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Feb. 9, 2022, 4:24 p.m. EST

10-Q: AZENTA, INC.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, describes principal factors affecting the results of our operations, financial condition and liquidity as well as our critical accounting policies and estimates that require significant judgment and thus have the most significant potential impact on our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Our MD&A is organized as follows:

Overview. This section provides a general description of our business and ? operating segments as well as a brief discussion and overall analysis of our business and financial performance, including key developments affecting the Company during the three months ended December 31, 2021 and 2020.

Critical Accounting Policies and Estimates. This section discusses accounting policies and estimates that require us to exercise subjective or complex ? judgments in their application. We believe these accounting policies and estimates are important to understanding the assumptions and judgments incorporated in our reported financial results.

Results of Operations. This section provides an analysis of our financial ? results for the three months ended December 31, 2021 as compared to the three months ended December 31, 2020.

Liquidity and Capital Resources. This section provides an analysis of our ? liquidity and changes in cash flows as well as a discussion of available borrowings and contractual commitments.

You should read the MD&A in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, the MD&A contains forward-looking statements that involve risks and uncertainties. You should read "Information Related to Forward-Looking Statements" below for a discussion of important factors that could cause our actual results to differ materially from our expectations.

Sale of the Semiconductor Automation Business

In the fourth quarter of fiscal year 2021, we entered into a definitive agreement to sell our semiconductor automation business to Thomas H. Lee, Partners, L.P., or THL, for $3.0 billion in cash subject to customary adjustments. In connection with the planned divestiture of the semiconductor automation business and our continued focus on our life sciences businesses, we changed our corporate name from "Brooks Automation, Inc." to "Azenta, Inc." and our common stock started to trade on the Nasdaq Global Select Market under the symbol "AZTA" on December 1, 2021. On February 1, 2022, subsequent to the close of our first fiscal quarter of 2022, we completed the sale of our semiconductor automation business for $3.0 billion in cash, subject to working capital and other customary adjustments. Since our founding in 1978, we have been a leading automation provider and partner to the global semiconductor manufacturing industry. Following the completion of the sale of the semiconductor automation business, we will no longer serve the semiconductor market. The semiconductor automation business has been classified as a discontinued operation and, unless otherwise noted, this MD&A relates solely to our continuing operations and does not include the operations of our semiconductor automation business.

Impact of the COVID-19 Pandemic

During the COVID-19 pandemic, our facilities have remained operational with only required personnel on site, and the balance of employees working from home. Our segments fall within the classification of "Essential Critical Infrastructure Sector" as defined by the U.S. Department of Homeland Security and have continued operations during the COVID-19 pandemic. We have followed government guidance in each region and country and have implemented the U.S. Centers for Disease Control and Prevention social distancing guidelines and other applicable best practices to protect the health and safety of our employees. Our life sciences business operations are accepting customer orders for all of their offerings and are fast tracking customer requests which support research and development and testing related to the COVID-19 virus. The COVID-19 pandemic has not had a substantial negative impact on our financial results and a portion of the impact has been mitigated by our realignment of resources to satisfy incremental orders related to virus research. As the COVID-19 outbreak continues to rapidly evolve, we are continuing to monitor and assess the effects of the COVID-19 pandemic on our business. However, we cannot at this time accurately predict what effects these

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conditions will ultimately have on our operations due to uncertainties relating to variants of the virus, vaccine effectiveness against the variants, the duration of the outbreak, and the length of the travel restrictions and business closures imposed by the governments of impacted countries, as the full impact of the pandemic on the economy and markets which we serve is as yet unknown. Our financial results will also depend on variables including reduced demand from our customers, the degree that the supply chain may be constrained which could impact our delivery of product and the potential impact to our operations if there is a significant outbreak among our employees, as well as the amount of incremental demand caused by research and treatments in the areas of COVID-19 or related threats.

