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Brooks Automation, Inc. (NASDAQ:BRKS)

F2Q12 Earnings Call

May 10, 2012 4:30 pm ET

Executives

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

Stephen S. Schwartz – President and Chief Executive Officer

Mark Morelli – Executive Vice President and Chief Operating Officer

Analysts

Y Edwin Mok – Needham & Company

Ben Pang – Caris & Co.

Farhan Ahmad – Credit Suisse Securities LLC

Operator

Good day, and welcome to the Brooks Automation Earnings Conference. Please be aware that today’s conference is being recorded. At this time, I’d like to turn the call over to your speaker today, Mr. Martin Headley, Chief Financial Officer. Please go ahead sir.

Martin S. Headley

Thank you very much Sandra, and good afternoon everybody. I’d like to welcome each of you to the second quarter financial results conference call of Brooks Automation for fiscal 2012 year. And we’re hosting here from San Diego, the heart of our Life Science Systems business. We’ll be covering the results of the second quarter that ended on March 31, and providing an outlook into the third fiscal quarter, which will end on June 30, 2012.

A press release was issued after the close of markets today and is available at the investor relations page of our website www.brooks.com, as are the illustrative PowerPoint slides to be used during our prepared comments during the call.

I’d like to remind everybody that during the course of the call we will be making number of forward-looking statements within the meaning of the Private Litigation Securities Act of 1995.

There are many factors that could cause actual results or other events to differ from those identified in such forward-looking statements. I’d 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 including the Form 10-Q just filed for the second quarter ending March 31, 2012. We make no obligation to update these statements, should future financial data or events occur that differ from forward-looking statements presented today.

I would 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. After I’ve outlined some of the significant events of the quarter, Steve will elaborate with remarks around the business environment and our current initiatives. I will then provide an overview of the second quarter financial results and a summary of our financial outlook for the quarter ended June 30, which is our third quarter of fiscal 2012. We’ll 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.

On slide number three, I’ve summarized significant events of the March quarter, the second quarter. The quarter was highlighted by substantial growth in semiconductor products and Life Science Systems resulting in revenues of $139.3 million, sequential growth of 15.9%. This growth provided a sequential growth margin recovery.

Meanwhile, we made investments for the future with a $3 million linear intellectual property acquisition from Intevac. Given that this is in-process research & development, the appropriate accounting treatment was to write-off the bulk of the acquisition price on acquisition. We’ve removed this charge from our non-GAAP adjusted earnings of $0.20 for the quarter.

There’s quite a lot going on in our SG&A spend. With a higher costs for a full launch of the full Brooks Life Science Systems product portfolio and running the trade shows. The annual direct to stock grant, model of forfeiting these temporary increases with a $3.2 million recovery of previously expensed legal costs associated with our past stock litigation matters.

We’ve not attempted to adjust for any of those items in the adjusted earnings. Finally, our tax provisions continue to bounce around. This quarter we had a net benefit of $700,000.

With that let me introduce Steve Schwartz.

Stephen S. Schwartz

Thank you, Martin, and hello everyone. I’m pleased to be able to speak with you today about our results for Q2 and to report on the progress of our strategic growth initiatives. We had another strong quarter moving along our aggressive growth path, and I’ll take a moment to give you some highlights from Q2, and an update on some of the longer-term initiatives that we’ve been working on.

In general, we made improvements across all areas of our business. We achieved revenue of $139 million, which was at the high-end of our expectations, improved gross margin and boosted adjusted earnings per diluted share to $0.20.

We generated over $20 million in adjusted EBITDA, and ended the quarter with more than $200 million cash and not debt. As we reported in our press release, we had a strong growth quarter. Semiconductor business improved significantly from the December quarter, and we’re investing in and strengthening our position in both front-end and back-end segments of this market. We also drove continued growth in our Life Science Systems business and we remain positive about the significant growth potential that exists for us as we apply our expertise in this new and exciting area.

Overall, our bookings were up 20% to $155 million, compared to the December quarter and it was boosted by $21.2 million of bookings for our Life Science Systems business. These are positive indicators that we’re continuing to enhance our market position. I do want to note that although the business is healthier than it was in the December quarter and our outlook remains positive. we do not have much visibility beyond the June quarter.

In any case, we use this period to continue to advance our strategic and operational initiatives for growth and operating performance. I’ll now give some color as to the progress on our strategic initiatives that we’ve been driving since the beginning of fiscal year 2011.

