Quarterly Report (10-q)

Date : 05/08/2019 @ 7:41PM
Source : Edgar (US Regulatory)
Stock : Bruker Corporation (BRKR)
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Quarterly Report (10-q)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934

 

For the quarterly period ended March 31, 2019

 

o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934

 

For the transition period from                  to

 

Commission File Number 000-30833

 

BRUKER CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

04-3110160

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

40 Manning Road, Billerica, MA 01821

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (978) 663-3660

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes       x        No       o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes       x      No       o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x

 

Accelerated filer  o

 

 

 

Non-accelerated filer  o  

 

Smaller reporting company  o

 

 

Emerging growth company  o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o     No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common stock

 

BRKR

 

Nasdaq Global Select Market

 

Class

 

Outstanding at May 2, 2019

Common Stock, $0.01 par value per share

 

156,816,577 shares

 

 

 


Table of Contents

 

B RUKER CORPORATION

 

Quarterly Report on Form 10-Q

For the Quarter Ended March 31, 2019

 

Index

 

 

 

Page

Part I

FINANCIAL INFORMATION

3

Item 1:

Unaudited Condensed Consolidated Financial Statements

3

 

Unaudited Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

3

 

Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2019 and 2018

4

 

Unaudited Condensed Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2019 and 2018

5

 

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4:

Controls and Procedures

38

Part II

OTHER INFORMATION

38

Item 1:

Legal Proceedings

38

Item 1A:

Risk Factors

39

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

39

Item 6:

Exhibits

39

 

Signatures

41

 

The accompanying notes are an integral part of these financial statements.

 

2


Table of Contents

 

PART I                 FINANCIAL INFORMATION

 

ITEM 1.               UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

BRUKER CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share data)

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

298.8

 

$

322.4

 

Accounts receivable, net

 

360.4

 

357.2

 

Inventories

 

541.8

 

509.6

 

Other current assets

 

142.7

 

115.1

 

Total current assets

 

1,343.7

 

1,304.3

 

 

 

 

 

 

 

Property, plant and equipment, net

 

267.6

 

270.6

 

Goodwill

 

275.3

 

275.7

 

Operating lease assets

 

77.4

 

 

Intangibles, net and other long-term assets

 

278.5

 

278.0

 

Total assets

 

$

2,242.5

 

$

2,128.6

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

2.6

 

$

18.5

 

Accounts payable

 

126.5

 

104.5

 

Customer advances

 

132.4

 

124.4

 

Other current liabilities

 

371.2

 

351.9

 

Total current liabilities

 

632.7

 

599.3

 

 

 

 

 

 

 

Long-term debt

 

332.0

 

322.6

 

Operating lease liabilities

 

58.3

 

 

Other long-term liabilities

 

275.7

 

279.0

 

 

 

 

 

 

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interest

 

22.0

 

22.6

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred stock, $0.01 par value 5,000,000 shares authorized, none issued or outstanding

 

 

 

Common stock, $0.01 par value 260,000,000 shares authorized, 172,836,469 and 172,634,220 shares issued and 156,814,676 and 156,609,340 shares outstanding at March 31, 2019 and December 31, 2018, respectively

 

1.7

 

1.7

 

Treasury stock, at cost, 16,021,793 and 16,024,880 shares at March 31, 2019 and December 31, 2018, respectively

 

(401.5

)

(401.5

)

Accumulated other comprehensive income

 

3.3

 

17.0

 

Other shareholders’ equity

 

1,309.7

 

1,279.4

 

Total shareholders’ equity attributable to Bruker Corporation

 

913.2

 

896.6

 

Noncontrolling interest in consolidated subsidiaries

 

8.4

 

8.5

 

Total shareholders’ equity

 

921.6

 

905.1

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

2,242.3

 

$

2,128.6

 

 

The accompanying notes are an integral part of these financial statements.

 

3


Table of Contents

 

BRUKER CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(in millions, except per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

Product revenue

 

$

383.0

 

$

352.2

 

Service revenue

 

77.4

 

77.7

 

Other revenue

 

1.0

 

1.8

 

Total revenue

 

461.4

 

431.7

 

 

 

 

 

 

 

Cost of product revenue

 

197.5

 

185.6

 

Cost of service revenue

 

49.1

 

46.5

 

Cost of other revenue

 

0.1

 

0.2

 

Total cost of revenue

 

246.7

 

232.3

 

Gross profit

 

214.7

 

199.4

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative

 

120.1

 

110.3

 

Research and development

 

46.4

 

43.2

 

Other charges, net

 

6.3

 

7.8

 

Total operating expenses

 

172.8

 

161.3

 

Operating income

 

41.9

 

38.1

 

 

 

 

 

 

 

Interest and other income (expense), net

 

(3.5

)

(2.3

)

Income before income taxes and noncontrolling interest in consolidated subsidiaries

 

38.4

 

35.8

 

Income tax provision

 

7.7

 

8.4

 

Consolidated net income

 

30.7

 

27.4

 

Net (loss) income attributable to noncontrolling interests in consolidated subsidiaries

 

(0.1

)

0.4

 

Net income attributable to Bruker Corporation

 

$

30.8

 

$

27.0

 

 

 

 

 

 

 

Net income per common share attributable to Bruker Corporation shareholders:

 

 

 

 

 

Basic

 

$

0.20

 

$

0.17

 

Diluted

 

$

0.20

 

$

0.17

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

Basic

 

156.7

 

155.9

 

Diluted

 

157.9

 

157.0

 

 

 

 

 

 

 

Comprehensive income

 

$

17.0

 

$

51.8

 

Less: Comprehensive income attributable to noncontrolling interests

 

(0.1

)

0.6

 

Comprehensive income attributable to Bruker Corporation

 

$

17.1

 

$

51.2

 

 

 

 

 

 

 

Dividend declared per common share

 

$

0.04

 

$

0.04

 

 

The accompanying notes are an integral part of these financial statements.

 

4


Table of Contents

 

BRUKER CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in millions, except share data)

 

 

 

Common Shares

 

Common
Stock

Amount

 

Treasury
Shares

 

Treasury
Stock
Amount

 

Additional
Paid-In
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Total
Shareholders’
Equity
Attributable to
Bruker
Corporation

 

Noncontrolling
Interests in
Consolidated
Subsidiaries

 

Total

Shareholders’
Equity

 

Balance at December 31, 2017

 

155,865,977

 

$

1.7

 

16,009,099

 

$

(401.2

)

$

155.9

 

$

942.0

 

$

27.0

 

$

725.4

 

$

8.1

 

$

733.5

 

Restricted shares terminated

 

(6,553

)

 

6,553

 

 

 

 

 

 

 

 

Stock options exercised

 

180,890

 

 

 

 

2.9

 

 

 

2.9

 

 

2.9

 

Restricted stock units vested

 

42,762

 

 

 

 

 

 

 

 

 

 

Stock based compensation

 

 

 

 

 

2.5

 

 

 

2.5

 

 

2.5

 

Shares issued for acquisition

 

(2,123

)

 

2,123

 

(0.1

)

 

 

 

(0.1

)

 

(0.1

)

Treasury stock acquired

 

(1,055

)

 

1,055

 

 

 

 

 

 

 

 

Adoption impact from new revenue standard ASC 606

 

 

 

 

 

 

5.9

 

 

5.9

 

0.2

 

