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Brooks Automation, Inc. (NASDAQ:BRKS)

F1Q13 Earnings Call

January 31, 2013 4:30 pm ET

Executives

Martin S. Headley – Executive Vice President and Chief Financial Officer

Dr. Stephen S. Schwartz – President and Chief Executive Officer

Analysts

Satya Kumar – Credit Suisse

Patrick Ho – Stifel Nicolaus & Company, Inc.

Ben Pang – B. Riley Caris

Edwin Mok – Needham and Company

Olga Levinzon – Barclays Capital

Jairam Nathan – Sidoti & Company, LLC

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Brooks Automation Q1 Financial Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded Thursday, January 31, 2013.

I would now like to turn the conference over to Mr. Martin Headley, Executive Vice President and Chief Financial Officer. Please go ahead sir.

Martin S. Headley

Thank you very much Christy and good afternoon everybody. I’d like to welcome each of you to the first quarter financial results conference call for Brooks’ financial year 2013. In addition to covering the results of the quarter that ended on December 31, we’ll be providing an outlook into the second quarter of fiscal 2013 that quarters will end on March 31.

Our press release was issued at the close of market today and is available at the Investor Relations page of our website at www.brooks.com, as are the illustrative PowerPoint slides to be used during our prepared comments during today’s call.

I’d like to remind everybody that during the course of the call, we’ll be making a number of forward-looking statements within the meaning of the Private Litigation Securities Act of 1995. There are many factors that can cause actual results or other events to differ from those identified in such forward-looking statements. I will refer you to the section of our earnings release titled Safe Harbor statement. The Safe Harbor slide in the aforementioned PowerPoint presentation on our website and the company’s various filings with the SEC. We make no obligation to update these statements, should future financial data or events occur that differ from forward-looking statements presented today.

I’d also like to note we also make reference to a number of non-GAAP financial measures which are used to, in addition to and in conjunction with results presented in accordance with GAAP. Management believes these non-GAAP measures provide an additional way of viewing aspects of our operations and performance and when considered with the GAAP financial results and the reconciliations of GAAP measures provide a more complete understanding of the Brooks’ business.

Non-GAAP measures should not be relied upon to the exclusion of GAAP measures.

With me today is Brooks’ President and Chief Executive Officer, Steve Schwartz who will follow my introductory remarks with some commentary on the business environment and our current initiatives. I’ll then provide an overview of the first quarter financial results and a summary of our financial outlook for the quarter ended March 31.

Following my comments regarding my upcoming retirement some comments from Steve, we will then take your questions. During our prepared remarks, I will from time to time make reference to the slides available to everybody on the Investor Relations page of our website.

To frame the events of the quarter, summary is provided in slide number 3. We experienced a further 20% sequential downturn in the December quarter for front-end semiconductor product. This performance was actually favorable to our expectations, as we saw a late quarter hold to the downwards trend. Countering this was slightly higher rate of decline in products sold to general vacuum purposes resulting in a 31% sequential decline for revenues into industrial market.

A $98.1 million, which were above the top end of our guidance range for revenues, and the results our adjusted earnings also exceed the guidance for the $0.5 net loss for diluted share. These results include two months of our Crossing Automation acquisition that closed on October 29, 2012. The quarter included $6.5 million of product revenues reported in the Brooks Product Solutions segment and $2 million of services revenues reported in the Brooks Global Services segment.

We were very active with restructuring and integration programs during the quarter. The actions taken during the past two quarters have removed permanent annualized costs of $40 million from operating expenses and $5 million from cost of goods sold.

These programs addressed the integration of the Crossing Automation acquisition, removal of cost and response to a somewhat U-shaped trough to the semiconductor capital equipment cycle, permanent improvements to our operating cost structure, downsizing the Life Sciences footprint and the initial steps taken to close our Petaluma, California, manufacturing facility as we outsource manufacture of our Polycold branded products to Malaysia. Additionally, we flexed down our cost of goods sold by $4 million in taking down our contractor workforce.

The order environment during the quarter was weak, with bookings of $92.6 million. This represented a sequential decline of 5%. Consistent with an expectation of the December quarter being a trough quarter, the book-to-bill of our business into semiconductor and adjacent markets was 0.99. However, the Life Sciences book-to-bill was lower 0.68 with the specter of sequestration at the end of the quarter weighing hard on capital expenditure decisions for many of the participants in these markets.

With that scene setting, let me introduce Stephen Schwartz.

Dr. Stephen S. Schwartz

Thank you, Martin. Good afternoon everyone and thank you for joining our call. We’re pleased to have the opportunity to be able to report the results of the first quarter of our fiscal year. As Martin mentioned, December revenue and earnings performance were ahead of what we had forecasted for the quarter. It’s too early to say that we’re experiencing an upturn in the semiconductor related portion of our business, but the upside that we saw to our estimates was related to some promising signs in that market.