First, to gain market share in our existing businesses, which we defined as front-end semiconductor and adjacent spaces like LED, MEMS, PV, active display and wafer level packaging. Second, to expand into new high growth markets, the first of which we’ve now clearly defined as Life Science Systems.

And third, to drive gross margin improvement across all of our businesses. I’ll report on progress meet these areas and give some additional information about next steps for growth. We continue to be rewarded by our significant investments in our core technology business as we win approximately two out of every three opportunities that we go after.

In the quarter, we captured another 17 design wins with OEMs for our BPS products bringing our first half total to 40 design wins, which is almost exactly on pace with the 79 wins we recorded in fiscal year 2011.

In terms of make up of the 17 design wins, 9 were for semi front end and 8 were for adjacent market applications, and we’re in business from three new customers. We had 8 robot wins, five for vacuum robots and three for atmospheric robots.

We also had three new systems wins for back-end applications. We also continued our advance into 450 millimeter space where we won an additional three 450 millimeter platforms bringing our total to seven active 450 millimeter programs.

As a means to fulfill our long-term growth initiatives, we plan to continue to invest in our D&E at a current level as we believe this gives us adequate resources to capture the most meaningful business opportunities that come up, and we think that around these levels of spending we are tapping into the most significant opportunities.

We’ll continue our aggressive pursuit of market share in both semi front end and adjacent markets. And we’re specially enthusiastic about the opportunity that comes with changes in the back-end including wafer level packaging, because it’s significant and we are in a good position to expand our market share for BPS products.

It’s now one year since we made our first move into the Life Science Systems business when we announced to you our acquisition of RTF Life Sciences at the beginning of April 2011. Since then we’ve been busy enhancing our position in automated cold sample management.

In July, we acquired Nexus Biosystems and this put us on a path with critical mass as the largest player in this growing segment with a run rate of approximately $48 million per year and an installed base serving approximately 100 customers worldwide. The integration of these businesses continues to go well, we’ve aligned the group around single product and technology roadmaps, and we’re unified in our approach to the market.

We still see opportunities to further improve our cost structure, but we’re pleased with our progress to date. In the March quarter, our Life Science Systems business achieved $21 million in bookings, exceeded $15 million in revenue and achieved gross margins above 40% and is now making a positive contribution to profitability.

Each of these metrics are meaningful internal milestones that we’ve achieved ahead of our already aggressive performance target for this business included in a $21 million of bookings, orders we received for five storage systems from four customers. Three systems are for the U.S. plus one each for new customers in Denmark and India.

As we move forward in Life Science Systems, we will continue to invest current and new products and technologies as we have organic development plans for products that will allow us to expand the market for automated cold stores. We also continue to look for acquisition opportunities that are consistent with our roadmaps. We are in the earliest stages of our development of our presence in this rapidly growing segment, but we are pleased with our progress to-date and bullish about our future.

Our business opportunity pipeline continues to be strong, because of the nature of the business, the order and revenue pattern will still be lumpy, but we are confident in our ability to capture new and next business, and we are pleased with the growth prospects afforded by this Life Science Systems business.

The third major thrust for us is profitability improvement driven by gross margin improvements in particular. We are just beginning to see the benefits from some of our supply chain imitative as we improve gross margin by 110 basis points in the quarter, but we acknowledge that we have much more work to do achieve our objectively and we are actively driving programs that will get us there.

I would like make two final comments to further emphasize the importance the Life Science Systems business. First, we are holding this call San Diego, where we just concluded our quarterly board meeting providing the board with firsthand exposure to our Life Science Systems business, which is headquartered nearby Poway.

Second, we are pleased to be able to announce that Ellen Zane a well known healthcare industry executive had joined the Brooks Board of Directors. Throughout her distinguished career, Ellen has demonstrated vision and leadership in the field, and we’re fortunate to have someone with her experience and track record of success on our Board as we look to enhance our market leading position in Life Sciences and automated cold sample management.

I joined the rest of the members of our Board of Directors in welcoming Ellen Zane to Brooks, and we look forward to her contributions to our success.

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

Mark Morelli

Thank you very much, Steve. If you turn to slide four, you’ll see that Brooks’ sequential revenues and operating profit before special charges recovered from the cyclical lows of the December quarter results. Semiconductor products revenues grew by 32% and were 58% of the $139.3 million of revenues in the March quarter.