6.1

 

Cash dividends paid to common stockholders

 

 

 

 

 

 

(6.3

)

 

(6.3

)

 

(6.3

)

Consolidated net income

 

 

 

 

 

 

27.0

 

 

27.0

 

0.4

 

27.4

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

24.2

 

24.2

 

0.1

 

24.3

 

Balance at March 31, 2018

 

156,079,898

 

$

1.7

 

16,018,830

 

$

(401.3

)

$

161.3

 

$

968.6

 

$

51.2

 

$

781.5

 

$

8.8

 

$

790.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

156,609,340

 

$

1.7

 

16,024,880

 

$

(401.5

)

$

176.9

 

$

1,102.5

 

$

17.0

 

$

896.6

 

$

8.5

 

$

905.1

 

Stock options exercised

 

167,177

 

 

 

 

3.1

 

 

 

3.1

 

 

3.1

 

Restricted stock units vested

 

35,072

 

 

 

 

 

 

 

 

 

 

Stock based compensation

 

 

 

 

 

2.7

 

 

 

2.7

 

 

2.7

 

Shares issued for acquisition

 

3,087

 

 

(3,087

)

 

 

 

 

 

 

 

Cash dividends paid to common stockholders

 

 

 

 

 

 

(6.3

)

 

(6.3

)

 

(6.3

)

Consolidated net income (loss)

 

 

 

 

 

 

30.8

 

 

30.8

 

(0.1

)

30.7

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

(13.7

)

(13.7

)

 

(13.7

)

Balance at March 31, 2019

 

156,814,676

 

$

1.7

 

16,021,793

 

$

(401.5

)

$

182.7

 

$

1,127.0

 

$

3.3

 

$

913.2

 

$

8.4

 

$

921.6

 

 

The accompanying notes are an integral part of these financial statements.

 

5


Table of Contents

 

BRUKER CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

Consolidated net income

 

$

30.7

 

$

27.4

 

Adjustments to reconcile consolidated net income to cash flows from operating activities:

 

 

 

 

 

Depreciation and amortization

 

19.0

 

15.8

 

Stock-based compensation expense

 

3.1

 

2.5

 

Deferred income taxes

 

(0.2

)

(7.1

)

Other non-cash expenses, net

 

4.5

 

18.2

 

Changes in operating assets and liabilities, net of acquisitions and divestitures:

 

 

 

 

 

Accounts receivable

 

(6.0

)

10.0

 

Inventories

 

(43.2

)

(32.0

)

Accounts payable and accrued expenses

 

11.0

 

(13.7

)

Income taxes payable, net

 

(7.9

)

(3.3

)

Deferred revenue

 

13.9

 

5.9

 

Customer advances

 

6.5

 

17.8

 

Other changes in operating assets and liabilities, net

 

(17.2

)

2.3

 

Net cash provided by operating activities

 

14.2

 

43.8

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Maturities of short-term investments

 

 

117.0

 

Cash paid for acquisitions, net of cash acquired

 

(16.1

)

(0.4

)

Purchases of property, plant and equipment

 

(10.6

)

(8.5

)

Net cash (used in) provided by investing activities

 

(26.7

)

108.1

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Repayments of Note Purchase Agreement

 

(15.0

)

 

Repayments of revolving lines of credit

 

(25.9

)

(195.0

)

Proceeds from revolving lines of credit

 

40.6

 

 

Repayment of other debt

 

(4.5

)

(0.1

)

Proceeds of other debt

 

0.2

 

 

Proceeds from issuance of common stock, net

 

3.1

 

2.6

 

Payment of contingent consideration

 

(1.0

)

 

Payment of dividends

 

(6.3

)

(6.3

)

Net cash used in financing activities

 

(8.8

)

(198.8

)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

(2.4

)

5.8

 

Net change in cash, cash equivalents and restricted cash

 

(23.7

)

(41.1

)

Cash, cash equivalents and restricted cash at beginning of period

 

326.3

 

328.9

 

Cash, cash equivalents and restricted cash at end of period

 

$

302.6

 

$

287.8

 

 

The accompanying notes are an integral part of these financial statements.

 

6


Table of Contents

 

BRUKER CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.               Description of Business

 

Bruker Corporation, together with its consolidated subsidiaries (Bruker or the Company), develops, manufactures and distributes high-performance scientific instruments and analytical and diagnostic solutions that enable its customers to explore life and materials at microscopic, molecular and cellular levels. Many of the Company’s products are used to detect, measure and visualize structural characteristics of chemical, biological and industrial material samples. The Company’s products address the rapidly evolving needs of a diverse array of customers in life science research, pharmaceuticals, biotechnology, applied markets, cell biology, clinical research, microbiology, in-vitro diagnostics, nanotechnology and materials science research.

 

The Company has two reportable segments,  Bruker Scientific Instruments (BSI) , which represented approximately 90.3% and 89.6% of the Company’s revenues during the three months ended March 31, 2019 and 2018, respectively, and  Bruker Energy & Supercon Technologies (BEST) , which represented the remainder of the Company’s revenues. Within BSI, the Company is organized into three operating segments: the Bruker BioSpin Group, the Bruker CALID Group and the Bruker Nano Group. For financial reporting purposes, the Bruker BioSpin Group, Bruker CALID Group and Bruker Nano Group operating segments are aggregated into the BSI reportable segment because each has similar economic characteristics, production processes, service offerings, types and classes of customers, methods of distribution and regulatory environments.

 

Bruker BioSpin - The Bruker BioSpin Group designs, manufactures and distributes enabling life science tools based on magnetic resonance technology. The majority of the Bruker BioSpin Group’s revenues are generated by academic and government research customers. Other customers include pharmaceutical and biotechnology companies and nonprofit laboratories, as well as chemical, food and beverage, clinical and other industrial companies.

 

Bruker CALID   (Chemicals, Applied Markets, Life Science, In-Vitro Diagnostics, Detection) - The Bruker CALID Group designs, manufactures and distributes life science mass spectrometry and ion mobility spectrometry solutions, analytical and process analysis instruments and solutions based on infrared and Raman molecular spectroscopy technologies and radiological/nuclear detectors for Chemical, Biological, Radiological, Nuclear and Explosive (CBRNE) detection. Customers of the Bruker CALID Group include: academic institutions and medical schools; pharmaceutical, biotechnology and diagnostics companies; contract research organizations; nonprofit and for-profit forensics laboratories; agriculture, food and beverage safety laboratories; environmental and clinical microbiology laboratories; hospitals and government departments and agencies.

 

Bruker Nano - The Bruker Nano Group designs, manufactures and distributes advanced X-ray instruments; atomic force microscopy instrumentation; advanced fluorescence optical microscopy instruments; analytical tools for electron microscopes and X-ray metrology; defect-detection equipment for semiconductor process control; handheld, portable and mobile X-ray fluorescence spectrometry instruments; and spark optical emission spectroscopy systems. Customers of the Bruker Nano Group include academic institutions, governmental customers, nanotechnology companies, semiconductor companies, raw material manufacturers, industrial companies, biotechnology and pharmaceutical companies and other businesses involved in materials analysis.

 

The Company’s BEST reportable segment develops and manufactures superconducting and non-superconducting materials and devices for use in renewable energy, energy infrastructure, healthcare and “big science” research. The segment focuses on metallic low temperature superconductors for use in magnetic resonance imaging, nuclear magnetic resonance, fusion energy research and other applications, as well as ceramic high temperature superconductors primarily for energy grid and magnet applications.

