Bruker Corporation — FY2016 Form 10-K
Reporting period: Year ended December 31, 2016; the filing was signed March 1, 2017. The filing also reports fourth-quarter results. Bruker develops and sells scientific instruments, analytical and diagnostic solutions, and superconducting materials and systems. Its reportable segments are Bruker Scientific Instruments (BSI; approximately 93% of revenue) and Bruker Energy & Supercon Technologies (BEST).
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $1,611.3 million | $1,623.8 million |
| Gross profit / margin | $742.5 million / 46.1% | $708.6 million / 43.6% |
| Operating income / margin | $177.2 million / 11.0% | $145.7 million / 9.0% |
| Net income attributable to Bruker | $153.6 million | $101.6 million |
| Diluted EPS | $0.95 | $0.60 |
| Cash from operating activities | $130.8 million | $229.2 million |
| Free cash flow (non-GAAP) | $93.7 million | $195.0 million |
- Fourth-quarter 2016 revenue was $470.3 million, versus $478.2 million in Q4 2015; operating income was $76.9 million versus $70.7 million, and net income attributable to Bruker was $69.0 million versus $61.4 million.
- BSI revenue was $1,492.6 million, down 0.4%; BEST revenue was $130.2 million, down 2.6%. Within BSI, BioSpin revenue rose to $562.7 million, while CALID fell to $475.4 million and Nano to $454.6 million.
- Cash, cash equivalents and short-term investments totaled $500.3 million at year-end, up from $468.3 million. Working capital was $751.2 million; current assets were $1,275.9 million and current liabilities $524.7 million.
- Total debt was $411.7 million, compared with $265.8 million a year earlier. The company had $327.9 million available under its $500 million revolving credit agreement; reported leverage and interest coverage ratios were 1.49 and 15.5, respectively, and it was in covenant compliance.
- About $460.9 million, or 92%, of cash, cash equivalents and short-term investments was held by foreign subsidiaries. Bruker stated that it expects existing cash and credit facilities to meet operating and investing needs for at least 12 months.
Material changes versus the prior year
- Reported revenue declined 0.8%; organic revenue, a company-defined non-GAAP measure excluding currency and acquisitions/divestitures, declined 2.3%. Jordan Valley added approximately $32.4 million to revenue; foreign currency translation reduced it by approximately $8.3 million.
- Gross margin improved 2.5 percentage points and operating margin improved 2.0 points, which management attributed principally to restructuring and operational improvements, pricing, favorable BioSpin mix and the Jordan Valley acquisition.
- Net income increased despite slightly lower revenue, helped by improved operating results, a lower effective tax rate and a swing in interest and other income/expense. FY2016 included a $9.2 million bargain-purchase gain on the OST acquisition.
- Operating cash flow and free cash flow fell materially from 2015. Management cited unusually strong prior-year collections and customer advances, 2016 inventory build for expected orders, and tax payments related to audit settlements and the 2015 European cash repatriation.
- Debt rose mainly because revolving-credit borrowings increased to $171.0 million from $25.0 million. Bruker repurchased $160.0 million of stock in 2016 and paid $25.8 million in dividends; the $225 million repurchase program was completed.
Outlook, commentary and risks
- Management forecast approximately $45 million of capital expenditures, $16 million of interest expense and a 25% income tax provision for 2017. It expected $6–$8 million of 2017 expense for restructuring and outsourcing activities.
- A restructuring initiative targeting approximately 125 positions in CALID and Nano was expected to generate $10–$13 million of annualized savings, fully effective in the second quarter of 2017. Total related 2016–2017 charges were estimated at $11–$13 million.
- Year-end system backlog was approximately $932 million, versus $856 million in 2015; management expected about 78% to be filled in 2017. Backlog is not necessarily a reliable indicator of long-term performance. Orders for ultra-high-field magnets included $102 million for which technical feasibility remained a risk.
- Key exposures include delayed European academic funding, weakness in global industrial markets, dependence on government and research funding, competition and rapid technological change, foreign currency movements, reliance on limited or single-source suppliers, and acquisition integration and restructuring execution.
- The company disclosed a material weakness in internal control over income-tax accounting, including controls over the tax provision and related tax balances. Management and the auditor concluded controls were ineffective at December 31, 2016; the auditor issued an adverse opinion on internal control, while its opinion on the financial statements was unqualified. Remediation was underway but not yet considered complete.
- Bruker Korea received a KFTC fine of approximately $15,000 and government-bidding suspensions of three to six months, with overlapping periods. Additional penalties remained possible; affected government customers represented less than 1% of 2016 revenue. Bruker did not expect a material adverse effect.
- The company reported $1.2 billion of foreign earnings considered indefinitely reinvested and estimated approximately $90 million of unrecognized deferred U.S. taxes if those earnings were distributed. It also disclosed $149.3 million of unconditional purchase commitments, most expected to be settled in 2017.
Important facts for investors to verify
- Whether the tax-accounting material weakness has been fully remediated and independently tested, and whether tax-related balances or disclosures require adjustment.
- Whether backlog converts to revenue and cash on schedule, particularly the $102 million of ultra-high-field magnet orders and customer-specific acceptance projects.
- Whether 2017 savings targets are achieved without further restructuring costs, lost customers or operational disruption.
- The sustainability of improved margins and earnings given declining organic revenue, weaker CALID/Nano demand and the one-time OST bargain-purchase gain.
- Cash generation, debt repayment capacity and U.S. liquidity needs given increased borrowings and the concentration of cash overseas.
- The eventual revenue-recognition effects of adopting the new customer-contract standard; the filing said the impact had not yet been quantified and anticipated changes for some project-based orders.