Brooks Automation Inc. (NASDAQ:BRKS) F3Q10 (Qtr End 06/30/10) Earnings Call August 5, 2010 4:30 AM ET
Martin Headley - CFO
Bob Lepofsky - CEO
Steve Schwartz - Designate CEO
Patrick Ho - Stifel Nicolaus
Ben Pang - Caris & Company
Hari Chandra - Deutsche Bank
Good afternoon, and welcome to the Brooks Automation Earnings Conference. Please be aware that today's conference is being recorded.
At this time, I'd like it turn the call over to your speaker today, Mr. Martin Headley, Chief Financial Officer. Please go ahead sir.
Thank you and good afternoon, everybody. I'd like to welcome each of you to the Brooks Automation fiscal 2010 third quarter results call. Our press release was issued its about 4:00 pm Eastern Time this afternoon, and is available on our website at www.brooks.com. As our copies of our third quarter Form 10-Q on the illustrative PowerPoint slides used during our call today.
I would like to remind everybody that during the course of the call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. There are a number of factors that cause actual financial results or other events to differ significantly from those identified in such forward-looking statements.
I refer you to the section of our earnings release titled Safe Harbor Statement. The Safe Harbor slide on our website and to the company's various filings with the SEC. I would also note that we will make reference to a number of non-GAAP financial measures, which are used in addition to and in conjunction with results presented in accordance with GAAP. We should not be relied upon to the exclusion of GAAP measures.
Management believes these financial measures provide an additional way of viewing aspects of our operations, but when viewed with our GAAP results and the reconciliations to GAAP measures provide a more complete understanding of our business.
Joining me on our call today are our Chief Executive Officer, Bob Lepofsky; and our CEO designate Steve Schwartz. Bob will open the call after which I will provide a more detailed overview of the third quarter financials and the summary of our outlook for the September quarter before Steve provide his prospective. We then take your questions and at the end of the call after that Q&A period, Steve will provide some concluding prepared remarks. And that with you, Bob.
Thank you, Martin and good day ladies and gentlemen. We do appreciate you joining us today. These are exciting times at Brooks as we take full advantage of the current strong market conditions, maintain a cautious view of next year given the uncertain pace over the broader economic recovery and accelerate the pace of our own work in new product and market segment development.
The current market is allowing is to deliver strong operating results, $0.26 a share in the June quarter and an expected $0.31 to $0.34 a share next quarter. We continue to see revenue growth and even faster market expansion at least through the end of calendar year 2010. While we are maintaining a cautious view of next year at this point in time as people debate the strength of the semi cap equipment investment cycle, we are encouraged about the success of our new product launches and the impact that they will have on 2011 results.
From where we sit today, we think that new business will more than mitigate any downward pressure on our core business and 2011 will still show growth over 2010. Building on the successes of our product to market development activities quarter by quarter we believe that you will see an accelerating impact of new product initiatives. Some of these we have talked about in the past others will emerge over the next several quarters.
The really good news for today is our current position. As a direct result of the incredible work of the entire global Brooks team, we are stronger today than at anytime in our history.
Three years ago we set out to turn the potential of Brooks into real performance to the benefit of our customers, employees, and most importantly the patient shareholders of Brooks. We knew at the time, that we had many of the critical pieces of the puzzle. A strong technology base, a core group of employees who really wanted to succeed. A global customer list with demanding requirements and growth opportunities and a strong balance sheet, and we have high expectations. What we did not appreciate at the time was that the world was headed into unprecedented economic collapse that it want to impact everything we wanted to do.
Despite the challenges the Brooks did what they needed to do and the results we announced today are reflective of the collaborative efforts of an incredible team. Martin will go into the details of the quarter in a moment, but before he does I want to make one thing clear, these results are not the combination of our work. Rather they form a foundation on the first steps that will support our long-term growth strategy.
We have no intensions to be merely another semi-cap industry cycle rider. We will continue to build on our strong position in the semi space but we will intensify our efforts in newer adjacencies where we can leverage out core technology capabilities.
