BRUKER CORP (BRKR) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and notes to those statements, appearing elsewhere in this report. This report contains forward-looking statements reflecting our current expectations that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this report should be read as applying to all related forward-looking statements wherever they appear in this report. Our actual results may differ materially from those indicated in the forward-looking statements due to a number of factors, including those discussed in Item 1A, Risk Factors and elsewhere in this report.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, describes the principal factors affecting the results of our operations, financial condition and changes in financial condition, as well as our critical accounting policies and estimates. Our MD&A is organized as follows:
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | Non-GAAP Measures. This section provides appropriate disclosures regarding forward looking statements and our use of Non-GAAP financial measures. |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | Overview. This section provides a brief discussion of our reportable segments’ results of operations, significant recent developments in our businesses, and challenges and risks that may impact our businesses in the future. |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | Results of Operations. This section provides our analysis of the significant line items on our consolidated statements of income and comprehensive income for the year ended December 31, 2021 compared to the year ended December 31, 2020. |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | Liquidity and Capital Resources. This section provides an analysis of our liquidity and cash flow and a discussion of our outstanding debt and commitments. |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | Critical Accounting Policies and Estimates. This section discusses the accounting estimates that are considered important to our financial condition and results of operations and require us to exercise subjective or complex judgments in their application. All of our significant accounting policies are summarized in Note 2 to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K. |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | Recent Accounting Pronouncements. This section provides a summary of recent accounting pronouncements and discusses their potential impact on our consolidated financial statements. |
Non-GAAP
Measures
Although our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), we believe describing revenue and expenses, excluding the effects of foreign currency, acquisitions and divestitures, as well as certain other charges, net, provides meaningful supplemental information regarding our performance. We rely internally on certain measures that are not calculated according to GAAP. These measures are organic revenue, free cash flow,
non-GAAP
gross profit margin and
non-GAAP
operating margin. Our management believes that these financial measures provide relevant and useful information that is widely used by equity analysts, investors and competitors in our industry, as well as by our management, in assessing both consolidated and business unit performance. We define the term organic revenue as GAAP revenue excluding the effect of foreign currency translation changes and the effect of acquisitions and divestitures. We define the term
non-GAAP
gross profit margin as GAAP gross profit margin with certain
non-GAAP
measures excluded and
non-GAAP
operating margin as GAAP operating margin with certain
non-GAAP
measures excluded. These
non-GAAP
measures exclude costs related to restructuring actions, acquisition and related integration expenses, amortization of acquired intangible assets, costs associated with our global information technology transition initiatives, and other
non-operational
costs and we believe these are useful measures to evaluate our continuing business.
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We define free cash flow as net cash provided by operating activities less additions to property, plant, and equipment. We believe free cash flow is a useful measure to evaluate our business as it indicates the amount of cash generated after additions to property, plant, and equipment which is available for, among other things, investments in our business, acquisitions, share repurchases, dividends and repayment of debt. We regularly use these
non-GAAP
financial measures internally to understand, manage, and evaluate our business results and make operating decisions. We also measure our employees and compensate them, in part, based on such
non-GAAP
measures and use this information for our planning and forecasting activities. These measures may also be useful to investors in evaluating the underlying operating performance of our business. The presentation of these
non-GAAP
financial measures is not intended to be a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP and may be different from
non-GAAP
financial measures used by other companies, and therefore, may not be comparable among companies.
OVERVIEW
We are a developer, manufacturer and distributor of high-performance scientific instruments and analytical and diagnostic solutions that enable our customers to explore life and materials at microscopic, molecular and cellular levels. Our corporate headquarters are located in Billerica, Massachusetts. We maintain major technical and manufacturing centers in Europe, Asia and North America and we have sales offices located throughout the world. Bruker is organized into three reportable segments: the BSI Life Science Segment (comprised of the Bruker BioSpin Group and the Bruker CALID Group), the BSI Nano Segment and the Bruker Energy & Supercon Technologies (BEST) Segment.
Revenue for the year ended December 31, 2021 increased by $430.4 million, or 21.7%, to $2,417.9 million, compared to $1,987.5 million for the comparable period in 2020. Included in revenue was an increase of approximately $43.3 million from foreign currency translation and an increase of $8.1 million from acquisitions. Excluding the effects of foreign currency translation and our recent acquisitions, our organic revenue,
a non-GAAP
measure, increased $379.0 million. Revenue increases were driven by strong demand for our products and solutions, as well as a robust recovery compared to the same period in 2020.
Our gross profit margin increased to 50.0% for the year ended December 31, 2021 as compared to 47.3% in the same period in 2020, the result of volume leverage.
The income tax provision for the years ended December 31, 2021 and December 31, 2020 was $113.0 million and $64.4 million, respectively, representing effective tax rates of 28.7% and 28.5%, respectively. The increase in our effective tax rate was primarily due to additional tax reserves for uncertain tax positions in 2021 and the impact of U.S. tax on foreign earnings, partially offset by the impact of discrete items in the period.
Diluted earnings per share for the year ended December 31, 2021 was $1.81, an increase of $0.79, compared to $1.02 per share in the same period in 2020. The increase in earnings per diluted share was primarily driven by higher revenue, favorable volume and operating leverage compared to the same period in 2020.
