BRUKER CORP - Quarter Report: 2017 March (Form 10-Q)

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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, 2017

 

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)

 

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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, 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.

 

 

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.    

 

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.

 

 

 

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BRUKER CORPORATION

 

Quarterly Report on Form 10-Q

For the Quarter Ended March 31, 2017

Index

 

		Page
Part I	FINANCIAL INFORMATION	1
Item 1:	Unaudited Condensed Consolidated Financial Statements	1
	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016	1
	Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2017 and 2016	2
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016	3
	Notes to Unaudited Condensed Consolidated Financial Statements	4
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4:	Controls and Procedures	33
Part II	OTHER INFORMATION	34
Item 1:	Legal Proceedings	34
Item 1A:	Risk Factors	34
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3:	Defaults Upon Senior Securities	35
Item 4:	Mine Safety Disclosure	35
Item 5:	Other Information	35
Item 6:	Exhibits	35
	Signatures	36

 

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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,
		2017			2016
ASSETS
Current assets:
Cash and cash equivalents		$	277.5		$	342.4
Short-term investments		187.0			157.9
Accounts receivable, net		225.4			243.9
Inventories		476.4			440.4
Other current assets		97.8			91.3
Total current assets		1,264.1			1,275.9
Property, plant and equipment, net		241.0			239.1
Intangibles, net and other long-term assets		334.8			293.4
Total assets		$	1,839.9		$	1,808.4
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	0.1		$	20.1
Accounts payable		94.7			86.1
Customer advances		148.9			149.0
Other current liabilities		271.2			269.5
Total current liabilities		514.9			524.7
Long-term debt		384.7			391.6
Other long-term liabilities		208.7			199.0
Commitments and contingencies (Note 10)
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, 170,636,719 and 170,552,890 shares issued and 159,933,578 and 159,854,695 shares outstanding at March 31, 2017 and December 31, 2016, respectively		1.7			1.7
Treasury stock, at cost, 10,703,141 and 10,698,195 shares at March 31, 2017 and December 31, 2016, respectively		(249.3		)	(249.3		)
Accumulated other comprehensive loss		(60.2		)	(75.9		)
Other shareholders’ equity		1,032.5			1,009.9
Total shareholders’ equity attributable to Bruker Corporation		724.7			686.4
Noncontrolling interest in consolidated subsidiaries		6.9			6.7
Total shareholders’ equity		731.6			693.1
Total liabilities and shareholders’ equity		$	1,839.9		$	1,808.4

 

The accompanying notes are an integral part of these statements.

 

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BRUKER CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(in millions, except per share data)

 

		Three Months Ended March 31,
		2017			2016
Product revenue		$	318.9		$	312.3
Service revenue		63.3			60.7
Other revenue		2.7			2.4
Total revenue		384.9			375.4
Cost of product revenue		172.7			170.2
Cost of service revenue		35.7			37.4
Cost of other revenue		0.1			1.0
Total cost of revenue		208.5			208.6
Gross profit		176.4			166.8
Operating expenses:
Selling, general and administrative		98.1			92.7
Research and development		37.6			36.1
Other charges, net		3.1			4.0
Total operating expenses		138.8			132.8
Operating income		37.6			34.0
Interest and other expense, net		(6.0		)	(5.6		)
Income before income taxes and noncontrolling interest in consolidated subsidiaries		31.6			28.4
Income tax provision		9.9			4.8
Consolidated net income		21.7			23.6
Net income attributable to noncontrolling interest in consolidated subsidiaries		0.1			—
Net income attributable to Bruker Corporation		$	21.6		$	23.6
Net income per common share attributable to Bruker Corporation shareholders:
Basic		$	0.14		$	0.14
Diluted		$	0.13		$	0.14
Weighted average common shares outstanding:
Basic		159.7			163.3
Diluted		160.5			164.3
Comprehensive income		$	37.5		$	56.2
Less: Comprehensive income attributable to noncontrolling interests		0.2			0.2
Comprehensive income attributable to Bruker Corporation		$	37.3		$	56.0
Dividend declared		$	0.04		$	0.04

 

The accompanying notes are an integral part of these statements.

