Business Context and Reporting Period
The filing is Brooks Automation, Inc.’s unaudited Form 10-Q for the three months ended December 31, 2018, filed February 8, 2019. The request identifies Azenta, Inc.; however, the supplied filing text identifies the registrant as Brooks Automation, Inc. The company operated through Brooks Semiconductor Solutions Group and Brooks Life Sciences. Its semiconductor cryogenics business was classified as discontinued operations and held for sale.
Key Financial Metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Total revenue | $179.4 million | $142.6 million | Up 26% |
| Gross profit | $72.1 million | $54.3 million | Up $17.8 million |
| Gross margin | 40.2% | 38.1% | Up 2.1 percentage points |
| Operating income | $5.3 million | $4.9 million | Up $0.4 million |
| Income from continuing operations | $6.3 million | $1.6 million | Up $4.6 million |
| Net income | $14.4 million | $16.5 million | Down $2.1 million |
| Diluted EPS | $0.20 | $0.23 | Down $0.03 |
| Cash flow from operations | $6.3 million | $3.2 million | Up $3.0 million |
Products generated $141.7 million of revenue and services generated $37.6 million. Semiconductor Solutions revenue was $112.7 million, up 18%; Life Sciences revenue was $66.7 million, up 41%. International revenue represented approximately 62% of total revenue.
Operating expenses increased to $66.7 million from $49.3 million, primarily due to acquisition-related costs, higher personnel and professional-services costs, and increased amortization. Selling, general and administrative expense was $53.5 million, including approximately $6.4 million of merger-related costs. Interest expense increased to $5.3 million from $2.2 million following the incremental acquisition financing.
Cash, cash equivalents and marketable securities totaled $138.3 million at December 31, 2018, compared with $251.2 million at September 30, 2018. Cash and cash equivalents were $135.8 million, including $99.1 million held outside the United States. Total assets were $1.50 billion and total liabilities were $766.5 million.
Total debt principal was approximately $552.4 million, or $540.8 million net of deferred financing costs. The company had no borrowings under its $75.0 million revolving credit facility and reported approximately $47.3 million of borrowing availability. The weighted-average stated interest rate on outstanding debt was 5.0%.
Material Changes Versus the Prior Comparable Period
- Revenue increased 26%, with growth in both reportable segments. Tec-Sem contributed $9.3 million and GENEWIZ contributed $16.4 million of quarterly revenue.
- Gross margin improved from 38.1% to 40.2%, driven by volume leverage, acquisitions, and improved Life Sciences margins.
- Operating income grew only modestly because operating expenses increased substantially, including $6.4 million of merger-related costs and higher amortization.
- Income from continuing operations benefited from a $5.8 million tax benefit, including discrete benefits from stock compensation, state tax-rate changes, and a transition-tax adjustment.
- Consolidated net income and EPS declined because discontinued-operations income fell to $8.1 million from $14.9 million.
- Cash declined primarily because of the $445.2 million GENEWIZ acquisition, partially funded by $340.5 million of incremental term-loan proceeds and $51.5 million of marketable-securities sales and maturities.
- Goodwill increased by approximately $234.6 million and net intangible assets increased to $279.2 million, primarily from the GENEWIZ acquisition.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide specific quantitative revenue or earnings guidance. Management stated that it expects adequate resources to fund working capital, debt service, capital expenditures and operations for the next twelve months, while noting that longer-term liquidity is difficult to predict because of semiconductor-market cyclicality and global economic uncertainty.
On November 15, 2018, the company acquired GENEWIZ for approximately $442.4 million net of cash acquired. The transaction added $350.0 million of incremental term debt and generated $236.5 million of goodwill. The purchase-price allocation included $188.5 million of acquired intangible assets and $37.4 million of deferred tax liabilities. Acquisition and integration costs, purchase-accounting amortization, and higher interest expense may continue to pressure reported earnings.
The company agreed to sell its semiconductor cryogenics business to Edwards Vacuum for approximately $675.0 million in cash, subject to adjustments and closing conditions, with closing anticipated in the third fiscal quarter of 2019. The business generated $39.3 million of revenue and $8.1 million of net income in the quarter, compared with $46.7 million and $14.9 million, respectively, in the prior-year quarter.
The company adopted ASC 606 revenue guidance on October 1, 2018 using the modified retrospective method. The adoption increased opening accumulated deficit by approximately $0.9 million. For the quarter, adoption reduced reported revenue by $0.4 million and operating income by $0.1 million compared with results without adoption.
Key risks include semiconductor demand cyclicality, variable-rate debt and interest-rate exposure, foreign-currency volatility, acquisition integration and valuation risks, potential changes in tax reserves, customer acceptance and contract-estimate risks, and legal proceedings arising in the ordinary course. The company reported $95.9 million of non-cancellable inventory purchase commitments and approximately $1.3 million of letters of credit. Management stated that no material legal proceeding was currently expected to adversely affect the company, but outcomes remain uncertain.
A hypothetical 100-basis-point interest-rate increase would have changed quarterly interest expense by approximately $1.1 million. A hypothetical 10% foreign-exchange movement would have affected quarterly net income by approximately $3.4 million.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Brooks Automation, Inc., not Azenta, Inc.
- Verify completion, final consideration and proceeds from the planned $675.0 million cryogenics-business divestiture.
- Assess GENEWIZ integration, recurring profitability, purchase-price accounting, goodwill and intangible-asset impairment exposure.
- Monitor leverage, variable-rate debt costs, excess-cash-flow repayment requirements and available revolver capacity.
- Separate continuing-operations performance from the substantial earnings contribution of discontinued operations.
- Evaluate the sustainability of the $5.8 million quarterly tax benefit and the company’s uncertain tax positions.
- Review semiconductor-market demand, Life Sciences organic growth, working-capital needs and the $95.9 million purchase commitments.
- Confirm the effect of ASC 606 on revenue timing, contract assets, deferred revenue and future reported margins.