BRUKER CORP - Quarter Report: 2018 March (Form 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, 2018

 

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.

 

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o  (Do not check if a smaller reporting company)	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.

 

Class		Outstanding at May 4, 2018
Common Stock, $0.01 par value per share		156,082,203 shares

 

 

Table of Contents

 

BRUKER CORPORATION

 

Quarterly Report on Form 10-Q

For the Quarter Ended March 31, 2018

 

Index

 

		Page
Part I	FINANCIAL INFORMATION	1
Item 1:	Unaudited Condensed Consolidated Financial Statements	1
	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017	1
	Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2018 and 2017	2
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017	3
	Notes to Unaudited Condensed Consolidated Financial Statements	4
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4:	Controls and Procedures	36
Part II	OTHER INFORMATION	37
Item 1:	Legal Proceedings	37
Item 1A:	Risk Factors	37
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3:	Defaults Upon Senior Securities	38
Item 4:	Mine Safety Disclosure	38
Item 5:	Other Information	38
Item 6:	Exhibits	38
	Signatures	39

 

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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,
		2018			2017
ASSETS
Current assets:
Cash and cash equivalents		$	283.9		$	325.0
Short-term investments		—			114.2
Accounts receivable, net		313.6			319.3
Inventories		518.0			486.2
Other current assets		125.0			114.1
Total current assets		1,240.5			1,358.8
Property, plant and equipment, net		270.0			266.5
Goodwill		171.1			169.8
Intangibles, net and other long-term assets		148.9			153.4
Total assets		$	1,830.5		$	1,948.5
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	15.0		$	—
Accounts payable		104.7			90.8
Customer advances		125.3			111.7
Other current liabilities		313.7			322.0
Total current liabilities		558.7			524.5
Long-term debt		205.6			415.6
Other long-term liabilities		275.9			274.9
Commitments and contingencies (Note 13)
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, 172,098,728 and 171,875,076 shares issued and 156,079,898 and 155,865,977 shares outstanding at March 31, 2018 and December 31, 2017, respectively		1.7			1.7
Treasury stock, at cost, 16,018,830 and 16,009,099 shares at March 31, 2018 and December 31, 2017, respectively		(401.3		)	(401.2		)
Accumulated other comprehensive income		51.2			27.0
Other shareholders’ equity		1,129.9			1,097.9
Total shareholders’ equity attributable to Bruker Corporation		781.5			725.4
Noncontrolling interest in consolidated subsidiaries		8.8			8.1
Total shareholders’ equity		790.3			733.5
Total liabilities and shareholders’ equity		$	1,830.5		$	1,948.5

 