 

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BRUKER CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

		Three Months Ended March 31,
		2017			2016
Cash flows from operating activities:
Consolidated net income		$	21.7		$	23.6
Adjustments to reconcile consolidated net income to cash flows from operating activities:
Depreciation and amortization		15.1			13.2
Write-down of demonstration inventories to net realizable value		2.8			4.8
Stock-based compensation expense		2.6			2.2
Deferred income taxes		0.4			(2.7		)
Other non-cash expenses, net		1.3			1.7
Changes in operating assets and liabilities, net of acquisitions and divestitures:
Accounts receivable		25.6			7.2
Inventories		(31.1		)	(28.8		)
Accounts payable and accrued expenses		(2.7		)	(9.0		)
Income taxes payable, net		(6.4		)	(13.7		)
Deferred revenue		0.9			9.2
Customer advances		(3.1		)	(18.4		)
Other changes in operating assets and liabilities, net		5.5			(3.3		)
Net cash provided by (used in) operating activities		32.6			(14.0		)
Cash flows from investing activities:
Purchases of short-term investments		(85.3		)	(21.7		)
Maturities of short-term investments		58.7			21.7
Cash paid for acquisitions, net of cash acquired		(39.8		)	—
Purchases of property, plant and equipment		(11.5		)	(8.0		)
Proceeds from sales of property, plant and equipment		6.6			0.6
Net cash used in investing activities		(71.3		)	(7.4		)
Cash flows from financing activities:
Repayments of the Note Purchase Agreement		(20.0		)	—
Repayments of revolving lines of credit		(40.0		)	—
Proceeds from revolving lines of credit		33.0			36.0
Proceeds (repayment) of other debt, net		(0.1		)	0.4
Proceeds from issuance of common stock, net		1.2			7.5
Repurchase of common stock		—			(78.9		)
Payment of dividends		(6.4		)	(6.5		)
Net cash used in financing activities		(32.3		)	(41.5		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		5.8			6.0
Net change in cash, cash equivalents and restricted cash		(65.2		)	(56.9		)
Cash, cash equivalents and restricted cash at beginning of period		345.9			271.2
Cash, cash equivalents and restricted cash at end of period		$	280.7		$	214.3

 

The accompanying notes are an integral part of these statements.

 

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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% and 93% of the Company’s revenues during the three months ended March 31, 2017 and 2016, 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, Bruker CALID and Bruker Nano 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 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 polymer 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 systems, infrared spectroscopy and radiological/nuclear detectors for Chemical, Biological, Radiological, Nuclear and Explosive (CBRNE) detection in emergency response, homeland security and defense applications, and analytical and process analysis instruments and solutions based on infrared and Raman molecular spectroscopy technologies. Customers of the Bruker CALID Group include pharmaceutical, biotechnology and diagnostics companies, contract research organizations, academic institutions, medical schools, nonprofit or for-profit forensics, agriculture, food and beverage safety, 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 biotechnology and pharmaceutical companies, academic institutions, governmental customers, nanotechnology companies, semiconductor companies, raw material manufacturers, industrial 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 significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements as of March 31, 2017 and December 31, 2016, and for the three months ended March 31, 2017 and 2016, have been prepared in accordance with accounting principles generally accepted in the United States of America (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

 

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information presented herein does not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation 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.

 

At March 31, 2017, 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, 2016, have not changed.

 

In November 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-18, Statement of Cash Flows, Restricted Cash, requiring restricted cash and restricted cash equivalents to be included with cash and cash equivalents on the statement of cash flows when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The Company adopted this standard during the first quarter of 2017. Restricted cash is now 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 which are required by local governance 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 beginning balances of the unaudited condensed consolidated statement of cash flows by $3.4 million and $4.2 million, respectively, and the ending balances by $3.2 million and $4.4 million, respectively, for the three months ended March 31, 2017 and 2016.

 

2.              Acquisitions

 

On January 23, 2017, the Company acquired 100% of the the shares of Hysitron, Incorporated (Hysitron). The acquisition adds Hysitron’s nanomechanical testing instruments to the Company’s existing portfolio of atomic force microscopes, surface profilometers, and tribology and mechanical testing systems. Hysitron is included in the Bruker Nano Group within the BSI reportable segment. The acquisition of Hysitron was accounted for under the acquisition method. The components and fair value allocation of the consideration transferred in connection with the acquisition of Hysitron were as follows (in millions):

 

Consideration Transferred:
Cash paid		$	27.9
Cash acquired		(0.7		)
Contingent consideration		1.6
Total consideration transferred		$	28.8
Allocation of Consideration Transferred:
Accounts receivable, net		$	3.0
Inventories		3.8
Other current assets		0.2
Property, plant and equipment		0.6
Intangible assets:
Customer relationships		5.8
Existing technology		4.7
Trade name		1.2
Other		0.6
Goodwill		16.6
Deferred taxes, net		(4.1		)
Capital Lease		(0.2		)
Liabilities assumed		(3.4		)
Total consideration transferred		$	28.8

