Bruker Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Bruker develops and sells scientific instruments and analytical and diagnostic solutions. Its reportable segments are Bruker Scientific Instruments (BSI) and Bruker Energy & Supercon Technologies (BEST). Figures are in U.S. dollars.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $414.9 million | $371.7 million | $799.8 million | $747.1 million |
| Gross profit | $183.4 million | $170.1 million | $359.8 million | $336.9 million |
| Gross margin | 44.2% | 45.8% | 45.0% | 45.1% |
| Operating income / margin | $33.5 million / 8.1% | $20.4 million / 5.5% | $71.1 million / 8.9% | $54.4 million / 7.3% |
| Net income attributable to Bruker | $23.4 million | $14.5 million | $45.0 million | $38.1 million |
| Diluted EPS | $0.15 | $0.09 | $0.28 | $0.23 |
Q2 revenue grew 11.6%; management reported organic growth of 7.6%, excluding acquisitions and foreign currency effects. For the first half, revenue grew 7.1%, with organic growth of 3.4%. Acquisitions added approximately $21.6 million to Q2 revenue and $41.3 million to first-half revenue; currency translation reduced revenue by approximately $6.8 million and $14.1 million, respectively. Higher BEST revenue reflected the OST acquisition and increased superconducting-wire shipments. BSI benefited from improved demand in certain academic and industrial markets.
Q2 gross margin fell primarily due to revenue mix and acquired businesses, particularly OST. Operating income and margin increased with higher revenue, operating leverage, restructuring benefits and operational improvements. The six-month effective tax rate was 26.1%, versus 16.9% in 2016, when discrete tax benefits—including released valuation allowances and resolution of tax audits—lowered the rate. Q2 rates were 20.5% and 16.9%, respectively.
Cash, liquidity and debt
- First-half cash from operating activities was $15.4 million, compared with $4.1 million in 2016. Free cash flow, a non-GAAP measure defined as operating cash flow less capital expenditures, was negative $5.7 million, versus negative $13.1 million.
- Investing activities used $122.0 million, including $58.7 million for acquisitions and $21.1 million of capital expenditures. Financing activities used $30.6 million, including $41.7 million of share repurchases and $12.8 million of dividends, partly offset by net revolving-credit borrowings.
- At June 30, cash and cash equivalents were $217.7 million and short-term investments were $222.6 million. Total debt was $430.8 million, including $210.0 million drawn on the revolving facility and $220.0 million of senior notes. The company reported $407.5 million available across revolving credit lines and other lines, net of borrowings and letters of credit.
- Management said existing cash and credit facilities should support operating and investing needs for at least the next 12 months. The company was in compliance with debt covenants; its reported leverage ratio was 1.46 and interest coverage ratio was 15.0.
- The board authorized up to $225 million in repurchases. Bruker repurchased 1,594,930 shares for $43.9 million through June 30; it reported an additional 670,000 shares repurchased for $19.2 million through August 4. The quarterly dividend was $0.04 per share.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management cautioned that changes to Chinese customs tax-free certification procedures announced July 27 could delay imports, deliveries and customer acceptances and negatively affect third- and fourth-quarter 2017 results; the potential impact was not yet clear.
- Results may fluctuate with government and academic budgets, order-to-acceptance timing, customer facility readiness, customs and export requirements, and licensing. Foreign-exchange movements and copper and other raw-material prices are additional exposures.
- The 2016 restructuring program targeting the CALID and Nano groups had incurred $14.3 million of restructuring and other one-time costs through June 30; total costs were expected to be $16–$18 million. Q2 other charges included restructuring, IT transformation and acquisition-related costs.
- The company disclosed a material weakness in internal control over financial reporting related to income-tax accounting. Management said the weakness had not caused a misstatement in the 2016 or first-half 2017 financial statements, but controls were not yet considered fully remediated. Management nevertheless concluded the filed financial statements fairly present the company’s financial position and results in all material respects.
- Bruker expects to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method. The largest expected impact concerns timing for certain project-based BEST orders; the financial effect had not been quantified.
- The Korean bidding investigation was considered resolved: the prosecutor declined to pursue criminal proceedings, suspensions had lapsed by June 30, and the company reported no further amounts owed or accrued. Other pending legal matters were not considered likely to have a material impact.
Important facts for investors to verify
- Whether Chinese customs changes caused order, delivery or acceptance delays in the second half of 2017.
- How much growth and margin performance came from organic demand versus acquisitions, especially OST, and whether BEST can improve profitability after its acquisition-related margin dilution.
- Whether operating cash flow and free cash flow improve as inventory and customer-advance timing normalize.
- Progress in remediating the income-tax control material weakness and the eventual quantified effect of the new revenue-recognition standard.
- Repurchase pace, debt levels and liquidity after post-quarter buybacks and any further acquisition or dividend commitments.