The following table presents a reconciliation from net cash provided by operating activities, which is the most directly comparable GAAP operating financial measure, to free cash flow as used by management (in millions):
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| Net cash provided by operating activities | $ | 282.4 | $ | 332.2 | ||||
| Less: purchases of property, plant and equipment | (92.0 | ) | (97.2 | ) | ||||
| Free cash flow | $ | 190.4 | $ | 235.0 |
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For the year ended December 31, 2021, our free cash flow was 19% lower than the same period in 2020, primarily from an increase in working capital due to increased accounts receivable from higher revenues and timing of receivables and strategic inventory build for 2021 orders and supply chain management.
The following table presents a reconciliation from gross profit and gross profit margin, which are the most directly comparable GAAP operating performance measures, to
non-GAAP
gross profit and
non-GAAP
gross profit margin as used by management (dollars in millions):
| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||||||||||
| Gross profit | $ | 1,209.6 | 50.0 | % | $ | 939.8 | 47.3 | % | ||||||||
| Non-GAAP adjustments: | ||||||||||||||||
| Restructuring costs | 3.4 | 0.1 | % | 3.8 | 0.2 | % | ||||||||||
| Acquisition-related costs | 0.7 | — | 0.8 | — | ||||||||||||
| Purchased intangible amortization | 20.2 | 0.9 | % | 19.9 | 1.0 | % | ||||||||||
| Other costs | 1.1 | 0.1 | % | 3.7 | 0.2 | % | ||||||||||
| Non-GAAP gross profit | $ | 1,235.0 | 51.1 | % | $ | 968.0 | 48.7 | % |
Our
non-GAAP
gross profit margin was 51.1% and 48.7% in the years ended December 31, 2021 and 2020, respectively. The increases in our
non-GAAP
gross profit margins were driven by higher revenue and volume leverage, compared to 2020 which was negatively impacted by the
COVID-19
pandemic. Contributions from higher margin products also favorably impacted our gross profit margin in the year ended December 31, 2021.
The following table presents a reconciliation from operating income and operating margin, which are the most directly comparable GAAP operating performance measures, to
non-GAAP
operating income and
non-GAAP
operating margin as used by management (in millions):
| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||||||||||
| Operating income | $ | 413.3 | 17.1 | % | $ | 248.3 | 12.5 | % | ||||||||
| Non-GAAP adjustments: | ||||||||||||||||
| Restructuring costs | 8.2 | 0.3 | % | 15.8 | 0.8 | % | ||||||||||
| Acquisition-related costs | 6.9 | 0.3 | % | 3.2 | 0.2 | % | ||||||||||
| Purchased intangible amortization | 37.4 | 1.5 | % | 35.7 | 1.8 | % | ||||||||||
| Other costs | 4.4 | 0.2 | % | 14.2 | 0.7 | % | ||||||||||
| Non-GAAP operating income | $ | 470.2 | 19.4 | % | $ | 317.2 | 16.0 | % |
Our
non-GAAP
operating margin was 19.4% and 16.0% for the years ended December 31, 2021 and 2020, respectively. The increase in our
non-GAAP
operating margins was driven by higher revenue and volume and operating leverage, compared to 2020 which was negatively impacted by the
COVID-19
pandemic. Contributions from higher margin products also favorably impacted our operating margin in the year ended December 31, 2021.
We can experience
quarter-to-quarter
fluctuations in our operating results as a result of various factors, some of which are outside our control, such as:
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | the impact of the COVID-19 global pandemic on our customers, supply chain or manufacturing capabilities; |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | the impact of certain weather-related disruptions, such as the recent flooding in Germany and other parts of Europe; |
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| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | the timing of governmental stimulus programs and academic research budgets; |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | the time it takes between the date customer orders and deposits are received, systems are shipped and accepted by our customers and full payment is received; |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | foreign currency exchange rates; |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | the time it takes for us to receive critical materials to manufacture our products; |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | general economic conditions, including the impact of COVID-19 or other factors on the global economy; |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | the time it takes to satisfy local customs requirements and other export/import requirements; |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | the time it takes for customers to construct or prepare their facilities for our products; and |
| Column 1 | Column 2 | Column 3 | Column 4 |
|---|---|---|---|
| • | the time required to obtain governmental licenses. |
Several of these factors have in the past affected the amount and timing of revenue recognized on sales of our products and receipt of related payments and will likely continue to do so in the future. Accordingly, our operating results in any particular quarter may not necessarily be an indication of any future quarter’s operating performance. The
COVID-19
pandemic continues to present a challenging operating environment. During the
COVID-19
pandemic, we have been focused on and continue to focus on four key priorities: the health and safety of our employees, customers and partners; maintaining business continuity and service levels for our customers; executing prudent temporary cost reductions based on demand; and delivering enabling research and diagnostic products to help fight the pandemic, and to support other essential priorities of our society.