 

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The fair value allocation included contingent consideration in the amount of $1.6 million, which represented the estimated fair value of future payments to the former shareholders of Hysitron based on achieving annual revenue targets for the years 2017-2018. The maximum potential future payments related to the contingent consideration is $10 million. As of March 31, 2017, certain amounts relating to the tax related matters and the valuation of intangibles have not been finalized.  The finalization of these amounts is expected within the measurement period and may result in changes to goodwill.  The Company expects to complete the fair value allocation in the second quarter of 2017. The amortization period for intangible assets acquired in connection with Hysitron is 7 years for customer relationships, trademarks and other intangibles and 5 years for existing technology.

 

The results of Hysitron, including the amount allocated to goodwill that is attributable to expected synergies and not expected to be deductible for tax purposes, have been included in the BSI Segment from the date of acquisition. Pro forma financial information reflecting the acquisition of Hysitron has not been presented because the impact on revenues, net income and total assets is not material.

 

In the three months ended March 31, 2017, the Company completed various acquisitions that collectively complemented the Company’s existing product offerings and added aftermarket and software capabilities to the Company’s existing microbiology business. The impact of these acquisitions on revenues, net income and total assets was not material.

 

3.              Stock-Based Compensation

 

On May 14, 2010, the Bruker Corporation 2010 Incentive Compensation Plan (the “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 (the “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 (the “2016 Plan”) was approved by the Company’s stockholders. With the approval of the 2016 Plan, no further grants will be 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 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 (in millions):

 

		Three Months Ended March 31,
		2017			2016
Stock options		$	1.7		$	1.8
Restricted stock awards		0.3			0.4
Restricted stock units		0.6			—
Total stock-based compensation		$	2.6		$	2.2

 

		Three Months Ended March 31,
		2017			2016
Costs of product revenue		$	0.4		$	0.3
Selling, general and administrative		1.8			1.6
Research and development		0.4			0.3
Total stock-based compensation		$	2.6		$	2.2

 

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

 

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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. Assumptions for the three months ended March 31, 2017 and 2016 regarding volatility, expected life, dividend yield and risk-free interest rates are required for the Black-Scholes model and are presented in the table below:

 

		2017		2016
Risk-free interest rates		2.02% - 2.09%		1.32% - 2.05%
Expected life		5.56 years		5.75 - 7.02 years
Volatility		33.97% - 34.13%		34.39% - 41.60%
Expected dividend yield		0.67% - 0.74%		0% - 0.63%

 

Stock option activity for the three months ended March 31, 2017 was as follows:

 

		Shares Subject to Options		Weighted Average Option Price			Weighted Average Remaining Contractual Term (Yrs)		Aggregate Intrinsic Value (in millions) (b)
Outstanding at December 31, 2016		4,625,678		$	18.73
Granted		10,430		22.80
Exercised		(83,829	)	14.41
Forfeited		(69,772	)	17.73
Outstanding at March 31, 2017		4,482,507		$	18.83		6.5		$	20.7
Exercisable at March 31, 2017		2,304,015		$	16.42		5.0		$	16.0
Exercisable and expected to vest at March 31, 2017 (a)		4,336,330		$	18.75		6.4		$	20.3

 

(a)         In addition to the options that are vested at March 31, 2017, 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, 2017.                                                                                                                       

(b)         The aggregate intrinsic value is based on the positive difference between the fair value of the Company’s common stock price of $23.33 on March 31, 2017, or the date of exercises, as appropriate, and the exercise price of the underlying stock options.

 

The weighted average fair value of options granted was $7.40 and $9.98 per share for the three months ended March 31, 2017 and 2016, respectively.

 

The total intrinsic value of options exercised was $0.8 million and $7.5 million for the three months ended March 31, 2017 and 2016, respectively.

 

Restricted stock award activity for the three months ended March 31, 2017 was as follows:

 

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		Shares Subject to Restriction		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2016		172,506		$	19.37
Vested		(3,276	)	24.80
Forfeited		(4,053	)	22.46
Outstanding at March 31, 2017		165,177		$	19.19

 

The total fair value of restricted stock vested was $0.1 million for the three months ended March 31, 2017, with no corresponding amount in the comparable period in 2016.

 

Restricted stock unit activity for the three months ended March 31, 2017 was as follows:

 

		Shares Subject to Restriction		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2016		262,317		$	22.32
Granted		53,581		21.91
Forfeited		(9,199	)	22.19
Outstanding at March 31, 2017		306,699		$	22.25

 

No restricted stock units vested in the three months ended March 31, 2017 or 2016.

