Azenta, Inc. annual report, FY2018

Azenta, Inc. (formerly Brooks Automation, Inc.) — Fiscal 2018 Form 10-K

Reporting period: Fiscal year ended September 30, 2018, with fourth-quarter information included. The filing was dated November 29, 2018 and was filed under the company’s then-current name, Brooks Automation, Inc. The company operated in semiconductor automation and life sciences sample management, with approximately 1,548 full-time employees and sales in more than 50 countries.

Business Context and Reporting Period

The company reported two continuing operating segments: Brooks Semiconductor Solutions Group and Brooks Life Sciences. Semiconductor solutions represented approximately 69% of continuing revenue, while Life Sciences represented approximately 31%. The semiconductor cryogenics business was classified as discontinued operations following an agreement to sell it to Edwards Vacuum LLC, a member of the Atlas Copco Group.

Semiconductor Solutions revenue: $435.0 million, up 15% from $378.8 million.
Life Sciences revenue: $196.5 million, up 32% from $148.7 million, including 14% organic growth.
Fourth-quarter revenue was $159.6 million, compared with $134.6 million in the fourth quarter of fiscal 2017.

Financial Performance and Liquidity

Metric	FY 2018	FY 2017	Change
Revenue	$631.6 million	$527.5 million	Up 20%
Gross profit	$246.1 million	$198.9 million	Up $47.2 million
Gross margin	39.0%	37.7%	Up 130 basis points
Operating income	$31.4 million	$14.3 million	Up $17.1 million
Income from continuing operations	$67.7 million	$10.7 million	Up $57.0 million
Net income attributable to Brooks Automation	$116.6 million	$62.6 million	Up $54.0 million
Diluted EPS	$1.64	$0.89	Up $0.75
Cash flow from operations	$74.0 million	$96.2 million	Down $22.3 million
Cash, cash equivalents and marketable securities	$251.2 million	$104.3 million	Up $146.9 million

Operating income benefited from revenue growth, improved product mix and operating leverage. The reported continuing-operations tax benefit of $47.3 million was substantially driven by a $77.2 million partial reversal of the U.S. deferred-tax-asset valuation allowance, making the increase in net income materially tax-driven.

Research and development expense increased to $46.9 million from $39.9 million.
Selling, general and administrative expense increased to $167.0 million from $141.5 million.
Restructuring charges declined to $0.7 million from $3.1 million.
Capital expenditures were $12.8 million, compared with $12.7 million.
Acquisition spending was $85.8 million, compared with $44.8 million.
Dividends paid were $28.3 million, or $0.40 per share for the year.

Debt and Liquidity

The company had $198.5 million of principal outstanding under a senior secured term loan at September 30, 2018, with a carrying value of $196.1 million after financing costs.
The term loan matured in October 2024, carried a variable interest rate, and had a fiscal 2018 weighted-average stated rate of 4.4%.
Interest expense increased to $9.5 million from $0.4 million, primarily because of the term loan.
A revolving credit facility provided up to $75.0 million, subject to borrowing-base availability; approximately $47.5 million was available and no amount was drawn at year-end.
Working capital, excluding cash and marketable securities, was $98.7 million, compared with $50.7 million.

Material Changes Versus the Prior Comparable Period

Continuing revenue increased 20%, with growth in both segments and particularly strong Life Sciences performance.
Gross margin improved to 39.0% from 37.7%; Semiconductor Solutions margin increased to 40.0%, while Life Sciences margin was essentially flat at 36.7%.
Operating income more than doubled, although higher operating expenses and acquisition-related amortization limited conversion of revenue growth into operating profit.
Operating cash flow declined despite higher earnings, primarily because accounts receivable and inventory increased to support growth.
Cash and investments increased primarily from $197.6 million of term-loan proceeds, partly offset by acquisitions, dividends and capital expenditures.
Goodwill increased to $255.9 million from $207.2 million and net intangible assets increased to $100.0 million from $83.5 million, reflecting acquisitions.
Backlog increased to approximately $124 million from $86 million in Semiconductor Solutions and to $273 million from $250 million in Life Sciences.

Discontinued Operations, Acquisitions and Outlook

The company agreed to sell its semiconductor cryogenics business for approximately $675.0 million in cash, subject to customary adjustments, regulatory approvals and other closing conditions. The business generated $196.1 million of revenue and $48.7 million of net income in fiscal 2018. Its results were reclassified as discontinued operations for all periods presented.

Fiscal 2018 acquisitions included Tec-Sem Group AG, 4titude Limited and BioSpeciMan Corporation. The company also entered into an agreement to acquire GENEWIZ for $450.0 million; the acquisition closed on November 15, 2018, after year-end. The transaction was partly financed with an incremental term loan that increased outstanding principal to $546.0 million.

Management expected continued growth in Life Sciences through organic investment and acquisitions, while acknowledging that Semiconductor Solutions remained exposed to cyclical semiconductor capital-equipment demand. The company stated that it had adequate resources for working capital, debt service and capital expenditures for the next twelve months, but noted that longer-term liquidity needs were difficult to predict.

The company adopted the new revenue-recognition standard, ASC 606, on October 1, 2018 using the modified retrospective method. It expected a cumulative retained-earnings adjustment not exceeding $3 million, reflecting acceleration of certain semiconductor revenue and deferral of certain Life Sciences revenue and commissions.

Key Risks, Contingencies and Unusual Items

Semiconductor demand is cyclical, creating potential volatility in revenue, margins, inventory and operating income.
The pending cryogenics divestiture was subject to regulatory approvals, including CFIUS approval, and could be delayed or fail to close.
The company faced integration, execution and goodwill or intangible-asset impairment risks from its acquisition strategy.
Variable-rate debt exposed the company to higher interest expense; a hypothetical 100-basis-point rate increase would have increased fiscal 2018 interest expense by approximately $2.0 million.
Foreign-exchange exposure was material: approximately 63% of revenue was generated outside North America, and a hypothetical 10% currency movement could have changed fiscal 2018 net income by approximately $4.9 million.
Top-ten customers represented approximately 34% of consolidated revenue, although no individual customer exceeded 10%.
Customer sample-storage operations were exposed to facility failures, severe weather, power outages, equipment failures, supply disruptions and data-security incidents.
The company had $85.4 million of non-cancelable inventory purchase commitments, $2.2 million of letters of credit and $3.2 million of net unrecognized tax benefits and related interest.
The company reported no material unresolved legal proceedings, no off-balance-sheet arrangements and effective disclosure and internal controls. The auditor also reported an unqualified opinion.

Facts Investors Should Verify

Completion and final cash proceeds of the approximately $675.0 million cryogenics divestiture, including working-capital and other purchase-price adjustments.
Post-closing financial contribution, integration progress and leverage impact from the GENEWIZ acquisition.
Actual debt balance, interest rate and covenant compliance after the GENEWIZ-related incremental borrowing.
Whether Life Sciences growth and Semiconductor Solutions backlog convert into sustainable revenue and margin improvement.
The actual ASC 606 adoption adjustment and its effect on revenue, deferred revenue, contract assets and retained earnings.
The sustainability of fiscal 2018 earnings excluding the $77.2 million deferred-tax valuation-allowance benefit and other acquisition-related or unusual items.
Exposure to semiconductor-cycle weakness, customer concentration, foreign exchange, tariffs, supply constraints and potential goodwill impairment.