Bruker Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are primarily with FY2016. Bruker develops and sells scientific instruments and analytical and diagnostic solutions. Its two reportable segments are Bruker Scientific Instruments (BSI) and Bruker Energy & Supercon Technologies (BEST).
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $1,765.9 million | $1,611.3 million |
| Gross profit / margin | $813.0 million / 46.0% | $742.5 million / 46.1% |
| Operating income / margin | $214.7 million / 12.2% | $177.2 million / 11.0% |
| Net income attributable to Bruker | $78.6 million | $153.6 million |
| Diluted EPS | $0.49 | $0.95 |
| Cash from operating activities | $154.4 million | $130.8 million |
| Free cash flow (company-defined non-GAAP) | $110.7 million | $93.7 million |
- Revenue rose 9.6%; management attributed approximately $77.2 million to acquisitions and $19.6 million to favorable currency translation. Organic revenue growth was 3.6%.
- Operating margin improved on higher sales, cost discipline and restructuring savings. Gross margin was essentially flat; mix effects, including a larger, lower-margin BEST business, offset improvements.
- Net income and EPS fell primarily because of the $68.9 million incremental tax provision associated with the 2017 Tax Act. The reported effective tax rate was 59.4%, versus 13.0% in FY2016.
- BSI revenue increased 6.1% to $1,583.9 million; BEST revenue increased 46.9% to $191.2 million, driven by the OST acquisition and higher superconductors shipments. BEST operating margin declined to 3.9% from 5.1%.
Liquidity, debt and capital allocation
- At year-end, cash and cash equivalents were $325.0 million and short-term investments were $114.2 million, totaling $439.2 million. Working capital was $834.3 million.
- Total debt was $415.6 million, compared with $411.7 million a year earlier. The company reported $303.9 million available on its $500 million revolving credit facility; it was in covenant compliance, with a 1.32 leverage ratio and 15.5 interest coverage ratio.
- Cash, cash equivalents and short-term investments held by foreign subsidiaries totaled $405.8 million. Management noted that U.S. cash requirements and the timing and cost of repatriation are relevant to liquidity.
- FY2017 included $152.2 million of share repurchases and $25.4 million of dividends paid. The annual dividend target was $0.16 per share, subject to board approval.
Material changes and unusual items
- The 2017 Tax Act produced a provisional $68.9 million tax charge, including an estimated $55.0 million toll charge and $12.5 million of estimated state and foreign withholding taxes, partly offset by a $1.4 million deferred-tax benefit. The company had not completed its assessment.
- Other charges, net were $19.7 million, including $10.6 million of restructuring costs, $4.5 million of acquisition-related contingent consideration, and $4.2 million of IT transformation costs. Management expected another $7–$10 million of restructuring and outsourcing expense in 2018.
- Interest and other expense, net was $16.9 million, compared with $0.4 million of income in 2016; FY2016 included a $9.2 million bargain-purchase gain.
- Fourth-quarter 2017 revenue was $530.5 million and operating income was $93.7 million, but Bruker reported a $3.4 million net loss attributable to the company, including the $68.9 million tax charge.
Outlook, risks and contingencies
- Management expected a 2018 effective tax rate of approximately 25%, interest expense of approximately $13.5 million and capital expenditures of approximately $50 million. No clear full-year revenue or earnings guidance is provided in the filing.
- System backlog was approximately $1.01 billion at year-end, up from $932 million; Bruker anticipated filling about 78% during 2018. Backlog is not necessarily a reliable indicator of longer-term revenue.
- The company identified $112 million of ultra-high-field magnet orders at risk if technical feasibility is not achieved, potentially leading to unfulfilled orders, rework, warranty costs or inventory write-offs.
- An SEC Enforcement Division subpoena received in October 2017 seeks information regarding revenue recognition, restructuring, financial reporting and disclosure, the former income-tax control weakness, and certain non-employee travel payments. Bruker said it was cooperating and could not predict the investigation’s duration, scope or outcome.
- Management said the previously disclosed material weakness in income-tax accounting controls was remediated; management and the auditor concluded internal control over financial reporting was effective at December 31, 2017. Hysitron was excluded from the control assessment because of its 2017 acquisition.
- Other notable exposures include foreign exchange, government and academic research funding, competition and technology shifts, acquisition integration, restructuring execution, sole-source suppliers and raw-material costs, regulatory compliance, and debt covenant requirements. The filing also identifies the EU GDPR compliance deadline in 2018.
- Adoption of the new revenue standard was expected to affect timing for certain BEST project and CBRNE orders; Bruker preliminarily estimated a $6 million retained-earnings adjustment on January 1, 2018. The final impact could differ.
Most important facts for investors to verify
- Whether organic growth, margins and backlog conversion held up after FY2017, particularly in BEST and BSI’s academic and industrial markets.
- The final tax-reform measurement, including the toll charge, GILTI accounting, potential withholding taxes and the expected 2018 tax rate.
- Any developments, findings or financial consequences from the SEC investigation, and continued effectiveness of financial-reporting controls.
- Technical progress and delivery economics for the $112 million ultra-high-field magnet backlog, as well as the revenue-standard impact on project orders.
- Cash availability in the United States, debt service and covenant headroom, while funding acquisitions, capital spending, dividends and repurchases.