Item 7. Management’s Discussion and Analysis
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:
● Non-GAAP Measures. This section provides appropriate disclosures regarding forward looking statements and our use of Non-GAAP financial measures.
● 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.
● Results of Operations. This section provides our analysis of the significant line items on our consolidated statements of income and comprehensive income (loss) for the year ended December 31, 2020 compared to the year ended December 31, 2019 and for the year ended December 31, 2019 compared to the year ended December 31, 2018.
● Liquidity and Capital Resources. This section provides an analysis of our liquidity and cash flow and a discussion of our outstanding debt and commitments.
● 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.
● 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
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acquired intangible assets, costs associated with our global information technology transition initiative, and other non-operational costs and we believe these are useful measures to evaluate our continuing business.
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, 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, 2020 decreased by $85.1 million, or 4.1%, to $1,987.5 million, compared to $2,072.6 million for the comparable period in 2019. The decline in revenue was primarily related to the impact of the COVID-19 pandemic and the related economic slowdown. Included in revenue were increases of approximately $29.4 million in favorable impact of foreign currency translation and $10.5 million attributable to our recent acquisitions in the year ended December 31, 2020 compared to the year ended December 31, 2019. Excluding the effects of foreign currency translation and recent acquisitions, our organic revenue, a non-GAAP measure, decreased by $125.0 million, or 6.0%.
Our gross profit margin decreased to 47.3% for the year ended December 31, 2020 as compared to 48.0% during the year ended December 31, 2019. The decrease in gross margin was a result of lower volume and reduced productivity due to disruptions from the COVID-19 pandemic and the related economic slowdown, partially offset by certain cost reduction measures.
Our operating margin decreased to 12.5% for the year ended December 31, 2020 from 14.5% during the year ended December 31, 2019. The decrease in operating margin was due to lower revenue and gross profit during the COVID-19 pandemic and related economic slowdown, partially offset by cost control and cost reduction measures.
The income tax provision in the years ended December 31, 2020 and December 31, 2019 was $64.4 million and $82.4 million, respectively, representing effective tax rates of 28.5% and 29.4%, respectively. The decrease in our effective tax rate for the year ended December 31, 2020, compared to 2019, was primarily attributable to the change in jurisdictional income mix and decrease in foreign income inclusions due to electing the high tax exemption relating to Global Intangible Low-Taxed Income (“GILTI”), partially offset by an increase in the effective tax rate due to change in valuation allowance. Our tax rate may change over time as the amount and mix of jurisdictional income mix changes.
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Earnings per share decreased to $1.02 per diluted share for the year ended December 31, 2020 from $1.26 per diluted share for the year ended December 31, 2019. The decrease compared to the prior year was driven primarily by lower revenues during the COVID-19 pandemic and related economic slowdown, partially offset by our cost control and cost reduction measures.
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,
2020
2019
2018
Net cash provided by operating activities
$
332.2
$
213.4
$
239.7
Less: purchases of property, plant and equipment
97.2
73.0
49.2
Free Cash Flow
$
235.0
$
140.4
$
190.5
For the year ended December 31, 2020, our free cash flow was 67% higher than the same period in 2019, primarily from an increase in customer advances and cash from receivables despite a decline in net income.
The following table presents a reconciliation from gross profit, which is the most directly comparable GAAP operating performance measure, to non-GAAP gross profit margin as used by management (in millions):
Year Ended December 31,
2020
2019
2018
Gross profit
$
939.8
$
995.3
$
900.0
Restructuring costs
3.8
5.2
2.6
Acquisition-related costs
0.8
12.2
3.9
Purchased intangible amortization
19.9
23.5
21.6
Other costs
3.7
0.8
0.6
Non-GAAP gross profit margin
$
968.0
$
1,037.0
$
928.7
Our non-GAAP gross profit margin was 48.7%, 50.0% and 49.0% in the years ended December 31, 2020, 2019 and 2018, respectively. Our non-GAAP gross profit margin decreased in 2020, as compared to 2019 due to lower volume and reduced productivity, due to COVID-19 and the economic slowdown. Our non-GAAP gross profit margin increased in the year ended December 31, 2019, as compared to the same period in 2018, primarily due to operational improvements within our BSI Life Science Segment, accretive acquisitions and favorable foreign currency translation effects.