In the quarter, we had a fast turn systems request from one of our Korean OEMs for multiple leading edge thin-film deposition systems. We had won the design of this tool 18 months ago, but these tool requests came quickly and we were able to respond. Additionally, the Crossing Automation team which is now part of our systems group was able to contribute more revenues in our forecast.

We’re also encouraged by the healthy capital spending projections that have been announced by some of the large IDMs of late. And although we have yet to see meaningful changes in order patterns from our OEM customers OEM customers, we’re positive that there is some kind of recovery coming in the next few quarters.

I’d like to spend a moment reviewing the results of our key initiatives as even in the down quarter we had several notable highlights that bode well for our future. On the product developments and market penetration side, we had another strong quarter. We captured another 21 OEM design wins essentially right on our average to the previous two years, eight of the wins were for front-end semi applications and 13 were for adjacent markets that include back-end packaging and MEMS, which are our principal targets for adjacent technology wins. Our loan Japan win for the quarter is one that provides tremendous upside potential. After years of persistence and determination, we won a vacuum robot application at a major Japanese semiconductor equipment maker. It was one of the several possible tool platforms for our next-generation technology, but it’s a good start and we are encouraged that it will lead to future success during the coming quarters and years.

After only two months of being together, we already have won a piece of business that incorporates both Brooks and Crossing Automation technologies into one product. Our Crossing wafer engine combined with a sophisticated end effector from Brooks, exactly satisfy the customer need for our back-end application, and we’ve identified other customer opportunities where our combined capabilities make our joint solutions more competitive in the marketplace.

In addition to the product and sales alignment, the rest of the Crossing Automation integration activity is going very well. We’re moving with great speed and focus to take advantage of all of the benefits brought by that acquisition. We’ve finalized the new organization. We’ve already taken a significant portion of the planned actions that will deliver the $12 million in synergies provided by this combination.

We’re ahead of schedule on our 15% ROI target as we expect the Crossing Automation acquisition to be accretive in the March quarter. In our Life Science Systems business unit, we made solid progress. We topped $14 million in revenue and had a significant increase in gross margin where we hit 44.5%. Thanks to a boost from a planned software project.

We won additional five new automated cold stores at four customers in three countries, and we’re competitive in all of the large automated store opportunities that we bid on. We also won a contract with the larger pharmaceutical manufacturer to perform an upgrade on an aging installed system. It’s noteworthy that we anticipate that the installed base of automated systems that are more than 10 years old will develop into steady revenue stream during the coming years.

Also, in its legal product line, we increased sales again, albeit off a small starting point, but the focus of our sales team and the excellence of the product in the field has allowed us to build a very strong pipeline going into 2013. We are particularly encouraged by one other news item in our Life Science business, and that we’re partnering with a newly established Chinese biobank that will enable us to be a part of a highly influential center of excellence in Shanghai.

Asia is becoming increasingly important as a market for upcoming biobanks. We see an increase in government funding, as well as the shifts by the pharmaceutical industry toward focusing research on the large and were relatively untapped populations in Asia. We will report more on the implications of this program on subsequent calls.

Let me shift now to an update on our operational and profitability improvement initiatives. Since August, we publicly disclosed the few activities related to cost reductions and restructuring. These initiatives are being taken to capture synergies from acquisitions in both the Life Science and core businesses, and provide organizational focus around one of our most critical business objectives, ensuring that we’re better able to deliver higher levels of profitability at all points in a SEMI cycle.

Some of these major actions include reducing global staffing by 180, consolidating or closing eight different sites around the world, investing in the reconstruction and rationalization of our supply chain to be able to secure lower parts cost and a more competitive sources of supply.

The impact of these changes will be to reduce our annual cost structure by $23 million, of which approximately one-third will be from cost of goods and two-thirds from operating expenses, and we are not finished. At this time, we have more than 30 value engineering activities underway to reduce the cost of our designs and we are in a multi-quarter product line rationalization exercise that will necessarily help us to be more efficient with our engineering focus as we discontinue some older and unprofitable product lines that we supported beyond useful life, and which have consumed too much of the company’s resources.

In the last quarter, we discontinued two older product lines we have a number of others on the list to be worked with customers in 2013. These deductions will continue throughout the year, but improvements are now starting to show through to our bottom line.

The upside of all these activity will be to increase gross margin and improve overall profitability. While these actions have been in process for sometime, it’s been difficult to show much in a way of progress because of the steep decline in the market.