Life Science Systems revenues on a GAAP basis grew by 14% and were 11% of our revenues in the quarter. Our industrial products revenue had a very late quarter surge and grew 21% sequentially, remaining is about 11% of our business. Elsewhere we saw a marked percentage declines in revenues into MEMS, LED, flat-panel display and solar market.

On a non-GAAP basis, gross profit margins increased to 35% in the second quarter compared to 33.9% in the first quarter of fiscal 2012, when compared to 32% for the second quarter of fiscal 2011. A sequential improvement came from our Brooks Product Solutions and Brooks Life Science Systems segment offsetting the decline in Global Services segment. while we are encouraged by our increase in margin, they continue to be affected by less favorable revenue mix and adverse absorption of fixed overhead costs and continued headwind with rare earth, metal surcharges and electronic component price increases.

the R&D expense increased in part from engineers taken on to support the new Celigo product line and then that’s associated with new product and design win introductions in our technology business. Meanwhile, reported SG&A expenses decreased by $2.4 million will be relatively flat in underlying continuing expense levels. And you can see we achieved nice growth in our operating income.

Slide five lays out our revenue in operating income waterfall compared to the second quarter compared to the first quarter. As you can see, we experienced nice growth in our product solutions, and Life Science Systems segment. With strong earnings breakthrough particularly from the higher margin Life Science Systems business.

the $8.6 million profit increase was slightly offset by a $0.5 million profits decrease in our global services business with slow pump repair revenues in the quarter. Slightly higher R&D and lower SG&A completed the $11.9 million sequential improvement in operating profits before special charges.

On slide six, you will see some of the GAAP basis. net income to the second quarter of fiscal 2012 was $9.5 million or $0.14 per diluted share, which includes Life Science Systems acquisition related adjustments of $0.5 million. And the $3 million charge, I’ve spoke to earlier from the write-off of the Linear automation in-process research and development.

Adjusted net income excluding these special charges was $30 million or $0.20 per diluted share. This compares to first quarter fiscal 2012 net income of $3.8 million or $0.06 per diluted share and $26.8 million or $0.41 per diluted share in the second quarter of fiscal 2011, at the peak of the last semiconductor equipment (inaudible). Our joint venture operations in Japan also submit a significant downturn and contributed $1 million less to earnings in the quarter, which offset the favorable impact of income taxes in the quarter.

In slide seven, you’ll see the consistency of our cash profits generation, which are adjusted EBITDA, against revenues since our fiscal 2009 restructuring. Adjusted EBITDA for the second quarter of fiscal 2012 was $20.6 million, which grew from $10.8 million in the first quarter of fiscal 2012. Our adjusted EBITDA margin of sales was 14.8%, compared to 9% for the first quarter of fiscal 2012. A reconciliation of these amounted to GAAP amount is included as an attachment to our press release.

In slide eight, you can see that the EBITDA grow cash flow from operations of $16.6 million, which was net of the $3 million Linear IP acquisition, which is treated under GAAP as an operating cash flow utilization. We also had a $1.8 million increase in working capital arising from growth in operating activity. Consistent with our funds, we spent $2.3 million on capital expenditures. Our capital expenditure plans offer an approximately $11 million spend in the fiscal year. We utilized $5.2 million on cash returns to shareholders through our dividend program, which currently produces a 3% yield to stockholders.

Overall, cash and marketable securities excluding restricted cash grew by $9.8 million to $204.3 million. Slide nine notes this cash and marketable securities balance, which represents $3.10 per share with no debt in the business, includes $200 million that is readily liquid and available for use.

The accounts receivable performance improved with receivable expressed with days sale outstanding shrinking from 55 days to 52 days. Inventory balances stuck by $2.5 million, but turns improved modestly to 3.4 times.

Overall, net working capital was $103 million and asset velocity net working capital as a percent of annualized quarter revenues of 18.3% improving from over 21% in the December quarter.

On slide 10, and 11, and 12, we breakout sequential revenue performance and operating performance for our three continuing businesses. When we look at the Brooks Life Sciences Systems segment, we are doing so without acquisition fair value adjustments that are set out in the appendix of the slide deck.

In the March quarter, this business generated $15.3 million of revenue, a 15% quarter-over-quarter increase sequentially, obviously, well at about 20% annual growth target. This growth is in part the function of the timing activities on larger Automated Sample store project. so we might bounce around on the top line from quarter-to-quarter with the momentum is consistent with our goals.