Information Related to Forward-Looking Statements

This Quarterly Report on Form 10-Q contains statements that are, or may be considered to be, forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995, as amended, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements that are not historical facts, including statements about our beliefs or expectations, are forward-looking statements. These statements may be identified by such forward-looking terminology as "expect," "estimate," "intend," "believe," "anticipate," "may," "will," "should," "could," "continue," "likely" or similar statements or variations of such terms. Forward-looking statements include, but are not limited to, statements that relate to our future revenue, margins, costs, earnings, profitability, product development, demand, acceptance and market share, competitiveness, market opportunities and performance, levels of research and development, the success of our marketing, sales and service efforts, outsourced activities, operating expenses, anticipated manufacturing, customer and technical requirements, the ongoing viability of the solutions that we offer and our customers' success, tax expenses, our management's plans and objectives for our current and future operations and business focus, the impact of the COVID-19 pandemic, the expected benefits and other statements relating to our divestitures and acquisitions, including sale of the semiconductor automation business and the semiconductor cryogenics business, our adoption of newly issued accounting guidance, the levels of customer spending, general economic conditions, the sufficiency of financial resources to support future operations, and capital expenditures. Such statements are based on current expectations and involve risks, uncertainties and other factors which may cause the actual results, our performance or our achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include the Risk Factors which are set forth in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, or the 2021 Annual Report on Form 10-K , filed with the U.S. Securities and Exchange Commission, or SEC, on November 24, 2021, as updated and/or supplemented in subsequent filings with the SEC, including under Item 1A "Risk Factors" in Part II of this Quarterly Report on Form 10-Q. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based on information currently and reasonably known to us. We do not undertake any obligation to release revisions to these forward-looking statements to reflect events or circumstances that occur after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence or effect of anticipated or unanticipated events. Precautionary statements made herein should be read as being applicable to all related forward-looking statements wherever they appear in this Quarterly Report on Form 10-Q. Any additional precautionary statements made in our 2021 Annual Report on Form 10-K should be read as being applicable to all related forward-looking statements whenever they appear in this Quarterly Report on Form 10-Q.

Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to "we", "us", "our" and "the Company" refer to Azenta, Inc. and its consolidated subsidiaries.

OVERVIEW

We are a leading global provider of life science sample exploration and management solutions for the life sciences market. We support our customers from research to clinical development with our sample management, automated storage, and genomic services expertise to help our customers bring impactful therapies to market faster. We understand the importance of sample integrity and offer a broad portfolio of products and services spanning across the life cycle of samples from procurement and sourcing, automated storage platforms, genomic services and a broad range of consumables, informatics and data software, and sample management solutions. Our expertise and leadership positions make us a trusted partner to pharmaceutical, biotechnology, and life sciences research institutions globally. In total, our life sciences business employs approximately 2,900 full-time employees, part-time employees and contingent workers worldwide and have sales in more than 90 countries. We are headquartered in Chelmsford, Massachusetts and have operations in North America, Asia, and Europe.

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In the life sciences sample management market, we utilize our core technology competencies and capabilities in automation and cryogenics to provide comprehensive bio-sample management solutions to a broad range of end markets within the life sciences industry. Our offerings include automated ultra-cold storage freezers, sample storage containers, instruments which assist in the workflow of sample management, genomic services and both on-site and off-site full sample management services. We expect the life sciences sample management market to remain one of our principal markets for our product and service offerings and provide favorable opportunities for the growth of our overall business. Over the past several years, we have acquired and developed essential capabilities required to strategically address the sample management needs across multiple end markets within the life sciences industry.

Our life sciences portfolio includes products and services that we acquired to bring together a comprehensive capability to service our customers' needs in the sample-based services arena. We continue to develop the acquired products and services offerings through the combined expertise of the newly acquired teams and our existing research and development resources. We believe our approach of acquisition, investment, and integration has allowed us to accelerate our internal development and that of the acquired entity, significantly decreasing our time to market.