 

At March 31, 2017, the Company expects to recognize pre-tax stock-based compensation expense of $12.8 million associated with outstanding stock option awards granted under the Company’s stock plans over the weighted average remaining service period of 2.44 years. The Company expects to recognize additional pre-tax stock-based compensation expense of $2.1 million associated with outstanding restricted stock awards granted under the Company’s stock plans over the weighted average remaining service period of 1.94 years. The Company also expects to recognize additional pre-tax stock-based compensation expense of $5.5 million associated with outstanding restricted stock units granted under the 2016 Plan over the weighted average remaining service period of 3.12 years.

 

In March 2016, the FASB issued ASU No. 2016-09, Stock Compensation - Improvements to Employee Share-Based Payment Accounting.  The new standard simplifies accounting for share-based payment transactions, including income tax consequences and the classification of the tax impact on the statement of cash flows.  The Company has adopted this standard effective January 1, 2017. The ASU requires that the difference between the actual tax benefit realized upon exercise or vesting, as applicable, and the tax benefit recorded based on the fair value of the stock award at the time of grant (the “excess tax benefits”) be reflected as a reduction of the current period provision for income taxes with any shortfall recorded as an increase in the tax provision rather than as a component of changes to additional paid-in capital. The ASU also requires the excess tax benefit realized be reflected as operating cash flow rather than a financing cash flow. This standard was adopted by the Company on a modified retrospective basis, which resulted in a cumulative adjustment to retained earnings of $3.6 million, which related to the timing of when excess tax benefits are recognized.  The actual benefit realized in future periods is inherently uncertain and will vary based on the timing and relative value realized for future share-based transactions.

 

4.              Earnings Per Share

 

Net income per common share attributable to Bruker Corporation shareholders is calculated by dividing net income attributable to Bruker Corporation by the weighted-average 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.

 

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

 

		Three Months Ended March 31,
		2017			2016
Net income attributable to Bruker Corporation, as reported		$	21.6		$	23.6
Weighted average shares outstanding:
Weighted average shares outstanding-basic		159.7			163.3
Effect of dilutive securities:
Stock options and restricted stock		0.8			1.0
		160.5			164.3
Net income per common share attributable to Bruker Corporation shareholders:
Basic		$	0.14		$	0.14
Diluted		$	0.13		$	0.14

 

Stock options to purchase approximately 0.3 million shares and 0.0 million shares were excluded from the computation of diluted earnings per share in the three months ended March 31, 2017 and 2016, respectively, as their effect would have been anti-dilutive.

 

5.              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, 2017 and December 31, 2016 (in millions):

 

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March 31, 2017		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		$	3.0		$	—		$	3.0		$	—
Fixed price commodity contracts		0.3			—			0.3			—
Total assets recorded at fair value		$	3.3		$	—		$	3.3		$	—
Liabilities:
Contingent consideration		$	18.3		$	—		$	—		$	18.3
Foreign exchange contracts		0.5			—			0.5			—
Total liabilities recorded at fair value		$	18.8		$	—		$	0.5		$	18.3

 

 

December 31, 2016		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		$	4.0		$	—		$	4.0		$	—
Fixed price commodity contracts		0.2			—			0.2			—
Total assets recorded at fair value		$	4.2		$	—		$	4.2		$	—
Liabilities:
Contingent consideration		$	16.6		$	—		$	—		$	16.6
Foreign exchange contracts		1.4			—			1.4			—
Embedded derivatives in purchase and delivery contracts		0.3			—			0.3			—
Total liabilities recorded at fair value		$	18.3		$	—		$	1.7		$	16.6

 

The Company’s financial instruments consist primarily of cash equivalents, short-term investments, restricted cash, derivative instruments consisting of forward 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 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 $230.4 million and $253.3 million at March 31, 2017 and December 31, 2016, respectively, based on the outstanding amount at March 31, 2017 and December 31, 2016, market 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 liabilities and did not elect the fair value option for any financial assets or liabilities which originated during the three months ended March 31, 2017 or 2016.

 

Excluded from the table above are cash equivalents, restricted cash and short-term investments as the cost approximates current fair value. The Company has a program to enter into time deposits with varying maturity dates ranging from one to

 

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twelve months, as well as call deposits for which the Company has the ability to redeem the invested amounts over a period of 95 days. The Company has classified these investments within cash and cash equivalents or short-term investments within the consolidated balance sheets based on call and maturity dates. There are no cash equivalents, $3.2 million and $3.4 million of restricted cash and $187.0 million and $157.9 million of short-term investments outstanding as of March 31, 2017 and December 31, 2016, respectively.