 

The unaudited condensed consolidated financial statements represent the consolidated accounts of the Company. All intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements as of March 31, 2019 and December 31, 2018, and for the three months ended March 31, 2019 and 2018, have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for Quarterly Reports on Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial information presented herein does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair statement have been included. The results for interim periods are not necessarily indicative of the results expected for any other interim period or the full year.

 

7


Table of Contents

 

At March 31, 2019, the Company’s significant accounting policies and estimates, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, have not changed other than for lease accounting as detailed in Footnote 14.

 

2.               Revenue

 

The following table presents the Company’s revenues by Group and end customer geographical location (dollars in millions):

 

 

 

Three Months Ended
March 31,

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Revenue by Group:

 

 

 

 

 

Bruker BioSpin

 

$

127.8

 

$

131.8

 

Bruker CALID

 

148.2

 

131.3

 

Bruker Nano

 

140.8

 

123.9

 

BEST

 

47.8

 

45.6

 

Eliminations

 

(3.2

)

(0.9

)

Total revenue

 

$

461.4

 

$

431.7

 

 

 

 

Three Months Ended
March 31,

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Revenue by End Customer Geography:

 

 

 

 

 

United States

 

$

117.6

 

$

104.8

 

Germany

 

42.8

 

41.5

 

Rest of Europe

 

112.3

 

119.9

 

Asia Pacific

 

152.2

 

126.9

 

Other

 

36.5

 

38.6

 

Total revenue

 

$

461.4

 

$

431.7

 

 

Revenue for the Company recognized at a point in time versus over time is as follows (dollars in millions):

 

 

 

Three Months Ended
March 31,

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

 

 

 

 

 

 

Revenue recognized at a point in time

 

$

410.5

 

$

395.2

 

Revenue recognized over time

 

50.9

 

36.5

 

Total revenue

 

$

461.4

 

$

431.7

 

 

Remaining Performance Obligations

 

Remaining performance obligations represent the aggregate transaction price allocated to a promise to transfer a good or service that is fully or partially unsatisfied at the end of the period. As of March 31, 2019, remaining performance obligations were approximately $1,048.9 million. The Company expects to recognize revenue on approximately 79.0% of the remaining performance obligations over the next twelve months and the remaining performance obligations primarily within one to three years.

 

8


Table of Contents

 

Contract Balances

 

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets) and deferred revenue, customer deposits and billings in excess of revenue recognized (contract liabilities) on the Company’s unaudited condensed consolidated balance sheets.

 

Contract assets— Most of the Company’s long-term contracts are billed as work progresses in accordance with the contract terms and conditions, either at periodic intervals or upon achievement of certain milestones. Billing often occurs subsequent to revenue recognition, resulting in contract assets. Contract assets are generally classified as other current assets in the unaudited condensed consolidated balance sheets. The balance of contract assets as of March 31, 2019 and December 31, 2018 was $31.5 million and $25.9 million, respectively.  The increase in the contract asset balance during the three month period ended March 31, 2019 is primarily a result of foreign currency translation and contracts that have been recognized as revenue during the three month period ending March 31, 2019 for which billing cannot contractually occur as of March 31, 2019.

 

Contract liabilities— The Company often receives cash payments from customers in advance of the Company’s performance, resulting in contract liabilities. These contract liabilities are classified as either current or long-term in the unaudited condensed consolidated balance sheet based on the timing of when revenue recognition is expected.  As of March 31, 2019 and December 31, 2018, the contract liabilities were $308.6 million and $288.5 million, respectively.   The increase in the contract liability balance during the three month period ended March 31, 2019 is primarily a result of new performance obligations entered into during the three month period.  Approximately $75.2 million of the contract liability balance on December 31, 2018 was recognized as revenue during the three month period ended March 31, 2019.

 

3.               Acquisitions

 

2019

 

In the three months ended March 31, 2019, the Company completed two acquisitions that collectively complemented the Company’s existing product offerings or added aftermarket and software capabilities to the Company’s existing businesses.

 

The following table reflects the consideration transferred and the respective reporting segment for each of these acquisitions:

 

Name of Acquisition

 

Date Acquired

 

Segment

 

Consideration

 

Cash Consideration

 

Arxspan, LLC

 

March 4, 2019

 

BSI

 

$

16.6

 

$

14.4

 

Ampegon PPT GmbH

 

March 7, 2019

 

BEST

 

2.0

 

2.0

 

 

 

 

 

 

 

$

18.6

 

$

16.4

 

 

The impact of these acquisitions, individually and collectively, on revenues, net income and total assets was not material. Pro forma financial information reflecting these acquisitions has not been presented because the impact, individually and collectively, on revenues, net income and total assets is not material.

 

2018

 

There were no material acquisitions completed in the three months ended March 31, 2018.

 

4.               Stock-Based Compensation

 

On May 14, 2010, the Bruker Corporation 2010 Incentive Compensation Plan (2010 Plan) was approved by the Company’s stockholders. The 2010 Plan provided for the issuance of up to 8,000,000 shares of the Company’s common stock. The 2010 Plan allowed a committee of the Board of Directors (Compensation Committee) to grant incentive stock options, non-qualified stock options and restricted stock awards. The Compensation Committee had the authority to determine which employees would receive the awards, the amount of the awards and other terms and conditions of any awards. Awards granted under the 2010 Plan typically were made subject to a vesting period of three to five years.

 

On May 20, 2016, the Bruker Corporation 2016 Incentive Compensation Plan (2016 Plan) was approved by the Company’s stockholders. With the approval of the 2016 Plan, no further grants have been made under the 2010 Plan. The 2016 Plan provides for the issuance of up to 9,500,000 shares of the Company’s common stock and permits the grant of awards of non-qualified

 

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stock options, incentive stock options, stock appreciation rights, restricted stock, unrestricted stock, restricted stock units, performance shares and performance units, as well as cash-based awards. The 2016 Plan is administered by the Compensation Committee. The Compensation Committee has the authority to determine which employees will receive awards, the amount of any awards, and other terms and conditions of such awards. Awards granted under the 2016 Plan typically vest over a period of one to four years.

 

The Company recorded stock-based compensation expense as follows in the unaudited condensed consolidated statements of income and comprehensive income (dollars in millions):

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

Stock options

 

$

0.7

 

$

1.0

 

Restricted stock awards

 

0.1

 

0.2

 

Restricted stock units

 

1.9

 

1.3

 

Total stock-based compensation

 

$

2.7

 

$

2.5

 

 

The Company also recorded stock-based compensation expense of $0.4 million in the three months ended March 31, 2019 related to the 2018 acquisition of Mestrelab Research, S.L. (Mestrelab).

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

Costs of product revenue

 

$

0.4

 

$

0.4

 

Selling, general and administrative

 

1.9

 

1.7

 

Research and development

 

0.4

 

0.4

 

Total stock-based compensation

 

$

2.7

 

$

2.5

 

 

Stock-based compensation expense is recognized on a straight-line basis over the underlying requisite service period of the stock-based award.

 

Stock options to purchase the Company’s common stock are periodically awarded to executive officers and other employees of the Company subject to a vesting period of three to four years. The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. There were no stock options awarded during the three months ended March 31, 2019 and 2018.