The following table presents a reconciliation from operating income, which is the most directly comparable GAAP operating performance measure, to non-GAAP operating income as used by management (in millions):
Year Ended December 31,
2020
2019
2018
Operating income
$
248.3
$
300.9
$
262.4
Restructuring costs
15.8
1.4
9.4
Acquisition-related costs
3.2
16.8
7.3
Purchased intangible amortization
35.7
38.3
28.9
Other costs
14.2
6.6
9.9
Non-GAAP operating margin
$
317.2
$
364.0
$
317.9
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Our non-GAAP operating margin was 16.0%, 17.6% and 16.8% in the years ended December 31, 2020, 2019 and 2018, respectively. Our non-GAAP operating margin decreased in 2020, as compared to 2019 on lower revenues, partially offset by cost control and cost reduction measures.
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:
● the impact of the COVID-19 global pandemic on our customers, supply chain or manufacturing capabilities;
● the timing of governmental stimulus programs and academic research budgets;
● 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;
● foreign currency exchange rates;
● the time it takes for us to receive critical materials to manufacture our products;
● general economic conditions, including the impact of COVID-19 on the global economy;
● the time it takes to satisfy local customs requirements and other export/import requirements;
● the time it takes for customers to construct or prepare their facilities for our products; and
● 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 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 and we remain focused 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; 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
While Bruker's businesses are essential, we have implemented strict social distancing, enhanced cleaning protocols and other preventative measures, such as temperature scanners and company-issued face coverings, 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 to ensure the safety of customer sites, when our employees need to be on site.
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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 emergency of additional strains of the virus, we may need to consider further temporary controlled shutdowns or reduced capacity measures. In addition, we are continuing capital investments in production facilities for efficiencies and expansion and our supply chain remains resilient. We carry higher inventory levels to address supply chain risks related to the pandemic and do not currently anticipate being supply or capacity limited in the first quarter of 2021.
Executing prudent temporary cost reductions
In an effort to mitigate the negative impacts on our business of COVID-19, and the slowdown in the global economy, we implemented temporary cost control and cost reduction measures. 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. Many of the cost reduction measures have now been relaxed and our revenue is experiencing a recovery.
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, to which we have added SARS-COV-2 PCR tests, 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 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 or the emergence of any new strains of the virus will impact our business, directly or indirectly, cannot accurately be predicted at this time. In 2020, the COVID-19 pandemic affected productivity at our manufacturing facilities and caused disruptions and delays in certain of our shipments to customers who closed facilities during the pandemic. We continue to monitor the impact of COVID-19 on our business 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.
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RESULTS OF OPERATIONS
Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
Consolidated Results
The following table presents our results for the years ended December 31, 2020 and 2019 (in millions, except per share data):
Year Ended
December 31,
Percentage
2020
2019
Dollar Change
Change
Product revenue
$
1,638.1
$
1,744.7
$
(106.6)
(6.1)
%
Service revenue
343.4
322.4
21.0
6.5
Other revenue
6.0
5.5
0.5
9.1
Total revenue
1,987.5
2,072.6
(85.1)
(4.1)
Cost of product revenue
840.2
878.5
(38.3)
(4.4)
Cost of service revenue
206.5
198.3
8.2
4.1
Cost of other revenue
1.0
0.5
0.5
100.0
Total cost of revenue
1,047.7
1,077.3
(29.6)
(2.7)
Gross profit
939.8
995.3
(55.5)
(5.6)
Operating expenses:
Selling, general and administrative
468.6
500.2
(31.6)
(6.3)
Research and development
198.0
187.7
10.3
5.5
Other charges, net
24.9
6.5
18.4
283.1
Total operating expenses
691.5
694.4
(2.9)
(0.4)
Operating income
248.3
300.9
(52.6)
(17.5)
Interest and other income (expense), net
(22.5)
(20.5)
(2.0)
9.8
Income before income taxes and noncontrolling interest in consolidated subsidiaries
225.8
280.4
(54.6)
(19.5)
Income tax provision
64.4
82.4
(18.0)
(21.8)
Consolidated net income
161.4
198.0
(36.6)
(18.5)
Net income attributable to noncontrolling interest in consolidated subsidiaries
3.6
0.8
2.8
350.0
Net income attributable to Bruker Corporation
$
157.8
$
197.2
$
(39.4)
(20.0)
%
Net income per common share attributable to
Bruker Corporation shareholders:
Basic
$
1.03
$
1.27
$
(0.24)
(18.9)
%
Diluted
$
1.02
$
1.26
$
(0.24)
(19.0)
%
Weighted average common shares outstanding:
Basic
153.4
155.2
Diluted
154.6
156.6
Revenue
The decline in revenue was primarily related to the impact of the COVID-19 pandemic on our customers as well as certain of our operations and lower global instrumentation and superconductor demand due to the pandemic and related economic slowdown.
Gross Profit
The decline in gross profit was a result of lower revenue volume and reduced productivity, given the impact of the pandemic and economic slowdown, partially offset by cost control and cost reduction measures.
