Brooks Automation, Inc. — Form 10-Q Summary
Filing identity: The supplied filing is for Brooks Automation, Inc., not Azenta, Inc. It covers the quarter and nine months ended June 30, 2018, with fiscal year-end September 30. The financial statements are unaudited and prepared under U.S. GAAP.
Business context and reporting period
Brooks operated through two reportable segments: Brooks Semiconductor Solutions Group, serving semiconductor capital equipment and related markets, and Brooks Life Sciences, providing biological sample-management products and services. The semiconductor business is cyclical, while the Life Sciences segment was expanded through acquisitions.
During the period, Brooks acquired 93% of Tec-Sem, BioSpeciMan, and previously 4titude. These transactions expanded semiconductor contamination-control capabilities and Life Sciences consumables and storage services.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Nine months ended June 30, 2018 | Nine months ended June 30, 2017 |
|---|---|---|---|---|
| Revenue | $223.5 million | $181.7 million | $620.1 million | $511.0 million |
| Gross profit | $89.2 million | $71.6 million | $248.7 million | $193.0 million |
| Gross margin | 39.9% | 39.4% | 40.1% | 37.8% |
| Operating income | $26.7 million | $18.8 million | $71.3 million | $46.7 million |
| Operating margin | 11.9% | 10.3% | 11.5% | 9.1% |
| Net income attributable to Brooks | $22.7 million | $17.4 million | $106.2 million | $45.2 million |
| Diluted EPS | $0.32 | $0.25 | $1.50 | $0.64 |
| Operating cash flow | Not separately provided | Not separately provided | $42.8 million | $61.4 million |
Quarterly revenue increased 23%, gross profit increased $17.7 million, and operating income increased $7.9 million. Nine-month revenue increased 21%, gross profit increased $55.6 million, and operating income increased $24.6 million.
Semiconductor Solutions revenue increased 20% in the quarter and 17% year to date. Life Sciences revenue increased 35% in the quarter and 39% year to date, supported by internal growth and acquisitions. One customer represented approximately 11% of quarterly revenue and 12% of nine-month revenue.
Cash flow, liquidity, debt, and balance sheet
- Cash, cash equivalents, and marketable securities totaled $232.0 million at June 30, 2018, compared with $104.3 million at September 30, 2017.
- Cash flow from operations was $42.8 million for the first nine months, down from $61.4 million in the prior-year period. Working-capital uses included increases of $32.9 million in accounts receivable and $21.6 million in inventories.
- Investing cash outflows were $142.0 million, including $83.0 million for acquisitions, $58.3 million for marketable securities, and $9.3 million for capital expenditures.
- Financing cash inflows were $176.4 million, primarily from $197.6 million of term-loan proceeds, partially offset by $21.2 million of dividends and $1.0 million of debt repayment.
- The senior secured term loan had $199.0 million of principal outstanding, or $196.5 million net of deferred financing costs, at June 30, 2018. It matures October 4, 2024, bears variable interest, and had a weighted average stated rate of 4.5% during the quarter.
- Approximately $49.5 million was available under the $75.0 million revolving credit facility; no revolving borrowings were outstanding. The company was in compliance with applicable covenants.
- Total assets were $1.09 billion and total liabilities were $378.3 million at June 30, 2018. Goodwill was $282.2 million and intangible assets were $106.2 million.
Material changes and unusual items
- Nine-month net income benefited from a $45.6 million discrete tax benefit related to reversal of a valuation allowance against U.S. deferred tax assets. The nine-month tax provision was therefore a benefit of $37.7 million, versus a $9.9 million provision in the prior-year period.
- Interest expense increased to $6.8 million for the nine months, primarily because of the new term loan, compared with $0.3 million in the prior-year period.
- Restructuring charges declined to nominal amounts: $0.1 million in both the quarter and nine-month period, versus $0.8 million and $2.7 million, respectively, in the prior-year periods.
- Foreign-currency losses increased to $3.1 million for the nine months from $1.6 million. The company uses short-term forward contracts to mitigate currency exposure.
- Gross margins benefited from volume leverage, favorable product mix, and lower material costs, but included amortization of acquired technology and purchase-accounting inventory step-up charges.
- No goodwill impairment was identified. The company had $148.4 million of non-cancellable inventory purchase commitments and $2.4 million of letters of credit outstanding.
Outlook, risks, and contingencies
- Management stated that existing cash, marketable securities, revolving-credit access, and operating cash flow should fund working capital, capital expenditures, debt service, and planned activities for the next twelve months.
- The company expects continued opportunities in Life Sciences and semiconductor markets but cautioned that semiconductor demand is cyclical and may fluctuate significantly.
- Variable-rate debt creates exposure to higher interest costs. Management estimated that a 100-basis-point rate change would affect nine-month interest expense by approximately $1.5 million.
- Foreign-exchange exposure is material: approximately 30% of nine-month sales were in currencies other than the U.S. dollar, and management estimated that a 10% currency move could change nine-month net income by approximately $5.1 million.
- Legal proceedings arise in the ordinary course of business. Management did not expect them to have a material adverse effect, but acknowledged that outcomes are uncertain.
- The company planned to adopt ASC 606 revenue recognition on October 1, 2018 using the modified retrospective method. Potential effects included changes to performance obligations, revenue timing, contract assets and liabilities, and capitalization of commissions.
- A $0.10-per-share dividend was declared on July 31, 2018, payable September 28, 2018. Future dividends remain discretionary and could be reduced, delayed, or canceled during a severe cyclical downturn.
Most important facts to verify
- Confirm that the intended issuer is Brooks Automation, Inc.; the supplied filing does not identify Azenta, Inc.
- Assess the sustainability of nine-month earnings excluding the $45.6 million tax valuation-allowance reversal.
- Review acquisition integration, purchase-accounting charges, goodwill, and intangible-asset amortization, particularly for Tec-Sem, 4titude, and BioSpeciMan.
- Evaluate cash conversion, given operating cash flow of $42.8 million versus $106.1 million of net income and significant working-capital investment.
- Review the $199.0 million variable-rate term loan, mandatory amortization, excess-cash-flow provisions, and covenant requirements.
- Monitor semiconductor-cycle exposure, customer concentration, foreign-currency sensitivity, inventory commitments, and the expected impact of ASC 606 adoption.