Item 7. Management’s Discussion and Analysis
Item 7. 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 Consolidated Financial Statements included elsewhere in this Form 10-K. Our MD&A is organized as follows:
● Overview . This section provides a general description of our business and operating segments, recent developments, as well as a brief discussion and overall analysis of our business and financial performance, including key developments affecting us during fiscal years ended September 30, 2020, 2019 and 2018.
● 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 fiscal year ended September 30, 2020 compared to the fiscal year ended September 30, 2019. For the discussion covering the fiscal year ended September 30, 2018, please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K for the fiscal year ended September 30, 2019.
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● 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 Consolidated Financial Statements and related notes in this Form 10-K. 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” and Item 1A, “Risk Factors" included above in this Form 10-K for a discussion of important factors that could cause our actual results to differ materially from our expectations.
OVERVIEW
General
We are a leading global provider of manufacturing automation solutions for the semiconductor industry, and life science sample-based services and solutions for the life sciences market. In the semiconductor manufacturing market, we provide precision robotics, integrated automation systems, and contamination control solutions to semiconductor fabs and OEMs worldwide. In the life sciences market, we offer a full suite of services and solutions for analyzing, managing, and storing biological and chemical compound samples to advance research and development for clinical, pharmaceutical, and other scientific endeavors. Our life sciences solutions include gene sequencing and synthesis, a broad suite of high-throughput automated cryogenic storage products, related consumables, sample inventory software, as well as fully outsourced solutions for sample storage, transport, and inventory management. Our leadership positions and our global support capability in each of these markets make us a valued business partner to the largest semiconductor and semiconductor capital equipment manufacturers and pharmaceutical and life sciences research institutions in the world.
In the semiconductor capital equipment market, equipment productivity and availability are critical factors for our customers, who typically operate equipment under demanding temperature and/or pressure environments. We are a leader in wafer automation and contamination controls solutions and services that are designed to improve throughput, yield, and cost of ownership of tools in semiconductor fabs. Our product offerings include vacuum and atmospheric robots, turnkey vacuum and atmospheric wafer handling systems, as well as wafer carrier cleaning and reticle storage systems. We also capture the complete life cycle of value through our global service network of expert application and field engineers who are located close to our customers. Our services include rapid refurbishment of robots to stringent specifications, upgrades to improve equipment productivity, and proactive monitoring and diagnostics for predictive risk management and improved up-time of the installed base. Although the demand for semiconductors and semiconductor manufacturing equipment is cyclical resulting in periodic expansions and contractions, we expect the semiconductor equipment market to remain one of our principal markets as we continue making investments to maintain and grow our semiconductor product and service offerings. A majority of our research and development spending advances our current product lines and drives innovations for new product offerings. We invest in research and development initiatives within the Brooks Semiconductor Solutions Group segment to maintain continued leadership position in the markets we serve. Our investments in Vacuum Automation and Contamination Control include ramping our intelligent vacuum robot platform, MagnaTran LEAP, with new designs at customers releasing tools for 10 nanometers and below. In addition, our new PuroMaxx LEAP carrier clean product line is well positioned to handle the contamination challenges at 5 nanometers and below. As the market for EUV lithography expands, we will continue our investment in EUV pod cleaning and reticle storage. Our initiatives with Guardian LEAP for EUV reticle storage will provide new innovation to solve many contamination challenges with EUV reticles. In April 2018, we acquired Tec-Sem, a Switzerland-based provider of semiconductor fabrication automation equipment with a focus on reticle management. The acquisition has enhanced our contamination controls solutions offerings.
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, consumable sample storage containers, instruments which assist in the workflow of sample management, 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
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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. This 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. Our recent acquisitions are as follows:
● In November 2018, we acquired GENEWIZ, a leading global genomics service provider headquartered in South Plainfield, New Jersey. GENEWIZ is a global leader in genomics services that enable research scientists to advance their discoveries within the pharmaceutical, academic, biotechnology, agriculture and other markets. GENEWIZ provides gene sequencing and synthesis services for more than 4,000 institutional customers worldwide supported by their global network of laboratories spanning the United States, China, Japan, Germany and the United Kingdom. This transaction has added a new and innovative services platform which we can leverage, along with our core capabilities, to add even more value to samples under our care.
● In February 2020, we acquired RURO, an informatics software company based in Frederick, Maryland. RURO provides cloud-based software solutions to manage laboratory workflow and bio-sample data for a broad range of customers in the biotech, healthcare, and pharmaceutical sectors. The addition of RURO's capabilities and offerings has enabled the Company to offer enhanced on-site and off-site management of biological sample inventories as well as integration solutions to its customers for their increasingly distributed workflow.
We have also strengthened and broadened our product portfolio and market reach by investing in internal product development. For the fiscal years ended 2020, 2019 and 2018, more than 29% of our cumulative research and development spending was focused on innovating and advancing solutions in the life sciences market. 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 storage from -20°C to -196°C. Our BioStore™ II’s unique design allows dual temperature storage down to -80°C with the industry’s highest throughput of sample retrieval. We recently launched the BioStore™ III V that compliments the BioStore™ III Cryo product line and offers improved data management and sample security for vaccines and biologics stored at -80°C. Within our Life Sciences Services segment, our GENEWIZ business advances research and development activities in gene sequencing, synthesis and related services to meet market demands. Recently, enabled by newly developed proprietary technologies, GENEWIZ launched a portfolio of new services, targeting analysis of adeno-associated virus, a common vector used in cell and gene therapy. We will continue to focus on developing processes and technologies that can streamline sample to data workflow.
Sale of the Semiconductor Cryogenics Business
In the fourth quarter of fiscal year 2018, we entered into a definitive agreement to sell our semiconductor cryogenics business to Edwards Vacuum LLC (a member of the Atlas Copco Group) for approximately $675.0 million in cash, subject to customary adjustments. We originally acquired the cryogenics business in 2005 as part of the acquisition of Helix Technology Corporation. The semiconductor cryogenics business has been classified as discontinued operations and, unless otherwise noted, the description of our business in this report relates solely to our continuing operations and does not include the operations of our semiconductor cryogenics business.
On July 1, 2019, we completed the sale of the semiconductor cryogenics business for $661.5 million which excludes $6.3 million retained by the buyer at closing based on an estimate of net working capital adjustments, which are currently pending finalization. Net proceeds from the sale were $553.1 million, net of taxes and closing costs paid and remaining taxes payable. As part of this sale, we transferred our intellectual property, for our cryogenics pump products, but not our intellectual property related to our semiconductor automation or life sciences businesses.
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On July 1, 2019, in connection with the completion of the sale of our semiconductor cryogenics business, we used $495.3 million of the cash proceeds to extinguish debt. As a result of the debt extinguishment we recorded a loss on extinguishment of debt of $5.2 million in the fourth quarter of fiscal year 2019. Refer to “Liquidity and Capital Resources” for further discussion of the debt extinguishment.
