Business Context and Reporting Period
This Form 10-Q is filed by Brooks Automation, Inc. for the three months ended December 31, 2016, the first quarter of fiscal 2017. The request identifies Azenta, Inc.; the filing itself identifies Brooks Automation, which was subsequently renamed Azenta. The company provides semiconductor automation and cryogenic solutions and life-science sample-management products and services through its Brooks Semiconductor Solutions Group and Brooks Life Science Systems segments.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $160.0 million | $120.0 million | +33% |
| Gross profit | $56.9 million | $40.6 million | +$16.4 million |
| Gross margin | 35.6% | 33.8% | +1.8 percentage points |
| Operating income (loss) | $13.2 million | $(8.3) million | Improved by $21.5 million |
| Operating margin | 8.2% | (6.9)% | Improved |
| Net income (loss) | $13.9 million | $(4.6) million | Improved by $18.5 million |
| Diluted EPS | $0.20 | $(0.07) | Improved |
| Cash flow from operations | $18.7 million | $(12.4) million | Improved by $31.1 million |
Revenue growth included Semiconductor Solutions revenue of $126.6 million, up 28%, and Life Science Systems revenue of $33.3 million, up 60%. Foreign revenue was $106.8 million, or 66.8% of total revenue. One customer represented 11% of quarterly revenue.
Research and development expense declined to $10.8 million from $13.3 million, selling, general and administrative expense declined to $32.0 million from $34.1 million, and restructuring charges declined to $1.0 million from $1.5 million. Equity-method earnings increased to $1.9 million, including $2.4 million from ULVAC Cryogenics. The company also recorded a $1.8 million gain on settlement of its BioCision investment and related instruments.
Financial Position, Liquidity and Capital Structure
- Cash and cash equivalents were $82.9 million at December 31, 2016, compared with $85.1 million at September 30, 2016.
- Total cash, cash equivalents and marketable securities were $89.0 million, compared with $91.2 million at fiscal year-end.
- Current assets were $306.2 million and current liabilities were $128.3 million.
- The company had no borrowings under its $75.0 million senior secured revolving credit facility and approximately $55.3 million of borrowing availability. It was in compliance with the facility covenants.
- Capital expenditures were $3.8 million. Dividends paid were $7.0 million, or $0.10 per share.
- Accounts receivable increased to $114.4 million from $106.4 million; deferred revenue increased to $24.8 million from $15.0 million.
- The company held $63.2 million of cash outside the United States and stated that it intended to permanently reinvest those funds overseas.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher contamination-control, robotic automation and cryogenic-pump revenue, plus the BioStorage acquisition and organic growth in life-science offerings.
- Semiconductor service and repair revenue declined by $2.9 million. The expiration of certain licensed patents and the exit from an atmospheric-robot distribution arrangement are expected to reduce fiscal 2017 revenue by approximately $8.6 million and $13.0 million, respectively, versus fiscal 2016.
- Gross-margin expansion reflected volume leverage, restructuring savings, improved Life Science Systems performance and BioStorage contributions. Semiconductor service margins weakened because of lower volumes over a largely fixed cost base.
- Cash from operations changed from a $12.4 million use to an $18.7 million source, helped by higher earnings, increased accounts payable and higher deferred revenue, partly offset by accounts-receivable and inventory investments.
- Q1 FY2016 included the $125.5 million BioStorage acquisition and substantial marketable-securities sales; Q1 FY2017 included the $15.2 million Cool Lab acquisition, funded with $4.8 million cash, $0.1 million seller liability and $10.3 million of non-cash consideration.
- Prior-period product and service cost classifications were revised. The filing states that the correction did not affect total cost of revenue, gross profit, operating income, net income, EPS, balance sheets or cash flows.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide clear numerical revenue or earnings guidance. Management expects continued life-science growth from internally developed products, services and acquisitions, while noting that semiconductor demand is cyclical and can fluctuate significantly between quarters. Management stated that existing liquidity, operating cash flows and available credit should fund planned requirements for the next twelve months.
- Restructuring actions were substantially completed and are expected to generate approximately $13.2 million of annual pre-tax savings from the company-wide program, with additional savings from segment initiatives. Accrued restructuring costs were $3.2 million at quarter-end and are expected to be paid within twelve months.
- Cool Lab contributed approximately $0.3 million of revenue and a $0.1 million net loss during its approximately one month in the quarter. Purchase accounting valuations for certain acquired assets and liabilities remained preliminary.
- Goodwill increased by $8.4 million primarily from Cool Lab. Net goodwill was $210.6 million and net intangible assets were $83.4 million. No goodwill impairment trigger was identified during the quarter.
- Foreign-exchange losses were approximately $0.5 million, and currency movements reduced quarterly revenue by approximately $1.0 million. A hypothetical 10% currency change was estimated to affect quarterly net income by approximately $0.3 million.
- Letters of credit totaled approximately $4.6 million. None had been called, and management did not expect near-term calls.
- Approximately 90,358 improperly registered ESPP shares remained potentially subject to rescission rights, with potential payments of up to approximately $0.8 million including estimated interest.
- The company remains exposed to semiconductor-market cyclicality, foreign-exchange movements, acquisition integration, customer concentration, execution of restructuring savings, tax valuation allowances and ordinary-course legal proceedings.
Investor Verification Points
- Verify the company identity and subsequent renaming from Brooks Automation to Azenta, since the filing is issued under Brooks Automation.
- Assess whether revenue growth and margin improvement persist after considering acquisitions, restructuring savings and the unusual BioCision settlement gain.
- Track semiconductor service revenue, the impact of expired patents and the discontinued atmospheric-robot distribution arrangement.
- Reconcile operating cash flow with working-capital movements, particularly accounts receivable, accounts payable and deferred revenue.
- Monitor Cool Lab purchase-accounting adjustments, goodwill and intangible-asset amortization.
- Review liquidity available outside the United States, potential repatriation tax implications and the borrowing-base limitations on the credit facility.
- Follow the ESPP rescission matter, letters of credit, legal proceedings and the company’s ability to sustain quarterly dividends through semiconductor downturns.