However, one indicator with the progress is our change in gross margin during the downturn. Over the last two quarters, while revenue dropped by 30%, our gross margin only decreased by 110 basis points, when our SEMI revenue recovers to even mid-cycle levels, the results should be measurable and meaningful.

At the same time, we’ve reduced overall expenses; we reinforce our commitment to our investment in R&D and E. We continued to make significant investments for new product and new market development. We solidified our effort significantly in this area and are just now beginning to see the fruits of these investments as contributions to the top line are now coming.

We believe that are the current level, we are adequately investing for the growth opportunities in our business sectors and we’re specifically targeting areas of SEMI and Life Sciences where we can deliver the most value and will derive the highest return on our innovation.

In terms of outlook, our March quarter is starting out well and we anticipate some list on the top line, driven mostly by the core business and we’ll also benefit from a full quarter of revenue from Crossing Automation. Although our bookings were down in the December quarter, we’ve seen them stabilize and we are encouraged by some of the orders that are coming through in January.

We projected our services business would be roughly flat with December, and we are seeing some shifting out in a couple of our Life Sciences projects, so we forecast that our March revenue will be approximately $12 million before growing again in the June quarter.

This slight drop-off is a result of delays in commitments from two European population biobanks, which are fully committed and funded, but are simply postponed for what we hope is only one quarter. We’re at an interesting point in the history of the company. We have an extremely strong product portfolio in the development engine that is allowing us to innovate and capture wins in market share.

During this SEMI equipment cycle downturn, we continue to invest in our profitability initiatives, which is substantial and we simultaneously restructured and leaned out much of our cost structure, so that we’ll run more effectively from now on. We’re marking our mark in Life Sciences and enjoyed the leadership position in this space that we’ve entered, and we’ll continue to build out our presence both by internal product development and through acquisitions that add capability to our cold chain roadmap.

We’re enthusiastic about the opportunities that are in front of us and all that we have planned to accomplish this year and we definitely look forward to being able to report to you on our progress.

I’ll now turn the call back over to Martin.

Martin S. Headley

Thanks very much, Steve. Slide number 4 reflects the 20% sequential reduction in revenues from $119.4 million in the September quarter to $8 million in the December quarter. The gross profits of $31.3 million presented here on a non-GAAP basis for the December quarter, excludes the $2.2 million of purchase accounting charges reflected in cost of goods sold.

The adjusted gross margin impact of the revenue decline was limited to 40 basis points with high margin contributions from Life Science Systems business on the Crossing acquisition. If you exclude the impact of 260,000 higher amortization cost of goods sold from the Crossing acquisition on a comparable basis, the underlying gross margins only declined 28 basis points, despite the significant revenue decrease. Operating costs control measures and $3.2 million of restructuring related benefits resulted in a limitation of the operating expense increased to $700,000 substantially less than the incremental Crossing Automation expenses.

Turning to slide number 5, the waterfall chart demonstrate the various moving pieces. The organic change in our Brooks Product Solutions business was $28.1 million or 33% sequential decline in revenues with an $11 million reduction in profits that took the segment to a loss position in the quarter.

The drop-through on the revenue declines was relatively modest 39%. The Life Sciences business produced slightly high revenues and as a result of much more software components of the revenues generated a $900,000 increase in gross profits.

Meanwhile in the core Brooks business within Brooks Global Services segment, this decline 10% organically from $21.1 million to $19.2 million; the results of the restructuring actions, the drop-through from this revenue decline was limited to $700,000 or 35% rate on our business that provides variable contributions well in excess of 50% on the upside. As previously mentioned, the operating expense benefits of restructuring actions was $3.2 million.

The slide 6 shows the GAAP net loss for the first quarter of fiscal 2013 with $9.2 million or $0.14 per diluted share, which includes special charges of $7.5 million before tax, being the restructuring and integration charges after tax of $3.4 million, or $0.05 a share, merger costs of $500,000 after tax, or $0.01 a share and after tax purchase accounting charges of $1.5 million.

Adjusted net loss excluding these charges was $3.8 million, or $0.06 per share. Our effective tax in light of the weak opening to the fiscal year is now projected a 28% with a cash tax rate of around 12%. The presence of non-cash taxes in fiscal 2013 following our reinstatements of deferred tax assets in September complicates the comparability of Brooks net results.

As I believe looking at adjusted EBITDA continues to be a meaningful way of judging the cash profits trends. Sequentially, adjusted EBITDA declined from $10.2 million in the September quarter to $3.3 million in the December quarter. This represents a 32% sequential drop-through, which is below the long-term trend drop-through rate since the major restructuring in 2009. Slide number 7 illustrates this trend.