In the near-term, you will see important results from our efforts to expand existing relationship, such as our work on high productivity tools for general lighting applications of high brightness LEDs, innovative new solar cell production tools and simplified analytical tools used in the widening range of markets.
Longer term I think you will see the market rep that can result from the strength of our core confidence, capability and capacity.
Yesterday afternoon, we announced the final step in our ongoing and completely stimulus management transition. I will resume my retirement at the end of September and Steve Schwartz who joined us earlier in the year as President of Brooks and he was just selected to our Board will succeed me as CEO. Steve will provide you some insights into his expectations for Brooks right after Martin's comments.
So on closing; let me say that it has been my pleasure to work with the customers, employees and shareholders of Brooks these past three years. I'm pleased with where we are at and I'm excited about the future that lies ahead a Brooks. Martin?
Thank you very much, Bob. During my prepared comments, slide references relate to the PowerPoint presentation posted on our website was the company's these remarks. As Bob previously mentioned, we reported net income attributable to Brooks of $16.6 million, both GAAP and non-GAAP diluted earnings per share with $0.26.
The non-GAAP earnings approve 67% sequentially from $10.1 million or $0.16 per share. As many of you will recollect our GAAP earnings in the second quarter of fiscal 2010 were favorably impacted by both of significant $7.5 million after tax gain on the sale of intellectual property right and $3.9 million tax credit arising out of recent economic incentive legislation.
Our earnings beats our preannounced range of expectations was a result of favorable resolution of some foreign tax matters which effectively eliminated the tax provision in the quarter. On minority and joint venture earnings we are adversely impacted by significant shipment into Japan missing customer qualification before the end of the quarter. This should provide Impetus for higher joint venture earnings in the fourth quarter.
A significant driver in performance this quarter was the very strong $6.4 million increase in operating profit before special charges on an $8.4 million growth in revenues. Slide number four, shows the 300 basis points improvements in gross profit under 370 basis points improvement in non-GAAP operating margins.
The operating margin performance a 10.7% this was strongest quarterly performance on record for Brooks. We still continue top line momentum from our Brooks products and extended factory during the quarter. With extended factory remaining at similar levels within the overall business mix. The quarter saw broadening of the customer and product growth profile and a consequent moderation of the core semiconductor content of the revenue mix from 85% to 81%. We drove exceptional gross margin drop through of $7 million on $8.4 million of incremental sales reflecting improved cost performance, favorable mix within our Brooks design systems portfolio and particularly strong revenues from our continuing IP license agreements.
Research and development spending increased very modestly to $7.9 million as we continue to build the competencies in breadth to support our goals for ongoing innovation. Higher selling general and administrative expenses were net of a $0.7 million lower stock compensation expense, the increases included both some permanent cost additions to support our long-term growth profile and some one time cost should not recur. Slide five, sets our how the revenues and operating profits before a non-recurring income and special charges reach from the March quarter our second quarter for a fiscal 2010 to the June quarter.
The critical solutions business provided additional operating profit of $2.6 million on $4 million of incremental revenues. A 65%, somewhere higher then our modeled drop through with benefits from both costs and mixed performance.
The system solutions business provided $3.2 million of incremental profits on $4.5 million high revenues. Cost performance was particularly strong from this segment, complementing a mix of products focused on higher margin applications.
Finally, our service business saw a $0.2 million decline in the top line from the continuing move away from low margin labor only contracts. Reduced stock compensation expense of $0.7 million on a higher expense of $0.2 million from additional engineering resources round out the profit movements in the quarter.
Slide number six, charts and revenue adjusted EBITDA progress over the past five quarters with a $40 million growth in adjusted EBITDA while revenue expansion has been a $113 million. EBITDA margins are now 14.4% and continue to expand. While we had a disappointing quarter in the first quarter of the fiscal year where the marginal profit growth trialed behind our expectations.