Segments
We serve the semiconductor capital equipment market through one operating and reportable segment, our Semiconductor Solutions Group segment. We serve the life sciences market through two operating and reportable segments: Brooks Life Sciences Products and Brooks Life Sciences Services. Prior to the fiscal year 2020, we had only two reportable segments that consisted of the Brooks Semiconductor Solutions Group segment and the Brooks Life Sciences segment. The Brooks Life Sciences segment consisted of two operating segments, Sample Management and GENEWIZ. During the fiscal year 2020, we realigned our life sciences businesses to combine the sample management services offerings under the leadership of our GENEWIZ genomic services business to form the Brook Life Sciences Services operating and reportable segment. By combining these two service-based businesses we believe we can more effectively leverage the potential for synergies as customers engage us to manage a broad variety of sample-based services including gene sequencing, gene synthesis, lab analysis, sample kitting and preparation, transportation, and storage. In the realignment we also formed our Brooks Life Sciences Products operating and reportable segment composed of product offerings of large automated ultra-cold stores, automated cryogenic storage systems, and consumables and instruments, and related product support services.
Our prior period reportable segment information has been reclassified to reflect the current segment structure and conform to the current period presentation.
For additional information on our segment revenues and their operating results, please refer to Note 20, "Segment and Geographic Information" to our Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.
The Brooks Semiconductor Solutions Group segment provides a variety of products, services and solutions that enable improved throughput and yield in controlled operating environments, as well as an extensive range of support services. The solutions include atmospheric and vacuum robots, robotic modules, tool automation systems, and contamination control of wafer carriers. The support services include repair services, diagnostic support services, and installation services in support of the products, which enable our customers to maximize process tool uptime and productivity. This segment also provides end-user customers with spare parts and productivity enhancement upgrades to maximize tool productivity.
The Brooks Life Sciences Products and Brooks Life Sciences Services segments provide comprehensive life cycle sample management solutions to life science and bioscience customers including complete end-to-end “cold chain of custody” solutions and sample-based lab services such as genomic sequencing and gene synthesis to advance scientific research and support drug development. The Brooks Life Sciences Products segment’s offerings include automated cold sample management systems for compound and biological sample storage, equipment for sample preparation and handling, consumables and instruments that help customers manage samples throughout their research discovery and development workflows. The Brooks Life Sciences Services segment’s offerings include sample storage services, genomic sequencing, gene synthesis, lab processing services, lab analysis, informatics and other support services provided to a wide range of life science customers, including pharmaceutical companies, biotechnology companies, biorepositories and research institutes.
Business and Financial Performance
Fiscal Year Ended September 30, 2020 Compared to Fiscal Year Ended September 30, 2019
Results of Operations - We reported revenue of $897.3 million for fiscal year 2020 compared to $780.8 million for fiscal year 2019, an increase of $116.4 million, or 15%. Gross margin was 42.4% for fiscal year 2020 compared to 40.5% for fiscal year 2019, an increase in gross profit of $63.8 million. Operating expenses were $301.6 million for fiscal year 2020 compared to $270.2 million for fiscal year 2019, an increase of $31.3 million. Operating income was
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$78.5 million for fiscal year 2020 compared to $46.0 million for fiscal year 2019, an increase of $32.4 million, which was primarily attributable to the revenue growth and gross margin improvement, partially offset by higher operating expenses. We generated income from continuing operations of $65.0 million during fiscal year 2020 as compared to $9.6 million in fiscal year 2019. This increase was primarily attributable to our increase in operating income as well as a loss on extinguishment of debt of $14.3 million and higher interest expense of $19.3 million in fiscal year 2019. Please refer to the “Results of Operations” section below for a detailed discussion of our financial results for the fiscal year 2020 compared to fiscal year 2019.
Cash Flows and Liquidity - Cash and cash equivalents, restricted cash and marketable securities were $305.7 million at September 30, 2020 as compared to $342.1 million at September 30, 2019. The decrease of $36.4 million was primarily comprised of outflows of $39.9 million for capital expenditures, $15.7 million for acquisitions, and $29.5 million for dividends, partially offset by cash inflows from operating activities of $37.9 million. Cash flows from operating activities was comprised of $64.9 million of net income and $77.2 million of adjustments to net income for non-cash items, partially offset by $91.5 million of cash taxes paid for the gain on the sale of the semiconductor cryogenics business and $12.7 million uses of cash from the changes in operating assets and liabilities. The prior fiscal year cash flows included $661.6 million related to proceeds from the sale of our semiconductor cryogenics business and cash inflows of $90.9 million generated from our operating activities, partially offset by net cash outflows of $442.7 million to acquire GENEWIZ, net cash outflows of $163.8 million related to principal payments made on and proceeds received from our term loans, cash dividends paid of $28.9 million and capital expenditures of $23.9 million. Please refer to the “Liquidity and Capital Resources” section below for a detailed discussion of our liquidity and changes in cash flows for fiscal year 2020 compared to fiscal year 2019.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the 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.
We believe that the assumptions and estimates associated with the following critical accounting policies involve significant judgment and thus have the most significant potential impact on our Consolidated Financial Statements.
Revenue Recognition
We generate revenue from the sale of products and services. A description of our revenue recognition policies is included in the Note 2, “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.
Although most of our sales agreements contain standard terms and conditions, certain agreements contain multiple performance obligations or non-standard terms and conditions. For customer contracts that contain more than one performance obligation, we allocate the total transaction consideration to each performance obligation based on the relative stand-alone selling price of each performance obligation within the contract. We rely on either observable standalone sales or an expected cost-plus margin approach to determine the standalone selling price of offerings, depending on the nature of the performance obligation. Performance obligations whose standalone selling price is estimated using an expected cost-plus margin approach relate to the sale of customized automated cold sample management systems and service-type warranties within the Brooks Life Sciences Products segment.
Revenue from the sales of certain products that involve significant customization, which primarily include automated cold sample management systems is recognized over time as the asset created by our performance does not
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have alternative use to us and an enforceable right to payment for performance completed to date is present. We recognize revenue as work progresses based on a percentage of actual labor hours incurred on the project to-date and total estimated labor hours expected to be incurred on the project. The selection of the method to measure progress towards completion requires judgment. We have concluded that using the percentage of labor hours incurred to estimated labor hours needed to complete the project most appropriately depicts our efforts towards satisfaction of the performance obligation. We develop profit estimates for long-term contracts based on total revenue expected to be generated from the project and total costs anticipated to be incurred in the project. These estimates are based on a number of factors, including the degree of required product customization and the work required to be able to install the product in the customer’s existing environment, as well as our historical experience, project plans and an assessment of the risks and uncertainties inherent in the contract related to implementation delays or performance issues that may or may not be within our control. We estimate a loss on a contract by comparing total estimated contract revenue to the total estimated contract costs and recognize a loss during the period in which it becomes probable and can be reasonably estimated. We review profit estimates for long-term contracts during each reporting period and revise the estimate based on changes in circumstances.