A reconciliation of this non-GAAP measure to the appropriate GAAP comparison is included as an attachment to our press release. Slide 8 portrays how the EBITDA performance resulted in cash flow from operations of $5.1 million. We were successful in our management of working capital including reductions of $4.7 million in core Brooks inventories.

Free cash flow, i.e., cash flow from operations less capital expenditures was $4.5 million. We’ve returned $5.3 million of cash to shareholders in the form of dividends during the quarter, and had cash outflows of $56 million related to the Crossing acquisition. We closed the quarter with a $142 million of cash and marketable securities. As shown on slide number 9, our balance sheet is very healthy with a $123 million of net working capital, which increased $7 million from the acquired Crossing balance sheet with $9.7 million of reductions in our core net working capital.

Receivables velocity was flat with a DSO of 59 days. Inventories increased with the addition of Crossing inventories, but core inventories as I mentioned were trimmed by $ 4.7 million. The calendar year end shutdown of operations contributed to a much lower accounts payable at the end of this quarter.

Additional fixed assets associated with the Crossing business were minimal and we’ve revised downwards our capital expenditure requirements in the current environment in the lives of the current environment. And after another quarter of minimal spend in the March quarter, expect our full fiscal year capital expenditures to be between $6 million and $8 million. Goodwill and other intangibles increased $56 million from the Crossing Automation acquisition.

Beginning on slide number 10, we breakout our results for each of the three segments in the first quarter of fiscal 2013. The Brooks Life Science systems business essentially broke even at $14.1 million of revenues in the December quarter. Gross margins improved to 44.5% with favorable impact from a mix favoring high margin software upgrades.

With a relatively larger proportion of our business represented by Life Science systems, the Brook, the business attracts a higher proportion of our corporate overhead allocation. And this allocation increase pulled on the contribution reflecting in our external results.

Turning to slide number 11; we’re presenting the sequential performance of the Brooks Product Solutions segment, excluding the fair value purchase accounting adjustments, excluded from our adjusted earnings. As I noted earlier, our organic revenues into Front End semiconductor were down $10.4 million or 20%.

Timely and comprehensive cost actions ensured that we kept gross margin above 30% even at these business levels. Restructuring actions and reductions in corporate cost allocations resulted in reduced operating expenses for the segment despite the addition of the Crossing business. Overall, the segment reported a $5.4 million loss.

On slide number 12, we again present the sequential performance of the Brooks Global Services segment. Here again excluding the fair value purchase accounting adjustments. We experience a 22% reduction in our organic robot repair business that offset the addition of $2 million in service and spares revenues from the Crossing business. Overall gross margin improved to 29.1% and we look to reaching 30% levels again in near future.

Additional global infrastructure costs came with the Crossing acquisition. These costs will be key elements of our integration focus over the next three to four months as we eliminate duplicate facilities and functions. Overall, the segment produced $1.6 million of segment operating income at the 7.7% margin.

On slide 13, we provide the revenue trends of the business excluding the divested contract manufacturing business and including our acquisitions. We’re confident with the December quarter revenues represent the trough of this current cycle. We’re starting to see bookings recovery in particular for pumps and robots. Additionally, we can build on the good starting point in adjacent market, where back-end semiconductor revenues are already running at a $20 million annualized run rate.

Accordingly, on side 14, we provide guidance of revenues for between $102 million and $112 million for the March quarter. This reflects a 3% improvement from a full quarter of the Crossing business in the March quarter as compared to 2 months in the December quarter.

A flat to 15% decline in the Life Science Systems business of the weaker bookings performance in the December quarter and a 17% to 32% increase in the technology business where front-end semiconductor demand grows.

Additionally, we have a couple of large new opportunities that we should land in the near future, but are not assuming to do so in the March quarter and not in the guidance we provided. We see these contributing to an even more robust recovery in the June quarter.

Of these levels of guidance, we guide adjusted EBITDA to be between $5 million and $9.5 million for the March quarter. And this will translate to adjusted bottom line performance of between $0.05 loss per diluted share and break-even.

Excluded from these projections of the residual fair value acquisition adjustments and restructuring associated with the actions already announced, consequently our guidance for the GAAP loss per share is between $0.10 and $0.03.

Finally, two announcements which were also included in our financial results release. First, we announced our Board of Directors have declared a dividend of $0.08 per share payable on March – payable on March 29 to shareholders of record as of March 8. And secondly, after a period of contemplation and subsequent discussion with Steve, I’ve decided to retire as CFO of Brooks and will be leaving the company in June, after an orderly transition to another yet unidentified successor.