Health and safety of our valued employees, customers and partners
We have implemented strict social distancing, enhanced cleaning protocols and other preventative measures, such as company-issued face coverings and mandatory mask protocols for unvaccinated employees, in our major facilities. While many of our office colleagues are working remotely, we are placing enhanced focus on our service organization and factory employees for whom work from home is not feasible. Where customer sites are accessible and open, our field service organizations operate under social distancing protocols with proper face coverings to ensure the safety of customer sites, when our employees need to be on site. Many of our facilities have begun to plan for employees who have been working remotely during the pandemic to gradually return to the office. Employee and visitor health and safety will remain our paramount concern.
Maintaining business continuity and service levels for our customers
Ensuring our ability to supply our enabling technologies and solutions and maintaining high service levels for our customers is another top priority for Bruker. In late March and during parts of April 2020, several of our manufacturing sites underwent temporary controlled shutdowns or were operating at reduced capacity to implement new safety protocols, comply with local rules, and manage cost and inventory levels. These sites thereafter ramped back up with expanding capacity and productivity levels. However, with any resurgence of the virus or the emergence of additional strains of the virus, particularly any new strains of the virus that are more resistant to existing vaccines, we may again need to consider temporary controlled shutdowns or reduced capacity measures. In addition, we are continuing capital investments in production facilities for efficiencies and expansion. We continue to manage supply chain risks, more recently associated with the economic recovery from the pandemic, like the worldwide shortage of semiconductor chips, components and raw materials, such as copper.
Executing prudent temporary cost reductions
During a period of reduced demand due
to COVID-19 in
2020, we implemented temporary cost reduction measures in an effort to mitigate the negative impacts on our business
of COVID-19 and
the related slowdown in
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the global economy. These temporary measures included short-time work for many of our European operations, temporary tiered salary reductions for our Board of Directors, global leadership team and
workforce, one-to
two-week closures
of select manufacturing locations, selective product manufacturing reductions, a hiring freeze, and curtailment
of non-strategic discretionary
spending. At the same time, we looked to minimize the disruption for our employees and preserve our ability to ramp up again with our highly trained and loyal work force. While pursuing cost savings throughout the business, we have maintained our important investments in key strategic initiatives. These cost reduction measures have since been relaxed, as our revenue has recovered. We could in fact experience increased compensation expenses associated with employee recruiting and employee retention to the extent employment opportunities continue multiplying post-pandemic, causing the search for and retention of talent to remain and become more competitive.
Delivering enabling research and diagnostic products to help fight the pandemic and to support other essential priorities of our society
Bruker is providing critical technologies and solutions to help combat the
COVID-19
crisis, most notably our Microbiology and infectious disease diagnostics portfolio and our nuclear magnetic resonance and mass spectrometry systems which are used in critical disease, therapeutic and vaccine research.
The COVID-19 global
pandemic has driven volatility and uncertainty in global markets and has in the past affected our operations significantly. We continue to work to manage the impact
of COVID-19 on
our operations; however, the full extent to which any resurgence of the virus, the emergence of any new strains of the virus, or the availability and effectiveness
of COVID-19 vaccines
will impact our business, directly or indirectly, cannot accurately be predicted at this time. We continue to monitor the impact
of COVID-19 on
our business and our supply chain and respond accordingly. For additional information on the various risks posed by
the COVID-19
pandemic, refer to Item 1A. Risk Factors included in this report.
RESULTS OF OPERATIONS
A discussion regarding our results of operations for the fiscal year ended December 31, 2020 compared to 2019 can be found under Item 7 of our Annual Report on Form
10-K
for the fiscal year ended December 31, 2020, filed with the SEC on March 1, 2021, which is available on the SEC’s website at www.sec.gov and our Investor Relations website at https://.ir.bruker.com under the “Financial Info” section.
Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
Consolidated Results
The following table presents our results for the years ended December 31, 2021 and 2020 (dollars in millions):
| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Dollar Change | Percentage Change | |||||||||||||
| Product revenue | $ | 2,017.3 | $ | 1,638.1 | $ | 379.2 | 23.1 | % | ||||||||
| Service revenue | 393.2 | 343.4 | 49.8 | 14.5 | % | |||||||||||
| Other revenue | 7.4 | 6.0 | 1.4 | 23.3 | % | |||||||||||
| Total revenue | 2,417.9 | 1,987.5 | 430.4 | 21.7 | % | |||||||||||
| Cost of product revenue | 979.3 | 840.2 | 139.1 | 16.6 | % | |||||||||||
| Cost of service revenue | 228.2 | 206.5 | 21.7 | 10.5 | % | |||||||||||
| Cost of other revenue | 0.8 | 1.0 | (0.2 | ) | (20.0 | )% | ||||||||||
| Total cost of revenue | 1,208.3 | 1,047.7 | 160.6 | 15.3 | % | |||||||||||
| Gross profit | 1,209.6 | 939.8 | 269.8 | 28.7 | % |
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| Year Ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Dollar Change | Percentage Change | |||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | 561.2 | 468.6 | 92.6 | 19.8 | % | |||||||||||
| Research and development | 220.8 | 198.0 | 22.8 | 11.5 | % | |||||||||||
| Other charges, net | 14.3 | 24.9 | (10.6 | ) | (42.6 | )% | ||||||||||
| Total operating expenses | 796.3 | 691.5 | 104.8 | 15.2 | % | |||||||||||
| Operating income | 413.3 | 248.3 | 165.0 | 66.5 | % | |||||||||||
| Interest and other income (expense), net | (19.7 | ) | (22.5 | ) | 2.8 | (12.4 | )% | |||||||||
| Income before income taxes and noncontrolling interest in consolidated subsidiaries | 393.6 | 225.8 | 167.8 | 74.3 | % | |||||||||||
| Income tax provision | 113.0 | 64.4 | 48.6 | 75.5 | % | |||||||||||
| Consolidated net income | 280.6 | 161.4 | 119.2 | 73.9 | % | |||||||||||
| Net income attributable to noncontrolling interests in consolidated subsidiaries | 3.5 | 3.6 | (0.1 | ) | (2.8 | )% | ||||||||||
| Net income attributable to Bruker Corporation | $ | 277.1 | $ | 157.8 | $ | 119.3 | 75.6 | % |
Revenue
Revenue increases were driven by strong broad demand for our products and solutions, and the business and end market recovery as compared to the same period in 2020.