We have also strengthened and broadened our product portfolio and market reach by investing in internal product development. We expect to continue investing in research and development and making strategic acquisitions with the objective of expanding our offerings in the life sciences market.

Within our Life Sciences Products segment, we have developed and continue to develop automated biological sample storage solutions for operating in ultra-low temperature environments. We have a complete line up of automated stores from ambient temperatures to -190degree. Our BioStore's (TM) unique design allows controlled temperature storage down to -80degreeC with the industry's highest throughput of sample retrieval. Our BioStore portfolio offers improved data management and sample security for vaccines and biologics stored at -80degreeC. Our BioStore's (TM) unique design allows controlled temperature storage with the industry's highest throughput of sample retrieval and improved data management and sample security for vaccines and biologics stored at ultra-cold temperatures.

Within our Life Sciences Services segment, our genomics services business advances research and development activities by gene sequencing, synthesis, editing and related services. We offer a comprehensive, global portfolio that has both broad appeal in the life sciences industry as well as enable customers to select the best solution for their research challenge. This portfolio also offers unique solutions for key markets such as cell and gene therapy, antibody development, and biomarker discovery by addressing genomic complexity and throughput challenges. Our sample repository solutions business is a global leader in sample storage and management, and provides a full suite of reliable cold and ultra-cold chain solutions.

Business and Financial Performance

Three Months Ended December 31, 2021 Compared to Three Months Ended December 31, 2020

Results of Operations - Revenue increased 18% as compared to the prior fiscal year period driven by both our Life Sciences Products and Life Sciences Services segments. Gross margin was 48.0% for the three months ended December 31, 2021, as compared to 48.5% for the corresponding period of the prior fiscal year. Operating expenses increased $10.4 million compared to the three months ended December 31, 2020, driven by increases in both research and development expenses and selling, general and administrative expenses. We reported an operating loss of $0.3 million for the three months ended December 31, 2021, as compared to operating income of $0.4 million for the corresponding prior fiscal year period due to an increase in operating expenses. Income from continuing operations increased $0.2 million due to a $3.1 million increase in income tax benefit.

December 31, 2021 Compared to September 30, 2021

Cash Flows and Liquidity - Cash and cash equivalents and restricted cash as presented on our Consolidated Statements of Cash Flows is on a total company basis and were $273.0 million as of December 31, 2021 compared to $285.3 million as of September 30, 2021. The decrease of $12.3 million included cash outflows for investing activities of $18.4 million and financing activities of $7.7 million, partially offset by cash inflows from operating activities of $15.6 million. The effects of foreign exchange reduced our cash balance by $1.8 million.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our unaudited consolidated financial statements are prepared in accordance with Generally Accepted Accounting Principles, or GAAP. The preparation of the interim consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue, intangible assets, goodwill, inventories, income taxes, and stock-based compensation. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. We evaluate current and anticipated worldwide economic conditions, both in general and specifically in relation to the semiconductor and life science industries, that serve as a basis for making judgments about the carrying values of assets and liabilities that are not readily determinable based on information from other sources. Actual results may differ from these estimates under different assumptions or conditions that could have a material impact on our financial condition and results of operations.

For further information with regard to our significant accounting policies and estimates, please refer to Note 2, "Summary of Significant Accounting Policies" in the Notes to the unaudited consolidated financial statements included in Item 1 "Consolidated Financial Statements" of this Quarterly Report on Form 10-Q and in the Notes to our audited consolidated financial statements included in Part II, Item 8 "Financial Statements and Supplementary Data" in our 2021 Annual Report on Form 10-K.

Recently Issued and Adopted Accounting Pronouncements

For a summary of recently issued and adopted accounting pronouncements applicable to our unaudited consolidated financial statements, please refer to Note 2, "Summary of Significant Accounting Policies" in the Notes to the unaudited consolidated financial statements included in Item 1 "Consolidated Financial Statements" of this Quarterly Report on Form 10-Q.