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Selling, General and Administrative
Our selling, general and administrative expenses in year ended December 31, 2020 decreased to 23.6% of total revenue from 24.1% of total revenue for the comparable period in 2019. The decrease as a percentage of total revenue, and in dollars, was a result of the cost control and cost reduction measures implemented during the COVID-19 pandemic in 2020.
Research and Development
Our research and development expenses for the year ended December 31, 2020 increased to 10.0% of total revenue from 9.1% of total revenue for the comparable period in 2019. The increase as a percentage of revenue, and in dollars, was a result of higher research and development spending, as we continued to fund certain growth investments, in comparison to lower revenue in 2020.
Other Charges, Net
Other charges, net was $24.9 million for the year ended December 31, 2020. The charges 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 initiative, $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.
Other charges, net was $6.5 million for the year ended December 31, 2019. The charges consisted primarily of $(3.9) million of restructuring costs related to closing facilities and implementing outsourcing and other restructuring initiatives, $4.6 million of acquisition-related charges related to acquisitions completed in 2019 and 2018, $3.7 million of costs associated with our global IT transformation initiative, and $2.1 million related to professional fees. The restructuring charges included a gain on the sale of a building of $7.7 million.
Operating Income
The decrease in operating income was due to lower revenue and gross profit during the COVID-19 pandemic and related economic slowdown, partially offset by cost control and cost reduction measures.
Interest and Other Income (Expense), Net
The primary components within interest and other income (expense), net for the year ended December 31, 2020 were net interest expense of $11.2 million, realized and unrealized losses on foreign currency denominated transactions of $8.0 million and $3.3 million related to pension plan. During the year ended December 31, 2019, the primary components were net interest expense of $14.7 million, realized and unrealized losses on foreign currency denominated transactions of $3.4 million, $2.5 million related to pension plan expenses and $0.1 million related to other income.
Income Tax Provision
The effective tax rates for years ended 2020 and 2019 were 28.5% and 29.4%, respectively. The decrease in our effective tax rate for the year ended December 31, 2020, compared to 2019, was primarily attributable to the change in jurisdictional income mix and decrease in foreign income inclusions due to electing the high tax exemption relating to GILTI, partially offset by an increase in the effective tax rate due to change in valuation allowance. Our tax rate may change over time as the amount and mix of jurisdictional income changes.
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 interest in our redeemable noncontrolling interest.
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Net Income Attributable to Bruker Corporation
The decrease in net income and earnings per diluted share was primarily driven by the decline in revenue, gross profit and operating profit as a result of reduced demand during the COVID-19 pandemic and the related economic slowdown.
Segment Results
Revenue
The following table presents revenue, change in revenue, and revenue growth by reportable segment for the years ended December 31, 2020 and 2019 (dollars in millions):
Percentage
2020
2019
Dollar Change
Change
BSI Life Science
$
1,253.9
$
1,244.9
$
9.0
0.7
%
BSI Nano
556.1
632.7
(76.6)
(12.1)
BEST
189.5
209.9
(20.4)
(9.7)
Eliminations (a)
(12.0)
(14.9)
2.9
$
1,987.5
$
2,072.6
$
(85.1)
(4.1)
%
(a) Represents product and service revenue between reportable segments.
For financial reporting purposes, we aggregate Bruker BioSpin Group and Bruker CALID Group as the BSI Life Science Segment. This aggregation reflects the similar economic characteristics, production processes, customer services provided, types and classes of customers, methods of distribution and regulatory environments.
BSI Life Science Segment revenue was approximately flat year over year from a decline in BioSpin systems and FTIR/NIR molecular spectroscopy revenues, due to the COVID-19 pandemic, which was offset by strong demand for our CALID microbiology and infectious disease diagnostics offering and for certain of CALID’s mass spectrometry systems. The decline in revenues for the BSI NANO Segment was due primarily to the impact of the COVID-19 pandemic and the related economic slowdown with reduced academic, industrial and industrial research demand. The decline in revenue for the BEST Segment was due to lower superconductor demand during 2020.
Operating Income
The following table presents operating income and operating margins on revenue by reportable segment for the years ended December 31, 2020 and 2019 (dollars in millions):
2020
2019
Percentage of
Percentage of
Operating
Segment
Operating
Segment
Income
Revenue
Income
Revenue
BSI Life Science
$
273.8
21.8
%
$
290.3
23.3
%
BSI NANO
23.6
4.2
40.4
6.4
BEST
6.2
3.3
16.4
7.8
Corporate, eliminations and other (a)
(55.3)
(46.2)
Total operating income
$
248.3
12.5
%
$
300.9
14.5
%
(a) Represents corporate costs and eliminations not allocated to the reportable segments.