Gross margin was above 40% and this segment has had a profitable quarter on operating losses as we move through the process of integration and bringing product to market position for the future. This broke the Life Science Systems business to an underlying $61 million revenue run rate and as I said, slightly ahead of plan at this point.

Revenues for the Brooks Product Solutions segment were $103.5 million in the second quarter of fiscal 2012 compared to $85.3 million in the first quarter of fiscal 2012, an increase of 21.3% to the semi front-end recovery in late quarter industrial market improvement.

Our gross margin of 34.7% in this segment while improving sequentially continue to be adversely affected by revenue mix, certain cost headwinds on lower overhead absorption. The mix profile and robust challenges on the pricing side will continue to challenge us in the back half of the year although operations initiatives and show continued sequential improvement.

Our Brooks Product Solutions operating profit was $7.6 million improving sequentially from $1.1 million. The revenues for the Brooks Global Services segment decreased 3.9% on a sequential basis to $21.2 million with a pullback in the pump repair business with the lowest spend associated with certain low fab utilizations.

Our gross profit was lower from – revenue decline and building capabilities for anticipated revenue growth.

Turning to guidance on slide 13, as Steve mentioned, order bookings in the second quarter of fiscal 2012 grew 20.7% to $155.3 million compared to order bookings of $158.6 million in the first quarter of fiscal 2012. This includes $21.2 million of Life Science system booking and $134.1 million of technology business booking.

Book-to-bill was $145 for the Life Science systems business, 106 the technology business. With these bookings as a backdrop we project the sequential revenue increase for the third quarter to be flat to up 5% for the third quarter with revenues in the range of $140 million to $147 million.

We anticipate the proportion of revenues from front-end semiconductor equipments to continue modestly increase with very soft performance in the markets adjacent to semiconductor and approximately flat performance from the Life Sciences Systems business.

The headwinds to driving earnings growth or (inaudible) from income taxes, higher SG&A spending with a net impact of the first items discussed earlier on the call and the fact that our gross margin improvement is being held back from our prior targets. This is a function of longer approval cycles than expected from some of our OEMs for cutting in lower cost product component, continuing product mix favoring some of the lower margin product lines in our portfolio. And some cost challenges impacting our Cryopumps business.

With these factors in mind, we expect adjusted EPS, excluding special charges to be in the range of $0.15 to $0.20 per diluted share. With the impact of some restructuring charges associated with improving operating expense performance, we expect GAAP earnings to be between $0.13 and $0.18 per diluted share.

On slide 14, you will see the third quarter revenue guidance added to the historic trends of the business in its configuration, and you should notice moving to new highs. Beyond the third quarter, we would expect to see again modest top line growth and expect sequential growth margin improvement to provide some earnings average.

We also plan on a fairly significant one-time charge in the fourth quarter from the termination of our frozen U.S. defined benefit plan. This termination will involve a $6 million to $7 million use of cash. Lastly, we announced that our Board of Directors have declared a dividend of $0.08 per share payable on June 08, 2012 to stockholders of record as of June 29, 2012. As noted previously, this currently equates to a yield in excess of 3%.

With that, I’ll now turn over for questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions) Okay, we have a question, which comes from the line of Edwin Mok. Please go ahead.

Y Edwin Mok – Needham & Company

Hi, thanks for taking my question, and congrats for the good quarter. So, my first question is on the guidance, if we listen to some of your peers in the semiconductor sub-system group, talk about the business deal or talk about the coming quarter being flat to down, why are you guys expecting your semiconductor business to grow in the coming quarter?

Martin S. Headley

Hi, we hope some of that is from market share gain and what we talk about being up is modestly up, but we’re getting pretty good look at order patterns and although it’s not going to be up like the quarter we just saw, we do feel that we’re starting to get some benefit from the market share gains that we’ve had.

Y Edwin Mok – Needham & Company

Great, that was very helpful. Then on the 450 that you talked about the seven active programs right now. Are you shifting products on those and recognizing revenue for those products?

Martin S. Headley

We are at modest level, we’re shipping one in a two quarter right now, but when we say seven active, it means we’ve had orders from seven from different units of production.