Gross Profit
The increase in gross profit was a result of higher revenue, volume leverage and favorable product mix.
Selling, General and Administrative
Our selling, general and administrative expenses for the year ended December 31, 2021 decreased to 23.2% of total revenue from 23.6% of total revenue for the comparable period in 2020. The increase in dollars was a result of the cost control and cost reduction measures implemented during the
COVID-19
pandemic in 2020 that did not occur in 2021. The decrease as a percentage of revenue was a result of the increase in revenue period over period and the delayed timing of certain investments.
Research and Development
Our research and development expenses for the year ended December 31, 2021 decreased to 9.1% of total revenue from 10.0% of total revenue for the comparable period in 2020. The increase in dollars was a result of the cost control and cost reduction measures implemented during the
COVID-19
pandemic in 2020 that did not occur in 2021.The decrease as a percentage of revenue was a result of the increase in revenue period over period and the delayed timing of certain investments.
Other Charges, Net
Other charges, net for the year ended December 31, 2021 consisted primarily of $6.1 million of acquisition-related charges related to acquisitions completed in 2021 and 2020, $4.8 million of restructuring costs related to closing facilities and implementing outsourcing and other restructuring initiatives, $2.8 million of costs associated with our global IT transformation activities, $1.1 million related to professional fees and ($0.5) million related to long-lived asset impairments.
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Other charges, net for the year ended December 31, 2020 consisted primarily of $12.0 million of restructuring costs related to closing facilities and implementing outsourcing and other restructuring initiatives, $5.9 million related to professional fees, $2.5 million of costs associated with our global IT transformation activities, $2.4 million of acquisition-related charges related to acquisitions completed in 2020 and 2019 and $2.1 million related to long-lived asset impairments.
Operating Income
The increase in operating income was due to higher revenue, gross profit and favorable operating leverage in the year ended December 31, 2021 as our business and end markets rebounded, as compared to the same period in 2020 which was negatively impacted by
the COVID-19 pandemic
and related economic slowdown.
Interest and Other Income (Expense), Net
The decline in net interest and other expense in the year ended December 31, 2021, as compared to the same period in 2020 was primarily due to the impact of foreign currency exchange rates.
Income Tax Provision
The effective tax rates for years ended 2021 and 2020 were 28.7% and 28.5%, respectively. The increase in our effective tax rate for the year ended December 31, 2021, compared to 2020, was primarily due to additional tax reserves for uncertain tax positions in 2021 and the impact of U.S. tax on foreign earnings, partially offset by the impact of discrete items in the period.
Net Income Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interest
The net income attributable to noncontrolling interests represented the minority shareholders’ proportionate share of the net income recorded by our majority-owned subsidiaries. In January 2020, we acquired the remaining 20%
non-controlling
interests from Hain LifeScience GmbH shareholders.
Net Income Attributable to Bruker Corporation
The increase in net income and earnings per diluted share was primarily driven by the increase in revenue, gross profit and operating profit as a result of strengthened demand and recovery in our business and end markets.
Segment Results
Revenue
The following table presents revenue, change in revenue, and revenue growth by reportable segment for the years ended December 31, 2021 and 2020 (dollars in millions):
| 2021 | 2020 | Dollar Change | Percentage Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| BSI Life Science | $ | 1,510.6 | $ | 1,253.9 | $ | 256.7 | 20.5 | % | ||||||||
| BSI Nano | 697.5 | 556.1 | 141.4 | 25.4 | % | |||||||||||
| BEST | 223.8 | 189.5 | 34.3 | 18.1 | % | |||||||||||
| Eliminations (a) | (14.0 | ) | (12.0 | ) | (2.0 | ) | ||||||||||
| $ | 2,417.9 | $ | 1,987.5 | $ | 430.4 | 21.7 | % |
| Column 1 | Column 2 |
|---|---|
| (a) | Represents product and service revenue between reportable segments. |
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The increase in revenue for the BSI Life Science segment for the year ended December 31, 2021 was due to strong demand and end market recovery across the segment’s major product lines, including mass spectrometry, infrared, Raman, microbiology, Nuclear Magnetic Resonance (NMR) and Preclinical Imaging (PCI) solutions. In addition, system installation activities recovered compared to the same period in 2020. The increase in revenue for the BSI Nano Segment was driven by a rebound in industrial research and academic market demand and continued strong demand from semiconductor and microelectronics customers and our
X-ray
products. The increase in revenue for the BEST Segment resulted from higher “big science” project revenue and a recovery in superconductors for healthcare MRI for the year ended December 31, 2021.