If our judgment regarding revenue recognition proves incorrect, our revenue in particular periods may be adversely affected and could have a material impact on our financial condition and results of operations.
Business Combinations
We account for business acquisitions using the purchase method of accounting, in accordance with which assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date. The fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities assumed based on their respective fair values. Goodwill represents the excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed.
Significant judgment is used in determining fair values of assets acquired and liabilities assumed, as well as intangibles and their estimated useful lives. Fair value and useful life determinations are based on, among other factors, estimates of future expected cash flows, royalty cost savings and appropriate discount rates used in computing present values. Particularly for GENEWIZ, management applied significant judgment in estimating the fair value of the acquired intangible assets, which involved significant estimates and assumptions with respect to forecast revenue growth rates, gross margin percentage, selling, general and administrative expense percentage and the discount rate. These judgments may materially impact the estimates used in allocating acquisition date fair values to assets acquired and liabilities assumed, as well as our current and future operating results. Actual results may vary from these estimates that may result in adjustments to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination of asset and liability fair values, whichever occurs first. Adjustments to fair values of assets and liabilities made after the end of the measurement period are recorded within our operating results.
Changes in the fair value of contingent consideration resulting from a change in the underlying inputs are recognized in results of operations until the arrangement is settled.
Intangible Assets, Goodwill and Other Long-Lived Assets
We have identified intangible assets and generated significant goodwill as a result of our acquisitions. Intangible assets other than goodwill are valued based on estimated future cash flows and amortized over their estimated useful lives. Goodwill is tested for impairment annually or more often if impairment indicators are present, at the reporting unit level. Intangible assets other than goodwill and long-lived assets are subject to impairment testing if events and circumstances indicate that the carrying amount of an asset or a group of assets may not be recoverable.
The goodwill impairment test is performed at the reporting unit level. A reporting unit is either an operating segment or one level below it, which is referred to as a “component.” The level at which the impairment test is performed requires an assessment of whether the operations below an operating segment constitute a self-sustaining business, in which case testing is generally performed at this level.
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We have three operating and three reportable segments consisting of Brooks Semiconductor Solutions Group, Brooks Life Sciences Products and Brooks Life Sciences Services. We have six reporting units, including three reporting units within the Brooks Semiconductor Solutions Group operating segment, one reporting unit within Brooks Life Sciences Products operating segment and two reporting units within the Brooks Life Sciences Services operating segment.
We perform our annual goodwill impairment assessment on April 1 st of each fiscal year. We evaluate a reporting unit’s goodwill for impairment between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of such reporting unit below its carrying value. In accordance with ASC 350, Intangibles- Goodwill and Other , we initially assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value. If we determine, based on this assessment, that it is more likely than not that the fair value of the reporting unit is less than its carrying value, we perform a quantitative goodwill impairment test by comparing the reporting unit’s fair value with its carrying value. An impairment loss is recognized for the amount by which the reporting unit’s carrying value exceeds its fair value, up to the total amount of goodwill allocated to the reporting unit. No impairment loss is recognized if the fair value of the reporting unit exceeds its carrying value.
We determine fair values of our reporting units based on an income approach in accordance with the discounted cash flow method, or DCF Method. The DCF Method is based on projected future cash flows and terminal value estimates discounted to their present values. Terminal value represents a present value an investor would pay on the valuation date for the rights to the cash flows of the business for the years subsequent to the discrete cash flow projection period. We consider the DCF Method to be the most appropriate valuation technique since it is based on management’s long-term financial projections. In addition to determining the fair value of our reporting units based on the DCF method, we also compare the aggregate values of our net corporate assets and reporting unit fair values to our overall market capitalization and use certain market-based valuation techniques to assess the reasonableness of the reporting unit fair values determined in accordance with the DCF Method. The key inputs used in the DCF Method include revenue growth rates, gross margin percentage, selling, general and administrative expense percentage and discount rates that are at or above our weighted-average cost of capital. We derive discount rates that are commensurate with the risks and uncertainties inherent in the respective reporting units and our internally developed projections of future cash flows.
Application of the goodwill impairment test requires judgment based on market and operational conditions at the time of the evaluation, including management’s best estimates of the reporting unit’s future business activity and the related estimates and assumptions of future cash flows from the assets that include the associated goodwill. Different assumptions of revenue growth rates, gross margin percentage, selling, general and administrative expense percentage and the discount rate used in the DCF model could results in different estimates of the reporting unit’s fair value as of each testing date.
We completed our annual goodwill impairment test as of April 1, 2020 for our six reporting units: Automation Solutions, Contamination Control Solutions and Global Semiconductor Services within the Brooks Semiconductor Solutions Group segment, as well Life Sciences Products, Sample Repository Solutions and GENEWIZ within the life sciences businesses. Based on the test results, we determined that no adjustment to goodwill was necessary. We conducted a qualitative assessment for the three reporting units within the Brooks Semiconductor Solutions Group segment and determined that it was more likely than not that their fair values were more than their carrying values. As a result of the analysis, we did not perform the quantitative assessment for these reporting units and did not recognize any impairment losses. We performed the quantitative goodwill impairment test for the three reporting units within the life sciences businesses. We determined that no adjustment to goodwill was necessary for these three reporting units. The Life Sciences Products and the Sample Repository Solutions unit’s fair values significantly exceeded book value. The GENEWIZ reporting unit, which was acquired in the first quarter of fiscal year 2019, also had a fair value in excess of its book value.
We are required to test long-lived assets, other than goodwill, for impairment when impairment indicators are present. For purposes of this test, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If we determine that indicators of potential impairment are present, we assess the recoverability of the long-lived asset group by comparing its undiscounted future cash flows to its carrying value. If the carrying value of the long-lived asset group
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exceeds its future cash flows, we determine fair values of the individual net assets within the long-lived asset group to assess potential impairment. If the aggregate fair values of the individual net assets of the group are less than their carrying values, an impairment loss is recognized for an amount in excess of the group’s aggregate carrying value over its fair value. The loss is allocated to the assets within the group based on their relative carrying values, with no asset reduced below its fair value. We did not test our long-lived assets for impairment during fiscal years 2020 and 2019 since no events indicating impairment occurred during the periods then ended.
Inventory
We state our inventory at the lower of cost or market amount and make adjustments to reduce the inventory cost to its net realizable value by providing estimated reserves for obsolete or unmarketable inventory. The reserves are established for the difference between the cost of inventory and its estimated market value based on assumptions related to future demand and market conditions. We fully reserve for inventories and non-cancelable purchase orders for inventory deemed obsolete. We perform periodic reviews of our inventory to identify excess inventories on hand. We compare on-hand inventory balances to anticipated inventory usage based on our recent historical activity and anticipated or forecasted demand for our products developed through our planning systems and sales and marketing inputs.