Y Edwin Mok – Needham & Company

Great. And then moving onto the Life Science area, you talked about strong bookings within last quarter. I think you guys guided for so much flattish revenue. Is it just due to timing of revenue and how do we kind of think about those bookings, does that usually take a longer time for the bookings to turn into revenue?

Martin S. Headley

Edwin, I that circumstance it was a major booking for a very large system that was taken in the quarter that won’t deliver until our fiscal 2013. And that kind of lumpiness of timing between a booking being taken and delivery being and installation being required by customer is going to be a little inconsistent in the Life Science Systems business, particularly in circumstances over the larger stores where they got to do a major building preparation.

Secondly, the other thing which – we’re learning a little bit about this business as we go long here as well, is that you will tend to see a little bit of peeking of bookings in the first calendar quarter of the year from our services business because so many of the service contracts actually run on a calendar year basis.

Y Edwin Mok – Needham & Company

I see. That was helpful. And then, I guess I have two more question, first is related to margins. I think you guys are – well done on bringing the Life Science to a positive operating margin, but how do you kind of see other margins profile for that business longer-term, I think you’ve (Inaudible) on the prepared remarks you talked a little bit about the margins progressing, but maybe not to what you guys are expecting. I mean longer-term do you think you still achieved this 40% gross margin that you guys talked about previously?

Martin S. Headley

I think, let me take and separate, the concern with margins was roughly around Life Science system frankly than it was around the other parts of our business in terms of reaching overall corporate wide 40% gross margin target and the fact that that might be being differed. On the Life Science systems business (inaudible) nicely forward on both gross and operating margins. We can take incremental steps in the near-term and in the longer-term this has the potential to be operating margins subsequent to other parts of our business.

Y Edwin Mok – Needham & Company

Great, I have one more question actually. I noticed that you guys talked about, you have two system once in Denmark, and I think once it’s in India, right. As the license business grow and probably some of the growth will come out from outside of U.S. do you see the risk that you might have to expand your operation just you have to target those opportunities there, and that's all I have. Thanks.

Martin S. Headley

Right, thank you. In terms of expansion we see the ability to do that at Brooks in terms of picking backing on the fact that we do already have a global infrastructure and an advantage in a relatively cost-effective way that Brooks can serve on a global basis, these customers which frankly the competitors to our business will find very challenging.

Y Edwin Mok – Needham & Company

Great, thanks.

Martin S. Headley

Thank you, Ed.

Operator

Okay, we have question from Ben Pang. Please go ahead.

Ben Pang – Caris & Co.

Thanks for taking my questions. First on the guidance for our Q3 in terms of SG&A expense, what is that related to?

Martin S. Headley

The SG&A is when you take out the three elements that which in the second quarter were somewhat (Inaudible) items being which were the expenses associated with the launch of Brooks Life Science systems and the Brooks Life Sciences systems branding. The annual direct to stock rent, which occurs one-time a year and invest immediately, which between them were about a $1 million of incremental expense.

And then we have the benefit from the recovery from insurance company, so open items related to legal matters expanded in the past that was favorable $3.2 million is going back to the normalized kind of operating expenses levels that we’ve had before. And also point you’ve done to the fact that we are looking very closely at our operating expense levels, and may well be taking actions as indicated by the fact that we are planning for some restriction charges in the quarter.

Ben Pang – Caris & Co.

Okay. And then on the gross margin for the Brooks, probably your BPS situation. Does that just – what causes the pump volume; I guess pump repair volume to go down? Is that a market share issue or?

Martin S. Headley

We don’t believe it to be a market share issue. It’s the fact that those fabs and foundries that were not close to capacity would in these circumstances typically be differing maintenance type of activities, in other words repair activities that were discretionary. And if you know a capacity and you have a pump, you might, will just swap around the pump from an idle machine as well. So it’s across a broad base, so there is nothing that indicates a specific loss of share.

Ben Pang – Caris & Co.

So as the utilization rate increases that should pick back up to normalized level I guess?

Martin S. Headley

Yeah, it’s sure.

Ben Pang – Caris & Co.

Okay. And then in the automation part of the gross margin, you mentioned a product mix, as well as I think pricing…

Martin S. Headley

Yeah.

Ben Pang – Caris & Co.

Give a little bit more color around what you are seeing in terms of pricing issue?

Martin S. Headley

I think you will clearly see as you have a concentration about the cap spend as of capital expenditure and a concentration of the OEMs that are providing the solutions on that spend. There is an increased fracture all the way down to supply chain from the end customer [band]?