 

Stock option activity for the three months ended March 31, 2019 was as follows:

 

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Shares Subject
to Options

 

Weighted
Average
Option Price

 

Weighted
Average
Remaining
Contractual
Term (Yrs)

 

Aggregate
Intrinsic Value
(in millions) (b)

 

Outstanding at December 31, 2018

 

2,593,310

 

$

21.41

 

 

 

 

 

Exercised

 

(167,177

)

19.02

 

 

 

 

 

Forfeited

 

(6,212

)

21.57

 

 

 

 

 

Outstanding at March 31, 2019

 

2,419,921

 

$

21.58

 

5.3

 

$

40.8

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March, 2019

 

1,658,792

 

$

19.94

 

4.9

 

$

30.7

 

 

 

 

 

 

 

 

 

 

 

Exercisable and expected to vest at

 

 

 

 

 

 

 

 

 

March 31, 2019 (a) 

 

2,356,595

 

$

21.48

 

5.3

 

$

40.0

 

 


(a)          In addition to the options that are vested at March 31, 2019, the Company expects a portion of the unvested options to vest in the future. Options expected to vest in the future are determined by applying an estimated forfeiture rate to the options that are unvested as of March 31, 2019.

(b)          The aggregate intrinsic value is based on the positive difference between the fair value of the Company’s common stock price of $38.44 on March 31, 2019 and the exercise price of the underlying stock options.

 

The total intrinsic value of options exercised was $3.1 million and $2.8 million for the three months ended March 31, 2019 and 2018, respectively.

 

There was no restricted stock award activity for the three months ended March 31, 2019.

 

The total fair value of restricted stock  awards vested was $0.1 million in the three months ended March 31, 2018.

 

Restricted stock unit activity for the three months ended March 31, 2019 was as follows:

 

 

 

Shares Subject
to Restriction

 

Weighted
Average Grant
Date Fair
Value

 

Outstanding at December 31, 2018

 

806,249

 

$

29.88

 

Granted

 

40,713

 

30.25

 

Vested

 

(36,047

)

35.47

 

Forfeited

 

(9,668

)

29.50

 

Outstanding at March 31, 2019

 

801,247

 

$

29.66

 

 

The total fair value of restricted stock units vested was $1.1 million and $1.5 million for the three months ended March 31, 2019 and 2018, respectively.

 

At March 31, 2019, the Company expects to recognize pre-tax stock-based compensation expense of $3.6 million associated with outstanding stock option awards granted under the Company’s stock plans over the weighted average remaining service period of 1.96 years. The Company expects to recognize additional pre-tax stock-based compensation expense of $0.2 million associated with outstanding restricted stock awards granted under the Company’s stock plans over the weighted average remaining service period of 0.35 year. The Company also expects to recognize additional pre-tax stock-based compensation expense of $17.7 million associated with outstanding restricted stock units granted under the 2016 Plan over the weighted average remaining service period of 2.75 years.

 

5.               Earnings Per Share

 

Net income per common share attributable to Bruker Corporation shareholders is calculated by dividing net income attributable to Bruker Corporation, adjusted to reflect changes in the redemption value of the redeemable noncontrolling interest, by the weighted-average number of shares outstanding during the period. The diluted net income per share computation includes the effect of shares which would be issuable upon the exercise of outstanding stock options and the vesting of restricted stock, reduced by the number of shares which are assumed to be purchased by the Company under the treasury stock method.   There was no

 

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redemption value adjustment of the redeemable noncontrolling interest for the three months ended March 31, 2019 or 2018.

 

The following table sets forth the computation of basic and diluted weighted average shares outstanding and net income per common share attributable to Bruker shareholders (dollars in millions, except per share amounts):

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

Net income attributable to Bruker Corporation, as reported

 

$

30.8

 

$

27.0

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

Weighted average shares outstanding-basic

 

156.7

 

155.9

 

Effect of dilutive securities:

 

 

 

 

 

Stock options and restricted stock awards and units

 

1.2

 

1.1

 

 

 

157.9

 

157.0

 

 

 

 

 

 

 

Net income per common share attributable to Bruker Corporation shareholders:

 

 

 

 

 

Basic

 

$

0.20

 

$

0.17

 

Diluted

 

$

0.20

 

$

0.17

 

 

Stock options to purchase approximately 0.1 million shares and 0.2 million shares were excluded from the computation of diluted earnings per share in the three months ended March 31, 2019 and 2018, respectively, as their effect would have been anti-dilutive.

 

6.               Fair Value of Financial Instruments

 

The Company applies the following hierarchy to determine the fair value of financial instruments, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The levels in the hierarchy are defined as follows:

 

·       Level 1:  Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

·       Level 2:  Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

·       Level 3:  Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The valuation techniques that may be used by the Company to determine the fair value of Level 2 and Level 3 financial instruments are the market approach, the income approach and the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value based on current market expectations about those future amounts, including present value techniques, option-pricing models and the excess earnings method. The cost approach is based on the amount that would be required to replace the service capacity of an asset (replacement cost).

 

The following tables set forth the Company’s financial instruments that are measured at fair value on a recurring basis and presents them within the fair value hierarchy using the lowest level of input that is significant to the fair value measurement at March 31, 2019 and December 31, 2018 (dollars in millions):

 

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March 31, 2019

 

Total

 

Quoted Prices
in Active
Markets
Available
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Embedded derivatives in purchase and delivery contracts

 

$

0.3

 

$

 

$

0.3

 

$

 

Foreign exchange contracts

 

0.5

 

 

0.5

 

 

Total assets recorded at fair value

 

$

0.8

 

$

 

$

0.8

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

15.3

 

$

 

$

 

$

15.3

 

Hybrid instrument liability

 

13.3

 

 

 

13.3

 

Embedded derivatives in purchase and delivery contracts

 

0.9

 

 

0.9

 

 

Foreign exchange contracts

 

1.3

 

 

1.3

 

 

Total liabilities recorded at fair value

 

$

30.8

 

$

 

$

2.2

 

$

28.6

 

 

December 31, 2018

 

Total

 

Quoted Prices
in Active 
Markets
Available
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

0.2

 

$

 

$

0.2

 

$

 

Embedded derivatives in purchase and delivery contracts

 

0.4

 

 

0.4

 

 

Total assets recorded at fair value

 

$

0.6

 

$

 

$

0.6

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

15.1

 

$

 

$

 

$

15.1

 

Hybrid instrument liability

 

12.9

 

 

 

12.9

 

Foreign exchange contracts

 

2.8

 

 

2.8

 

 

Embedded derivatives in purchase and delivery contracts

 

0.9

 

 

0.9

 

 

Fixed price commodity contracts

 

0.5

 

 

0.5

 

 

Total liabilities recorded at fair value

 

$

32.2

 

$

 

$

4.2

 

$

28.0

 

 

The Company’s financial instruments consist primarily of restricted cash, derivative instruments consisting of foreign exchange contracts, commodity contracts, derivatives embedded in certain purchase and sale contracts, accounts receivable, borrowings under a revolving credit agreement, accounts payable, contingent consideration, a hybrid instrument liability and long-term debt. The carrying amounts of the Company’s cash equivalents, short-term investments and restricted cash, accounts receivable, borrowings under a revolving credit agreement and accounts payable approximate fair value because of their short-term nature. Derivative assets and liabilities are measured at fair value on a recurring basis. The Company’s long-term debt consists principally of a private placement arrangement entered into in 2012 with various fixed interest rates based on the maturity date. The fair value of the long-term fixed interest rate debt, which has been classified as Level 2, was $212.3 million and $228.8 million at March 31, 2019 and December 31, 2018, respectively, based on the outstanding amount at March 31, 2019 and December 31, 2018, market prices and observable sources with similar maturity dates.