        RESULTS OF OPERATIONS
        Our performance for the three months ended December 31, 2021 and 2020 are as
        follows:
                                                             Three Months Ended December 31,
        Dollars in thousands                                    2021                 2020
        Revenue                                           $         139,652    $         118,142
        Cost of revenue                                              72,608               60,807
        Gross profit                                                 67,044               57,335
        Operating expenses
        Research and development                                      6,485                5,088
        Selling, general and administrative                          60,711               51,930
        Restructuring charges                                           173                 (40)
        Total operating expenses                                     67,369               56,979
        Operating (loss) income                                       (325)                  356
        Interest income                                                  35                   76
        Interest expense                                              (455)                (557)
        Other income (expense), net                                 (1,077)                1,281
        (Loss) income before income taxes                           (1,822)                1,156
        Income tax benefit                                          (4,680)              (1,550)
        Income from continuing operations                 $           2,858    $           2,706
        Income from discontinued operations, net of tax              40,462               23,322
        Net income                                        $          43,320    $          26,028
        


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Summary

Revenue increased 18% as compared to the prior fiscal year period driven by both our Life Sciences Products and Life Sciences Services segments. Gross margin was 48.0% for the three months ended December 31, 2021, as compared to 48.5% for the corresponding period of the prior fiscal year. Operating expenses increased $10.4 million compared to the three months ended December 31, 2020, driven by increases in both research and development expenses and selling, general and administrative expenses. We reported an operating loss of $0.3 million for the three months ended December 31, 2021, as compared to operating income of $0.4 million for the corresponding prior fiscal year period due to an increase in operating expenses. Income from continuing operations increased $0.2 million as compared to the prior year primarily due to a $3.1 million increase in income tax benefit, partially offset by a $2.9 million change in (loss) income before income taxes.

Please refer to the commentary provided below for further discussion and analysis of the factors contributing to our results from operations for the three months ended December 31, 2021 as compared to the three months ended December 31, 2020.







        Revenue
        Our revenue performance for the three months ended December 31, 2021 and 2020 is
        as follows:
                                    Three Months Ended December 31,
        Dollars in thousands         2021           2020      % Change
        Life Sciences Products   $     49,877    $   45,508         10 %
        Life Sciences Services   $     89,775    $   72,634         24 %
        Total revenue            $    139,652    $  118,142         18 %
        


Revenue increased 18% driven by increases in both our Life Sciences Products and our Life Sciences Services segments. The COVID-19 pandemic has had varying impacts on our business for the three months ended December 31, 2021.

Our Life Sciences Products segment revenue increased 10% driven by increases in our automated cold sample management systems revenue and infrastructure services revenue, partially offset by a decrease in demand for our consumables and instruments revenue.

Our Life Sciences Service segment revenue increased 24% driven by increased revenue in both our sample repository solutions and genomics services businesses. Sample repository solutions revenue increased 26%. The primary drivers of this increase were storage, logistics services, and revenue from Trans-Hit Biomarkers Inc., or THB, which was acquired in December 2020. Genomic services revenue increased 23% due to an increase in demand across all services lines, primarily driven by increased revenue from next generation sequencing and gene synthesis services.

We estimate that the COVID-19 pandemic had a positive net impact of approximately $10 million on our revenue for both the three months ended December 31, 2021 and 2020.

Revenue generated outside the United States was $50.1 million, or 36% of total revenue, for the three months ended December 31, 2021, as compared to $45.5 million, or 38% of total revenue, for the corresponding period of the prior fiscal year. We had no individual customer that accounted for more than 10% of our consolidated revenue for the three months ended December 31, 2021 or 2020.