Ben Pang – Caris & Co.

And is it, I mean are you seeing the same type of pricing pressure I guess even for the high vacuum products?

Martin S. Headley

Yes, and I would say it’s across all product lines.

Ben Pang – Caris & Co.

Okay. And then two more questions from me. One, in terms of the design wins for the back end, can you provide comparison relative to the 70 design wins for fiscal year ’11, in terms of how many were back end wins in fiscal year ’11 and is that run rate really increasing for your wafer level packaging et cetera.

Stephen S. Schwartz

Yeah Ben, hi it’s Steve. We don’t have it very specifically broken out. We can do that, but we don’t have it here, but if we look at front end semi versus adjacent 79 wins in 2011 actually and continuing with the 40 additional wins, it’s almost 50-50 in terms of what’s front-end and what’s adjacent.

Ben Pang – Caris & Co.

Okay.

Stephen S. Schwartz

And we have three back end wins for example in Q2. But without question, the wafer level activity is having an impact.

Ben Pang – Caris & Co.

Okay, and the last question from me is, when you talk about the other parts of that business, MEMS, LED, solar for example. I mean, do you have any visibility, I guess beyond the June quarter on those segments. Do you think they are bottomed out, what’s your feel there?

Martin S. Headley

It’s close to bottomed out Ben, we still don’t have an idea when they are going to pickup.

Ben Pang – Caris & Co.

Okay, all right fair enough. Thank you very much.

Martin S. Headley

Thanks Ben.

Operator

Your next question comes from (inaudible). Please go ahead.

Unidentified Analyst

Hi this is (inaudible) on for Torrens. Couple of questions, first of all in your discussion with your semiconductor customers, what is their view or their forecast in terms of how the calendar second half looks like?

Martin S. Headley

I think without question, everybody is cautious. We’re getting mixed signals about even the June quarter, frankly. Some say, up slightly; some say, down slightly; and when we all talk about what the back half looks like, I don’t think anybody has any certainty to offer.

Unidentified Analyst

Is there any change of terms in the last couple of weeks in terms of the outlook?

Stephen S. Schwartz

I wouldn’t say there is, for instance, I think the TSMC outlook is still not passed down to the OEM level at this stage, further to be any degree of clarity as to where that increased spend that they talked about is actually going to occur, either in terms of what they’re going to spend on not all the timing of that spend.

Unidentified Analyst

That’s very helpful. Regarding the inventory level at your semi customers, is there any change in terms of inventory levels, we hear some kind of pocket of supply constraints, maybe we would assume in the lithography area or inspection area, but in terms of your customers are there any inventory issues or supply chain constraint as you have seen?

Martin S. Headley

We don’t know right now. The customers who need product, need it right now and so when we’re timely that’s very important to them. So we would guess, we would infer from that, that the inventory levels are likely low, but we don’t have good visibility into it, But because when their order patterns go up, ours go up almost instantaneously. One would infer that there is a not a lot of inventory of our product anyway in the pipeline.

Unidentified Analyst

Okay. Just switch gear to the Life Science, try to look at more of a longer term view on the business, let’s assume that you don’t acquire any new companies, and just based on the market you’re serving right now, I kind of model $60 million revenues in this fiscal year and you’re mentioning – it should grow 20% plus annually, so is that a kind of a safe assumption in terms of a revenue trajectory for the life science, $60 million run rate for this year and 20% growth?

Martin S. Headley

Yeah, that’s an expectation that’s good for the market if we and if we didn’t gain any market share.

Unidentified Analyst

Okay.

Stephen S. Schwartz

So we’re aggressively investing in the product portfolio, but you’re correct we anticipate about 20% market share growth – very sorry 20% growth in the market, but we have high expectation for our capability to compete?

Unidentified Analyst

Okay, so if by adding the market share side of the upside, it could be out growing the 20% average for the whole market right.

Stephen S. Schwartz

Yeah, that’s correct.

Unidentified Analyst

Okay, and in terms of the lumpiness of the business, for example in this quarter you booked much more than you could recognizing the revenue and should we assume that the lumpiness will happen every quarter or is it more of a seasonal pattern.