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,
		2018			2017
Product revenue		$	352.2		$	318.9
Service revenue		77.7			63.3
Other revenue		1.8			2.7
Total revenue		431.7			384.9
Cost of product revenue		185.6			172.7
Cost of service revenue		46.5			35.7
Cost of other revenue		0.2			0.1
Total cost of revenue		232.3			208.5
Gross profit		199.4			176.4
Operating expenses:
Selling, general and administrative		110.3			98.1
Research and development		43.2			37.6
Other charges, net		7.8			3.1
Total operating expenses		161.3			138.8
Operating income		38.1			37.6
Interest and other income (expense), net		(2.3		)	(6.0		)
Income before income taxes and noncontrolling interest in consolidated subsidiaries		35.8			31.6
Income tax provision		8.4			9.9
Consolidated net income		27.4			21.7
Net income attributable to noncontrolling interest in consolidated subsidiaries		0.4			0.1
Net income attributable to Bruker Corporation		$	27.0		$	21.6
Net income per common share attributable to Bruker Corporation shareholders:
Basic		$	0.17		$	0.14
Diluted		$	0.17		$	0.13
Weighted average common shares outstanding:
Basic		155.9			159.7
Diluted		157.0			160.5
Comprehensive income		$	51.8		$	37.5
Less: Comprehensive income attributable to noncontrolling interests		0.6			0.2
Comprehensive income attributable to Bruker Corporation		$	51.2		$	37.3
Dividend declared per common share		$	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,
		2018			2017
Cash flows from operating activities:
Consolidated net income		$	27.4		$	21.7
Adjustments to reconcile consolidated net income to cash flows from operating activities:
Depreciation and amortization		15.8			15.1
Stock-based compensation expense		2.5			2.6
Deferred income taxes		(7.1		)	0.4
Other non-cash expenses, net		18.2			4.1
Changes in operating assets and liabilities, net of acquisitions and divestitures:
Accounts receivable		10.0			25.6
Inventories		(32.0		)	(31.1		)
Accounts payable and accrued expenses		(13.7		)	(2.7		)
Income taxes payable, net		(3.3		)	(6.4		)
Deferred revenue		5.9			0.9
Customer advances		17.8			(3.1		)
Other changes in operating assets and liabilities, net		2.3			5.5
Net cash provided by operating activities		43.8			32.6
Cash flows from investing activities:
Purchases of short-term investments		—			(85.3		)
Maturities of short-term investments		117.0			58.7
Cash paid for acquisitions, net of cash acquired		(0.4		)	(39.8		)
Purchases of property, plant and equipment		(8.5		)	(11.5		)
Proceeds from sales of property, plant and equipment		—			6.6
Net cash provided by (used in) investing activities		108.1			(71.3		)
Cash flows from financing activities:
Repayments of the Note Purchase Agreement		—			(20.0		)
Repayments of revolving lines of credit		(195.0		)	(40.0		)
Proceeds from revolving lines of credit		—			33.0
Repayment of other debt, net		(0.1		)	(0.1		)
Proceeds from issuance of common stock, net		2.6			1.2
Payment of dividends		(6.3		)	(6.4		)
Net cash used in financing activities		(198.8		)	(32.3		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		5.8			5.8
Net change in cash, cash equivalents and restricted cash		(41.1		)	(65.2		)
Cash, cash equivalents and restricted cash at beginning of period		328.9			345.9
Cash, cash equivalents and restricted cash at end of period		$	287.8		$	280.7

 

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 89.6% and 90.0% of the Company’s revenues during the three months ended March 31, 2018 and 2017, 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 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 or 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, 2018 and December 31, 2017, and for the three months ended March 31, 2018 and 2017, 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

 

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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.

 

At March 31, 2018, 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, 2017, have not changed other than for revenue recognition as detailed in Footnote 2.

 

2.              Revenue

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements under Accounting Standards Codification (ASC) Topic 605. The new guidance was the result of a joint project between the FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and to develop common revenue standards for U.S. GAAP and International Financial Reporting Standards. The core principle of the new guidance is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance was effective as of January 1, 2018 and was applied on a modified retrospective basis. The Company elected the practical expedient and only evaluated contracts for which substantially all revenue had not been recognized under ASC 605 with the cumulative effect of the new guidance recorded as of the date of initial application.  The impact of adoption was an increase to beginning retained earnings of $8.2 million, offset in part by a $2.1 million impact related to taxes. As the adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements, transitional disclosures were not provided.

 

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. The key elements of ASC 606 are: 1) identifying a contract with the customer; 2) identifying the performance obligations in the contract; 3) determining the transaction price; 4) allocating the transaction price to the performance obligations in the contract; and 5) recognizing revenue when (or as) each performance obligation is satisfied.

 

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Some of the Company’s contracts have multiple performance obligations, most commonly due to providing additional goods or services along with a system such as installation, accessories, parts and services. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using the best estimate of the standalone selling price of each distinct good or service being provided to the customer. The Company’s best evidence of standalone selling price is its normal selling pricing and discounting practices for the specific product or service when sold on a standalone basis. Alternatively, when not sold separately, the Company may determine standalone selling price using an expected cost plus a margin approach.