We adjust the reserves for obsolete or unmarketable inventory and record additional inventory write downs based on unfavorable changes in estimated customer demand or actual market conditions that may differ from management projections.
Deferred Income Taxes
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We consider recent historical income, estimated future taxable income, carry-forward periods of tax attributes, the volatility of the semiconductor industry and ongoing tax planning strategies in assessing the need for the valuation allowance. We evaluate the realizability of our deferred tax assets by tax-paying component and assess the need for a valuation allowance on an annual and quarterly basis. We evaluate the profitability of each tax-paying component on a historic cumulative basis and on a forward-looking basis while performing this analysis. After evaluating all the relevant positive and negative evidence as of March 31, 2018, we concluded that it was more likely than not that a substantial portion of the U.S. deferred tax assets would be realized. In the second quarter of fiscal year 2018 we reached a significant level of cumulative profitability in the U.S., coupled with an improved outlook of U.S. earnings. During the full fiscal year 2018, we reduced our U.S. valuation allowance against our U.S. net deferred tax assets resulting in a tax benefit of $77.2 million. In the fourth quarter of fiscal year 2020 we reduced our U.S. valuation allowance by an additional $1.0 million based on our conclusion that it is more likely than not that there will be sufficient future foreign source income to realize the foreign tax credit carryover balance held in the U.S. The remaining portion of our U.S. valuation allowance is related to the realizability of certain state tax credits and net operating loss carry-forwards. We also continue to maintain valuation allowances against net deferred tax assets in certain foreign tax-paying components as of the end of fiscal year 2020.
Stock-Based Compensation
We measure compensation cost for all employee stock awards at fair value on the date of grant and recognize compensation expense over the service period for awards expected to vest. The fair value of restricted stock units is determined based on the number of shares granted and the closing price of our common stock quoted on Nasdaq on the date of grant, and the fair value of stock options is determined using the Black-Scholes valuation model. Such fair values are recognized as expense over the service period, net of estimated forfeitures. The estimation of stock awards that will ultimately vest requires significant judgment. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. In addition, for stock-based awards where vesting is dependent upon achieving certain operating performance goals, we estimate the likelihood of achieving the performance goals. Actual results, and future changes in estimates, may differ from our current estimates.
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Recently Issued Accounting Pronouncements
For a summary of recently issued accounting pronouncements applicable to our Consolidated Financial Statements which is incorporated here by reference, please refer to Note 2, “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.
RESULTS OF OPERATIONS
Fiscal Year Ended September 30, 2020 Compared to Fiscal Year Ended September 30, 2019
Revenue
We reported revenue of $897.3 million for fiscal year 2020 compared to $780.8 million for fiscal year 2019, an increase of $116.4 million, or 15%. The COVID-19 pandemic has had varying impacts on our business for the fiscal year ended September 30, 2020. Further discussion of the impacts by each segment are discussed below.
Our Brooks Semiconductor Solutions Group segment reported revenue of $508.7 million for fiscal year 2020 compared to $446.7 million for fiscal year 2019, an increase of $62.1 million or 14%. We reported increases in contamination control solutions revenue of $39.2 million, automation revenue of $22.4 million, and services revenue of $0.4 million. The semiconductor markets are cyclical and may fluctuate significantly from quarter to quarter. Demand for our Brooks Semiconductor Solutions Group products and services is affected by these cycles and a prolonged effect of the COVID-19 pandemic could negatively impact demand for our products and services in this segment. To date, we have experienced some disruption in our supply chain as a result of the COVID-19 pandemic, which constrained our ability to ship some of the orders in our backlog during the second and third quarters of fiscal 2020. However, we do not believe that COVID-19 pandemic has impacted our bookings or demand for our semiconductor equipment products.
Our Brooks Life Sciences Products segment reported revenue of $129.8 million for fiscal year 2020 compared to $119.0 million for fiscal year 2019, an increase of $10.7 million or 9%. The increase in revenue was driven by consumables and instruments, which delivered record revenue levels driven by COVID-19 related demand, and an increase in revenue for our BioStore III Cryo systems, partially offset by decreases in revenue from automated cold sample management systems and infrastructure services revenue which were both impacted by customer site restrictions and schedule delays due to COVID-19.
Our Brooks Life Sciences Services segment reported revenue of $258.8 million for fiscal year 2020 compared to $215.2 million for fiscal year 2019, an increase of $43.6 million or 20%. We reported an increase of $40.2 million from GENEWIZ, which was composed of $20.0 million from the additional weeks of ownership for the twelve months ended September 30, 2020, and $20.2 million from organic growth. We reported an increase in Sample Repository Solutions revenue of $3.4 million primarily driven by informatics services and storage services, partially offset by declines in outsourced genomic services and transportation services, which were negatively impacted by COVID-19. Informatics revenue was primarily driven by the acquisition of RURO in February 2020.
We estimate that the impact of the COVID-19 pandemic on our two life sciences segments’ revenue for the fiscal year ended September 30, 2020 was a net reduction of approximately $11 million in the aggregate primarily attributable to a slow-down in the marketplace, reflecting the absence of a portion of the workforces within our customers. This slow-down was first present in the China market in the early part of the second quarter ended March 31, 2020 and began surfacing in the rest of the world in the latter part of March 2020. Partially offsetting these declines, we experienced an increase in demand for gene synthesis services and consumables and instruments, in support of numerous activities including research and development in the areas of virus detection and vaccines. During the fourth quarter of fiscal year 2020, demand and shipments for certain products and services in our life sciences businesses which were impacted by COVID-19 recovered to levels we experienced prior to the pandemic.
We anticipate continued growth in revenue from our Brooks Life Sciences Products segment and our Brooks Life Sciences Services segment through our internally-developed products and services and through our acquired businesses. We will continue to seek opportunities to expand our market share in the semiconductor and adjacent technology
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markets served by our Brooks Semiconductor Solutions Group segment. Our sales into the semiconductor and adjacent technology markets are substantially driven by our customers’ significant capital investments. These markets are cyclical, often fluctuating significantly from quarter to quarter. Demand for our Brooks Semiconductor Solution Group products is affected by these cycles.
Revenue generated outside the United States amounted to $559.9 million, or 62% of total revenue, for fiscal year 2020 compared to $455.6 million, or 58% of total revenue, for fiscal year 2019.
Operating Income
We reported operating income of $78.5 million for fiscal year 2020 compared to $46.0 million for fiscal year 2019. The increase of 70% was driven by higher revenue and gross profit, partially offset by an increase in both research and development expenses and selling, general and administrative expenses compared to the prior fiscal year. Drivers of the increases to research and development and selling, general and administrative expenses are described below.