 

The Company measures certain assets and liabilities at fair value with changes in fair value recognized in earnings. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did not elect to remeasure any of its existing financial assets or

 

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liabilities and did not elect the fair value option for any financial assets or liabilities which originated during the three months ended March 31, 2019 or 2018.

 

As part of certain acquisitions, the Company recorded contingent consideration liabilities that have been classified as Level 3 in the fair value hierarchy. The contingent consideration represents the estimated fair value of future payments to the former shareholders of certain acquired companies based on the applicable acquired company achieving annual revenue and gross margin targets in certain years as specified in the relevant purchase and sale agreement. The Company initially values the contingent considerations by using a Monte Carlo simulation or an income approach method.  The Monte Carlo method models future revenue and costs of goods sold projections and discounts the average results to present value.  The income approach method involves calculating the earnout payment based on the forecasted cash flows, adjusting the future earnout payment for the risk of reaching the projected financials, and then discounting the future payments to present value by the counterparty risk.  The counterparty risk considers the risk of the buyer having the cash to make the earnout payments and is commensurate with a cost of debt over an appropriate term.

 

The following table sets forth the changes in contingent consideration liabilities for the three months ended March 31, 2019 (dollars in millions):

 

Balance at December 31, 2018

 

$

15.1

 

Current period additions

 

 

Current period adjustments

 

1.5

 

Current period settlements

 

(1.0

)

Foreign currency effect

 

(0.3

)

Balance at March, 2019

 

$

15.3

 

 

As part of the Mestrelab acquisition, the Company entered into an agreement with the noncontrolling interest holders that provides the Company with the right to purchase, and the noncontrolling interest holders with the right to sell, the remaining 49% of Mestrelab for cash at a contractually defined redemption value. These rights (an embedded derivative) are exercisable beginning in 2022 and can be accelerated, at a discounted redemption value, upon certain events related to post combination services. As the option is tied to continued employment, the Company classified the hybrid instrument (noncontrolling interest with an embedded derivative) as a long-term liability on the consolidated balance sheet. Subsequent to the acquisition, the carrying value of the hybrid instrument is remeasured to fair value with changes recorded to stock-based compensation expense in proportion to the requisite service period vested. The hybrid instrument is classified as Level 3 in the fair value hierarchy.

 

The following table sets forth the changes in hybrid instrument liability for the year ended March 31, 2019 (dollars in millions):

 

Balance at December 31, 2018

 

$

12.9

 

Current period adjustments

 

0.4

 

Balance at March, 2019

 

$

13.3

 

 

7.               Restricted Cash

 

Restricted cash is included as a component of cash, cash equivalents, and restricted cash on the Company’s unaudited condensed consolidated statement of cash flows. The Company has certain subsidiaries that are required by local laws and regulations to maintain restricted cash balances to cover future employee benefit payments. Restricted cash balances are classified as non-current unless, under the terms of the applicable agreements, the funds will be released from restrictions within one year from the balance sheet date. The current and non-current portion of restricted cash is recorded within other current assets and other long-term assets, respectively, in the accompanying consolidated balance sheets.

 

The inclusion of restricted cash increased the balances of the unaudited condensed consolidated statement of cash flows as follows (dollars in millions):

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

Beginning Balance

 

$

3.9

 

$

3.9

 

Ending Balance

 

3.8

 

3.9

 

 

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8.               Inventories

 

Inventories consisted of the following (in millions):

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

Raw materials

 

$

178.7

 

$

164.5

 

Work-in-process

 

200.4

 

182.4

 

Finished goods

 

92.3

 

94.8

 

Demonstration units

 

70.4

 

67.9

 

Inventories

 

$

541.8

 

$

509.6

 

 

Finished goods include in-transit systems that have been shipped to the Company’s customers, but not yet installed and accepted by the customer. As of March 31, 2019 and December 31, 2018, the value of inventory-in-transit was $35.6 million and $38.3 million, respectively.

 

9.               Goodwill and Intangible Assets

 

The following table sets forth the changes in the carrying amount of goodwill for the three months ended March 31, 2019 (dollars in millions):

 

Balance at December 31, 2018

 

$

275.7

 

Current period additions

 

2.3

 

Foreign currency effect

 

(2.7

)

Balance at March 31, 2019

 

$

275.3

 

 

The following is a summary of intangible assets, excluding goodwill (dollars in millions):

 

 

 

March 31, 2019

 

December 31, 2018

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Existing technology and related patents

 

$

277.6

 

$

(164.8

)

$

112.8

 

$

272.6

 

$

(160.5

)

$

112.1

 

Customer relationships

 

116.2

 

(20.8

)

95.4

 

112.0

 

(18.1

)

93.9

 

Non compete contracts

 

1.8

 

(1.8

)

 

1.8

 

(1.8

)

 

Trade names

 

11.9

 

(1.9

)

10.0

 

11.6

 

(1.6

)

10.0

 

Other

 

5.5

 

(4.4

)

1.1

 

5.1

 

(2.4

)

2.7

 

Intangible assets

 

$

413.0

 

$

(193.7

)

$

219.3

 

$

403.1

 

$

(184.4

)

$

218.7

 

 

For the three months ended March 31, 2019 and 2018, the Company recorded amortization expense of $10.1 million and $6.8 million, respectively, related to intangible assets subject to amortization.

 

10.        Debt

 

The Company’s debt obligations as of March 31, 2019 and December 31, 2018 consisted of the following (dollars in millions):

 

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March 31,

 

December 31,

 

 

 

2019

 

2018

 

US Dollar revolving loan under the 2015 Credit Agreement

 

$

124.8

 

$

111.6

 

US Dollar notes under the Note Purchase Agreement

 

205.0

 

220.0

 

Unamortized debt issuance costs under the Note Purchase Agreement

 

(0.5

)

(0.5

)

Other revolving loans

 

2.6

 

2.9

 

Capital lease obligations and other loans

 

2.7

 

7.1

 

Total debt

 

334.6

 

341.1

 

Current portion of long-term debt

 

(2.6

)

(18.5

)

Total long-term debt, less current portion

 

$

332.0

 

$

322.6

 

 

On October 27, 2015, the Company entered into a new revolving credit agreement, referred to as the 2015 Credit Agreement. The 2015 Credit Agreement provides a maximum commitment on the Company’s revolving credit line of $500 million and a maturity date of October 2020. Borrowings under the revolving credit line of the 2015 Credit Agreement accrue interest, at the Company’s option, at either (a) the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) adjusted LIBOR plus 1.00%, plus margins ranging from 0.00% to 0.30% or (b) LIBOR, plus margins ranging from 0.90% to 1.30%. There is also a facility fee ranging from 0.10% to 0.20%.