The operating margin decline in the BSI Life Science segment was due to higher operating expenses in 2020 as compared to 2019. The decline in operating margin for the BSI NANO segment was due to lower revenue and gross profit, partially offset by cost reduction measures. The decline in the operating margin for the BEST
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segment was due to lower revenue, unfavorable mix and charges related to planned restructuring actions, partially offset by reduced operating expenses.
Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018
Consolidated Results
The following table presents our results for the years ended December 31, 2019 and 2018 (in millions, except per share data):
Year Ended
December 31,
Percentage
2019
2018
Dollar Change
Change
Product revenue
$
1,744.7
$
1,576.6
$
168.1
10.7
%
Service revenue
322.4
311.7
10.7
3.4
Other revenue
5.5
7.3
(1.8)
(24.7)
Total revenue
2,072.6
1,895.6
177.0
9.3
Cost of product revenue
878.5
801.1
77.4
9.7
Cost of service revenue
198.3
193.4
4.9
2.5
Cost of other revenue
0.5
1.1
(0.6)
(54.5)
Total cost of revenue
1,077.3
995.6
81.7
8.2
Gross profit
995.3
900.0
95.3
10.6
Operating expenses:
Selling, general and administrative
500.2
444.7
55.5
12.5
Research and development
187.7
173.4
14.3
8.2
Other charges, net
6.5
19.5
(13.0)
(66.7)
Total operating expenses
694.4
637.6
56.8
8.9
Operating income
300.9
262.4
38.5
14.7
Interest and other income (expense), net
(20.5)
(17.7)
(2.8)
(15.8)
Income before income taxes and noncontrolling interest in consolidated subsidiaries
280.4
244.7
35.7
14.6
Income tax provision
82.4
63.7
18.7
29.4
Consolidated net income
198.0
181.0
17.0
9.4
Net income attributable to noncontrolling interest in consolidated subsidiaries
0.8
1.3
(0.5)
(38.5)
Net income attributable to Bruker Corporation
$
197.2
$
179.7
$
17.5
9.7
%
Net income per common share attributable to
Bruker Corporation shareholders:
Basic
$
1.27
$
1.15
$
0.12
10.4
%
Diluted
$
1.26
$
1.14
$
0.12
10.5
%
Weighted average common shares outstanding:
Basic
155.2
156.2
Diluted
156.6
157.2
Revenue
The increase in revenue in the year ended December 31, 2019 compared to the year ended December 31, 2018 included $118.4 million attributable to our recent acquisitions and a decrease of approximately $50.3 million from the impact of foreign currency translation. Excluding the effects of foreign currency translation and our recent acquisitions, our organic revenue, a non-GAAP measure, increased by $108.9 million, or 5.7%.
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Gross Profit
Our gross profit margin was 48.0% for the year ended December 31, 2019, compared to 47.5% for the year ended December 31, 2018. Included in gross profit were various charges for amortization of acquisition-related intangible assets and other acquisition-related costs and restructuring costs totaling $41.7 million and $28.7 million for the years ended December 31, 2019 and 2018, respectively. Our gross profit margin increased in the year ended December 31, 2019 primarily due to operational improvements within our BSI Life Science Segment, accretive acquisitions and favorable foreign currency translation effects.
Selling, General and Administrative
Our selling, general and administrative expense was 24.1% and 23.5% of revenue in 2019 and 2018, respectively. The increase was primarily caused by the addition of recent acquisitions and select investments in strategic growth areas, partially offset by favorable foreign currency translation effects.
Research and Development
Our research and development expense was 9.1% of revenue in 2019 and 2018. The dollar increase in research and development was driven primarily by the addition of recent acquisitions, partially offset by favorable foreign currency translation effects.
Other Charges, Net
Other charges, net for 2019 consisted primarily of a net gain of $3.9 million of restructuring costs related to closing facilities and implementing outsourcing and other restructuring initiatives, $4.6 million of acquisition-related charges related to acquisitions completed in 2019 and 2018, $3.7 million of costs associated with our global IT transformation initiative, and $2.1 million related to professional fees. The restructuring charges included a gain on the sale of a building of $7.7 million.
Other charges, net in 2018 consisted primarily of $6.8 million of restructuring costs related to closing facilities and implementing outsourcing and other restructuring initiatives, $3.4 million of acquisition-related charges related to acquisitions completed in 2018 and 2017, $4.8 million of costs associated with our global information technology (IT) transformation initiative and $4.5 million related to professional fees.
At December 31, 2019 and 2018, we performed our annual goodwill and indefinite-lived intangible impairment evaluation and concluded the fair values of each of our reporting units were significantly greater than their carrying amounts, and therefore, no additional impairment is required.