 

The Company’s performance obligations are typically satisfied at a point in time, most commonly either on shipment or customer acceptance. Certain performance obligations, such as maintenance contracts and extended warranty, are recognized over time based on the contractual obligation period. In addition, certain arrangements to provide more customized deliverables may be satisfied over time based on the extent of progress towards completion. Typically, progress is measured using a cost-to-cost method based on cost incurred to date relative to total estimated costs upon completion as this best depicts the transfer of control to the customer. Application of the cost-to-cost method requires the Company to make reasonable estimates of the extent of progress toward completion and the total costs the Company expects to incur. Losses are recorded immediately when we estimate that contracts will ultimately result in a loss.

 

The Company includes costs incurred in connection with shipping and handling of products within selling, general and administrative costs. Amounts billed to customers in connection with these costs are included in total revenues. When control of the goods transfers prior to the completion of the Company’s obligation to ship the products to its customers, the Company has elected the practical expedient to account for the shipping services as a fulfillment cost. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period is one year or less or the amount is immaterial. The Company excludes from the transaction price all taxes assessed by a governmental authority on revenue-producing transactions that are collected by the Company from a customer.

 

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The Company has historically required an advance deposit based the terms and conditions of contracts with customers for many its contracts. Typically, revenue is recognized within one year of receiving an advance deposit. The Company does not have any material payment terms that extend beyond one year. For contracts where an advance payment is received greater than one year from expected revenue recognition, or a portion of the payment due extends beyond one year, the Company determined it does not constitute a significant financing component. There is minimal variable consideration included in the transaction price of the Company’s contracts.

 

The Company’s revenues and cash flows may be adversely impacted by unfavorable changes in economic or political conditions in the countries and markets in which they operate, including, among others, adverse changes in interest rates or tax rates, volatility in financial and commodity markets, contraction in the availability of credit in the marketplace, and changes in capital spending patterns.  Economic factors that could adversely influence demand for the Company’s products include uncertainty about global economic conditions leading to reduced levels of investment, changes in government spending levels and/or priorities, the size and availability of government budgets, customers’ and suppliers’ access to credit and other macroeconomic factors affecting government, academic or industrial spending behavior. Slower economic growth or deterioration in economic conditions could result in a decrease in government funding for scientific research, a delay in orders from current or potential customers or a reduction in purchases of our products.  The Company cannot predict how changes in economic conditions or political instability will affect customers and suppliers or how any negative impact on customers and suppliers might adversely impact the Company’s business results or financial condition.

 

The following table presents the Company’s revenues by Group and end customer geographical location for the three month period ended March 31, 2018 (in millions):

 

		Three Months Ended March 31,
		2018
Revenue by Group:
Bruker BioSpin		$	131.8
Bruker CALID		131.3
Bruker Nano		123.9
BEST		45.6
Eliminations		(0.9		)
Total revenue		$	431.7

 

		Three Months Ended March 31,
		2018
Revenue by End Customer Geography:
United States		$	104.8
Germany		41.5
Rest of Europe		119.9
Asia Pacific		126.9
Other		38.6
Total revenue		$	431.7

 

Revenue for the Company recognized at a point in time versus over time are as follows for the three month period ended March 31, 2018 (in millions):

 

		Three Months Ended March 31,
		2018
Revenue recognized at a point in time		$	395.2
Revenue recognized over time		36.5
Total revenue		$	431.7

 

Remaining Performance Obligations

 

Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to performance obligations with an original contract term greater than one year which are fully or partially unsatisfied at the end of the period. As of March 31, 2018, remaining performance obligations were approximately $1,012.7 million. The Company expects to recognize revenue on approximately 75.9% of the remaining performance obligations over the next twelve months and the remaining performance obligations primarily within one to three years.

 

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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 current assets in the unaudited condensed consolidated balance sheets. The balance of contract assets as of March 31, 2018 and January 1, 2018, the date of adoption of ASC 606, was $22.2 million and $12.8 million, respectively.  The increase in the contract asset balance during the three month period ended March 31, 2018 is primarily a result of foreign currency translation and contracts which have been recognized as revenue during the three month period ending March 31, 2018 for which billing cannot contractually occur as of March 31, 2018.

