Business Context and Reporting Period
This unaudited Form 10-Q identifies the registrant as Brooks Automation, Inc., not Azenta, Inc. It covers the fiscal quarter and nine-month period ended June 30, 2019, with comparisons to June 30, 2018. The company operated through Brooks Semiconductor Solutions Group and Brooks Life Sciences. The semiconductor cryogenics business was classified as discontinued operations and was sold on July 1, 2019.
Key Financial Metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Nine months ended June 30, 2019 | Nine months ended June 30, 2018 |
|---|---|---|---|---|
| Continuing-operations revenue | $203.9 million | $172.4 million | $581.6 million | $471.9 million |
| Gross profit | $83.5 million | $66.8 million | $236.1 million | $183.5 million |
| Gross margin | 41.0% | 38.8% | 40.6% | 38.9% |
| Operating income | $16.4 million | $12.5 million | $35.4 million | $27.8 million |
| Income from continuing operations | $0.9 million | $4.8 million | $4.4 million | $68.9 million |
| Net income attributable to Brooks | $7.3 million | $22.7 million | $25.1 million | $106.2 million |
| Diluted earnings per share | $0.10 | $0.32 | $0.35 | $1.50 |
Continuing-operations revenue increased 18% in the quarter and 23% year to date. Life Sciences revenue increased 77% in the quarter and 65% year to date, largely from acquisitions, while Semiconductor Solutions revenue declined 5% in the quarter and increased 5% year to date.
- Operating expenses were $67.1 million in the quarter and $200.7 million year to date, up from $54.3 million and $155.7 million, respectively.
- Interest expense was $8.0 million in the quarter and $21.3 million year to date, compared with $2.5 million and $6.8 million in the prior-year periods.
- The company recorded a $9.1 million loss on extinguishment of debt during the nine months ended June 30, 2019.
- Net cash provided by operating activities was $58.2 million year to date, compared with $42.8 million in the prior-year period. Capital expenditures were $15.5 million.
- Cash and cash equivalents were $156.9 million at June 30, 2019; total cash, cash equivalents and marketable securities were $159.8 million, down from $251.2 million at September 30, 2018.
- Total debt, net of deferred financing costs, was approximately $541.1 million, including $534.7 million of long-term debt and $6.3 million of current debt. The company had approximately $48.7 million available under its $75.0 million revolving credit facility and no revolver borrowings.
- Assets held for sale totaled $127.2 million and liabilities held for sale totaled $12.8 million at June 30, 2019.
Material Changes Versus the Prior Comparable Period
- The November 2018 acquisition of GENEWIZ contributed $37.1 million of quarterly revenue and $86.3 million of revenue for the period since acquisition. The acquisition cost $442.7 million, net of cash acquired, and added approximately $234.7 million of goodwill during the first nine months.
- Life Sciences segment operating income increased to $4.2 million in the quarter and $8.9 million year to date, compared with $0.7 million and $0.8 million, respectively, primarily reflecting GENEWIZ and other acquisition contributions.
- Semiconductor Solutions quarterly revenue declined because of lower automation systems demand, although contamination control revenue increased. Management described the semiconductor market as cyclical.
- ASC 606 revenue recognition was adopted on October 1, 2018 using the modified retrospective method. Adoption reduced reported revenue by $0.9 million for the quarter and $2.4 million year to date, and reduced operating income by $0.6 million and $1.5 million, respectively, compared with amounts without adoption.
- Year-to-date continuing-operations income declined sharply because the prior-year period included a $56.3 million tax benefit from releasing a U.S. deferred-tax valuation allowance, while 2019 included the $9.1 million debt-extinguishment loss and higher interest expense.
- On July 1, 2019, the company completed the sale of the semiconductor cryogenics business for $675.0 million, subject to adjustments. Estimated net proceeds were approximately $550 million after taxes and other items.
- Sale proceeds were used to repay $495.3 million of debt: $348.3 million of incremental term debt and $147.0 million of the original term loan. Management stated that debt outstanding after the repayment was approximately $46 million.
Outlook, Commentary, Risks, and Unusual Items
Management stated that existing resources were adequate for working capital, debt service, capital expenditures and operations for at least the next twelve months, but noted that the cyclical semiconductor market and broader economic uncertainty make longer-term liquidity needs difficult to predict. No specific revenue or earnings guidance was provided in the filing.
- The company expects to continue investing in semiconductor products, Life Sciences capabilities, research and development, acquisitions and infrastructure.
- It committed to construct a facility in Suzhou, China, with expected capital expenditures of $50 million to $55 million over five years, including up to $10 million during 2019.
- Purchase commitments for inventory were $97.2 million at June 30, 2019. Letters of credit outstanding were approximately $1.3 million; none had been called.
- Variable-rate debt exposed the company to interest-rate risk. Management estimated that a 100-basis-point rate change would have changed nine-month interest expense by approximately $3.8 million.
- The company reported foreign-currency exposure, with approximately 35% of nine-month revenue generated in currencies other than the U.S. dollar. A hypothetical 10% currency-rate change was estimated to affect nine-month net income by approximately $1.6 million.
- The company maintained $97.2 million of goodwill and intangible assets? The filing reports goodwill of $490.5 million and net intangible assets of $262.2 million at June 30, 2019. The GENEWIZ reporting unit’s fair value was only slightly above carrying value in the annual impairment test.
- Income taxes included a $4.3 million discrete expense in the quarter from final U.S. transition-tax regulations. The July 1 divestiture generated a taxable gain and could result in further valuation-allowance adjustments.
- Management reported no material changes to the risk factors in the 2018 Form 10-K and stated that disclosure controls were effective.
Important Facts for Investors to Verify
- Confirm that this filing belongs to Brooks Automation, Inc., the company later known as Azenta, Inc., and that the requested issuer identification is not a filing-matching error.
- Verify the final cash proceeds, working-capital adjustments, taxes and closing costs from the July 1, 2019 cryogenics divestiture.
- Reconcile post-transaction cash, debt and leverage after the $495.3 million debt repayment.
- Assess the sustainability of Life Sciences growth after separating acquisition-driven growth from internal growth, particularly for GENEWIZ.
- Review the effect of ASC 606 on revenue timing, contract assets, deferred revenue and future margins.
- Monitor semiconductor cyclicality, variable-rate debt, foreign exchange exposure, goodwill impairment sensitivity and the $97.2 million inventory purchase commitment.