Business Context and Reporting Period
Azenta, Inc. was named Brooks Automation, Inc. during the period covered. This unaudited Form 10-Q reports the quarter and six months ended March 31, 2015, the second quarter of fiscal 2015. The company provided automation and cryogenic solutions primarily to semiconductor manufacturers and life-science customers through Brooks Product Solutions, Brooks Global Services, and Brooks Life Science Systems.
Results exclude the Granville-Phillips business, which was sold on May 30, 2014 and presented as a discontinued operation in prior-period results.
Key Financial Metrics
| Metric | Three months ended March 31, 2015 | Three months ended March 31, 2014 | Six months ended March 31, 2015 | Six months ended March 31, 2014 |
|---|---|---|---|---|
| Total revenue | $139.3 million | $125.9 million | $262.0 million | $243.0 million |
| Gross profit | $46.0 million | $44.3 million | $85.1 million | $85.2 million |
| Gross margin | 33.0% | 35.2% | 32.5% | 35.1% |
| Operating income (loss) | $3.1 million | $2.4 million | $(3.4) million | $3.9 million |
| Net income (loss) attributable to Brooks | $2.7 million | $3.2 million | $(23 thousand) | $6.6 million |
| Diluted earnings per share | $0.04 | $0.05 | — | $0.10 |
| Cash flow from operations | Not separately reported | Not separately reported | $5.0 million | $35.7 million |
Product revenue increased to $116.4 million in the quarter and $216.1 million for the six-month period. Services revenue was $22.9 million in the quarter and $45.9 million for the six-month period.
- Quarterly segment revenue was $99.0 million for Brooks Product Solutions, $22.8 million for Brooks Global Services, and $17.5 million for Brooks Life Science Systems.
- Quarterly segment operating income was $8.0 million, $2.1 million, and $(4.4) million, respectively.
- Research and development expense was $12.7 million for the quarter and $26.2 million year to date.
- Selling, general and administrative expense was $29.6 million for the quarter and $59.0 million year to date.
- Restructuring charges were $0.7 million for the quarter and $3.4 million year to date.
Balance Sheet, Cash Flow, Debt, and Liquidity
- Cash and cash equivalents were $73.2 million at March 31, 2015, compared with $94.1 million at September 30, 2014.
- Short- and long-term marketable securities totaled $133.9 million, resulting in cash, cash equivalents, and marketable securities of $207.1 million.
- Total assets were $757.0 million and total liabilities were $128.1 million.
- The principal financing obligation was a capital lease totaling $8.1 million, including $0.9 million due within twelve months. The filing does not identify material funded debt beyond this lease.
- Year-to-date operating cash flow of $5.0 million was substantially below the prior-year $35.7 million, primarily reflecting working-capital uses, including higher accounts receivable, lower accrued compensation, and lower deferred revenue.
- Year-to-date investing cash use was $9.0 million, including the FluidX acquisition, BioCision investments, capital expenditures, and the YBA asset acquisition.
- Year-to-date financing cash use was $12.9 million, primarily due to $13.5 million of dividends.
- The company stated that available resources were adequate for currently planned working capital and capital expenditures for the next twelve months.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue rose 11%; six-month revenue rose 8%. Management attributed growth primarily to acquisitions and selected organic product-line growth.
- DMS contributed $9.0 million of quarterly revenue and $16.1 million year to date after its April 2014 acquisition.
- FluidX contributed $3.8 million of quarterly revenue and $7.4 million year to date after its October 2014 acquisition.
- Brooks Product Solutions revenue increased 10% in the quarter and 6% year to date, while Brooks Global Services revenue declined 2% and 1%, respectively.
- Brooks Life Science Systems revenue increased 39% in the quarter and 38% year to date, but its segment operating loss widened to $4.4 million in the quarter and $9.9 million year to date.
- Gross margin declined 220 basis points in the quarter and 260 basis points year to date. Management cited product mix, higher warranty costs, project cost overruns, premium installation and freight costs, and inventory-related charges.
- Six-month operating results included $1.5 million of acquisition-related inventory step-up charges and $3.4 million of restructuring charges.
- Six-month results also included a $0.7 million impairment charge related to the Yaskawa Brooks Automation joint venture and lower equity-method investment earnings.
- Prior-year results included $2.7 million of after-tax income from the discontinued Granville-Phillips operation; no such income was recorded in 2015.
- Foreign currency movements reduced revenue by $2.0 million in the quarter and $3.2 million year to date.
Guidance, Outlook, Commentary, and Risks
The filing does not provide specific quantitative revenue, earnings, or margin guidance. Management expects semiconductor capital-equipment demand to remain cyclical and intends to continue investing in semiconductor and life-science products, including through acquisitions and technology development.
- Management cited semiconductor-market cyclicality, global economic uncertainty, foreign-exchange exposure, customer spending, and the possibility of difficulty obtaining additional financing as key risks.
- The Brooks Life Science Systems segment experienced project cost overruns related to materials and resource planning deficiencies. Management also cited product rationalization and higher excess and obsolete inventory expense.
- The company was transitioning selected manufacturing activities to third-party contract manufacturers. Its Mistelgau, Germany manufacturing site was expected to close in 2016.
- Approximately $19.9 million of letters of credit supported customer advances and performance obligations. Although management did not expect them to be called, beneficiaries could demand payment if contractual requirements were not met.
- Legal proceedings were described as ordinary-course matters; management did not expect them to have a material adverse effect, while acknowledging that outcomes remain unpredictable.
- The company had approximately $3.0 million of deferred tax benefit-related items and expected potential reductions in unrecognized tax benefits of approximately $1.3 million over the following twelve months; tax audits remained ongoing in multiple jurisdictions.
- A $0.10 per-share dividend was declared on April 28, 2015, payable June 26, 2015. Future dividends remain discretionary and could be reduced, delayed, or canceled during a severe cyclical downturn.
- Management concluded that disclosure controls and procedures were effective and reported no material changes in internal control over financial reporting.
Facts Investors Should Verify
- Whether margin pressure in Brooks Life Science Systems and the reported project cost overruns have been resolved.
- The sustainability of revenue growth from DMS, FluidX, and other acquisitions versus organic growth.
- Working-capital conversion and whether operating cash flow improves from the six-month $5.0 million level.
- The financial impact and completion timing of manufacturing transfers, the Germany facility closure, and restructuring actions.
- The final purchase-price allocations for FluidX and DMS, including goodwill and intangible-asset amortization.
- The status and valuation of the BioCision convertible securities and warrants, the impaired note receivable, and the YBA joint-venture dissolution.
- Exposure to semiconductor-capital-equipment cyclicality, foreign currency movements, customer concentration, letters of credit, tax audits, and pending legal matters.