Operating income for our Brooks Semiconductor Solutions Segment was $80.0 million for fiscal year 2020 compared to $66.2 million for fiscal year 2019. Operating income includes charges for amortization related to completed technology of $2.9 million and $3.6 million for fiscal years 2020 and 2019, respectively. Fiscal year 2019 also includes inventory step-up charges of $0.2 million. There were no such charges in fiscal year 2020. Adjusted operating income for our Brooks Semiconductor Solutions Group segment, which excludes the charges mentioned above, was $83.0 million for fiscal year 2020 compared to $70.0 million in fiscal year 2019. Please refer to Note 20, “Segment and Geographic Information”.
Operating income for our Brooks Life Sciences Products segment was $8.2 million for fiscal year 2020 compared to an operating loss of $3.1 million for fiscal year 2019. Operating income for our Brooks Life Sciences Products segment includes charges for amortization related to completed technology of $1.2 million in each of the fiscal years 2020 and 2019. Adjusted operating income for our Brooks Life Sciences Products segment, which excludes the charges mentioned above, was $9.4 million for fiscal year 2020 compared to an operating loss of $1.8 million in fiscal year 2019. Please refer to Note 20, “Segment and Geographic Information”.
Operating income for our Brooks Life Sciences Services segment was $21.6 million for fiscal year 2020 compared to $16.6 million for fiscal year 2019. Operating income for our Brooks Life Sciences Services segment includes charges for amortization related to completed technology of $6.9 million and $5.6 million for fiscal years 2020 and 2019, respectively, and restructuring related charges of $0.3 million in each of the fiscal years 2020 and 2019. Adjusted operating income for our Brooks Life Sciences Services segment, which excludes the charges mentioned above, was $28.8 million for fiscal year 2020 compared to $22.5 million in fiscal year 2019. Please refer to Note 20, “Segment and Geographic Information”.
Gross Margin
We reported gross margins of 42.4% for fiscal year 2020 compared to 40.5% for fiscal year 2019, an increase of 1.9 points. Gross margin increased 6.3 points in the Brooks Life Sciences Products segment, 2.7 points in the Brooks Life Sciences Services segment and 0.2 points in the Brooks Semiconductor Solutions segment. Cost of revenue for fiscal year 2020 included $11.0 million of charges for amortization related to completed technology as compared to $10.4 million incurred during fiscal year 2019. Cost of revenue for both fiscal year 2020 and 2019 included $0.3 million of restructuring related charges. Additionally, fiscal year 2019 included $0.2 million of inventory step-up charges from acquisitions. There were no such charges in the current year period. Excluding these charges, margins expanded 1.7 percentage points in fiscal year 2020, as compared to fiscal year 2019.
Our Brooks Semiconductor Solutions Group segment reported gross margins of 40.9% for fiscal year 2020 compared to 40.7% for fiscal year 2019. The gross margin improvement of 0.2 percentage points was primarily driven by volume leverage and lower amortization expense related to completed technology, partially offset by adverse impact from product mix. Cost of revenue during fiscal year 2020 included $2.9 million of amortization related to completed technology as compared to $3.6 million during fiscal year 2019. During fiscal year 2019, cost of revenue included $0.2 million of inventory step-up charges, which were attributable to the acquisition of Tec-Sem. There were no such charges
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in fiscal year 2020. Excluding these charges, margins declined 0.1 percentage points in fiscal year 2020, as compared to fiscal year 2019, primarily due to adverse product mix.
Our Brooks Life Sciences Products segment reported gross margins of 42.9% for fiscal year 2020 compared to 36.6% for fiscal year 2019. The improvement of 6.3 points was driven by material and labor cost reductions related to large stores and BIII Cryo systems, efficiencies realized installing large stores and performing infrastructure services, and volume leverage. Cost of revenue in each of the fiscal years 2020 and 2019 included $1.2 million of amortization related to completed technology. Excluding these charges, margins expanded 6.2 percentage points in fiscal year 2020, as compared to fiscal year 2019.
Our Brooks Life Sciences Services segment reported gross margins of 45.0% for fiscal year 2020 compared to 42.3% for fiscal year 2019. The improvement of 2.7 points is due to volume leverage, cost performance, and favorable service mix. Cost of revenue during fiscal year 2020 included $6.9 million of amortization related to completed technology as compared to $5.6 million incurred during fiscal year 2019. Cost of revenue for both fiscal year 2020 and 2019 included $0.3 million of restructuring related charges. Excluding these charges, margins expanded 2.8 percentage points in fiscal year 2020, as compared to fiscal year 2019.
Research and Development Expenses
Research and development expenses were $59.1 million in fiscal year 2020 compared to $56.4 million in fiscal year 2019. The increase of $2.7 million was due to increased expense of $2.5 million within the Brooks Life Sciences Services segment and $2.2 million within the Brooks Semiconductor Solutions segment, partially offset by a decline of $2.0 million within our Brooks Life Sciences Products segment.
Research and development expenses in our Brooks Semiconductor Solutions Group segment were $41.3 million in fiscal year 2020 compared to $39.1 million in fiscal year 2019. Higher research and development expenses were primarily attributable to employee related costs and outside services, driven by product development initiatives related to our vacuum robotics platform, contamination control solutions for lower technology nodes and reticle storage for EUV.
Research and development expenses in our Brooks Life Sciences Products segment were $8.8 million in fiscal 2020 compared to $10.8 million in fiscal year 2019. The decline in research and development expenses were primarily attributable to lower outside service costs and lower temporary employee costs supporting product development initiatives.
Research and development expenses in our Brooks Life Sciences Services segment were $9.1 million in fiscal 2020 compared to $6.5 million in fiscal year 2019. The increase of $2.5 million was primarily driven by acquisitions. The timing of the GENEWIZ acquisition added an additional $1.1 million of expense in fiscal year 2020 and the RURO acquisition added $0.6 million of additional expense. Investments in employee related costs and outside services to support development initiatives in our service offerings drove the remainder of the increase.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $241.1 million in fiscal year 2020 as compared to $212.0 million in fiscal year 2019. The increase of $29.2 million was due to increased expense of $17.9 million within the Brooks Life Sciences Services segment, $10.2 million within the Brooks Semiconductor Solutions segment, and $2.9 million within the Brooks Life Sciences Products segment. Our segment selling general and administrative expenses include allocations for Corporate general and administrative functions which drove $15.1 million of the $29.2 million increase. The increase in Corporate expenses were driven by legal and audit fees, and finance and IT department expenses. Corporate expenses, not allocated to segments, were $30.0 million in fiscal year 2020, compared to $31.8 million in fiscal year 2019. Unallocated corporate expenses included amortization expense related primarily to customer relationships of $30.8 million and $24.7 million, during fiscal years 2020 and 2019, respectively, and merger and acquisition related expenses of $0.5 million and $6.7 million, during fiscal years 2020 and 2019, respectively.