Operating Income
Operating margin increased to 14.5% in 2019, as compared to 13.8% for the year ended December 31, 2018. Included in operating income were various charges for amortization of acquisition-related intangible assets and other acquisition-related costs and restructuring costs totaling $63.1 million and $55.5 million for the years ended December 31, 2019 and 2018, respectively. The increase in GAAP operating margin was due primarily to volume and operational improvements within our BSI Life Science Segment, accretive acquisitions and the positive impact of foreign currency translation.
Interest and Other Income (Expense), Net
The increase in net interest expense in 2019, as compared to 2018, was primarily attributable to higher outstanding debt balances in 2019 compared to 2018 being marginally offset by interest income from the new 2019 U.S. Dollar-to-Euro and U.S. Dollar to Swiss Franc interest rate cross-currency swap agreements.
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During the year ended December 31, 2019, the major components within interest and other income (expense), net were net interest expense of $14.7 million, realized and unrealized losses on foreign currency denominated transactions of $3.3 million, and $2.5 million related to pension plan expenses.
During the year ended December 31, 2018, the major components within interest and other income (expense), net were net interest expense of $11.4 million, realized and unrealized losses on foreign currency denominated transactions of $3.0 million, and $3.9 million related to pension plan expenses.
Income Tax Provision
The effective tax rate was 29.4% and 26.0% for the years ended December 31, 2019 and 2018, respectively. The increase in our effective tax rate for the year ended December 31, 2019, compared to 2018, was primarily attributable to a benefit recorded in 2018 associated with the reversal of state and foreign withholding taxes on unremitted earnings that did not recur in 2019 and additional tax reserves for uncertain tax positions in Europe in 2019.
Net Income Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interest
Net income attributable to noncontrolling interests and redeemable noncontrolling interest decreased in 2019 as a result of the minority shareholders’ proportionate share of the net income recorded by our majority-owned indirect subsidiaries, as compared to 2018.
Net Income Attributable to Bruker Corporation
For the year ended December 31, 2019 our diluted earnings per share was $1.26, compared to $1.14 per diluted share for 2018. The increase in net income attributable to Bruker Corporation in 2019, as compared to the prior year, was driven primarily by revenue growth, higher gross and operating profit offset by an increase in the effective tax rate for the year ended December 31, 2019.
Segment Results
Revenue
The following table presents revenue, change in revenue, and revenue growth by reportable segment for the years ended December 31, 2019 and 2018 (dollars in millions):
Percentage
2019
2018
Dollar Change
Change
BSI Life Science
$
1,244.9
$
1,138.9
$
106.0
9.3
%
BSI Nano
632.7
568.1
64.6
11.4
%
BEST
209.9
194.8
15.1
7.8
%
Eliminations (a)
(14.9)
(6.2)
(8.7)
$
2,072.6
$
1,895.6
$
177.0
9.3
%
(a) Represents product and service revenue between reportable segments.
BSI Life Science Segment revenue increased by $106.0 million to $1,244.9 million for the year ended December 31, 2019, compared to $1,138.9 million for the year ended December 31, 2018. The Bruker BioSpin Group revenue increase was primarily due to growth in the system revenue, which included the revenue recognition of three GHz class systems, as well as aftermarket revenue and a small contribution from recent software acquisitions. The increase in Bruker CALID Group revenue was a result of continued strong demand for life science mass spectrometry and microbiology products, growth in molecular spectroscopy FT-IR and NIR products and contributions from an acquisition.
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BSI NANO Segment revenue increase was primarily the result of acquisitions as well as continued demand for advanced X-Ray and nano analysis products, partially offset by a sharp decline in demand for semiconductor metrology products and unfavorable foreign currency translation.
BEST Segment revenue increase was primarily from shipments of superconductors for healthcare applications offset in part by the impact of unfavorable foreign currency translation.
Operating Income
The following table presents operating income and operating margins on revenue by reportable segment for the years ended December 31, 2019 and 2018 (dollars in millions):
2019
2018
Percentage of
Percentage of
Operating
Segment
Operating
Segment
Income
Revenue
Income
Revenue
BSI Life Science
$
290.3
23.3
%
$
244.0
21.4
%
BSI NANO
40.4
6.4
%
48.4
8.5
%
BEST
16.4
7.8
%
14.5
7.4
%
Corporate, eliminations and other (a)
(46.2)
(44.5)
Total operating income
$
300.9
14.5
%
$
262.4
13.8
%
(a) Represents corporate costs and eliminations not allocated to the reportable segments.