Operating Income
The following table presents operating income and operating margins on revenue by reportable segment for the years ended December 31, 2021 and 2020 (dollars in millions):
| 2021 | 2020 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Operating Income (Loss) | Percentage of Segment Revenue | Operating Income (Loss) | Percentage of Segment Revenue | |||||||||||||
| BSI Life Science | $ | 385.4 | 25.5 | % | $ | 273.8 | 21.8 | % | ||||||||
| BSI Nano | 73.4 | 10.5 | % | 23.6 | 4.2 | % | ||||||||||
| BEST | 22.2 | 9.9 | % | 6.2 | 3.3 | % | ||||||||||
| Corporate, eliminations and other (a) | (67.7 | ) | (55.3 | ) | ||||||||||||
| Total operating income | $ | 413.3 | 17.1 | % | $ | 248.3 | 12.5 | % |
| Column 1 | Column 2 |
|---|---|
| (a) | Represents corporate costs and eliminations not allocated to the reportable segments. |
The operating margin increases in the BSI Life Science and BSI Nano Segments resulted from higher revenue, volume and operating leverage. The operating margin increase in the BEST Segment resulted from higher revenue and favorable mix.
LIQUIDITY AND CAPITAL RESOURCES
We anticipate that our existing cash, cash equivalents, short-term investments and credit facilities will be sufficient to support our operating and investing needs for at least the next twelve months. Our future cash requirements could be affected by acquisitions that we may complete, purchases of our common stock or the payment of dividends in the future. Historically, we have financed our growth and liquidity needs through cash flow from operations and a combination of debt financings and issuances of common stock. In the future, there are no assurances that we will continue to generate cash flow from operations or that additional financing alternatives will be available to us, if required, or if available, will be obtained on terms favorable to us.
Cash, cash equivalents and short-term investments at December 31, 2021 and 2020 totaled $1,168.2 million and $731.8 million, respectively, of which $646.9 million and $514.9 million, respectively, related to cash, cash equivalents and short-term investments is held outside of the U.S. in our foreign subsidiaries, most significantly in the Netherlands, Switzerland and Hong Kong.
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The following table presents our cash flows from operating activities, investing activities and financing activities for the periods presented (in millions):
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| Net cash provided by operating activities | $ | 282.4 | $ | 332.2 | ||||
| Net cash used in investing activities | (192.4 | ) | (192.7 | ) | ||||
| Net cash provided by (used in) financing activities | 318.7 | (161.6 | ) | |||||
| Effect of exchange rates on cash and cash equivalents and restricted cash | (22.5 | ) | 25.7 | |||||
| Total increase in cash and cash equivalents and restricted cash | $ | 386.2 | $ | 3.6 |
Cash provided by operating activities during the year ended December 31, 2021 resulted from consolidated net income adjusted
for non-cash
items of $408.0 million, partially offset by a change in operating assets and liabilities, net of acquisitions and divestitures of $125.6 million. The primary increase is a result of increased net income driven by the increase in revenue, gross profit and operating profit as a result of the rebounding in our business and end markets. The decrease in cash flows due to change in operating assets and liabilities, net of acquisitions for the year ended December 31, 2021 was primarily due to increases in inventory in response to supply chain challenges, timing of tax payments and increased accounts receivable at the end of 2021 due to higher revenues. These decreases were partially offset by a decrease in timing of payments as compared to the same period in the prior year. During the year ended December 31, 2020, net cash provided by operating activities resulted from consolidated net income adjusted
for non-cash items
of $262.6 million, offset by a change in operating assets and liabilities, net of acquisitions and divestitures of $69.6 million. The increase in cash flows due to changes in operating assets and liabilities, net of acquisitions for the year ended December 31, 2020 was primarily caused by a decrease in accounts receivable due to increased cash collections, increased customer advances related to
COVID-19
order increases late in 2020 offset by a strategic inventory build for 2021 orders and supply chain management.
Cash used in investing activities during the year ended December 31, 2021 resulted primarily from purchases of property, plant and equipment of $92.0 million, acquisitions of $65.0 million and purchases of short-term investments, net of maturities of $49.8 million, offset by $10.0 million of net proceeds from our cross-currency swap agreements and proceeds from sales of property, plant and equipment of $4.9 million. Cash used in investing activities during the year ended December 31, 2020 was primarily attributed to net capital expenditures of $97.2 million, net cash paid for acquisitions of $59.2 million and purchases of short-term investments, net of maturities of $43.9 million.
We currently expect capital expenditures in 2022 to be approximately $115.0 million.
Net cash provided by financing activities during the year ended December 31, 2021 was primarily from proceeds from the 2021 Note Purchase Agreement of $492.8 million, offset by cash paid for purchases of common stock under our repurchase program of $153.3 million and $24.2 million for the payment of dividends. Net cash used in financing activities during the year ended December 31, 2020 was primarily attributable to $123.2 million used for the purchase of common stock under our repurchase program, $24.6 million used for the payment of dividends, $7.6 million in net payments of borrowings under the 2019 Revolving Credit Agreement and a $7.5 million payment of contingent consideration.