 

Borrowings under the 2015 Credit Agreement are secured by guarantees from certain material subsidiaries, as defined in the 2015 Credit Agreement. The 2015 Credit Agreement also requires the Company to maintain certain financial ratios related to maximum leverage and minimum interest coverage (as defined in the 2015 Credit Agreement). Specifically, the Company’s leverage ratio cannot exceed 3.5 and the Company’s interest coverage ratio cannot be less than 2.5. In addition to the financial ratios, the 2015 Credit Agreement contains negative covenants, including among others, restrictions on liens, indebtedness of the Company and its subsidiaries, asset sales, dividends and transactions with affiliates. Failure to comply with any of these restrictions or covenants may result in an event of default on the 2015 Credit Agreement, which could permit acceleration of the debt and require the Company to prepay the debt before its scheduled due date.

 

The following is a summary of the maximum commitments and the net amounts available to the Company under the 2015 Credit Agreement and other lines of credit with various financial institutions located primarily in Germany and Switzerland that are unsecured and typically due upon demand with interest payable monthly, at March 31, 2019 (dollars in millions):

 

 

 

Weighted
Average
Interest Rate

 

Total Amount
Committed by
Lenders

 

Outstanding
Borrowings

 

Outstanding
Letters of
Credit

 

Total Amount
Available

 

2015 Credit Agreement

 

1.6

%

$

500.0

 

$

124.8

 

$

1.3

 

$

373.9

 

Hain revoling line of credit

 

3.5

%

4.0

 

2.5

 

 

1.5

 

Alicona revolving line of credit

 

0.5

%

5.3

 

0.1

 

 

5.2

 

Other lines of credit

 

 

253.2

 

 

131.1

 

122.1

 

Total revolving lines of credit

 

 

 

$

762.5

 

$

127.4

 

$

132.4

 

$

502.7

 

 

In January 2012, the Company entered into a note purchase agreement, referred to as the Note Purchase Agreement, with a group of accredited institutional investors. Pursuant to the Note Purchase Agreement, the Company issued and sold $240.0 million of senior notes, referred to as the Senior Notes, which consisted of the following:

 

·                   $20.0 million 3.16% Series 2012A Senior Notes, Tranche A, due January 18, 2017;

 

·                   $15.0 million 3.74% Series 2012A Senior Notes, Tranche B, due January 18, 2019;

 

·                   $105.0 million 4.31% Series 2012A Senior Notes, Tranche C, due January 18, 2022; and

 

·                   $100.0 million 4.46% Series 2012A Senior Notes, Tranche D, due January 18, 2024.

 

On January 18, 2017, the outstanding $20.0 million principal amount of Tranche A of the Senior Notes was repaid in accordance with the terms of the Note Purchase Agreement.  On January 18, 2019, the outstanding $15.0 million principal amount of Tranche B of the Senior Notes was repaid in accordance with the terms of the Note Purchase Agreement.

 

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Under the terms of the Note Purchase Agreement, the Company may issue and sell additional senior notes up to an aggregate principal amount of $600 million, subject to certain conditions. Interest on the Senior Notes is payable semi-annually on January 18 and July 18 of each year. The Senior Notes are unsecured obligations of the Company and are fully and unconditionally guaranteed by certain of the Company’s direct and indirect subsidiaries. The Senior Notes rank pari passu in right of repayment with the Company’s other senior unsecured indebtedness. The Company may prepay some or all of the Senior Notes at any time in an amount not less than 10% of the original aggregate principal amount of the Senior Notes to be prepaid, at a price equal to the sum of (a) 100% of the principal amount thereof, plus accrued and unpaid interest, and (b) the applicable make-whole amount, upon not less than 30 and no more than 60 days written notice to the holders of the Senior Notes. In the event of a change in control of the Company, as defined in the Note Purchase Agreement, the Company may be required to prepay the Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest.

 

The Note Purchase Agreement contains affirmative covenants, including, without limitation, maintenance of corporate existence, compliance with laws, maintenance of insurance and properties, payment of taxes, addition of subsidiary guarantors and furnishing notices and other information. The Note Purchase Agreement also contains certain restrictive covenants that restrict the Company’s ability to, among other things, incur liens, transfer or sell assets, engage in certain mergers and consolidations and enter into transactions with affiliates. The Note Purchase Agreement also includes customary representations and warranties and events of default. In the case of an event of default arising from specified events of bankruptcy or insolvency, all outstanding Senior Notes will become due and payable immediately without further action or notice. In the case of a payment events of defaults, any holder of Senior Notes affected thereby may declare all Senior Notes held by it due and payable immediately. In the case of any other event of default, a majority of the holders of the Senior Notes may declare all the Senior Notes to be due and payable immediately. Pursuant to the Note Purchase Agreement, so long as any Senior Notes are outstanding the Company will not permit (i) its leverage ratio, as determined pursuant to the Note Purchase Agreement, to exceed 3.50 to 1.00 as of the end of any fiscal quarter, (ii) its interest coverage ratio, as determined pursuant to the Note Purchase Agreement, to be less than 2.50 to 1 as of the end of any fiscal quarter for any period of four consecutive fiscal quarters or (iii) priority debt at any time to exceed 25% of consolidated net worth, as determined pursuant to the Note Purchase Agreement.

 

As of March 31, 2019, the Company was in compliance with the covenants of the Note Purchase Agreement and the 2015 Credit Agreement.  The Company’s leverage ratio (as defined in the respective agreements) was 0.91 and interest coverage ratio (as defined in the respective agreements) was 23.6.

 

11.        Derivative Instruments and Hedging Activities

 

Interest Rate Risks

 

The Company’s exposure to interest rate risk relates primarily to outstanding variable rate debt and adverse movements in the related short-term market rates. Typically, the most significant component of the Company’s interest rate risk relates to amounts outstanding under the 2015 Credit Agreement, which totaled $124.8 million at March 31, 2019. The Company currently has a higher level of fixed rate debt than variable rate debt, which limits the exposure to adverse movements in interest rates.

 

Foreign Exchange Rate Risk Management

 

The Company generates a substantial portion of its revenues and expenses in international markets which subjects its operations to the exposure of exchange rate fluctuations. The impact of currency exchange rate movement can be positive or negative in any period. The Company periodically enters into foreign currency contracts in order to minimize the volatility that fluctuations in currency translation have on its monetary transactions. Under these arrangements, the Company typically agrees to purchase a fixed amount of a foreign currency in exchange for a fixed amount of U.S. Dollars or other currencies on specified dates with maturities of less than twelve months, with some agreements extending to longer periods. The Company had the following notional amounts outstanding under foreign exchange contracts at March 31, 2019 and December 31, 2018 (in millions):

 

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Buy 

 

Notional
Amount in Buy
Currency

 

Sell

 

Maturity

 

Notional
Amount in U.S.
Dollars

 

Fair Value of
Assets

 

Fair Value of
Liabilities

 

March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

Euro

 

25.0

 

U.S. Dollars

 

April 2019

 

$

28.6

 

$

 

$

0.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Great Britain Pound

 

14.7

 

Euro

 

April 2019

 

18.6

 

0.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swiss Francs

 

10.4

 

Japanese Yen

 

April 2019

 

10.7

 

 

0.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swiss Francs

 

9.6

 

U.S. Dollars

 

April 2019

 

9.7

 

 

0.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Euro

 

6.9

 

Great Britain Pound

 

May 2019 to October 2020

 

8.2

 

 

0.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taiwan Dollar

 

129.0

 

U.S. Dollars

 

April 2019

 