The operating margin expansion for BSI Life Science and BEST was primarily due to positive operating leverage on higher sales mix and operational improvements as well as favorable foreign currency translation for the BSI Life Science Segment. The decline in operating margin for the BSI NANO Segment was due to a decline in semiconductor metrology demand, softness in industrial research markets in the second half of 2019 and the impact of costs related to a recent acquisition.
LIQUIDITY AND CAPITAL RESOURCES
We anticipate that our existing cash and cash equivalents 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, repurchases of our common stock, or the payment of dividends in the future. In addition, our ability to access capital and maintain liquidity may be impacted by the volatile market conditions caused by the COVID-19 pandemic. Historically, we have financed our growth and liquidity needs through cash flow generation 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, 2020 and 2019 totaled $731.8 million and $684.9 million, respectively, of which $514.9 million and $301.1 million, respectively, related to cash, cash equivalents and short-term investments 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,
2020
2019
2018
Net cash provided by operating activities
$
332.2
$
213.4
$
239.7
Net cash used in investing activities
(192.7)
(158.4)
(123.4)
Net cash (used in) provided by financing activities
(161.6)
300.0
(112.4)
Effect of exchange rates on cash and cash equivalents
25.7
0.6
(6.5)
Total increase (decrease) in cash and cash equivalents
$
3.6
$
355.6
$
(2.6)
Operating Activities
During the year ended December 31, 2020, net cash provided by operating activities resulted primarily from consolidated net income adjusted for non-cash items of $262.6 million, in addition to a net increase in operating assets and liabilities, net of acquisitions and divestitures, of $69.6 million. The increase in operating assets and liabilities, net of acquisitions and divestitures, 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.
During the year ended December 31, 2019, net cash provided by operating activities resulted primarily from consolidated net income adjusted for non-cash items of $287.9 million, offset by a net decrease in operating assets and liabilities, net of acquisitions and divestitures, of $74.5 million. The decrease in operating assets and liabilities, net of acquisitions and divestitures, for the year ended December 31, 2019 was primarily caused by an increase in inventory build for 2020 orders.
During the year ended December 31, 2018, net cash provided by operating activities resulted primarily from consolidated net income adjusted for non-cash items of $281.9 million, offset by a net decrease in operating assets and liabilities, net of acquisitions and divestitures, of $42.2 million. The decrease in operating assets and liabilities, net of acquisitions and divestitures, for the year ended December 31, 2018 was primarily caused by an increase in accounts receivable caused by proportionately higher sales late in the fourth quarter of 2018 and inventory build for 2019 orders, which were offset in part by cash received from customer advances.
Investing Activities
During the year ended December 31, 2020, the increase in net cash used in investing activities during the year ended December 31, 2020 was primarily attributable 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.
During the year ended December 31, 2019, the increase in net cash used in investing activities was primarily attributable to net cash paid for acquisitions of $90.0 million, net capital expenditures of $62.0 million and the purchase of short-term investments of $6.4 million.
During the year ended December 31, 2018, the increase in net cash used in investing activities was primarily attributable to net cash paid for acquisitions of $191.6 million and net capital expenditures of $48.8 million. These activities were offset, in part, by net cash proceeds of short-term investments of $117.0 million.
We expect capital expenditures in 2021 to be approximately $100.0 million.
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Financing Activities
During the year ended December 31, 2020, the net cash used in financing activities was primarily caused by $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 $7.5 million payment of contingent consideration.
During the year ended December 31, 2019, the increase in net cash provided by financing activities was primarily caused by $597.9 million of new debt borrowings, described below, offset in part by $361.9 million of repayments under revolving lines of credit. Other cash uses were $142.3 million used for the repurchase of common shares, $25.0 million for the payment of dividends and $15.0 million repayment on the 2012 Note Purchase Agreement. Other cash sources borrowings of $250.6 million under the revolving lines of credit and $10.9 million of proceeds from the issuance of common stock in connection with stock option exercises.
During the year ended December 31, 2018, the decrease in net cash used in financing activities was primarily caused by $218.1 million of repayments under revolving lines of credit and $25.1 million used for the payment of dividends. These cash uses were partially offset by borrowings of $129.4 million under the revolving lines of credit and $9.4 million of proceeds from the issuance of common stock in connection with stock option exercises.
Share Repurchase Program
In May 2019, our Board of Directors approved a share repurchase program which authorizes the purchase of our common stock in the amount of up to $300.0 million from time to time, in amounts, at prices, and at such times as management deems appropriate, subject to market conditions, legal requirements and other considerations. We repurchased a total of 2,711,952 shares at an aggregate cost of $123.2 million for the year ended December 31, 2020. We repurchased a total of 3,323,104 shares at an aggregate cost of $142.3 million for the year ended December 31, 2019. The remaining authorization as of February 25, 2021 is $5.3 million and this Repurchase Program expires on May 13, 2021. We intend to fund any future purchases from cash on hand, future cash flows from operations and available borrowings under the revolving credit facility.