I’ve enjoyed the challenging, but rewarding period of Brooks, where working with many outstanding people we have addressed unique business challenges and repositioned Brooks for a successful future. I thank, Steve, and before him, Bob Lepofsky, and together with the Board of Directors for this opportunity. I look forward to a different set of experiences with as-yet-unplanned encore activities. And I believe at this stage, Steve would like to make some comments before we turn the call over for questions.

Dr. Stephen S. Schwartz

Yes I would. Thank you, Martin. Martin, let me just say it’s been a true honor and privilege to have teamed with you over these past three years. And the support you’ve provided to me on my ramp up to CEO and throughout my tenure at Brooks, has been exemplary and much appreciated.

Mark and I, as well as all the Brooks employees will certainly miss working with you, and I’m sure your friends and colleagues on the call, as well as across your professional network look forward to wishing you the best in this new life chapter. Thank you very much.

Martin S. Headley

Thank you. And with that operator we’ll be happy to take questions please.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) One moment please for the first question. Our first question comes from the line of Sathya Kumar from Credit Suisse. Please proceed with your question.

Satya Kumar – Credit Suisse

Yeah, hi, thanks. And, Martin, we will really miss you. Wish you the very best for your transition.

Dr. Stephen S. Schwartz

Thank you very much Satya.

Satya Kumar – Credit Suisse

I guess like on the cycle, I guess if I take Crossing out of last year and if I take contract manufacturing out of 2011, I guess you guys in the product business were probably down roughly about 25% year-on-year. Typically, you see a bigger amplitude related to the cycle. If you’re looking at, let’s say an increase in CapEx that starts to approach a flattish sort of trajectory for this year, how would you think about the product business for the full year? And, likewise, on the Life Sciences business, you mentioned that March would be down a bit in the retail bookings in December, how do you think about the trajectory of that business for the remainder of this year?

Martin S. Headley

I think Satya with the addition of Crossing that we would see that because of the significant back-end loading to the likely semiconductor demand within 2013. We will still be down in our revenues from SEMI Front End products on a year-to-year basis from 2012 to 2013, but should be starting out 2014 with a very strong level and runway for our products business there. So just with the nature of whether that looks likely that those orders will come in, it looks like we will be down sequentially even if the calendar year capital expenditures were as good as flat.

Satya Kumar – Credit Suisse

Then on Life Sciences?

Dr. Stephen S. Schwartz

Yeah, Satya on the Life Sciences, we’re learning that as we continue to have success in the business that these $1 million, $2 million, $3 million projects still provide a little bit of a lumpiness in the business. We project the business to grow, we know the market opportunity continues to grow, but we’re going to see these $1 million or $2 million up and down from time to time, but we’re still very positive on the business and the opportunity that it presents.

We are very close to some stores that have moved out. They could just as easily move in a quarter, but we’re still bullish on that business opportunity, on the growth of the business. We would hope that as we get towards the end of the fiscal year that we would be up closer to a $70 million run rate compared to where we are today.

Satya Kumar – Credit Suisse

And then, Steve, one follow-up, I think you mentioned that you saw some turns business in the quarter from one of your Korean OEMs for that position. I was wondering if you could clarify to that which were [idolatric] or a metal deposition. And I think in the last three or six months, you had mentioned that the visibility from your Korean customers has been unusually limited. But it sounds like there has been some change. How do you sort of think about the (inaudible) that, as you look at the bright side of opportunities beyond the March quarter with your Korean OEMs?

Dr. Stephen S. Schwartz

Yeah, Satya, so we like the position we have with them. We really don’t get much visibility out all the systems that we are able to turn was helped actually, because we had some product that was in the inventory which was really helpful. The specific application I shouldn’t speak to, but it’s a thin – very thin film the CVD application. And we were aware when we won the business about a year and a half ago, the application that it was four. And there are several of these kinds of films for which the system architecture is well suited and already qualified. So we like that part of it, we anticipate that as there is any further development in Korea at this particular front-end device node that it will drive more business. But we are relegated to very short window lead times and I can’t tell you specifically what line prompted pretty rush order, but business for Korean OEM in Korea.

Satya Kumar – Credit Suisse

That’s very helpful. Thanks a lot.

Operator

Our next question comes from the line of Mr. Patrick Ho from Stifel Nicolaus. Please proceed with your question.

Patrick Ho – Stifel Nicolaus & Company, Inc.

Thank you very much. And Martin I’d like to extend my congrats and best of luck going forward.

Martin S. Headley

Thank you very much Patrick.

Patrick Ho – Stifel Nicolaus & Company, Inc.

First, Steve, maybe on the core semiconductor automation business, I know we’ve talked about it, but the advanced packaging market and some of the emerging opportunities there, you detailed that you generated some good design wins this past quarter. Maybe if you could give a little color in, where in your product portfolio are you getting these wins? And what type of applications are they for?

