Business context and reporting period
This filing is a Form 10-Q for Brooks Automation, Inc. (the company now known as Azenta, Inc.), covering the second quarter and first six months of fiscal 2019 ended March 31, 2019. Continuing operations comprised the Brooks Semiconductor Solutions Group and Brooks Life Sciences segments. The semiconductor cryogenics business was classified as held for sale and discontinued operations.
Key financial metrics
| Metric | Three months ended March 31, 2019 | Six months ended March 31, 2019 |
|---|---|---|
| Revenue | $198.4 million | $377.8 million |
| Gross profit | $80.5 million | $152.6 million |
| Gross margin | 40.6% | 40.4% |
| Operating income | $13.7 million | $19.0 million |
| Income from continuing operations | $(2.8) million | $3.4 million |
| Net income | $3.4 million | $17.8 million |
| Diluted EPS | $0.05 | $0.25 |
| Cash flow from operations | Not separately provided | $22.2 million |
Revenue increased 26% in both the quarter and first six months versus the prior-year comparable periods. Semiconductor Solutions revenue rose 4% in the quarter and 11% year to date, while Life Sciences revenue increased 76% and 59%, respectively. Life Sciences growth primarily reflected acquisitions, including GENEWIZ.
At March 31, 2019, cash and cash equivalents were $137.2 million and total marketable securities were $2.8 million, compared with combined cash and securities of $251.2 million at September 30, 2018. The company had $543.5 million of term-loan principal outstanding, net of $6.1 million of deferred financing costs, and no borrowings under its $75.0 million revolving credit facility. Approximately $51.3 million was available under the revolver.
Total assets were $1.49 billion and stockholders’ equity was $729.9 million at March 31, 2019. Goodwill was $492.5 million and intangible assets were $270.8 million, substantially higher following the GENEWIZ acquisition.
Material changes versus the prior comparable period
- GENEWIZ was acquired on November 15, 2018 for $442.7 million, net of cash acquired. It contributed $32.8 million of quarterly revenue and $49.3 million since acquisition.
- The acquisition was financed partly with a $350.0 million incremental term loan. Debt-related interest expense increased to $8.0 million in the quarter and $13.3 million year to date, versus $2.2 million and $4.4 million, respectively.
- The company recorded a $9.1 million loss on extinguishment of debt following the February 2019 syndication of the incremental term loan.
- Gross margin expanded from 39.7% to 40.6% for the quarter and from 38.9% to 40.4% year to date. Management attributed the improvement to product mix, production efficiencies, higher-margin GENEWIZ revenue, volume leverage, and stronger consumables and instruments margins.
- Operating expenses increased to $66.8 million for the quarter and $133.6 million year to date, driven by acquired operations, amortization and merger-related costs.
- Prior-year continuing-operations earnings benefited from a $58.0 million release of a U.S. deferred-tax valuation allowance. The 2019 period did not include a comparable benefit, making year-over-year net income comparisons less meaningful.
- The company adopted ASC 606 using the modified retrospective method. Adoption reduced reported revenue by $1.2 million for the quarter and $1.6 million year to date, and reduced operating income by $0.9 million and $1.0 million, respectively, versus results without adoption.
Cash flow, outlook, risks and unusual items
Operating cash flow was $22.2 million for the first six months. Investing cash outflow was $402.2 million, primarily due to the GENEWIZ acquisition, while financing cash inflow was $320.0 million, primarily from term-loan proceeds. The company paid $14.4 million of dividends and spent $9.7 million on capital expenditures.
Management stated that existing resources should be adequate for working capital, debt service and capital expenditures for the next twelve months, but noted that semiconductor demand is cyclical and longer-term liquidity needs are difficult to predict. The company has variable-rate debt and estimated that a 100-basis-point rate change would have affected six-month interest expense by approximately $2.5 million.
The company agreed to sell the cryogenics business to Edwards Vacuum for approximately $675.0 million in cash, subject to working-capital adjustments, regulatory approvals and other closing conditions. Management anticipated closing in the third fiscal quarter of 2019. The discontinued operation generated $35.7 million of revenue and $6.3 million of net income in the quarter.
Additional commitments included $88.3 million of non-cancellable inventory purchase commitments and approximately $1.3 million of letters of credit. Legal proceedings were described as ordinary-course matters that management did not believe would have a material adverse effect, although outcomes remain uncertain. No material changes to previously disclosed risk factors were reported.
In April 2019, the company committed to construct a GENEWIZ facility in Suzhou, China, with expected capital expenditures of $50 million to $55 million over five years, including up to $10 million in 2019. The company declared a subsequent quarterly dividend of $0.10 per share.
Important facts for investors to verify
- Confirm the current corporate name and ticker, because the filing is issued under Brooks Automation, Inc., while the request identifies Azenta, Inc.
- Verify completion, final proceeds and any working-capital or regulatory adjustments related to the planned cryogenics divestiture.
- Assess post-acquisition GENEWIZ revenue growth, profitability, integration costs and the sustainability of the reported Life Sciences margin improvement.
- Review leverage, variable-rate exposure, required amortization and the October 2024 maturity of the senior secured term loans.
- Separate recurring operating performance from the $9.1 million debt-extinguishment loss, acquisition costs, purchase-accounting amortization and prior-year $58.0 million tax valuation-allowance release.
- Evaluate liquidity after the decline in cash and securities, the China facility commitment, dividends, inventory commitments and the cyclical semiconductor market exposure.