Income Taxes
At December 31, 2020 and in accordance with the 2017 Tax Cuts and Jobs Act (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 $436 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, 2020. The amount of unrecognized deferred withholding taxes on the undistributed E&P was $63 million at December 31, 2020.
As of December 31, 2020, we had approximately $65.2 million of net operating loss carryforwards available to reduce state taxable income that are expected to expire at various times beginning in 2021; approximately $108.4 million of net operating losses available to reduce German federal income and trade taxes that are carried forward indefinitely and $18.5 million of other foreign net operating losses that are expected to expire at various times beginning in 2021. We also had U.S. state research and development tax credit carryforward of $7.1 million. Utilization of these credits and state net operating losses may be subject to annual limitations due to the ownership percentage change limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended (“Code”) and similar state provisions. In the event of a deemed change in control under 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.
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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 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 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, 2020, we have entered into several cross-currency and interest rate swap agreements with a notional value of $150 million of U.S. Dollar to Swiss Franc and a notional value of $355 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 entering into these agreements, we lowered our net interest expense by $7.2 million and $0.6 million during the year ended December 31, 2020 and 2019, respectively. We anticipate these swap agreements will lower net interest expense by approximately $8.8 million in 2021 and $4.8 million in 2022.
We had the following debt outstanding (in millions):
2020
2019
US Dollar notes under the 2012 Note Purchase Agreement
$
205.0
$
205.0
CHF notes (in dollars) under the 2019 Note Purchase Agreement
335.5
306.8
US Dollar notes under the 2019 Term Loan
300.0
300.0
Unamortized debt issuance costs
(2.4)
(2.6)
Capital lease obligations and other loans
6.4
4.1
Total debt
844.5
813.3
Current portion of long-term debt
(2.2)
(0.5)
Total long-term debt, less current portion
$
842.3
$
812.8
There was no amount outstanding under the 2019 Credit Agreement as of December 31, 2020 or 2019.
As of December 31, 2020, 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
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institutions located primarily in Germany and Switzerland that are unsecured and typically due upon demand at December 31, 2020 (dollars in millions):
Weighted
Total Amount
Total Amount
Outstanding
Total Committed
Average
Committed
Uncommitted
Outstanding
Letters
and Uncommitted
Interest Rate
by Lenders
by Lenders
Borrowings
of Credit
Amounts Available
2019 Credit Agreement
1.3
%
$
600.0
—
$
—
$
0.1
$
599.9
Bank guarantees and working capital line
0.0
%
132.9
103.3
—
132.9
103.3
Total revolving lines of credit
$
732.9
103.3
$
—
$
133.0
$
703.2
As of December 31, 2020, we were in compliance with the covenants of all debt agreements.
Other Liquidity Matters
The following table summarizes maturities for our significant financial obligations as of December 31, 2020 (in millions):
Contractual Obligations
Total
2021
2022-2023
2024-2025
Thereafter
Other long-term debt, including current portion
$
846.9
$
2.6
$
128.6
$
131.0
$
584.7
Interest payable on long-term debt (1)
60.6
11.5
19.3
13.7
16.1
Unconditional purchase commitments (2)
313.9
281.9
31.2
0.8
—
Acquisition-related contingent consideration (3)
4.3
2.7
1.6
—
—
Finance lease obligations
3.5
1.2
1.8
0.5
—
Operating lease liabilities
72.0
22.6
25.6
12.9
10.9
2017 Tax Act impact
26.9
2.8
15.2
8.9
—
Pension liabilities
86.8
8.3
15.8
17.0
45.7
Uncertain tax contingencies
24.5
4.6
6.2
11.0
2.7
$
1,439.4
$
338.2
$
245.3
$
195.8
$
660.1
(1) Interest payable on long-term debt is net of the impact of our cross-currency and interest rate swap agreements.
(2) Unconditional purchase commitments include agreements to purchase goods, services, or fixed assets that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase commitments exclude agreements that are cancellable at any time without penalty.
(3) Acquisition-related 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.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The preparation of these financial statements requires that we 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. On an ongoing basis, management evaluates its estimates and judgments, including those related to: revenue recognition; stock-based compensation expense; restructuring and other related charges; income taxes, including the recoverability of deferred tax assets; allowances for doubtful accounts; inventory reductions for excess and obsolete inventories; estimated fair values of long-lived assets used to measure the recoverability of long-lived assets; intangible assets and goodwill; expected future cash flows used to measure the recoverability of intangible assets and long-lived assets; warranty costs; derivative financial instruments; and contingent liabilities. 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 and form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
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 606, Revenue from Contracts with Customers (ASC 606) . 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.