Selling, general and administrative expenses in our Brooks Semiconductor Solutions Group segment were $86.6 million in fiscal year 2020 as compared to $76.4 million in fiscal year 2019. The increase of $10.2 million was primarily
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due to an increase in corporate allocated costs and segment employee payroll costs, partially offset by decreases in employee travel, trade shows and conferences.
Selling, general and administrative expenses in our Brooks Life Sciences Products segment were $38.8 million in fiscal year 2020 as compared to $35.9 million in fiscal year 2019. The increase of $2.9 million is primarily due to higher corporate allocated costs and higher sales commissions partially offset by decreases in employee related costs as a result of restructuring actions taken in 2019 and 2020 and decreases in expenses related to employee travel, trade shows, and conferences.
Selling, general and administrative expenses in our Brooks Life Sciences Services segment were $85.8 million in fiscal year 2020 as compared to $67.9 million in fiscal year 2019. The increase of $17.9 million is primarily related to acquisitions, corporate allocations, and bad debt expense, partially offset by lower employee travel expense. The timing of the GENEWIZ acquisition added an additional $5.1 million of expense in fiscal year 2020 and the RURO acquisition added $1.2 million of additional expense in fiscal year 2020.
Non-Operating Income (Expenses)
Interest income – During fiscal years 2020 and 2019, we recorded interest income of $0.8 million and $1.5 million respectively, which primarily represented interest earned on our marketable securities.
Interest expense – During fiscal years 2020 and 2019, we recorded interest expense of $2.9 million and $22.2 million, respectively. The decrease in interest expense in the current fiscal year compared to the prior fiscal year is due to carrying less debt. We extinguished $495.3 million of debt during the fourth quarter of fiscal year 2019.
Loss on extinguishment of debt - During fiscal year 2019, we recorded losses on extinguishment of debt of $14.3 million of which $9.1 million was in connection with the syndication of the incremental term loan secured during the first quarter of fiscal 2019. The syndication to a new group of lenders during the second quarter of fiscal 2019 met the criteria of a debt extinguishment and therefore the amortization of the deferred financing costs associated with the origination of the incremental term loan was accelerated and recorded as a loss on extinguishment of debt in our statement of operations. In addition, as a result of the $495.3 million extinguishment of debt during the fourth quarter of fiscal year 2019, we recorded an additional $5.2 million loss on extinguishment of debt.
Other expenses, net – During fiscal years 2020 and 2019 we recorded other expenses, net of $1.4 million and $1.5 million, respectively.
Income Tax Provision
We recorded an income tax provision on continuing operations of $9.9 million in fiscal year 2020 compared to an income tax benefit of $0.1 million in fiscal year 2019. The income tax expense for fiscal year 2020 was primarily driven by the provision on earnings from operations during the year. The expense was partially offset by a $6.4 million stock compensation windfall benefit for tax deductions that exceeded the associated compensation expense, a $2.0 million benefit from research tax credits, and a benefit of $0.5 million from a reduction of deferred tax liabilities related to the extension of a tax rate incentive in China.
The income tax benefit during fiscal year 2019 was driven primarily by benefits in the U.S. jurisdiction related to continuing operations losses, research tax credits, and stock compensation deductions in excess of book expenses. We also recorded a $1.4 million benefit due to a state tax change that resulted from the acquisition of GENEWIZ. We also recorded a tax provision of $3.0 million during the year related to changes in the toll charge based on a change in tax legislation and the completion of all accounting of the charge under SAB 118. The overall benefit for fiscal year 2019 was partially offset by the tax provisions on earnings in our foreign jurisdictions during the year.
Discontinued Operations
On July 1, 2019, we completed the sale of the semiconductor cryogenics business which we include as a discontinued operation. We recorded $0.2 million of net loss from discontinued operations for fiscal year 2020. We recorded revenue of $109.5 million and $427.9 million of net income from discontinued operations for fiscal year 2019,
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which includes the net gain on sale of the business of $408.6 million. The net income is also inclusive of income from the ULVAC Cryogenics, Inc. joint venture in 2019. The income from discontinued operations only includes direct operating expenses incurred that (1) are clearly identifiable as costs being disposed of upon completion of the sale and (2) will not be continued by the Company on an ongoing basis. Indirect expenses which supported the semiconductor cryogenics business, and which remained as part of the continuing operations, are not reflected in income from discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
A considerable portion of our revenue is dependent on the demand for semiconductor capital equipment which historically has experienced periodic downturns. We believe that we have adequate resources to satisfy our working capital, financing activities, debt service and capital expenditure requirements for the next twelve months. The cyclical nature of our served markets and uncertainty in the current global economic environment, including the uncertainty related to the COVID-19 pandemic, make it difficult for us to predict longer-term liquidity requirements with sufficient certainty. We may be unable to obtain any required additional financing on terms favorable to us, if at all. If adequate funds are not available to us on acceptable terms or otherwise, we may be unable to successfully develop or enhance products and services, respond to competitive pressure or take advantage of acquisition opportunities, any of which could have a material adverse effect on our business, financial condition and operating results.
The discussion of our cash flows and liquidity that follows does not include the impact of the disposition of the semiconductor cryogenics business, unless otherwise noted, and is stated on a total company consolidated basis.
Overview of Cash Flows and Liquidity
Our cash and cash equivalents, restricted cash and marketable securities as of September 30, 2020 and 2019 consist of the following (in thousands):
Year Ended September 30,
2020
2019
Cash and cash equivalents
$
295,649
$
301,642
Restricted cash
6,877
3,529
Short-term marketable securities
67
34,124
Long-term marketable securities
3,101
2,845
$
305,694
$
342,140
Our cash and cash equivalents, restricted cash and marketable securities were $305.7 million as of September 30, 2020. Our cash balances are held in numerous locations throughout the world, with the substantial majority of those amounts located outside of the United States. As of September 30, 2020, we had cash and cash equivalents of $295.7 million, of which $241.1 million was held outside of the United States. If these funds are needed for the United States operations, we would need to repatriate these funds. As a result of recent changes in U.S. tax legislation, any repatriation in the future would likely not result in U.S. federal income tax. Our intent is to reinvest these funds outside of the United States and our current operating plans do not demonstrate a need to repatriate these funds for our U.S. operations. We had marketable securities of $3.2 million and $37.0 million as of September 30, 2020 and 2019, respectively. Our marketable securities are generally readily convertible to cash without an adverse impact.
Fiscal Year Ended September 30, 2020 Compared to Fiscal Year Ended September 30, 2019
Overview
Cash Flows and Liquidity - Cash and cash equivalents, restricted cash and marketable securities were $305.7 million at September 30, 2020 as compared to $342.1 million at September 30, 2019. The decrease of $36.4 million was comprised of outflows of $39.9 million for capital expenditures, $15.7 million for acquisitions, and $29.5 million for dividends, partially offset by cash inflows from operating activities of $37.9 million. Cash inflows from operating activities was $37.9 million and was comprised of $64.9 million of net income and $77.2 million of adjustments to net
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income for non-cash items, partially offset by $91.5 million of cash taxes paid for the gain on the sale of the semiconductor cryogenics business and $12.7 million uses of cash from the changes in operating assets and liabilities.