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        Operating Income (Loss)
        Our operating income performance for the three months ended December 31, 2021
        and 2020 is as follows:
                                                            Three Months Ended December 31,
        Dollars in thousands                                      2021               2020
        Revenue:
        Life Sciences Products                           $         49,877    $         45,508
        Life Sciences Services                                     89,775              72,634
        Total revenue                                    $        139,652    $        118,142
        Operating income:
        Life Sciences Products                           $          4,388    $          4,183
        Life Sciences Products adjusted operating margin                9 %                 9 %
        Life Sciences Services                           $          7,883    $          6,928
        Life Sciences Services adjusted operating margin                9 %                10 %
        Segment adjusted operating income                $         12,271    $         11,112
        Total segment adjusted operating margin                         9 %                 9 %
        Amortization of completed technology                        1,773               2,005
        Amortization of acquired intangible assets                  6,272               6,905
        Restructuring charges                                         173                (40)
        Other unallocated corporate expenses                        4,378               1,885
        Total operating (loss) income                    $          (325)    $            356
        Total operating margin                                        (0) %                 0 %
        


We reported an operating loss of $0.4 million, a decrease of $0.7 million compared operating income of $0.3 million reported in the prior fiscal year period. This decrease was due to an increase in operating expenses of $10.4 million, partially offset by an increase is gross profit of $9.7 million. Within operating expenses, selling, general, and administrative expenses increased $8.8 million, and research and development expenses increased $1.4 million. Restructuring expenses increased $0.2 million.

Life Sciences Products segment adjusted operating income increased $0.2 million and adjusted operating margin was flat compared to the prior fiscal year period. Adjusted operating income for our Life Sciences Products segment excludes charges for amortization related to completed technology of $0.2 million and $0.3 million for the three months ended December 31, 2021 and 2020, respectively. Please refer to Note 15, "Segment Information" in the Notes to the unaudited consolidated financial statements included in Item 1 "Consolidated Financial Statements" of this Quarterly Report on Form 10-Q.

Life Sciences Services segment adjusted operating income increased $1.0 million and adjusted operating margin decreased one percentage point. Adjusted operating income for our Life Sciences Services segment excludes charges for amortization related to completed technology of $1.6 million and $1.7 million for the three months ended December 31, 2021 and 2020, respectively. Please refer to Note 15, "Segment Information" in the Notes to the unaudited consolidated financial statements included in Item 1 "Consolidated Financial Statements" of this Quarterly Report on Form 10-Q.







        Gross Margin
        Our gross margin performance for the three months ended December 31, 2021 and
        2020 is as follows:
                                                           Life Science Products                      Life Science Services                          Azenta Total
                                                     Three Months Ended December 31,             Three Months Ended December 31,           Three Months Ended December 31,
        Dollars in thousands                            2021                  2020                  2021                  2020                2021                  2020
        Revenue                                 $        49,877         $      45,508       $        89,775         $      72,634      $      139,652         $      118,142
        Gross profit                                     22,690                20,525                44,354                36,810              67,044                 57,335
        Gross margin                                       45.5 %                45.1 %                49.4 %                50.7 %              48.0 %                 48.5 %
        Adjustments:
        Amortization of completed technology                203                   273                 1,570                 1,732               1,773                  2,005
        Adjusted gross profit                   $        22,894         $      20,798       $        45,924         $      38,542      $       68,817         $       59,340
        Adjusted gross margin                              45.9 %                45.7 %                51.2 %                53.1 %              49.3 %                 50.2 %
        


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Total gross margin decreased 0.5 percentage points to 48.0% driven by decreased gross margin in our Life Sciences Services segment; partially offset by a gross margin increase in our Life Sciences Products segment.

Life Sciences Products segment gross margin increased 0.4 percentage points. The increase was primarily driven by cost reduction initiatives and customer mix within our automated storage systems business. Cost of revenue included $0.2 million of charges for amortization related to completed technology for the three months ended December 31, 2021 and $0.3 million for the three months ended December 31, 2020. Excluding the impact of the amortization of completed technology, margins expanded 0.2 percentage points during the three months ended December 31, 2021, as compared to the corresponding period of the prior fiscal year.

. . .

Feb 09, 2022

COMTEX_402079720/2041/2022-02-09T16:24:20

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