Share Repurchase Program
In May 2019, our Board of Directors approved a share repurchase program (the “2019 Repurchase Program”) authorizing the purchase of our common stock of up to $300.0 million from time to time, in amounts,
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at prices, and at such times as management deems appropriate, subject to market conditions, legal requirements and other considerations. We purchased a total of 555,602 shares at an aggregate cost of $34.5 million under the 2019 Repurchase Program during the year ended December 31, 2021. We completed the 2019 Repurchase Program in April 2021, after reaching the maximum cumulative spend.
In May 2021, our Board of Directors approved a share repurchase program (the “2021 Repurchase Program”) authorizing the purchase of our common stock up to $500.0 million from time to time over a
two-year
period, in amounts, at prices, and at such times we deem appropriate, subject to market conditions, legal requirements and other conditions. We purchased a total of 1,537,217 shares at an aggregate cost of $118.9 million under the 2021 Repurchase Program during the year ended December 31, 2021. As of February 23, 2022, $374.9 million remains for future purchases under the 2021 Repurchase Program. We intend to fund any additional purchases from cash on hand, future cash flows from operations and available borrowings under the revolving credit facility.
Income Taxes
At December 31, 2021 and in accordance with the tax reform legislation signed by the president of the United States on December 22, 2017, or the 2017 Tax Act, we recorded state and foreign withholding taxes, as well as subsequent foreign currency translations on these withholding taxes as they are an obligation of the parent company, on the cash and liquid assets portion of the unremitted earnings and profits (E&P) of foreign subsidiaries expected to be repatriated from our foreign subsidiaries to the United States. We continue to be indefinitely reinvested in the amount of $546 million of
non-cash
E&P that is subject to the 2017 Tax Act deemed repatriation. If this E&P is ultimately distributed to the United States in the form of dividends or otherwise we would likely be subject to additional withholding tax. We will continue to evaluate our assertions on the cumulative historical outside basis differences in our foreign subsidiaries as of December 31, 2021. The amount of unrecognized deferred withholding taxes on the undistributed E&P was $69 million at December 31, 2021.
As of December 31, 2021, we had approximately $89.4 million of net operating loss carryforwards available to reduce state taxable income that are expected to expire at various times beginning in 2022; approximately $86.1 million of net operating losses available to reduce German federal income and trade taxes that are carried forward indefinitely and $6.4 million of other foreign net operating losses that are expected to expire at various times in the future. We had U.S. federal foreign tax credit carried forwards in the amount of $6.3 million. We also had U.S. federal and state research and development tax credits of $4.6 million and $7.8 million, respectively. Utilization of these credits and state net operating losses may be subject to annual limitations due to the ownership percentage change limitations provided by Internal Revenue Code Section 382 and similar state provisions. In the event of a deemed change in control under Internal Revenue Code Section 382, an annual limitation on the utilization of net operating losses and credits may result in the expiration of all or a portion of the net operating loss and credit carryforwards. Additionally, the Company has $40.2 million of gross interest expense carryforward as provided by Code Section 163(j) that can be carried forward indefinitely.
Uncertain tax contingencies are positions taken or expected to be taken on an income tax return that may result in additional payments to tax authorities. If a tax authority agrees with the tax position taken or expected to be taken or the applicable statute of limitations expires, then additional payments will not be necessary.
Credit Facilities
On December 7, 2021, the Company entered into a note purchase agreement to issue and sell CHF 300 million aggregate principal amount of 0.88% series A senior notes and EUR 150 million aggregate principal amount of 1.03% series B senior notes due December 8, 2031. We designated our CHF 300 million series A senior notes as a hedge in our net investment in our Swiss Franc denominated net assets. We designated our EUR 150 million series B senior notes as a hedge in our net investment in our Euro denominated net assets. Proceeds of the notes will be used for general corporate purposes.
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On December 11, 2019, we entered into (1) a new revolving credit agreement to establish a new revolving credit facility in the aggregate principal amount of $600 million; (2) a term loan agreement to establish a new term loan facility in the aggregate principal amount of $300 million; and (3) a note purchase agreement to issue and sell CHF 297 million aggregate principal amount of 1.01% senior notes due December 11, 2029. Floating interest rates under the term loan were simultaneously fixed through cross-currency and interest rate swap agreements into Euro ($150 million) and Swiss Franc ($150 million) rates carrying average effective interest rates of 0.94% and hedge our net investment in our Euro and Swiss Franc denominated net assets. The new revolving credit agreement replaced our $500 million five-year revolving credit agreement established on October 27, 2015, that was terminated on December 11, 2019.