4.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chinese Renminbi

 

23.7

 

U.S. Dollars

 

April 2019

 

3.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Singapore Dollar

 

4.3

 

U.S. Dollars

 

April 2019

 

3.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swedish Krona

 

14.8

 

U.S. Dollars

 

April 2019

 

1.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollars

 

1.2

 

Canadian Dollars

 

April 2019

 

1.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollars

 

1.1

 

Singapore Dollar

 

April 2019

 

1.1

 

 

 

 

 

 

 

 

 

 

 

$

90.6

 

$

0.5

 

$

1.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

Euro

 

25.4

 

U.S. Dollars

 

January 2019

 

$

31.1

 

$

 

$

2.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollars

 

8.5

 

Euro

 

January 2019

 

8.6

 

 

0.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swiss Francs

 

11.1

 

U.S. Dollars

 

January 2019

 

11.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollars

 

2.1

 

Swiss Francs

 

January 2019

 

2.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swiss Francs

 

10.4

 

Japanese Yen

 

April 2019

 

10.8

 

 

0.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollars

 

1.5

 

Canadian Dollars

 

January 2019

 

1.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Singapore Dollar

 

4.3

 

U.S. Dollars

 

January 2019

 

3.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chinese Renminbi

 

41.1

 

U.S. Dollars

 

January 2019

 

5.9

 

0.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Great Britian Pound

 

15.4

 

Euro

 

January 2019

 

20.0

 

 

0.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Euro

 

6.9

 

Great Britian Pound

 

May 2019 to October 2020

 

8.0

 

0.1

 

 

 

 

 

 

 

 

 

 

$

102.4

 

$

0.2

 

$

2.8

 

 

In addition, the Company periodically enters into purchase and sales contracts denominated in currencies other than the functional currency of the parties to the transaction. The Company accounts for these transactions separately valuing the “embedded derivative” component of these contracts. The contracts, denominated in currencies other than the functional currency of the transacting parties, amounted to $99.3 million for the delivery of products and $6.3 million for the purchase of products at March 31, 2019 and $113.5 million for the delivery of products and $6.0 million for the purchase of products at December 31, 2018. The changes in the fair value of these embedded derivatives are recorded in interest and other income (expense), net in the consolidated statements of income and comprehensive income.

 

Commodity Price Risk Management

 

The Company has arrangements with certain customers under which it has a firm commitment to deliver copper based superconductor wire at a fixed price. In order to minimize the volatility that fluctuations in the price of copper have on the Company’s sales of these commodities, the Company enters into commodity hedge contracts.  At March 31, 2019 and

 

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December 31, 2018, the Company had fixed price commodity contracts with notional amounts aggregating $5.1 million and $6.8 million, respectively. The changes in the fair value of these commodity contracts are recorded within interest and other income (expense), net in the unaudited condensed consolidated statements of income and comprehensive income.

 

The fair value of the derivative instruments described above is recorded in the unaudited condensed consolidated balance sheets for the periods as follows (dollars in millions):

 

 

 

 

 

March 31,

 

December 31,

 

 

 

Balance Sheet Location

 

2019

 

2018

 

Derivative assets:

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other current assets

 

$

0.5

 

$

0.2

 

Embedded derivatives in purchase and delivery contracts

 

Other current assets

 

0.3

 

0.2

 

Embedded derivatives in purchase and delivery contracts

 

Other long-term assets

 

 

0.2

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other current liabilities

 

$

1.1

 

$

2.8

 

Embedded derivatives in purchase and delivery contracts

 

Other current liabilities

 

0.9

 

0.9

 

Fixed price commodity contracts

 

Other current liabilities

 

 

0.5

 

Foreign exchange contracts

 

Other long-term liabilities

 

0.2

 

 

 

The impact on net income of unrealized gains and losses resulting from changes in the fair value of derivative instruments not designated as hedging instruments are as follows (dollars in millions):

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

Foreign exchange contracts

 

$

1.7

 

$

(4.4

)

Embedded derivatives in purchase and delivery contracts

 

(0.1

)

0.1

 

Fixed price commodity contracts

 

0.5

 

(0.6

)

Net impact to interest and other income (expense)

 

$

2.1

 

$

(4.9

)

 

The amounts related to derivative instruments not designated as hedging instruments are recorded within interest and other income (expense), net in the unaudited condensed consolidated statements of income and comprehensive income.

 

12.        Provision for Income Taxes

 

The Company accounts for income taxes using the asset and liability approach by recognizing deferred tax assets and liabilities for the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities, calculated using enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return. The Company records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. In addition, the Company accounts for uncertain tax positions that have reached a minimum recognition threshold.

 

The income tax provision for the three months ended March 31, 2019 and 2018 was $7.7 million and $8.4 million, respectively, representing effective tax rates of 20.1% and 23.5%, respectively.  The decrease in the Company’s effective tax rate for the three months ended March 31, 2019, compared to the same period in 2018, was primarily due to the recording of items related to the update of a one-time tax on the mandatory deemed repatriation of post-1986 untaxed foreign earnings and profits (toll charge) assessed under the Tax Cuts and Jobs Act (2017 Tax Act) due to the release of final regulations in the three months ended March 31, 2019.  The Company’s effective tax rate may change over time as the amount or mix of income and taxes changes among the jurisdictions in which the Company is subject to tax.

 

As of March 31, 2019 and December 31, 2018, the Company had unrecognized tax benefits, excluding penalties and interest, of approximately $6.5 million and $6.6 million, respectively, which, if recognized, would result in a reduction of the Company’s effective tax rate. The Company recognizes penalties and interest related to unrecognized tax benefits in the provision for income

 

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taxes.  As of March 31, 2019 and December 31, 2018, approximately $0.3 million and $0.2 million, respectively, of accrued interest and penalties related to uncertain tax positions was included in other long-term liabilities on the Company’s unaudited condensed consolidated balance sheets.  Penalties and interest of $0.1 million were recorded in the provision for income taxes for unrecognized tax benefits during the three months ended March 31, 2019.  There were no penalties or interest recorded in the three months ended March 31, 2018.

 

The Company files tax returns in the United States, which includes federal, state and local jurisdictions, and many foreign jurisdictions with varying statutes of limitations. The Company considers Germany, the United States and Switzerland to be its significant tax jurisdictions. The majority of the Company’s earnings are derived in Germany and Switzerland. Accounting for the various federal and local taxing authorities, the statutory rates for 2019 are approximately 30.0% and 20.0% for Germany and Switzerland, respectively. The mix of earnings in those two jurisdictions resulted in an increase of 4.5% from the U.S. statutory rate of 21.0% in the three months ended March 31, 2019. The Company has not been a party to any tax holiday agreements. The tax years 2013 to 2018 are open to examination in Germany and Switzerland. Tax years 2011 to 2018 remain open for examination in the United States.

 

13.        Commitments and Contingencies

 

In accordance with ASC Topic 450, Contingencies, the Company accrues anticipated costs of settlement, damages or other costs to the extent specific losses are probable and estimable.