 

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, 2018 and January 1, 2018, the date of adoption of ASC 606, contract liabilities were $311.6 million and $291.3 million, respectively.   The increase in the contract liability balance during the three month period ended March 31, 2018 is primarily a result of cash payments received in advance of satisfying performance obligations and foreign currency translation, offset by revenue recognized during the period that was included in the contract liability balance at the date of adoption.

 

3.              Acquisitions

 

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

 

On January 23, 2017, the Company acquired 100% of 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 through 2018. The Company completed the fair value allocation in the second quarter of 2017. The maximum potential future payments related to the contingent consideration is $10 million. 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.

 

4.              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 of the Board of Directors. 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,
		2018			2017
Stock options		$	1.0		$	1.7
Restricted stock awards		0.2			0.3
Restricted stock units		1.3			0.6
Total stock-based compensation		$	2.5		$	2.6

 

		Three Months Ended March 31,
		2018			2017
Costs of product revenue		$	0.4		$	0.4
Selling, general and administrative		1.7			1.8
Research and development		0.4			0.4
Total stock-based compensation		$	2.5		$	2.6

 

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, 2018.  Assumptions for the three months ended March 31, 2017 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:

 

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		2017
Risk-free interest rates		2.02% - 2.09%
Expected life		5.56 years
Volatility		33.97% - 34.13%
Expected dividend yield		0.67% - 0.74%

 

Stock option activity for the three months ended March 31, 2018 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, 2017		3,235,673		$	20.16
Exercised		(180,890	)	14.87
Forfeited		(105,882	)	20.48
Outstanding at March 31, 2018		2,948,901		$	20.47		6.4		$	27.9
Exercisable at March 31, 2018		1,641,446		$	18.97		5.7		$	18.0
Exercisable and expected to vest at March 31, 2018 (a)		2,798,092		$	20.36		6.3		$	26.8

 

(a)                                 In addition to the options that are vested at March 31, 2018, 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, 2018.

(b)                                 The aggregate intrinsic value is based on the positive difference between the fair value of the Company’s common stock price of $29.92 on March 31, 2018 and the exercise price of the underlying stock options.

 

The weighted average fair value of options granted was $7.40 per share during the three months ended March 31, 2017, with no corresponding amount in the current period.

 

The total intrinsic value of options exercised was $2.8 million and $0.8 million for the three months ended March 31, 2018 and 2017, respectively.

 

Restricted stock award activity for the three months ended March 31, 2018 was as follows:

 

		Shares Subject to Restriction		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2017		85,529		$	20.39
Vested		(3,276	)	24.80
Forfeited		(6,553	)	24.80
Outstanding at March 31, 2018		75,700		$	19.82

 

The total fair value of restricted stock vested was $0.1 million in each of the three months ended March 31, 2018 and 2017, respectively.

 

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Restricted stock unit activity for the three months ended March 31, 2018 was as follows:

 

		Shares Subject to Restriction		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2017		652,123		$	25.47
Granted		50,180		35.58
Vested		(43,052	)	21.91
Forfeited		(27,095	)	26.75
Outstanding at March 31, 2018		632,156		$	26.46

 

The total fair value of restricted stock units vested was $1.5 million in the three months ended March 31, 2018, with no corresponding amount in the comparable period in 2017.

 

At March 31, 2018, the Company expects to recognize pre-tax stock-based compensation expense of $6.5 million associated with outstanding stock option awards granted under the Company’s stock plans over the weighted average remaining service period of 2.05 years. The Company expects to recognize additional pre-tax stock-based compensation expense of $0.7 million associated with outstanding restricted stock awards granted under the Company’s stock plans over the weighted average remaining service period of 1.17 years. The Company also expects to recognize additional pre-tax stock-based compensation expense of $12.9 million associated with outstanding restricted stock units granted under the 2016 Plan over the weighted average remaining service period of 2.98 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 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.

 

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,
		2018			2017
Net income attributable to Bruker Corporation, as reported		$	27.0		$	21.6
Weighted average shares outstanding:
Weighted average shares outstanding-basic		155.9			159.7
Effect of dilutive securities:
Stock options and restricted stock awards and units		1.1			0.8
		157.0			160.5
Net income per common share attributable to Bruker Corporation shareholders:
Basic		$	0.17		$	0.14
Diluted		$	0.17		$	0.13

 

Stock options to purchase approximately 0.2 million shares and 0.3 million shares were excluded from the computation of diluted earnings per share in the three months ended March 31, 2018 and 2017, respectively, as their effect would have been anti-dilutive.

