Business Context and Reporting Period
Azenta, Inc. was operating as Brooks Automation, Inc. during this filing. This Form 10-K covers the fiscal year ended September 30, 2019, including fourth-quarter results, and compares primarily with fiscal 2018. The company operated two reportable segments: Brooks Semiconductor Solutions Group and Brooks Life Sciences. It provided semiconductor manufacturing automation, sample management, cold-chain services, and genomic sequencing and synthesis services.
On November 15, 2018, the company acquired GENEWIZ, a global genomics services provider. On July 1, 2019, it completed the sale of its semiconductor cryogenics business to Edwards Vacuum LLC.
Financial Performance and Key Metrics
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $780.8 million | $631.6 million | Up 24% |
| Gross profit | $316.3 million | $246.1 million | Up $70.2 million |
| Gross margin | 40.5% | 39.0% | Up 1.5 percentage points |
| Operating income | $46.0 million | $31.4 million | Up 47% |
| Income from continuing operations | $9.6 million | $67.7 million | Down materially |
| Net income attributable to the company | $437.4 million | $116.6 million | Includes divestiture gain |
| Diluted EPS | $6.04 | $1.64 | Includes discontinued operations |
| Operating cash flow | $90.9 million | $74.0 million | Up $16.9 million |
| Cash, restricted cash and marketable securities | $342.1 million | $251.2 million | Up $90.9 million |
Semiconductor Solutions revenue was $446.7 million, up 3% from $435.0 million. Life Sciences revenue was $334.2 million, up 70% from $196.5 million; $126.3 million of the increase came from GENEWIZ and $16.0 million from organic growth. Adjusted operating income was $70.0 million for Semiconductor Solutions and $20.6 million for Life Sciences.
Research and development expense increased to $56.4 million from $46.9 million. Selling, general and administrative expense increased to $212.0 million from $167.0 million, primarily because of GENEWIZ. Restructuring charges were $1.9 million versus $0.7 million.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $301.6 million; marketable securities totaled $37.0 million and restricted cash was $3.5 million.
- Operating cash flow was $90.9 million; capital expenditures were $23.9 million, compared with $12.8 million in fiscal 2018.
- The company received approximately $661.6 million from the cryogenics divestiture and used $495.3 million to repay debt. Net proceeds from the sale were approximately $553.1 million after estimated taxes and closing costs.
- Outstanding term-loan principal was $51.1 million at September 30, 2019, excluding deferred financing costs. The weighted-average stated interest rate was 5.3%.
- No amounts were outstanding under the $75.0 million revolving credit facility; approximately $40.4 million was available for borrowing.
- Total contractual cash obligations were $214.9 million, plus $1.3 million of letters of credit. The company reported no off-balance-sheet arrangements.
- Quarterly dividends remained $0.10 per share, or $0.40 per share for fiscal 2019. A further $0.10 per share dividend was declared for payment in December 2019.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by the Life Sciences segment and the GENEWIZ acquisition, while Semiconductor Solutions grew modestly.
- Gross margin improved primarily from product mix, GENEWIZ’s higher-margin services, and improved Sample Management performance, partly offset by cost overruns in automated storage systems.
- Continuing-operations earnings declined despite higher operating income because fiscal 2018 included a $77.2 million tax valuation allowance release. Fiscal 2019 also included $22.3 million of interest expense and a $14.3 million loss on debt extinguishment.
- Reported net income rose sharply because fiscal 2019 included $427.9 million of income from discontinued operations, including a $408.6 million after-tax gain on the cryogenics sale.
- GENEWIZ contributed $126.3 million of revenue and $3.2 million of net income during the period. The acquisition added $235.2 million of goodwill and $189.1 million of intangible assets.
- The company adopted ASC 606 using the modified retrospective method. The adoption reduced fiscal 2019 revenue by approximately $0.9 million relative to the prior guidance and produced an opening accumulated-deficit adjustment of $0.9 million, net of tax.
- Backlog increased to approximately $127 million in Semiconductor Solutions from $124 million and to $303 million in Life Sciences from $273 million.
Guidance, Outlook, Risks and Unusual Items
Management stated that it expected continued long-term growth in Life Sciences through internally developed products, services, and acquisitions, while continuing to pursue opportunities in semiconductor automation. No specific quantitative fiscal 2020 revenue or earnings guidance was provided in the filing.
- Semiconductor demand and capital equipment spending are cyclical, with quarterly product sales potentially varying 10% to 20% sequentially.
- International sales represented 58% of fiscal 2019 revenue, creating exposure to currency movements, tariffs, trade restrictions, geopolitical conditions, and Brexit-related uncertainty.
- The company identified two material weaknesses in internal control over financial reporting: billing accuracy at a Life Sciences business unit and revenue occurrence and cutoff for products shipped from contract manufacturers in a Semiconductor Solutions business unit. Disclosure controls were also ineffective, and the auditors issued an adverse opinion on internal control effectiveness.
- The revenue-cutoff weakness resulted in approximately $1.0 million of revenue and related profit being moved from the fourth quarter of fiscal 2019 to the quarter ended December 31, 2019. Management stated that identified adjustments were not material to the consolidated financial statements.
- GENEWIZ was excluded from the internal-control assessment because it was acquired during the year; its assets and revenue represented approximately 9% and 16%, respectively, of the related consolidated amounts.
- Goodwill and net intangible assets totaled $488.6 million and $251.2 million, respectively. The GENEWIZ reporting unit had fair value only slightly above book value in the April 2019 impairment test.
- The company committed to a Suzhou, China facility and expected to incur $50 million to $55 million of capital expenditures over five years; $0.7 million had been incurred by September 30, 2019.
- Legal proceedings were described as ordinary-course matters that management did not expect to have a material adverse effect, although outcomes remain uncertain.
Most Important Facts an Investor Should Verify
- Separate sustainable continuing-operations performance from the $408.6 million after-tax divestiture gain and other discontinued-operation results.
- Assess whether GENEWIZ revenue growth and margins offset its acquisition-related amortization, integration costs, and significant goodwill and intangible-asset balances.
- Review remediation of the two material weaknesses and confirm whether subsequent filings report effective internal controls and any additional revenue corrections.
- Evaluate semiconductor-cycle exposure, customer concentration, international revenue, tariffs, foreign exchange, and supply-chain risks.
- Verify post-divestiture debt balances, variable-rate exposure, liquidity availability, and the company’s ability to fund the China facility and ongoing dividends.
- Review the final working-capital adjustment and tax liabilities associated with the cryogenics sale, including approximately $95 million of accrued taxes payable at year-end.