 

Litigation and Related Contingencies

 

Lawsuits, claims and proceedings of a nature considered normal to its businesses may be pending from time to time against the Company. Third parties might allege that the Company or its collaborators are infringing their patent rights or that the Company is otherwise violating their intellectual property rights. Loss contingency provisions are recorded if the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount can be reasonably estimated or a range of loss can be determined. These accruals represent management’s best estimate of probable loss. Disclosure is also provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. The Company believes the outcome of pending proceedings, individually and in the aggregate, will not have a material impact on the Company’s financial statements. As of March 31, 2019 and December 31, 2018, no material accruals have been recorded for potential contingencies.

 

Governmental Investigations

 

The Company is subject to regulation by national, state and local government agencies in the United States and other countries in which it operates. From time to time, the Company is the subject of governmental investigations often involving regulatory, marketing and other business practices. These governmental investigations may result in the commencement of civil and criminal proceedings, fines, penalties and administrative remedies which could have a material adverse effect on our financial position, results of operations and/or liquidity.

 

In August 2018, the Korea Fair Trade Commission (KFTC) informed the Company that it is conducting an investigation into the public tender bidding activities of a number of life science instrument companies operating in Korea, including Bruker Korea Co., Ltd.  The Company is cooperating fully with the KFTC regarding this matter and is unable to predict the timing or outcome of this investigation at this time. Revenues from Korea represent approximately 2% of the Company’s consolidated revenue for the three month period ended March 31, 2019.

 

On October 19, 2017, the Company received a notice of investigation and subpoena to produce documents from the Division of Enforcement of the SEC. The subpoena sought information related to an employee terminated as part of a restructuring and certain matters involving the Company’s policies and accounting practices related to revenue recognition and restructuring activities, as well as related financial reporting, disclosure and compliance matters, since January 1, 2013. The subpoena also sought information concerning, among other things, the Company’s previously identified material weakness in internal controls over the accounting for income taxes, related financial reporting matters and certain payments for non-employee travel expenses. On April 25, 2019, the Staff notified the Company that it had concluded its investigation and, based on the information received to date, does not intend to recommend an enforcement action by the SEC against the Company.

 

Additionally, the Audit Committee of the Company’s Board of Directors, with the assistance of outside counsel,  conducted an internal investigation into practices of certain business partners in China and into the conduct of former employees of the Bruker Optics division in China which raised questions of compliance with laws, including the U.S. Foreign Corrupt Practices

 

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Act, and/or compliance with the Company’s business policies and code of conduct. The Audit Committee has concluded its internal investigation.

 

As of March 31, 2019 and December 31, 2018, no material accruals have been recorded for potential contingencies related to these matters.

 

Letters of Credit and Guarantees

 

At March 31, 2019 and December 31, 2018, the Company had bank guarantees of $132.4 million and $138.3 million, respectively, related primarily to customer advances. These arrangements guarantee the refund of advance payments received from customers in the event that the merchandise is not delivered or warranty obligations are not fulfilled in compliance with the terms of the contract. These guarantees affect the availability of the Company’s lines of credit.

 

14.        Leases

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, which provides guidance on the recognition, measurement, presentation and disclosure of leases. The new standard, effective as of January 1, 2019, supersedes present U.S. GAAP guidance on leases and requires all leases with terms longer than 12 months to be reported on the balance sheet as right-of-use (ROU) assets and lease liabilities, as well as provide additional disclosures. The lease liability represents the lessee’s obligation to make lease payments arising from a lease and will be measured as the present value of the lease payments. The right-of-use asset represents the lessee’s right to use a specified asset for the lease term, and will be measured at the lease liability amount, adjusted for lease prepayment, lease incentives received and the lessee’s initial direct costs.

 

Under ASU No. 2016-02, companies are required to transition to the new standard in the period of adoption at the beginning of the earliest period presented in the financial statements (January 1, 2017 for the Company). In July 2018, the FASB issued ASU No. 2018-11 as an update to ASU No. 2016-02, which in part provided companies the option of transitioning to the new standard as of the adoption date and recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted the new standard as of January 1, 2019 using the alternative transition method under ASU No. 2018-11 and recognized a cumulative-effect adjustment to the opening balance sheet. The Company’s prior period financial statements were not adjusted due to adopting the new standard based on the alternative transition method. The Company elected the available package of practical expedients for leases that commenced prior to the effective date that allows it to not reassess: 1) whether any expired or existing contracts are or contain leases; 2) the lease classification for any expired or existing leases; and 3) the accounting treatment of initial direct costs for any expired or existing leases. The Company also elected the practical expedient that allows lessees to treat lease and non-lease components of leases as a single lease component for all asset classes. The adoption of the new standard resulted in recording $75.5 million and $77.9 million of ROU assets and lease liabilities, respectively, as of January 1, 2019 on the Company’s unaudited condensed consolidated balance sheet.  The adoption of the new standard did not significantly affect the Company’s results of operations.

 

Starting in the first quarter of 2019, the Company accounts for leases in accordance with ASC 842, Leases. At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Leases with a term greater than 12 months are recognized on the balance sheet as ROU assets, lease liabilities and, if applicable, long-term lease liabilities. The Company has elected not to recognize on the balance sheet leases with an initial term of 12 months or less.  Leases with an initial term of 12 months or less are directly expensed as incurred. Leases are classified as either operating or finance depending on the specific terms of the arrangement.

 

The Company’s leases mainly consist of facilities, office equipment, and vehicles. The majority of leases are classified as operating, with certain vehicle leases classified as finance leases based on the specific terms of the arrangement. The remaining lease term ranges from 2019 to 2029, with some leases including an option to extend the lease for varying periods of time or to terminate prior to the end of the lease term. Certain lease agreements contain provisions for future rent increases.  Lease payments included in the measurement of the lease liability comprise fixed payments, and the exercise price of a Company option to purchase the underlying asset if the Company is reasonably certain to exercise the option. The Company’s leases typically do not contain residual value guarantees.

 

At the commencement date, operating and finance lease liabilities, and their corresponding ROU assets, are recorded based on the present value of lease payments over the expected lease term. The lease term includes the noncancellable period of the lease, plus any additional periods covered by either a Company option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor. The interest rate implicit in lease contracts is typically not readily determinable, therefore an incremental borrowing rate is used to

 

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calculate the lease liability. The incremental borrowing rate is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Certain adjustments to the ROU asset may be required for items such as prepayments, lease incentives received or initial direct costs paid.

 

Operating lease cost is recognized over the lease term on a straight-line basis, while finance lease cost is amortized over the expected term on a straight-line basis. Variable lease cost not dependent on an index or rate is recognized when incurred.

 

The components of lease cost for the three months ended March 31, 2019 are as follows:

 

 

 

Three Months Ended

 

 

 

March 31, 2019

 

Amortization of right-of-use assets

 

$

 

Interest on lease liabilities

 

 

Total finance lease cost

 

$

 

 

 

 

 

Operating lease cost

 

$

6.6

 

Short term lease cost

 

0.5

 

Variable lease cost

 

0.5

 

Sublease income

 

(0.3

)

Total lease cost

 

$

7.3

 

 

Supplemental balance sheet information as of March 31, 2019 related to leases was as follows: (in millions):

 

 

 

Three Months Ended

 

 

 

March 31, 2019

 

Operating leases

 

 

 

Operating lease assets, net

 

$

77.4

 

Other current liabilities

 

21.3

 

Operating lease liability - long term

 

58.3

 

 

 

 

 

Finance leases

 

 

 

Property, plant and equipment, net

 

$

0.5

 

Current portion of long-term debt

 

0.1

 

Long-term debt