Divestiture and Extinguishment of Debt
In the fiscal year 2019, we completed the sale of the semiconductor cryogenics business for $661.5 million which excludes $6.3 million retained by the buyer at closing to preliminarily settle net working capital adjustments. Net proceeds from the sale were $553.1 million, net of estimated taxes payable and closing costs. In connection with the completion of the sale of our semiconductor cryogenics business, we used $348.3 million of the cash proceeds from the sale to extinguish the total remaining outstanding balance of the incremental term loan and $147.0 million of the cash proceeds from the sale to extinguish a portion of the outstanding balance of the term loan. The total amount of debt extinguished was $495.3 million.
Operating Activities
Cash flows from operating activities can fluctuate significantly from period to period as earnings, working capital needs and the timing of payments for income taxes, restructuring activities and other charges impact reported cash flows.
Cash flows provided by operating activities were $37.9 million during fiscal year 2020 and were comprised primarily of $50.5 million of earnings, which included $64.9 million of net income and a $77.2 million impact of non-cash related items, partially offset by $91.5 million of cash taxes paid for the gain on the sale of the semiconductor cryogenics business. Cash flows provided by operating activities also included $12.7 million in uses of cash from the changes in operating assets and liabilities. The changes in operating assets and liabilities that resulted in a use of cash consisted primarily of an increase in accounts receivable and inventory levels. These uses of cash were partially offset by an increase in accrued expenses and other liabilities, accrued compensation and tax withholdings and increased prepaid expenses and other assets. Cash flows provided by operating activities were $90.9 million during fiscal year 2019 and comprised primarily of earnings of $84.6 million and sources of cash provided by changes in operating assets and liabilities of $6.3 million. Earnings of $84.6 million consists of net income of $437.4 million offset by the impact of non-cash related charges of $352.8 million which includes the net gain on the sale of our semiconductor cryogenics business of $408.6 million and $13.4 million of contingent transaction fees paid related to the closing of the sale of the cryogenics business. The changes in operating assets and liabilities which results in sources of cash consisted primarily of an increase in accrued expenses and other liabilities which includes accrued taxes of approximately $95.0 million related to the sale of our semiconductor cryogenics business, as well as decreases in accounts receivable, prepaid expenses and other current assets and an increase of deferred revenue. These sources of cash were partially offset by decreased accrued compensation and tax withholdings.
Discontinued operations contributed $0.2 million loss and $427.9 million gain for fiscal years ended 2020 and 2019, respectively, in the net income referenced for the respective periods above. Net income for fiscal year 2019 includes the net gain on sale of the semiconductor cryogenics business of $408.6 million. The sale of the semiconductor cryogenics business was completed on July 1, 2019.
Investing Activities
Cash flows from investing activities consist primarily of cash used for acquisitions, proceeds from divestitures, capital expenditures and purchases of marketable securities as well as cash proceeds generated from sales and maturities of marketable securities. Cash used in investing activities was $22.7 million during fiscal year 2020 and consisted of $39.9 million for capital expenditures and $15.7 million for acquisitions, partially offset by $33.9 million of net proceeds from the purchases, sales and maturities of marketable securities. Cash provided by investing activities was $211.3 million during fiscal year 2019 and consisted of $661.6 million related to the proceeds from the sale of our semiconductor cryogenics business, partially offset by net cash outflows of $442.7 million to acquire GENEWIZ, $23.9 million of capital expenditures, and net purchases, sales and maturities of marketable securities of $16.2 million.
Capital expenditures were $39.9 million during fiscal year 2020 as compared to $23.9 million during the fiscal year 2019. Capital expenditures are made primarily for increasing capacity, replacing equipment, supporting new product development and improving information technology infrastructure. Capital expenditures for the fiscal year 2020
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included $8.3 million for construction in process of a building site in Suzhou, China. The site is intended to replace space currently leased in three different buildings in the same city and to allow for growth.
Financing Activities
Cash used for financing activities was $27.0 million during fiscal year 2020 and included net cash outflows for cash dividends paid of $29.5 million. Cash used for financing activities was $191.2 million during fiscal year 2019 and included net cash outflows of $163.8 million primarily related to the extinguishment of debt and principal payments on our term loans totaling $850.2 million offset by proceeds of $686.4 million. Proceeds from the incremental term loan in the first quarter of fiscal year 2019 were $340.5 million. In the second quarter of fiscal year 2019, we syndicated the incremental term loan which resulted in an extinguishment of the incremental term loan of $349.1 million and proceeds from syndication of $345.2 million. Cash outflows also included cash dividends paid of $28.9 million.
China Facility
In April 2019, we committed to construct a facility in Suzhou China, to consolidate the Suzhou operations of the GENEWIZ business and provide infrastructure to support future growth. The facility is being constructed in two phases. We have incurred $9.0 million of capital expenditures to date related to the construction of the facility, which includes $8.3 million and $0.7 million, respectively, for fiscal years 2020 and 2019. We expect to incur an additional $41 to $46 million of capital expenditures related to this facility over the next four years.
Capital Resources
Term Loans
On October 4, 2017, we entered into a $200.0 million term loan with Morgan Stanley Senior Funding, Inc., JPMorgan Chase Bank, N.A. and Wells Fargo Securities, LLC pursuant to the terms of a credit agreement with the lenders. The term loan was issued at $197.6 million, or 98.8% of its par value, resulting in a discount of $2.4 million, or 1.2%, which represented loan origination fees paid at the closing. The loan principal amount may be increased by an aggregate amount equal to $75.0 million plus any voluntary repayments of the term loan plus any additional amount such that our secured leverage ratio is less than 3.00 to 1.00.
The term loan matures and becomes fully payable on October 4, 2024. Installment principal payments equal to 0.25% of the initial principal amount of the term loan are payable on the last day of each quarter, with any remaining principal amount becoming due and payable on the maturity date. Subject to certain conditions stated in the credit agreement, we may redeem the term loan at any time at our option without a significant premium or penalty, except for a repricing transaction, as defined in the credit agreement. We are required to redeem the term loan at the principal amount then outstanding upon the occurrence of certain events, as set forth in the credit agreement.
On November 15, 2018, we entered into an incremental amendment to the credit agreement under which we obtained an incremental term loan in an aggregate principal amount of $350.0 million, issued at $340.5 million. The proceeds of the incremental term loan were used to pay a portion of the purchase price for our acquisition of GENEWIZ. On February 15, 2019, we entered into the second amendment to the credit agreement and syndicated the incremental term loan to a group of new lenders. The syndicated incremental term loan was issued at $345.2 million. Except as provided for in the amendments, the incremental term loan was subject to the same terms and conditions of the initial term loan.