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 it 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.
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.
For contracts that include multiple performance obligations, the transaction price is allocated to each distinct performance obligation based on the relative standalone selling prices of the goods and services being provided to the customer. Our 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, we may determine standalone selling price using an expected cost plus a margin approach.
We analyze our selling prices used in the allocation of the transaction price, at a minimum, on an annual basis. Selling prices will be analyzed more frequently if a significant change in our business or other factors necessitate more frequent analysis or we experience significant variances in our selling prices.
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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.
For performance obligations recognized over time, revenue is measured by progress toward completion of the performance obligation that reflects the transfer of control. In particular, we have certain contracts recognized over time for which we apply the cost-to-cost method based on costs incurred to date relative to the total estimated costs for the contract upon completion. 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 will 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 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. 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, we determined it does not constitute a significant financing component. 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.
Contract Assets and Liabilities
Contract assets represent unbilled receivables when revenue recognized exceeds the amount billed to the customer, and the right to payment is not just subject to the passage of time. Contract assets typically result from system revenue recorded where a portion of the transaction price is not billable until a future event, such as customer acceptance, or from contracts recognized on a cost-to-cost or cost-plus-fixed-fee basis as revenue exceeds the amount billed to the customer. Amounts may not exceed their net realizable value. Contract assets are generally classified as current.
Contract liabilities consist of customer advances, deferred revenue and billings in excess of revenue from contracts recognized on a cost-to-cost or cost-plus-fixed-fee basis. Contract liabilities are classified as current or long-term based on the timing of when we expect to recognize revenue. Contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period.
Income taxes
The determination of income tax expense requires us to make certain estimates and judgments concerning the annual effective tax rate, the calculation of deferred tax assets and liabilities, the forecasted profitability of our subsidiaries in certain geographic jurisdictions, as well as the deductions, carryforwards and credits that are available to reduce taxable income. Deferred tax assets and liabilities arise from differences in the timing of the recognition of revenue and expenses for financial statement and tax purposes. Deferred tax assets and liabilities are measured using the tax rates in effect for the year in which these temporary differences are expected to be settled. We estimate the degree to which tax assets and loss carryforwards will result in a benefit based on expected profitability by tax jurisdiction, and we provide a valuation allowance for tax assets and loss
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carryforwards that we believe will more likely than not go unused. If it becomes more likely than not that a tax asset or loss carryforward will be used for which a valuation allowance has been provided, we reverse the related valuation allowance. If our actual future taxable income by tax jurisdiction differs from estimates, additional allowances or reversals of a valuation allowance may be necessary. In addition, we only recognize benefits for tax positions that we believe are more likely than not of being sustained upon review by a taxing authority with knowledge of all relevant information. We reevaluate our uncertain tax positions on a quarterly basis and any changes to these positions as a result of tax audits, tax laws or other facts and circumstances could result in additional charges or credits to operations. The expiration of statutes of limitations affecting estimates made for uncertain tax positions can cause higher earnings.
On December 22, 2017 (Enactment Date), former President Trump signed the 2017 Tax Act, which enacted a wide range of changes to the U.S. corporate income tax system, many of which differ significantly from the provisions of the previous U.S. tax law. We have completed the assessment of the tax effects associated with the enactment of the 2017 Tax Act. Changes in the tax rates and laws are accounted for in the period of enactment.
Inventories
Inventories are stated at the lower of cost and net realizable value, with costs determined by the first-in, first-out method for a majority of subsidiaries and by average cost for certain other subsidiaries. We record provisions to account for excess and obsolete inventory to reflect the expected non-saleable or non-refundable inventory based on an evaluation of slow-moving products or products no longer offered for sale. Inventories also include demonstration units located in our demonstration laboratories or installed at the sites of potential customers. We consider our demonstration units to be available for sale and have a history of selling these demonstration units. We reduce the carrying value of demonstration 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 the unit. If ultimate usage or demand varies significantly from expected usage or demand, additional write-downs may be required, resulting in additional charges to operations.
Goodwill, other intangible assets and other long-lived assets
We evaluate goodwill and other indefinite lived intangible assets for impairment annually and when events occur or circumstances change. 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 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 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 January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new standard simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. The adoption of this ASU on January 1, 2020 did not have a material impact on our consolidated financial statements.
We also review definite-lived intangible assets and other long-lived assets when indications of potential impairment exist. Should the fair value of our long-lived assets decline because of reduced operating performance, market declines or other indicators of an impairment, a charge to operations for impairment may be necessary.
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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 allocates 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.