 

Short-term investments are classified as available-for-sale and are reported at fair value, with unrealized gains (losses) excluded from earnings and reported, net of tax, in accumulated other comprehensive income (loss) within the accompanying unaudited condensed consolidated balance sheets. There were no unrealized gains (losses) recorded during the three months ended March 31, 2017 and 2016. On a quarterly basis, the Company reviews its short-term investments to determine if there have been any events that could create an impairment. None were noted for the three month periods ended March 31, 2017 or 2016.

 

As part of certain acquisitions in 2017, 2016, and 2015, 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 applicable acquired companies based on achieving annual revenue and gross margin targets in certain years as specified in the purchase and sale agreements. The Company initially valued the contingent consideration by using a Monte Carlo simulation which models future revenue and costs of goods sold projections and discounts the average results to present value.

 

The following table sets forth the changes in contingent consideration liabilities for the three months ended March 31, 2017 (in millions):

 

Balance at December 31, 2016		$	16.6
Current period additions		1.6
Foreign currency effect		0.1
Balance at March 31, 2017		$	18.3

 

There was no change in the value of the contingent consideration recognized in earnings for the three month periods ended March 31, 2017 or 2016.

 

6.              Inventories

 

Inventories consisted of the following (in millions):

 

		March 31,			December 31,
		2017			2016
Raw materials		$	140.4		$	132.8
Work-in-process		195.2			181.0
Finished goods		104.7			91.8
Demonstration units		36.1			34.8
Inventories		$	476.4		$	440.4

 

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, 2017 and December 31, 2016, inventory-in-transit was $46.0 million and $37.5 million, respectively.

 

The Company reduces the carrying value of its demonstration inventories for differences between its cost and estimated market value through a charge to cost of product revenue that is based on a number of factors, including the age of the unit, the physical condition of the unit and an assessment of technological obsolescence. Amounts recorded in cost of revenue related to the write-down of demonstration units to net realizable value were $2.8 million and $4.8 million for the three months ended March 31, 2017 and 2016, respectively.

 

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. The new guidance eliminates the measurement of inventory at market value, and inventory will now be measured at the lower of cost and net realizable value. The ASU defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably

 

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predictable costs of completion, disposal, and transportation. No other changes were made to the current guidance on inventory measurement. The Company adopted ASU 2015-11 on a prospective basis for the quarter ended March 31, 2017 and the adoption did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

7.              Goodwill and Other Intangible Assets

 

The following table sets forth the changes in the carrying amount of goodwill for the three months ended March 31, 2017 (in millions):

 

Balance at December 31, 2016		$	130.6
Goodwill acquired during the period		20.6
Foreign currency effect		0.4
Balance at March 31, 2017		$	151.6

 

The following is a summary of intangible assets (in millions):

 

		March 31, 2017									December 31, 2016
		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount			Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
Existing technology and related patents		$	177.2		$	(119.3	)	$	57.9		$	169.0		$	(113.9	)	$	55.1
Customer relationships		32.5			(8.9		)	23.6			20.0			(7.9		)	12.1
Non compete contracts		2.4			(1.2		)	1.2			1.8			(1.1		)	0.7
Trade names		3.1			(0.5		)	2.6			1.6			(0.4		)	1.2
Intangible assets subject to amortization		215.2			(129.9		)	85.3			192.4			(123.3		)	69.1
In-process research and development		0.6			—			0.6			0.6			—			0.6
Intangible assets		$	215.8		$	(129.9	)	$	85.9		$	193.0		$	(123.3	)	$	69.7

 

For the three months ended March 31, 2017 and 2016, the Company recorded amortization expense of $6.9 million and $5.4 million, respectively, related to intangible assets subject to amortization.

 

The goodwill and intangibles acquired in the first quarter of 2017 related primarily to the Hysitron acquisition.  Please see Note 2—Acquisitions, for additional details on the goodwill and intangibles acquired.

 

8.              Debt

 

The Company’s debt obligations as of March 31, 2017 and December 31, 2016 consisted of the following (in millions):

 

		March 31,			December 31,
		2017			2016
US Dollar revolving loan under the 2015 Credit Agreement		$	164.0		$	171.0
US Dollar notes under the Note Purchase Agreement		220.0			240.0
Unamortized debt issuance costs under the Note Purchase Agreement		(0.8		)	(0.8		)
Capital lease obligations and other loans		1.6			1.5
Total debt		384.8			411.7
Current portion of long-term debt		(0.1		)	(20.1		)
Total long-term debt, less current portion		$	384.7		$	391.6

 

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%.