 

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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).

 

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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, 2018 and December 31, 2017 (in millions):

 

March 31, 2018		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		$	1.3		$	—		$	1.3		$	—
Foreign exchange contracts		0.1			—			0.1			—
Fixed price commodity contracts		0.2			—			0.2			—
Total assets recorded at fair value		$	1.6		$	—		$	1.6		$	—
Liabilities:
Contingent consideration		$	13.5		$	—		$	—		$	13.5
Foreign exchange contracts		0.1			—			0.1			—
Embedded derivatives in purchase and delivery contracts		3.2			—			3.2			—
Total liabilities recorded at fair value		$	16.8		$	—		$	3.3		$	13.5

 

December 31, 2017		Total			Quoted Prices in Active Markets Available (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets:
Foreign exchange contracts		$	4.5		$	—		$	4.5		$	—
Embedded derivatives in purchase and delivery contracts		0.9			—			0.9			—
Fixed price commodity contracts		0.8			—			0.8			—
Total assets recorded at fair value		$	6.2		$	—		$	6.2		$	—
Liabilities:
Contingent consideration		$	12.7		$	—		$	—		$	12.7
Foreign exchange contracts		0.1			—			0.1			—
Embedded derivatives in purchase and delivery contracts		2.9			—			2.9			—
Total liabilities recorded at fair value		$	15.7		$	—		$	3.0		$	12.7

 

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 $227.6 million and $231.3 million at March 31, 2018 and December 31, 2017, respectively, based on the outstanding amount at March 31, 2018 and December 31, 2017, 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, 2018 or 2017.

 

Excluded from the table above are cash equivalents, restricted cash and short-term investments related to time and call deposits. The Company has a program to enter into time deposits with varying maturity dates ranging from one to 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 and these are not subject to fair value measurement. The following tables set forth the balances of cash equivalents, restricted cash and short-term investments as of March 31, 2018 and December 31, 2017:

 

		March 31,			December 31,
		2018			2017
Cash Equivalents		$	—		$	—
Restricted Cash		4.1			4.0
Short-term Investments		—			114.2

 

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 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.

 

For the three months ended March 31, 2018, additional contingent consideration of $0.6 million was recognized in earnings related to a recent acquisition within the Bruker Nano Group based upon an increase in forecasted revenue levels for the acquired business for the remainder of 2018 and was recorded within other charges, net in the unaudited condensed consolidated statements of income and comprehensive income.

 

The following table sets forth the changes in contingent consideration liabilities for the three months ended March 31, 2018 (in millions):

 

Balance at December 31, 2017		$	12.7
Current period adjustments		0.6
Foreign currency effect		0.2
Balance at March 31, 2018		$	13.5

 

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 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.

 

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The inclusion of restricted cash increased the balances of the unaudited condensed consolidated statement of cash flows as follows:

 

		Three Months Ended March 31,
		2018			2017
Beginning Balance		$	3.9		$	3.4
Ending Balance		3.9			3.2

 

8.              Inventories

 

Inventories consisted of the following (in millions):

 

		March 31,			December 31,
		2018			2017
Raw materials		$	161.1		$	152.0
Work-in-process		204.6			183.1
Finished goods		95.0			96.6
Demonstration units		57.3			54.5
Inventories		$	518.0		$	486.2

 

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, 2018 and December 31, 2017, the value of inventory-in-transit was $28.5 million and $41.4 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, 2018 (in millions):

 

Balance at December 31, 2017		$	169.8
Foreign currency effect		1.3
Balance at March 31, 2018		$	171.1

 

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

 