In addition, we designated our CHF 297 million senior notes as a hedge in our net investment in our Swiss Franc denominated net assets. Proceeds from this financing were used to repay the outstanding borrowings under our prior 2015 revolving credit facility and we intend to use the remaining proceeds for general corporate purposes and to support corporate strategic objectives. During December 2019, we entered into U.S. Dollar to Euro cross-currency swaps on our existing 2012 private placement notes of $105 million 4.31% Series 2012A Senior Notes, Tranche C, due January 18, 2022 and subsequently paid in January 2022, and the existing $100 million 4.46% Series 2012A Senior Notes, Tranche D, due January 18, 2024, resulting in an average effective interest rate of 2.25% on these instruments. The cross-currency swaps hedge our net investment in our Euro denominated net assets.
As of December 31, 2021, we have several cross-currency and interest rate swap agreements with a notional value of $149.6 million of U.S. Dollar to Swiss Franc and a notional value of $354.7 million of U.S. Dollar to Euro to hedge the variability in the movement of foreign currency exchange rates on portions of our Euro and Swiss Franc denominated net asset investments. As a result of these agreements, we lowered our net interest expense by $5.5 million and $7.2 million during the year ended December 31, 2021 and 2020, respectively. We anticipate these swap agreements will lower net interest expense by approximately $4.6 million in 2022 and $7.4 million in 2023.
We had the following debt outstanding (in millions):
| 2021 | 2020 | |||||||
|---|---|---|---|---|---|---|---|---|
| EUR notes (in dollars) under the 2021 Note Purchase Agreement | $ | 170.7 | $ | — | ||||
| CHF notes (in dollars) under the 2021 Note Purchase Agreement | 329.2 | — | ||||||
| CHF notes (in dollars) under the 2019 Note Purchase Agreement | 325.9 | 335.5 | ||||||
| U.S. Dollar notes under the 2019 Term Loan | 299.2 | 300.0 | ||||||
| U.S. Dollar notes under the 2012 Note Purchase Agreement | 205.0 | 205.0 | ||||||
| Unamortized debt issuance costs | (2.0 | ) | (2.4 | ) | ||||
| Other loans | 1.9 | 3.0 | ||||||
| Total notes and loans outstanding | 1,329.9 | 841.1 | ||||||
| Finance lease obligations | 4.3 | 3.4 | ||||||
| Total debt | 1,334.2 | 844.5 | ||||||
| Current portion of long-term debt | (112.4 | ) | (2.2 | ) | ||||
| Total long-term debt, less current portion | $ | 1,221.8 | $ | 842.3 |
There was no amount outstanding under the 2019 Credit Agreement as of December 31, 2021 or 2020.
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Annual maturities of notes and loans outstanding are as follows (in millions):
| 2022 | $ | 111.1 | |
|---|---|---|---|
| 2023 | 15.8 | ||
| 2024 | 115.2 | ||
| 2025 | 15.5 | ||
| 2026 | 15.2 | ||
| Thereafter | 1,059.1 | ||
| Total | $ | 1,331.9 |
As of December 31, 2021, we had no
off-balance
sheet arrangements and we were in compliance with the financial covenants of these debt arrangements.
The following is a summary of the maximum commitments and the net amounts available to us under the 2019 Credit Agreement and other banking working capital lines and guarantees of credit with various financial institutions located primarily in Germany and Switzerland that are unsecured and typically due upon demand at December 31, 2021 (dollars in millions):
| Weighted Average Interest Rate | Total Amount Committed by Lenders | Outstanding Borrowings | Outstanding Letters of Credit | Total Committed Amounts Available | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 Credit Agreement | 1.3 | % | $ | 600.0 | $ | — | $ | 0.2 | $ | 599.8 | |||||||||
| Bank guarantees and working capital line | varies | 116.2 | — | 116.2 | — | ||||||||||||||
| Total revolving lines of credit | $ | 716.2 | $ | — | $ | 116.4 | $ | 599.8 |
As of December 31, 2021, we were in compliance with the covenants of all debt agreements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period.
We consider our accounting estimates to be critical to the consolidated financial statements if (i) the estimate requires significant judgment or is complex in nature and (ii) if different estimates and assumptions were used, the results could have a material impact on our consolidated financial statements. We evaluate our estimates and the application of our policies on an ongoing basis.
We base our estimates and judgments on our historical experience, current market and economic conditions, industry trends, and other assumptions that we believe are reasonable. Actual results could differ from these estimates. Changes in estimates are recorded in the period in which they become known.
We believe the following critical accounting policies and estimates to be both those most important to the portrayal of our financial position and results of operations and those that require the most estimation and subjective judgment.
Revenue recognition
We recognize revenue in accordance with Accounting Standards Codification (“ASC”) 606,
Revenue from Contracts with Customers
(ASC 606)
.
The key elements of ASC 606 are: 1) identifying a contract with the
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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 our 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, we allocate 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. Our best evidence of standalone selling price is our normal selling pricing and discounting practices for the specific product or service when sold on a standalone basis. Alternatively, when not sold separately, we may determine standalone selling price using an expected cost plus a margin approach.
Our 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. For performance obligations recognized over time, revenue is measured by progress toward completion of the performance obligation that reflects the transfer of control. 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 us to make reasonable estimates of the extent of progress toward completion and the total costs we expect to incur. Losses are recorded immediately when we estimate that contracts will ultimately result in a loss. Changes in the estimates could affect the timing of revenue recognition.