 

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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.

 

As of March 31, 2017, the Company was in compliance with the covenants of the 2015 Credit Agreement. The Company’s leverage ratio (as defined in the 2015 Credit Agreement) was 1.39 and interest coverage ratio (as defined in the 2015 Credit Agreement) was 14.9.

 

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, 2017 (in millions):

 

		Weighted Average Interest Rate		Total Amount Committed by Lenders			Outstanding Borrowings			Outstanding Lines of Credit			Total Amount Available
2015 Credit Agreement		2.2	%	$	500.0		$	164.0		$	1.1		$	334.9
Other lines of credit		—		234.6			—			131.0			103.6
Total revolving lines of credit				$	734.6		$	164.0		$	132.1		$	438.5

 

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 consist 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.

 

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 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

 

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Agreement, as of the end of any fiscal quarter to exceed 3.50 to 1.00, (ii) its interest coverage ratio as determined pursuant to the Note Purchase Agreement as of the end of any fiscal quarter for any period of four consecutive fiscal quarters to be less than 2.50 to 1 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, 2017, the Company was in compliance with the covenants of the Note Purchase Agreement.  The Company’s leverage ratio (as defined in the Note Purchase Agreement) was 1.39 and interest coverage ratio (as defined in the Note Purchase Agreement) was 14.9.

 

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.

 

9.              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. The most significant component of the Company’s interest rate risk relates to amounts outstanding under the 2015 Credit Agreement, which totaled $164.0 million at March 31, 2017. 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, principally Germany and other countries in the European Union and Switzerland, 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. These transactions do not qualify for hedge accounting and, accordingly, the instrument is recorded at fair value with the corresponding gains and losses recorded in the consolidated statements of income and comprehensive income (loss). The Company had the following notional amounts outstanding under foreign exchange contracts at March 31, 2017 and December 31, 2016 (in millions):

 

Buy		Notional Amount in Buy Currency		Sell		Maturity		Notional Amount in U.S. Dollars			Fair Value of Assets			Fair Value of Liabilities
March 31, 2017:
Euro		72.3		U.S. Dollars		April 2017 to January 2018		$	78.3		$	—		$	0.4
Swiss Francs		8.0		U.S. Dollars		April 2017		8.0			—			—
Euro		1.4		Polish Zloty		April 2017		1.5			—			0.1
								$	87.8		$	—		$	0.5
December 31, 2016:
Euro		21.1		U.S. Dollars		January 2017		$	23.3		$	—		$	1.1
Swiss Francs		7.9		U.S. Dollars		January 2017		8.0			—			0.3
U.S. Dollars		4.0		Israel Shekel		January 2017		4.0			—			—
Israel Shekel		15.3		U.S. Dollars		January 2017		4.0			—			—
Euro		1.4		Polish Zloty		January 2017		1.4			—			—
								$	40.7		$	—		$	1.4

 

In addition, the Company periodically enters into purchase and sales contracts denominated in currencies other than the

 

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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 $110.5 million for the delivery of products and $1.9 million for the purchase of products at March 31, 2017 and $120.7 million for the delivery of products and $2.3 million for the purchase of products at December 31, 2016. 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 (loss).

 

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, 2017 and December 31, 2016, the Company had fixed price commodity contracts with notional amounts aggregating $4.8 million and $2.7 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 (in millions):

 

				March 31,			December 31,
		Balance Sheet Location		2017			2016
Derivative assets:
Embedded derivatives in purchase and delivery contracts		Other current assets		$	2.0		$	2.7
Fixed price commodity contracts		Other current assets		0.3			0.2
Embedded derivatives in purchase and delivery contracts		Other long-term assets		1.0			1.3
Derivative liabilities:
Foreign exchange contracts		Other current liabilities		$	0.5		$	1.4
Embedded derivatives in purchase and delivery contracts		Other current liabilities		—			0.3

 

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 (in millions):

 

		Three Months Ended March 31,
		2017			2016
Foreign exchange contracts		$	0.9		$	2.2
Embedded derivatives in purchase and delivery contracts		(0.7		)	(0.3		)
Fixed price commodity contracts		0.1			0.1
Other income (expense), net		$	0.3		$	2.0

 

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.

 

10.       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.

 

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