Azenta, Inc. — Q1 FY2023 Form 10-Q Summary
Business context and reporting period
Azenta provides life sciences sample management, automated storage, cold-chain and genomic services through its Life Sciences Products and Life Sciences Services segments. The filing covers the three months ended December 31, 2022, with comparison to the three months ended December 31, 2021. The semiconductor automation business was sold on February 1, 2022 and is presented as discontinued operations.
Key financial metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $178.4 million | $139.7 million | +28% |
| Gross profit | $73.9 million | $67.0 million | +10% |
| Gross margin | 41.4% | 48.0% | Down 6.6 points |
| Operating loss | $(27.7) million | $(0.3) million | Higher loss |
| Loss from continuing operations | $(11.2) million | Income of $2.9 million | Material deterioration |
| Net income/(loss) | $(11.2) million | $43.3 million | Prior period included $40.5 million discontinued-operations income |
| Diluted EPS | $(0.15) | $0.58 | Prior period included discontinued operations |
| Operating cash flow | $(27.0) million | $15.6 million | Down $42.6 million |
Life Sciences Products revenue increased 80% to $89.7 million, primarily from the B Medical and Barkey acquisitions. Life Sciences Services revenue declined 1% to $88.7 million. Segment adjusted operating income fell to $0.04 million from $12.3 million, and adjusted operating margin declined to approximately 0% from 9%.
Interest income increased to $10.7 million from less than $0.1 million, mainly due to returns on cash proceeds from the semiconductor business sale and interest on a net investment hedge. Interest expense was $0.04 million versus $0.5 million, as the former term loan was repaid in February 2022.
Liquidity, capital resources and balance sheet
- Cash, cash equivalents, restricted cash and marketable securities totaled $1.44 billion at December 31, 2022, down from $2.31 billion at September 30, 2022.
- Cash and cash equivalents were $608.3 million; marketable securities were $827.6 million.
- The quarter-end balance included $615.9 million of cash, cash equivalents and restricted cash, of which $521.8 million was held outside the United States.
- Cash uses included approximately $371.6 million for the B Medical acquisition and $500 million under an accelerated share repurchase agreement. Approximately 6.1 million shares were initially repurchased and retired.
- The company authorized a new $1.5 billion share repurchase program; approximately $1.0 billion remained available at December 31, 2022. Final settlement of the ASR was expected by the end of Q3 FY2023.
- The company stated that it had adequate resources for working capital, financing and capital expenditure requirements for the next twelve months.
- There was no material conventional debt outstanding after repayment of the former term loan. Long-term operating lease liabilities were $52.5 million, and contingent consideration related to B Medical was $18.5 million.
- Non-cancellable purchase and information-technology commitments totaled $65.4 million.
Material changes versus the prior comparable period
- Revenue growth was acquisition-driven: B Medical contributed $41.8 million of revenue after its October 3, 2022 acquisition, while revenue from Life Sciences Products excluding B Medical was $47.8 million versus $49.9 million in the prior period.
- COVID-related revenue declined to approximately $1 million from approximately $11 million, primarily because of lower demand for COVID-testing consumables.
- Gross margin contracted because of acquired-intangible amortization, the B Medical purchase-accounting inventory adjustment, product mix and higher labor costs.
- Operating expenses increased $34.2 million, including higher selling, general and administrative expenses, acquisition costs, ASR-related costs, commercial and laboratory investments, and restructuring charges.
- Accounts receivable increased to $201.9 million from $163.8 million, and inventories increased to $145.9 million from $85.5 million, substantially reflecting the acquisition and operating needs.
- The company’s share count declined following the $500 million ASR; shares outstanding were approximately 69.1 million as of February 8, 2023.
Guidance, outlook, commentary and risks
The filing does not provide specific quarterly or full-year revenue, earnings or margin guidance. Management expects cost savings from restructuring actions to be realized over the following twelve months and believes its liquidity is adequate for the next twelve months, while noting that longer-term requirements are difficult to predict.
- Management expects continuing effects from reduced COVID-related demand and is monitoring the impact of changing COVID restrictions in China.
- Key risks include customer-demand volatility, supply-chain disruption, inflation, tariffs and export controls, foreign-exchange movements, competition, dependence on key personnel and suppliers, regulatory compliance, cybersecurity and the integration of acquisitions.
- B Medical represented approximately 11% of consolidated assets and 23% of consolidated revenue for the quarter; its internal controls were excluded from management’s control assessment during the permitted one-year integration period.
- The B Medical contingent consideration liability is based on revenue targets through September 30, 2023 and is subject to remeasurement using significant unobservable assumptions.
- One distributor accounted for 20% of consolidated revenue and 12% of accounts receivable in the quarter, creating customer concentration risk.
- Azenta disclosed an Edwards-related indemnification lawsuit seeking approximately $1.0 million plus related damages. Management could not determine the outcome but did not expect a material adverse effect; insurance may cover losses beyond applicable deductibles and escrow.
- On February 2, 2023, after quarter-end, Azenta acquired Ziath Ltd. for $16 million, subject to customary adjustments.
Investor verification points
- Verify the sustainability of revenue growth after separating B Medical and Barkey acquisition effects from underlying demand.
- Track recovery in segment adjusted margins, particularly Life Sciences Services and the acquired B Medical operations.
- Review cash conversion, working-capital growth and the effect of the $500 million ASR on liquidity.
- Monitor B Medical integration, contingent consideration remeasurement and purchase-accounting amortization.
- Assess concentration from the distributor representing 20% of quarterly revenue.
- Review the final ASR settlement, remaining repurchase authorization and any subsequent acquisitions or litigation developments.