We include 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 our obligation to ship the products to our customers, we have elected the practical expedient to account for the shipping services as a fulfillment cost. We expense 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. We exclude from the transaction price all taxes assessed by a governmental authority on revenue-producing transactions that are collected by us from a customer.
We recognize revenue from systems sales upon transfer of control in an amount that reflects the consideration we expect to receive. Transfer of control generally occurs upon shipment, or for certain systems, based upon customer acceptance for a system once delivered and installed at a customer facility. For systems that include customer-specific acceptance criteria, we are required to assess when we can demonstrate the acceptance criteria has been met, which generally is upon successful factory acceptance testing or customer acceptance and evidence of installation. For systems that require installation and where system revenue is recognized upon shipment, the standalone selling price of installation is deferred until customer acceptance. Revenue from accessories and parts is generally recognized based on shipment. Service revenue is recognized as the services are performed or ratably over the contractual obligation and includes maintenance contracts, extended warranties, training, application support and
on-demand
services.
When products are sold through an independent distributor or a strategic distribution partner, we recognize the system sale upon transfer of control which is typically on shipment. When we are responsible for installation, the standalone selling price of installation is deferred until customer acceptance. Our distributors do not have price protection rights or rights of return; however, our products are typically warranted to be free from defect for a period of one year.
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We require an advance deposit based on the terms and conditions of contracts with customers for many of our contracts. Typically, revenue is recognized within one year of receiving an advance deposit. We do not have any material payment terms that extend beyond one year. There is minimal variable consideration included in the transaction price of our contracts.
Other revenues are primarily comprised of development arrangements recognized on a
cost-plus-fixed-fee
basis and licensing arrangements recognized either when the licenses are provided or ratably over the contract term depending on the nature of the arrangement.
Income taxes
Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the income tax basis of assets and liabilities. A valuation allowance is applied against any net deferred tax asset if, based on the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
We record liabilities related to uncertain tax positions in accordance with the guidance that clarifies the accounting for uncertainty in income taxes recognized in our financial statements. This guidance prescribes a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We include accrued interest and penalties related to unrecognized tax benefits and income tax liabilities, when applicable, in income tax expense.
Inventories
All inventories are stated at the lower of cost and net realizable value. Cost is determined principally by the
first-in,
first-out
method for a majority of subsidiaries and by average-cost for certain other subsidiaries. We reduce the carrying value of our inventories for differences between cost and estimated net realizable value, taking into consideration usage in the preceding twelve months, expected demand, technological obsolescence and other information including the physical condition of demonstration inventories. We record a charge to cost of product revenue for the amount required to reduce the carrying value of inventory to net realizable value. Costs associated with the procurement of inventories, such as inbound freight charges and purchasing and receiving costs, are capitalized as part of inventory and are also included in the cost of product revenue line item within the consolidated statements of income and comprehensive income.
Goodwill, other intangible assets and other
long-lived
assets
Goodwill and indefinite-lived intangible assets are not amortized, but are evaluated for impairment on an annual basis, or on an interim basis when events or changes in circumstances indicate that the carrying value may not be recoverable. In assessing the recoverability of goodwill and indefinite-lived intangible assets, we must make assumptions regarding the estimated future cash flows, including forecasted revenue growth and the discount rate to determine the fair value of these assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges against these assets in the reporting period in which the impairment is determined.
We test goodwill for impairment at the reporting unit level, which is the operating segment or one level below an operating segment. We have the option of performing a qualitative assessment to determine whether further impairment testing is necessary before performing the quantitative assessment. If as a result of the qualitative assessment, it is
more-likely-than-not
that the fair value of a reporting unit is less than its carrying amount, a quantitative impairment test will be required. Otherwise, no further testing will be required. If a quantitative impairment test is performed, we compare the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. We determine the fair value of reporting units using a weighting of both the market and the income methodologies. Estimating the fair value of the reporting units requires
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significant judgment by management. If the carrying amount of a reporting unit exceeds the fair value of the reporting unit, an impairment charge is recognized for the amount by which the carrying value amount exceeds the reporting unit’s fair value up to the total amount of goodwill allocated to the reporting unit.
In process research and development, or IPR&D, acquired as part of business combinations under the acquisition method represents ongoing development work associated with enhancements to existing products, as well as the development of next generation products. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment on an annual basis, or when indicators of impairment are identified. When the IPR&D project is complete, it is reclassified as a finite-lived intangible asset and is amortized over its estimated useful life. If an IPR&D project is abandoned before completion or is otherwise determined to be impaired, the value of the asset or the amount of the impairment is charged to the consolidated statements of income and comprehensive income in the period the project is abandoned or impaired.
Business Combinations
We account for business combinations under the acquisition method of accounting. Accordingly, at the date of each acquisition, we measure the fair value of all identifiable assets acquired (including intangible assets), liabilities assumed and any remaining noncontrolling interests and allocate the amounts paid to all items measured. The fair value of identifiable intangible assets acquired is based on valuations that use information and assumptions determined by management and which consider management’s best estimates of inputs and assumptions that a market participant would use.
RECENT ACCOUNTING PRONOUNCEMENTS
Information regarding recently issued accounting pronouncements may be found in Note 3 to our consolidated financial statements included in this Annual Report on Form
10-K.