		March 31, 2018									December 31, 2017
		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount			Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
Existing technology and related patents		$	198.6		$	(146.8	)	$	51.8		$	195.4		$	(138.9	)	$	56.5
Customer relationships		34.7			(13.9		)	20.8			34.6			(12.9		)	21.7
Non compete contracts		1.8			(1.6		)	0.2			1.8			(1.5		)	0.3
Trade names		4.3			(1.0		)	3.3			4.2			(0.9		)	3.3
Intangible assets subject to amortization		239.4			(163.3		)	76.1			236.0			(154.2		)	81.8
In-process research and development		0.7			—			0.7			0.6			—			0.6
Intangible assets		$	240.1		$	(163.3	)	$	76.8		$	236.6		$	(154.2	)	$	82.4

 

For the three months ended March 31, 2018 and 2017, the Company recorded amortization expense of $6.8 million and $6.9 million, respectively, related to intangible assets subject to amortization.

 

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10.       Debt

 

The Company’s debt obligations as of March 31, 2018 and December 31, 2017 consisted of the following (in millions):

 

		March 31,			December 31,
		2018			2017
US Dollar revolving loan under the 2015 Credit Agreement		$	—		$	195.0
US Dollar notes under the Note Purchase Agreement		220.0			220.0
Unamortized debt issuance costs under the Note Purchase Agreement		(0.6		)	(0.7		)
Capital lease obligations and other loans		1.2			1.3
Total debt		220.6			415.6
Current portion of long-term debt		(15.0		)	—
Total long-term debt, less current portion		$	205.6		$	415.6

 

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.  As of March 31, 2018, there were no outstanding  borrowings under the 2015 Credit Agreement.

 

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, 2018 (in millions):

 

		Weighted Average Interest Rate		Total Amount Committed by Lenders			Outstanding Borrowings			Outstanding Letters of Credit			Total Amount Available
2015 Credit Agreement		0.0	%	$	500.0		$	—		$	1.1		$	498.9
Other lines of credit		—		263.6			—			137.7			125.9
Total revolving lines of credit				$	763.6		$	—		$	138.8		$	624.8

 

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.

 

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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 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, 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, 2018, 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 0.69 and interest coverage ratio (as defined in the respective agreements) was 15.8.

 

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. The most significant component of the Company’s interest rate risk relates to amounts outstanding under the 2015 Credit Agreement, which did not have an outstanding balance as of March 31, 2018. The Company currently has fixed rate debt, which limits the exposure to adverse movements in interest rates.

 

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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. The Company had the following notional amounts outstanding under foreign exchange contracts at March 31, 2018 and December 31, 2017 (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, 2018:
Euro		55.4		U.S. Dollars		April 2018 to January 2019		$	68.9		$	0.1		$	—
U.S. Dollars		14.7		Euro		April 2018		14.7			—			—
Swiss Francs		8.3		U.S. Dollars		April 2018		8.7			—			—
Swiss Francs		1.8		Japanese Yen		April 2018		1.9			—			0.1
U.S. Dollars		3.7		Japanese Yen		April 2018		3.7			—			—
Japanese Yen		391.0		U.S. Dollars		April 2018		3.7			—			—
Euro		2.3		Polish Zloty		April 2018		2.8			—			—
Polish Zloty		2.6		Euro		April 2018		0.8			—			—
Singapore Dollar		2.8		U.S. Dollars		April 2018		2.1			—			—
								$	107.3		$	0.1		$	0.1
December 31, 2017:
Euro		59.5		U.S. Dollars		January 2018		$	67.0		$	4.5		$	—
Swiss Francs		11.0		U.S. Dollars		January 2018		11.3			—			—
Singapore Dollar		4.9		U.S. Dollars		January 2018		3.6			—			—
Euro		1.8		Polish Zloty		January 2018		2.3			—			0.1
								$	84.2		$	4.5		$	0.1

 

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 $92.3 million for the delivery of products and $3.7 million for the purchase of products at March 31, 2018 and $98.3 million for the delivery of products and $3.6 million for the purchase of products at December 31, 2017. 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, 2018 and December 31, 2017, the Company had fixed price commodity contracts with notional amounts aggregating $4.0 million and $3.0 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.

 

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