R&D expenses increased, including from acquired businesses and project timing.
Cash, debt and liquidity
At March 31, 2019, cash and cash equivalents were $298.8 million, down from $322.4 million at year-end 2018. Current assets were $1,343.7 million and current liabilities were $632.7 million. Total debt was $334.6 million, compared with $341.1 million at year-end. The company had $502.7 million available under revolving credit lines after borrowings and letters of credit. It reported compliance with debt covenants; its defined leverage ratio was 0.91 and interest coverage ratio was 23.6.
Operating cash flow fell principally because of working-capital movements, including a $43.2 million cash use from inventories. Capital expenditures were $10.6 million. Investing cash use was $26.7 million, including $16.1 million for acquisitions; financing cash use was $8.8 million. Management said existing cash and credit facilities were expected to meet operating and investing needs for at least the next 12 months.
Outlook, risks and unusual items
- The filing provides no numerical revenue or earnings guidance. Management cautioned that quarterly results can fluctuate with research budgets, order-to-installation and acceptance timing, import/export requirements, customer facility readiness and licensing.
- Foreign exchange remains a material exposure: currency translation reduced Q1 revenue by 4.6%. The company also disclosed exposure to interest rates and commodity prices, including copper and niobium tin.
- Cash flow and liquidity warrant attention given the sharp year-over-year decline in operating and free cash flow and the increase in inventory. The company cited working capital as the principal factor.
- In Q1, Bruker acquired Arxspan and Ampegon PPT for total consideration of $18.6 million, including $16.4 million in cash; their financial impact was described as immaterial. On April 2, 2019, after quarter-end, it acquired Rave assets and liabilities for $55.8 million, with up to $5.0 million additional consideration tied to revenue achievements.
- Adoption of lease accounting in Q1 added $77.4 million of operating lease assets and $58.3 million of long-term operating lease liabilities at March 31. The company said adoption did not significantly affect results of operations.
- The SEC notified Bruker on April 25, 2019 that its investigation was concluded and staff did not intend to recommend an enforcement action. A Korea Fair Trade Commission investigation into tender bidding remains ongoing; the company said it could not predict its outcome. The company reported no material accruals for these matters.
- The Q1 effective tax rate declined to 20.1% from 23.5%, primarily due to updates to the one-time repatriation tax under the 2017 Tax Act. Foreign currency translation also reduced comprehensive income materially year over year.
Most important facts for investors to verify
- Whether organic growth and margin expansion persist after separating acquisition contributions, foreign exchange and excluded non-GAAP costs.
- Whether inventory and other working-capital demands normalize and operating cash flow recovers.
- Integration, purchase accounting and returns from Q1 acquisitions and the subsequent Rave acquisition, including contingent consideration.
- Progress and outcome of the KFTC investigation, and any material developments in legal, regulatory or compliance matters.
- Debt, covenant headroom, revolving-credit availability and the company’s ability to fund acquisitions, dividends and other capital needs.
- Foreign exchange, commodity-price and tax exposures, including potential withholding taxes on indefinitely reinvested foreign earnings.