Martin S. Headley

I would say this is something that can happen fairly frequently depending up on the pace and timing of particular large projects and where the spend occur, I wouldn’t say that it’s a seasonal pattern and we’re looking at this being a strong quarter. Historically this March quarter would have been one of the strong quarters from the businesses before we own them, so this was a very strong performance.

Stephen S. Schwartz

Yeah, and just to clarify, $155 million is not more than we could ship, it’s just – the bookings come now, the expectations for delivery from the customer standpoint are early.

Unidentified Analyst

I understand. And just two quick questions on the finance side, one is, regarding the gross margin, Martin, should we assume that the revenue is the biggest lever to improve your gross margin or is there any other things you could do before your revenue reach to higher level?

Martin S. Headley

I think we talked before about the fact that we have an ongoing margin improvement program, an operations improvement program, a large path driven around supply chain improvement. The timing of that really showing in our results, and giving rise to a margin improvement is in partly a function of the timing of our customers approving the curtain of those, and that’s a very rigorous process in the copy exact world of semiconductor, and one in which we’re comfortable, we’ll get through and have some meaningful margin improvement when those changes are approved.

Unidentified Analyst

Okay, okay. But the last one is on the tax rate we should use to model Q3?

Martin S. Headley

For Q3, with in that guidance is a 3% to 4% tax rate for that quarter.

Unidentified Analyst

Great. Thank you.

Martin S. Headley

Thank you.

Operator

Okay. And we have a question from Satya Kumar. Please go ahead.

Farhan Ahmad – Credit Suisse Securities LLC

Hi, this is Farhan, asking a question on behalf of Satya. I had a question in regard to the mix profile you mentioned on your semi side that impacted the gross margins this quarter. Just wanted to go a little bit more, was it a customer mix issue or product mix issue, if you could just talk about it. And also longer-term, the factors that you mentioned for the margins in the semi business in terms of customers consolidation and margin improvements at your customer site, those are like longer-term issues? How should we think about margins within this year? Is there an expectation of margin improvement within this year in your semi business and going forward as well?

Martin S. Headley

Yeah, there is – I will start with the last question first, there is an expectation of sequential margin improvement for both the third quarter and the fourth quarter driven off of the initiatives I was just talking about in response to the previous question. So, those we do believe will generate further momentum. We think there are equally other initiatives that are being looked up in terms of our strategic presence in our services to our customers, who will give rise to further improvements in the longer-term. In reference to the mix, the mix is predominantly, which particular kind of products to which particular OEMs, not something I can go into a much detail, but it is very specific to certain product lines that would go into certain customers.

Farhan Ahmad – Credit Suisse Securities LLC

Okay. (Inaudible) just in regard to the merger between Novellus and Lam do you see that that could impact your margins as well and both of the market customers (Inaudible) and in terms of like, what you’ve seen from [IMA3] and could you and just comment on like what you have seen at IMA3 and just what do you think about similar dynamics there?

Martin S. Headley

That clearly ends up being some interesting dialog as they compare prices is to merge businesses go together, I don’t think we find tremendous amounts of discrepancies rather, we have to adjust to, but there are some and so we don’t see that is being a major impact there and just by virtue of the mergers.

Farhan Ahmad – Credit Suisse Securities LLC

Got you. So the other question I had was in terms of your adjacent market. In your December quarter, you had mentioned like roughly about one-third or a little more than that of your product revenue or from a decent spaces, how that’s more mix looking now when you look in your product solution business?

Martin S. Headley

As I said, when you start taking 58% of the business was semiconductor products in the quarter, 11% was industrials, 11% was life sciences and service was 15%, you can see that in fact the adjacent markets are really quite normal levels and cumulatively well under 10%.

Farhan Ahmad – Credit Suisse Securities LLC

That’s all I have. Thank you.

Martin S. Headley

Okay.

Operator

And we have a question from [Richard Campbell]. Please go ahead.

Unidentified Analyst

Hi, thank you for taking my question. It’s related to the life sciences business, we noticed early integrating life sciences acquisitions, but can you give us an update on the steps you have taken this quarter integrate the manufacturing by chain strategies, have you been able to leverage that of course, manufacturing capabilities in that process and if so are there any potential synergies like opportunities you can share with us going forward in the second half?