Dr. Stephen S. Schwartz

Yes, Patrick these are four – the robotic applications primarily on the back-end. There is a lot of complexity associated with some of the wafer handing if you will, so end effector designs. But that atmospheric and vacuum level, we have the ability really to adapt. We spent a lot of the last two years focused on how do we capture more business from the back-end and wafer level packing applications. And as Martin mentioned, we’re at a run rate now about $20 million of annual business driven by the back-end with more opportunity coming we think.

Patrick Ho – Stifel Nicolaus & Company, Inc.

Great. Going to the Life Sciences side for a second, I know you’ve talked about the different cold storage products that you have. Some of the revenue that you generated this past quarter, and maybe looking forward, are they on the more medium-sized systems or on the larger-sized systems?

Dr. Stephen S. Schwartz

Patrick, what we have mostly is if it’s a pharmaceutical company it’s a large sized – large-size store means measured in millions. And if it’s a bio store typically medium-sized system might be 500,000 to 700,000 samples and we had a mix.

Patrick Ho - Stifel Nicolaus & Company, Inc.

Okay. And going forward, how do you think that mix could turn out, say, for the next, at least for calendar 2013? Where do you see the greater penetration?

Dr. Stephen S. Schwartz

We think that the growth is – so that we think the compound storage that relates to the pharma business is relatively steady, we think the growth in this market opportunity really comes from bio stores. So for the colder stores of medium and smaller-sized.

Martin S. Headley

And we are seeing quite a number more of actually the smaller stores be successful in terms of what’s in the pipelines for the balance of the fiscal year.

Patrick Ho - Stifel Nicolaus & Company, Inc.

Great. And then final question, Martin, for you. Just housekeeping, I was a little unclear about what the tax rate was on a going-forward basis for your fiscal year, and I guess calendar year. What was the tax rate again?

Martin S. Headley

28% is our effective tax rate for both purposes of which 12%, so not 12% of 28%, but 12% absolute are cash taxes and the balance on non-cash taxes.

Patrick Ho - Stifel Nicolaus & Company, Inc.

Great. Thank you very much.

Operator

Our next question comes from the line of Ben Pang from B. Riley Caris. Please proceed with your question.

Ben Pang – B. Riley Caris

I’d also like to offer my best wishes to Martin. You’ve done a great job here. To follow-up on the earlier line of question in terms of the Korean business that you won. Is that an indication that that business has come back or this kind of a market share win scenario? Is this a rebound in the business, or market share gain?

Dr. Stephen S. Schwartz

So Ben, hard to say, so to me let me put it this way, it’s something that we won to a while ago. I think the equipment maker that we sell the product to has been in qualification. And what turned on this particular thing is difficult to say, but obviously it was a win for this particular application that got us going here in production environment.

Ben Pang – B. Riley Caris

Okay. And then in terms of the Crossing business, is the behavior that they’re seeing near-term pretty much exactly what you are seeing with your own business? Is there any kind of difference in terms of the (inaudible) mix or whatever that might cause there to be a deviation later on in the year?

Dr. Stephen S. Schwartz

Yeah, so Ben, a pretty significant portion of the Crossing business is directly to the end-user. So they are getting a little bit different look and maybe a little bit earlier look with some of the products goes directly to IDMs. So again a little bit of earlier and more encouraging look if you will.

Ben Pang – B. Riley Caris

And is that one of the reasons why there’s an offset on the service?

Dr. Stephen S. Schwartz

Sorry, Ben what do you mean by the offset, sorry.

Ben Pang – B. Riley Caris

In your prepared commentary, you were talking about this, maybe I misunderstood it. Their service revenues are higher than what you expected?

Dr. Stephen S. Schwartz

No, no. you mean the $2 million that we allocated to services?

Ben Pang – B. Riley Caris

Yeah.

Dr. Stephen S. Schwartz

As we got into it, there was actually the identification of the spare part business and where that should have gone, so the difference between what we previously said what we did is the spare parts business properly belonged and is going to be managed in the Services business. So for consistency sake we moved it there in terms of the way they characterized it, they have the spare parts actually within what we would have called the Products business. So it’s more an alignment around the way that we normally report. So that wasn’t so much something that was news to us. It was half something we didn’t communicate as effectively as we should have done.

Ben Pang – B. Riley Caris

Okay. And the final question is on the Polycold business. Can you give us any indication, do you see better signs of a ramp up there? And in general, what’s the lead time right now for that part of the business?

