Bruker Corporation — Q1 2012 Form 10-Q
Business and period: Bruker designs and manufactures scientific instruments and superconducting materials and devices. This unaudited filing covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011. Figures are in U.S. dollars; financial-statement amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $405.6 | $357.0 | Up 13.6% |
| Gross profit / margin | $190.4 / 46.9% | $161.8 / 45.3% | Margin up 1.6 percentage points |
| Operating income / margin | $34.4 / 8.5% | $25.7 / 7.2% | Margin up 1.3 percentage points |
| Net income attributable to Bruker | $15.1 | $11.3 | Up 33.6% |
| Diluted earnings per share | $0.09 | $0.07 | Up $0.02 |
| Operating cash flow | $4.8 | $(29.4) | Improved by $34.2 |
Revenue growth excluding foreign exchange and acquisitions was 13.7%, according to management. Foreign exchange reduced reported revenue by approximately $4.9 million; recent acquisitions contributed approximately $4.5 million. Management cited stronger X-ray and mass spectrometry sales and higher demand for low-temperature superconducting wire. The effective tax rate was 43.9%, compared with 43.5%.
Segments
- Scientific Instruments: Revenue of $378.1 million, up 12.6% reported and 12.4% excluding foreign exchange and acquisitions. Operating income was $35.1 million, with a 9.3% margin, versus $27.7 million and 8.2%.
- Energy & Supercon Technologies: Revenue of $30.0 million, up 25.0% reported and 30.4% excluding foreign exchange. Operating loss narrowed to $0.3 million from $0.7 million.
Financial position and liquidity
- Cash and cash equivalents were $229.5 million at March 31, 2012, down from $246.0 million at year-end 2011. Total assets were $1,797.3 million; shareholders’ equity was $662.1 million.
- Total debt was $319.6 million, including $240.0 million of senior notes, $75.0 million under the term loan and $4.6 million of capital leases. The company repaid its $216.5 million revolving-credit borrowing during the quarter. It reported $311.7 million available across revolving facilities, net of outstanding letters of credit.
- In January 2012, Bruker issued $240.0 million of senior notes with maturities from 2017 to 2024 and fixed coupons of 3.16% to 4.46%; proceeds were used partly to reduce revolving borrowings.
- Investing cash outflow was $32.5 million, including $21.7 million for the SkyScan acquisition and $10.8 million of capital expenditures. Inventory rose to $648.0 million from $576.2 million. Management attributed the working-capital increase primarily to inventory built to support anticipated growth.
Changes, outlook and notable matters
- Reported revenue, gross profit, operating income and net income all increased year over year. Gross-margin improvement reflected product mix and newly introduced products, while gas chromatography, inductively coupled plasma products and higher-than-planned chemical-analysis production costs weighed on margins.
- Operating expenses increased, partly due to acquisition-related and growth-supporting headcount, higher commissions, and R&D investment. Management’s adjusted operating margin, excluding specified charges, was 10.7% versus 10.0%; adjusted gross margin was 48.2% versus 47.4%. These are non-GAAP measures as presented by management.
- Management expected existing cash and credit facilities to support operating and investing needs for at least 12 months, subject to profitability and working-capital management. It planned approximately $50 million of 2012 capital spending. The filing gives no specific revenue or earnings guidance.
- The Audit Committee completed an internal investigation into allegations involving Bruker Optics operations in China and Hong Kong. It found evidence of payments that improperly benefited employees or agents of government-owned enterprises and policy violations. Bruker reported the matter to U.S. and Hong Kong authorities, is cooperating with their inquiries, and says it cannot estimate the timing, outcome or potential loss. No provision was recorded; adverse outcomes could materially affect future-period results.
- Q1 other charges included $2.5 million of professional fees for the investigation, $0.5 million of factory relocation costs and $0.4 million of acquisition-related costs. Demonstration-inventory write-downs were $6.8 million, compared with $6.5 million.
- Unrecognized tax benefits were approximately $35.5 million, including $28.5 million that would reduce the effective tax rate if recognized. Swiss and German tax audits were ongoing. The company reported compliance with its credit-agreement covenants and no material changes to previously disclosed risk factors.
Key investor verification points
- Track cash conversion and inventory levels, given the modest positive operating cash flow and substantial inventory increase.
- Review the outcome and potential financial, regulatory and business consequences of the China and Hong Kong investigations.
- Assess debt-service obligations, covenant headroom, and the terms and availability of revolving facilities.
- Monitor whether revenue growth and improved product mix translate into sustained margins as operating expenses and R&D investment rise.
- Follow tax-audit developments and the recognition or utilization of tax benefits and carryforwards.