Martin S. Headley

There are definitely opportunities, I think a lot of what we are doing in the last quarter was around marketing sales, branding and profile and presence with the customer. And so there was more emphasis in the most recent quarters than they were on operations. I think next area of focus for us will be in the operating expense area and we see further benefits can be brought to the bottom line and we’ll be working on those. There are relatively modest impacts in manufacturing that come just from rationalization, but we are already introducing better practices and better supply chain management that you’ve already seen, have an impact of that gross margin improving over 40%. And that volume leverage, we’ve talked about this business, I mean the potential to be kind of mid-40s gross margins, and we feel very confident that we are on that pathways there and we’ll get there in relatively short order.

Unidentified Analyst

Okay, great. Thank you. And as far as it relates to Celigo, your most recent acquisition with Life Sciences, how have you been able to leverage your previous acquisition Life Science some more quickly integrate Celigo and also does that acquisition potentially drive incremental revenues for achieving a sustainable profitability breakeven Life Sciences?

Martin S. Headley

I think it can be significantly more contribution from Celigo that we see today and that you do that you’ll see even more incremental leveraged benefit to the bottom line from the revenue increases in the Life Sciences business. And so that business is integrated completely, it’s been manufactured just down the road here in Poway, California. We have the sales force out there very actively with an interested customer rate and so we believe that can be a good contributor into the future.

Unidentified Analyst

Okay, great. As I noticed in the last quarter you had a revenue about $13.3 million in life sciences and about $300,000 loss, and in this quarter $15.3 million and obviously a break-even. Could you potentially give us a better understanding of – is there a specific revenue run rate in which an operating break-even can be achieved going forward?

Martin S. Headley

I think from what we’re talking about in terms of the initiatives that we have underway at Brooks Life Science Systems. We are looking to continually decrease the break-even point of the business. So I think it will be ever decreasing break-even point below the roughly $60 million mark that it was in the current quarter.

Unidentified Analyst

Okay, great. I’m sorry to head home on the margin questions, but I’ve noticed that in the – I saw from the last four quarters, you said that around $150 million of revenue run rate should to be possible to achieve 40% gross margins. Given the product mix, it’s going to the second half more favorably focused on semis. Is that something you think it’s still potentially possible to head a 40% gross margin and $140 million of revenue?

Martin S. Headley

I think that is probably doubtful with the product mix that we’re looking at, one or two to cost headwinds I made referenced too early in my prepared remarks that we see that in the current fiscal year.

Martin S. Headley

Okay, great. Thank you very much. That’s all I had.

Operator

Thank you. (Operator Instructions) We have a question from (inaudible). Please go ahead.

Unidentified Analyst

Hi, just to better understand the gross margin impact, is there a way you can give us a walk on a year-over-year basis, I noticed that excluding contract manufacturing probably you had a 38% kind of gross margin rate. And can you just kind of give us, I don’t want the exact numbers but just a walk on what was the volume impact, what was the mix impact and what was the cost impact?

Martin S. Headley

Well, if you’re talking about kind of the run rate, the business was running about 37% last year versus the 35% that we are talking about currently, a big part is absorption, the mixed piece. If you were to take roughly (inaudible) you could roughly attribute a third of them to each of those three particular categories.

Unidentified Analyst

Third to each of (inaudible) absorption mix and cost?

Martin S. Headley

Yes.

Unidentified Analyst

Okay. And on the active display you said that (inaudible) down because of overcapacity, how is that business doing and what is the outlook there?

Martin S. Headley

Sorry, I missed that (inaudible) Polycold?

Unidentified Analyst

Yeah, the active display...

Martin S. Headley

The Polycold business actually started to see a pick up very late in the quarter, so we’re starting to see that recover and we would expect to see that business also grow in the June quarter, we do not expect it to be running kind of the peak levels that we saw towards the back half last year though.

Unidentified Analyst

Okay. And my last question is on the tax rate for the full year?

Stephen S. Schwartz

I think what you should expect is as I previously said, kind of 3% to 4% tax rate in the third quarter.

Unidentified Analyst

Yeah.

Stephen S. Schwartz

And a small tax benefit in the fourth quarter.

Unidentified Analyst

Okay, great, thank you.

Stephen S. Schwartz

Okay.

Operator

We have no more questions at this moment. (Operator Instructions)

Stephen S. Schwartz

Okay. Well, we thank everyone for your interest and participation on the call today. And we very much look forward to speaking with you at the end of our third fiscal quarter. Thanks very much.

Operator

Thank you. Ladies and gentlemen that concludes the conference call for today. You may now disconnect. Thank you for joining and have a good day.

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