Dr. Stephen S. Schwartz

Yeah, Ben, so that’s kind of a big question here at the company too. We know there is a pent-up demand, a lot of preparation work going on amongst all of the people were supplied to the tablet display market, we are on notice, but we are not holding for motors right now. So we hope that that business will come soon, but it’s not something that we are putting into our current projections right now. But when Martin talked earlier about there are some things that could happen that’s one potential, but we just – we have to wait and see.

Ben Pang – B. Riley Caris

You can turn that business during the quarter?

Dr. Stephen S. Schwartz

We can build a lot of units in a quarter.

Martin S. Headley

We turn it providing the orders come in on the right timeframe, so it will depend relatively soon.

Ben Pang – B. Riley Caris

Okay, fair enough. Thank you very much, and a really good quarter.

Martin S. Headley

Thank you.

Dr. Stephen S. Schwartz

Thanks, Ben.

Operator

(Operator Instructions) Our next question comes from the line of Edwin Mok from Needham and Company. Please proceed with your question.

Edwin Mok – Needham and Company

Hi, thanks for taking my questions. So first question is on what happened to your industrial and other adjacent market business in the calendar fourth quarter? And are you guiding to that business recovering in the coming quarter? Why did it decline so much in the fourth quarter?

Dr. Stephen S. Schwartz

It decline because we found the demand for general – in general vacuum markets was declining. Part of it was actually going back to the last question we just got. A lot of uncertainty around the timetable for installing equipment to support the tablets business, a lot of uncertainty there and it slow down a lot more quickly than we anticipated.

In terms of our guidance, we’re kind of seeing that business would be flattish. The recovery is much more around SEMI Front End, which is around the adjacent markets going from our December quarter to our March quarter.

Edwin Mok – Needham and Company

Great, that’s helpful. Thank you for clarifying that. And then on the SEMI equipment business, I think on the prepared remarks you mentioned that you guys are looking through your product portfolio and might discontinue some older product lines that might have generated either no revenue growth or lower margin, et cetera, et cetera. Just curious, have you guys thought about how much revenue you will lose from discontinuing those lines? And how do we think about that?

Dr. Stephen S. Schwartz

Yeah, hi, it’s Steve. We have talked about the amount of revenue. Right now we discontinue a product. It’s in the hundreds and thousands and perhaps $1 million kind of range. It’s a small amount on the revenue lines, big amount usually on the cost line. It’s another interesting amount that the gross margin line, but some of these products are very important to our customers. So we’re very spending time working with the customer very specifically on either a phase out or a change or getting them to move to a different product. And I think people are generally understanding that that’s the way we are going to go. So in the aggregate here over the year if you are going to imagine that if we were down even $10 million or $20 million of revenue, the company would be healthier. That’s not what we are forecasting right now, but just to give you an idea that’s about the magnitude of the kind of the things that we’re probably looking at the upside here.

Edwin Mok – Needham and Company

I see. I would imagine if you get to that $10 million to $20 million, based on your commentary, it means by two years out or something that kind of time horizon takes me to work through that?

Dr. Stephen S. Schwartz

You would take couple of years to get there, Edwin.

Edwin Mok – Needham and Company

I see. Okay, great. That’s helpful to clarify that. And then on the Life Science side, can you remind us, how much of your business is now coming from biobank versus compound? And how do you view that? You mentioned in the coming quarter you might have a slightly lower quarter because of the weakness in Europe. How do you kind of see that?

Dr. Stephen S. Schwartz

Edwin, so to give you an example of that the tools we just booked, the systems we just booked in the quarter three were for compound and two were for bio, that’s pretty typical actually, that’s a bigger percentage of bio compared to the installed base and what we are seeing now is more of bio stores coming forward in the future without question.

Edwin Mok – Needham and Company

But your compound installation typically is much bigger than the biobank, right? Is that correct?

Dr. Stephen S. Schwartz

Yeah, the installed base is much greater in the compound, so that’s correct. But in terms of incrementally we are seeing the growth really coming from the biological sample stores.

Edwin Mok – Needham and Company

I see, I see, great. That’s all I have. And I guess last question, in terms of your costs, I think on your prepared remarks you guys talked about cost savings, up to $23 million of cost savings, right. I was wondering what timeframe are you thinking to achieve that and from what level will you baseline that number from?

Martin S. Headley

Those costs were baseline versus the run rate that we’re run that in the month of August. And the timeframe, the furthest any of those goes out is towards the end of our June fiscal quarter this year. As you can see, we’re already getting significant levels of that when you look at the level for instance of sequential cost saving in the December quarter versus the September quarter of $3.2 million. That’s nearly $13 million they’re already locked, loaded and recognized and that was need necessarily a full quarter of some of the actions.

Edwin Mok – Needham and Company

Okay.

