Azenta, Inc. Form 10-Q Summary
Reporting period: Second fiscal quarter and six months ended March 31, 2023. The filing was signed May 10, 2023. Azenta provides life sciences sample management, automated storage, genomic services, and related cold-chain solutions through its Life Sciences Products and Life Sciences Services segments. The semiconductor automation business was sold in February 2022 and is reported as discontinued operations.
Financial performance and liquidity
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $148.4 million, up 2% | $326.8 million, up 15% |
| Gross profit | $53.2 million | $127.1 million |
| Gross margin | 35.9%, versus 48.7% | 38.9%, versus 48.3% |
| Operating loss | $13.0 million | $40.7 million |
| Loss from continuing operations | $2.0 million | $13.2 million |
| Net loss | $4.9 million | $16.2 million |
| Diluted loss per share | $0.07 | $0.23 |
| Operating cash flow | Not separately provided for the quarter | $(39.2) million |
Life Sciences Products revenue increased 10% in the quarter and 44% year to date, primarily reflecting the B Medical and Barkey acquisitions. Life Sciences Services revenue declined 3% in the quarter and 2% year to date. Interest income increased to $10.4 million in the quarter and $21.1 million year to date, while interest expense was zero after repayment of the former term loan in February 2022.
At March 31, 2023, cash and cash equivalents were $667.4 million, restricted cash was $4.5 million, and marketable securities totaled $779.8 million. Total cash, restricted cash, and marketable securities were $1.45 billion, compared with $2.31 billion at September 30, 2022. The company reported no outstanding debt; operating lease liabilities totaled $65.9 million and finance lease liabilities totaled $1.7 million.
Material changes versus the prior comparable periods
- Revenue growth was offset by substantially lower profitability. Gross margin declined 12.8 percentage points in the quarter and 9.4 percentage points year to date.
- Margin pressure reflected higher costs, unfavorable product mix, lower cost absorption, B Medical purchase-accounting inventory charges, and increased amortization of acquired technology.
- Operating expenses included $17.1 million of income from reducing the fair value of B Medical contingent consideration, partially offsetting higher selling, general and administrative costs and restructuring charges.
- COVID-related revenue declined to approximately $3 million in the quarter and $4 million year to date, compared with approximately $10 million and $20 million, respectively, in the prior-year periods.
- B Medical contributed $15.1 million of revenue and a $10.4 million net loss in the quarter; year-to-date contributions were $57.3 million of revenue and a $13.0 million net loss.
- The company acquired Ziath for approximately $16 million on February 2, 2023. B Medical was acquired in October 2022 for approximately $432.2 million, including contingent consideration.
- Cash used in financing activities included a $500 million accelerated share repurchase. The ASR ultimately resulted in approximately 10 million shares repurchased, including 4 million shares received in April 2023 after quarter-end.
- Net income in the prior-year periods included approximately $2.1 billion of gain from the semiconductor automation divestiture; this unusual item did not recur.
Outlook, risks, contingencies, and unusual items
Management states that it expects existing resources to satisfy working capital, financing, and capital expenditure needs for at least the next twelve months. The filing does not provide a clear numerical revenue, earnings, or margin guidance range.
- Management expects cost savings from restructuring actions to be realized by June 30, 2023.
- The company has up to approximately $1.0 billion remaining under its $1.5 billion repurchase authorization as of March 31, 2023. After the ASR termination, new arrangements were initiated for up to an additional $500 million of open-market repurchases.
- Goodwill testing performed at March 31, 2023 found estimated fair value exceeded carrying value by approximately 24% for Life Sciences Services and 17% for Life Sciences Products. Future underperformance, market declines, or changes in valuation assumptions could result in impairment charges.
- Key risks include customer-demand fluctuations, reduced COVID-related demand, supply-chain disruption, inflation, tariffs and export controls, foreign-exchange exposure, competition, regulatory compliance, cybersecurity, dependence on personnel and suppliers, and acquisition integration.
- The company had $83.5 million of non-cancellable commitments, including $56.3 million for inventory purchases and $27.2 million for information technology.
- Azenta accrued $2.5 million related to a claim associated with the divestiture of its semiconductor cryogenics business. Edwards Vacuum filed a lawsuit seeking approximately $1.0 million and related damages; the company cannot determine the ultimate outcome but does not currently expect a material adverse effect.
- B Medical’s internal control over financial reporting was excluded from management’s assessment for the permitted one-year period following acquisition. Management concluded that disclosure controls and procedures were effective.
Important facts for investors to verify
- Whether acquired B Medical operations can improve margins after purchase-accounting charges, integration costs, and elevated operating expenses.
- The sustainability of cash resources after acquisitions, the $500 million ASR, planned additional repurchases, and continuing negative operating cash flow.
- Underlying organic demand excluding acquisitions and the continuing decline in COVID-related revenue.
- Progress toward restructuring savings and recovery in both segment operating margins.
- Potential effects of goodwill impairment sensitivities, contingent consideration remeasurement, foreign-exchange movements, and unresolved legal or tariff matters.
- The final impact of the April 2023 ASR settlement and subsequent share repurchase activity on outstanding shares and liquidity.