On July 1, 2019, in connection with the completion of the sale of our semiconductor cryogenics business, we used $348.3 million of the cash proceeds from the transaction to extinguish the outstanding balance at July 1, 2019 of the incremental term loan and $147.0 million of the cash proceeds from the transaction to extinguish a portion of the outstanding balance at July 1, 2019 of the term loan. The total amount of debt extinguished on July 1, 2019 was $495.3 million.
The credit agreement, as amended, for contains certain customary representations and warranties, covenants and events of default. As of September 30, 2020, we were in compliance with all covenants and conditions under the credit agreement, as amended.
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In connection with our acquisition of GENEWIZ in November 2018, we assumed three five-year term loans and two one-year term loans. At September 30, 2020, we had an aggregate outstanding principal balance of $0.8 million under the three five-year term loans. The two one-year short term loans matured and were repaid in full as of September 30, 2019.
At September 30, 2020, the aggregate outstanding principal balance of all outstanding term loans was $50.4 million, excluding unamortized deferred financing costs of $0.4 million. Borrowings under the term loans bear variable interest rates. As a result, we may experience exposure to interest rate risk due to the potential volatility associated with the variable interest rates on the term loans. If rates increase, we may be subject to higher costs of servicing the loans which could reduce our profitability and cash flows. During the year ended September 30, 2020, the weighted average stated interest rate on the term loans was 4.1%. During the year ended September 30, 2020, we incurred aggregate interest expense of $2.4 million on the term loans, including $0.2 million of deferred financing costs amortization. Our debt service requirements are expected to be funded through our existing sources of liquidity and operating cash flows.
Line of Credit Facility
We maintain a revolving line of credit under a credit agreement with Wells Fargo Bank, N.A. and JPMorgan Chase Bank, N.A that provides for a revolving credit facility of up to $75.0 million, subject to borrowing base availability, as defined in the credit agreement. The line of credit matures on October 4, 2022. The proceeds from the line of credit are available for permitted acquisitions and general corporate purposes.
As of September 30, 2020, we had approximately $45.5 million available for borrowing under the line of credit. There were no amounts outstanding pursuant to the line of credit as of September 30, 2020. The amount of funds available for borrowing under the credit agreement may fluctuate each period based on our borrowing base availability. The credit agreement contains certain customary representations and warranties, a financial covenant, affirmative and negative covenants, as well as events of default. We were in compliance with the credit agreement as of September 30, 2020. Although we believe we will be able to generate sufficient cash in the United States and foreign jurisdictions to fund future operating costs, we secured the revolving line of credit as an additional assurance for maintaining liquidity in the United States during potentially severe downturns of the cyclical semiconductor market, as well as for strategic investments and acquisitions.
Dividends
Our Board of Directors declared the following dividends during the fiscal years 2020 and 2019 (in thousands, except per share data):
Dividend
per
Record
Payment
Declaration Date
Share
Date
Date
Total
Fiscal Year Ended September 30, 2020
November 1, 2019
0.10
December 6, 2019
December 20, 2019
$
7,362
January 24, 2020
0.10
March 6, 2020
March 27, 2020
7,375
April 29, 2020
0.10
June 5, 2020
June 26, 2020
7,376
July 29, 2020
0.10
September 4, 2020
September 25, 2020
7,383
Fiscal Year Ended September 30, 2019
November 6, 2018
$
0.10
December 2, 2018
December 20, 2018
$
7,191
January 30, 2019
0.10
March 1, 2019
March 22, 2019
7,212
April 26, 2019
0.10
June 7, 2019
June 28, 2019
7,222
July 31, 2019
0.10
September 6, 2019
September 27, 2019
7,230
On November 5, 2020, our Board of Directors approved a cash dividend of $0.10 per share of our common stock. The total dividend of approximately $7.4 million will be paid on December 17, 2020 to shareholders of record at the close of business on December 4, 2020. Dividends are declared at the discretion of our Board of Directors and depend on actual cash flow from operations, our financial condition, debt service and capital requirements and any other factors our
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Board of Directors may consider relevant. We intend to pay quarterly cash dividends in the future; however, the amount and timing of these dividends may be impacted by the cyclical nature of certain markets we serve or the impact of the COVID-19 pandemic. We may reduce, delay or cancel a quarterly cash dividend based on the severity of a cyclical downturn or if the effects of the COVID-19 pandemic are prolonged.
Share Repurchase Program
On September 29, 2015, our Board of Directors approved a share repurchase program for up to $50.0 million worth of our common stock. The timing and amount of any shares repurchased are based on market and business conditions, legal requirements and other factors and may be commenced or suspended at any time at our discretion. There were no shares repurchased under this program during fiscal year 2020.
Contractual Obligations and Requirements
Our contractual obligations were as follows at September 30, 2020 (in thousands):
Less than
One to
Four to
Total
One Year
Three Years
Five Years
Thereafter
Contractual Cash Obligations:
Pension and other post-retirement benefit plans
6,944
538
850
867
4,689
Term loan
50,415
827
—
49,588
—
Inventory purchase commitment
127,900
116,047
11,853
—
—
IT-related commitments
22,607
6,921
9,844
5,524
318
China facility commitments
13,153
9,516
3,637
—
—
Other commitments
229
229
—
—
—
Total contractual cash obligations
$
221,248
$
134,078
$
26,184
$
55,979
$
5,007
Other Commercial Commitments:
Letters of credit
$
1,267
$
745
$
522
$
—
$
—
Total commitments
$
222,515
$
134,823
$
26,706
$
55,979
$
5,007
The letters of credit of approximately $1.3 million are related primarily to customer advances and other performance obligations at September 30, 2020. These arrangements guarantee the refund of advance payments received from our customers in the event that the product is not delivered or warranty obligations are not fulfilled in accordance with the contract terms. These obligations could be called by the beneficiaries at any time before the expiration date of the particular letter of credit if we fail to meet certain contractual requirements. None of these obligations were called during fiscal year 2020, and we currently do not anticipate any of these obligations to be called in the near future.
As of September 30, 2020, the total amount of net unrecognized tax benefits for uncertain tax positions and the accrual for the related interest was $19.2 million, all of which represents a potential future cash outlay, in comparison to September 30, 2019 where the balance was $18.3 million. The increase in the balance over the year was primarily driven by normal interest accruals on our preexisting unrecognized tax benefits for uncertain tax positions. We are unable to make a reasonably reliable estimate of the timing of the cash settlement for these liabilities since the timing of future tax examinations by various tax jurisdictions and the related resolution is uncertain, however, $15.3 million of this liability is indemnified by the sellers of GENEWIZ.
Off-Balance Sheet Arrangements
As of September 30, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.