Dr. Stephen S. Schwartz

To put into perspective a little bit, if you look at the September quarter and December quarter as Martin mentioned at the operating expense line that it looks very similar quarter-to-quarter. But we added Crossing Automation. So revenue about $50 million gross margin, 40% and two months of the operating expenses about $3.2 million. But we held OpEx in the aggregate flat.

Edwin Mok – Needham and Company

I see just to clear, you Just to be clear, you said basically you expect to finish that exiting the fiscal third quarter? Am I correct?

Dr. Stephen S. Schwartz

For those actions yes.

Edwin Mok – Needham and Company

Okay, great. That’s all I have, thank you.

Operator

Our next question comes from the line C.J. Muse from Barclays Capital. Please proceed with your question.

Olga Levinzon – Barclays Capital

Hi. This is Olga calling in for C.J. Thank you for taking my question. And Martin good luck with all of your future endeavors.

Martin S. Headley

Thank you very much Olga.

Olga Levinzon – Barclays Capital

Just wanted to follow-up on the previous question on the cost reductions, could you provide us with what you are currently assuming within the guidance on the OpEx side and gross margins, especially kind of by segment, so we can see some of these cost cuts flowing through the model.

Dr. Stephen S. Schwartz

Yeah we haven’t provided kind of the gross margin by segment guidance. But what we can say is that if you were to look at the guidance that we have here, but the operating expenses would be around $37 million to $37.5 million within that guidance range. And the guidance range is then largely a function of gross margin, which is somewhat volume dependent, which is why we prefer not to give point estimates there.

Olga Levinzon – Barclays Capital

Got it. And then, you mentioned on the front-end SEMI side, expectations for a bit of a recovery there in the June quarter, pointing to some of your design wins. Excluding some of these incremental wins coming through, do you expect the underlying business to see an inflection in June, or will most of the growth come in the second half of the year?

Dr. Stephen S. Schwartz

August is still a little bit too hard to call. We see kind of what March quarter looks like. We’re encouraged and hopeful about June. But we really don’t have any signs that indicate anything about the magnitude of the June business.

Olga Levinzon – Barclays Capital

Okay, got it. And, final question, given some of the – some slipping of the timelines within the Life Sciences business that’s impacting your March outlook, could you – do you still see that business growing 20%-plus in 2013, or is visibility there also a bit more limited?

Dr. Stephen S. Schwartz

Well, the visibility is better actually. We understand pretty strong pipeline although we got to get a little bit more crisp about being able to close very specific opportunities and frankly a lot of them do move, but we have a very strong pipeline good position. We know the growth that’s in the business is around 20% opportunity, we intend to capture at least with the same market share. So we do believe that we will be able to get business up to a run rate that’s in the $65 million, $70 million range is a target by the time we exit 2013.

Olga Levinzon – Barclays Capital

Okay, thank you.

Operator

Our next question comes from the line of Jairam Nathan from Sidoti & Company. Please proceed with your question.

Jairam Nathan – Sidoti & Company, LLC

Hey. Hi, guys, thanks for taking my question and good luck, Martin for…

Martin S. Headley

Thank you very much, Jairam.

Jairam Nathan – Sidoti & Company, LLC

So you mentioned the sequestration issue in the Life Sciences. Was that US-related? And do you think that – we still haven’t figured it out, right? It could be March, or it could be, so do you think the constant uncertainty could hurt Life Sciences business, especially in the U.S. this year?

Dr. Stephen S. Schwartz

Jairam, you could have some impact. These are the biological stores that go in are important, but they may or may not be at the top of the priority list. But we think that the opportunities we continue to track, we think there has been more positive tone if you will in the nature of the business, but one or two stores moving in or out just has something of an impact. We are positive about the business and if we talk to blame the sequestration on anything as we go forward, I think we might have had some hiccups here going into the March quarter from that standpoint, but going forward we think we are in good position.

Jairam Nathan – Sidoti & Company, LLC

Okay. And the gross margin on the Life Sciences side, is the 45% -- is that sustainable? Or you think it was more because the software content and it might not repeat?

Martin S. Headley

I think in the near-term it’s going to dip below that 44.5% level, because the software content was particularly large in the December quarter. I think returning to these levels is entirely within our plans. But we need to get further along with some of our supply chain activities to get there and that will not be the case for the March quarter.

Jairam Nathan – Sidoti & Company, LLC

Okay, all right. That’s all I have. Thank you.

Operator

Mr. Schwartz, there are no further questions at this time. I will now turn the call back to you, please continue with your presentation or closing remarks.

Dr. Stephen S. Schwartz

Okay, well thank you everyone for your interest in Brooks, and we very much look forward to speaking with you when we report our results for fiscal 2013 second quarter. Thanks everyone.

Operator

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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