Perseverance and dedication to our continuing margin expansion initiatives have borne fruit and we have recovered. From a Reg-G perspective, please note that the adjusted EBITDA reconciliations are provided as a supplement to each of our quarterly earnings releases.
We generated cash of $7.2 million in the quarter as shown in slide number seven, restructuring cash outflows were $1.5 million, we are now within 12 months of the end of this cash drain, most of which is related to charges taken some years ago. We utilized $12.6 million of additional networking capital in supporting the revenue increase, mostly the result of $13.4 million growth in inventories.
Cash flow from operations was $8.6 million, capital expenditures for the quarter were $0.7 million. We should see full fiscal year spending of less than $4 million for capital expenditures.
Looking at some critical balance sheet accounts that set out on slide number eight, cash and marketable securities grow from a $125.8 million to a $132.9 million. This includes, those securities classified as long term on our balance sheet, which are nevertheless freely marketable, and can be considered readily liquid.
Overall, our working capital velocity remains significantly favorable to historical levels of 14.3%, although slightly muted from the position at March. Our receivables DSO was approximately flat on the dollar growth was volume related. As previously mentioned inventories increased by $13.4 million, some of this increase was planned was associated with initiatives to reduce logistic costs both for us and for our customers. Additionally we built inventory to support our new product launches and our customers launches.
Days payable outstanding moved out three days resulting in payables increases of $3.8 million. The next three slides, I'll briefly cover our sequential segment performance. On slide number 9, we review the sequential results fourth our critical solutions segment. The top line increased sequentially by 6.7% with the strongest growth in our polycold products. Gross margin improved to 40% slightly offsetting this we commenced increasing our engineering investments which resulted in higher operating expenses.
The reported segment operating income for critical solutions was $10.2 million or 16% of revenues. On slide number 10, we summarized the performance with the system solutions segment. Revenues grew by 6.3% including our initial next generation LED platform deliveries.
Gross margins improved by $3.7 million to $16.8 million or 21.8% of revenues with relatively flat operating expenses, the gross margin improves segment operating margins to 9.8% of revenues. The global customer operations results set out on slide number 11, shows a slight decline in revenues previously noted but a strengthening in gross profits. Our margins from the service and repair activities are now 22.5%.
The improvements in these margins narrowed the segments operating loss to $0.3 million. It's important to understand that our customer service engineers have been prone to interactions with our customers to benefit our business as a whole. Thus internally, we look at this business from a manage contribution prospective which is a print of the reasonable level of blanking.
Tuning to our financial outlook, we continue to see robustness to our order bookings. Gross bookings for the third quarter were a $166 million and we continued with book-to-bill about one in the first month of the fourth quarter. Accordingly, we now view the September quarter to preview for revenues of at least $175 million. With continued margin growth we expect that this will translate into diluted earnings per share of between $0.31 and $0.34. The improved operating margins and disciplined balance sheet management should continue the expansion of our return on invested capital to levels above 35% from just shy of 30% in the current quarter.
And looking into the final quarter of the calendar year, we anticipate continued growth which will result in a calendar 2010 non-GAAP diluted EPS in excess of $1. Finally, in closing I want to revisit the impact of this guidance on our adjusted EBITDA momentum. Chart 13, portrays a likely outcome as we exit the fiscal year, while we should be generating a run rate of close to $120 million on adjusted EBITDA and should be holding at least $140 million of cash of that of that juncture.
And now I'll turn the call over to Steve.
Thank you, Martin. As Bob mentioned, we are in a very strong position, both financially and with our customers. In my remarks submitted today, I'd like to just take a moment to reinforce the direction of the company.
We spent a significant portion of the last several months honing our product and business strategy and as a result we are even more enthusiastic about our prospects to serve markets for controlled environments are important. For the most part our direction is straight forward, we'll continue to serve the semi-market well and better, by offering new products that address the ever changing needs of the market. And second, we will further develop products to leverage our core capabilities that can address the technical applications for adjacent markets where we are advantaged.
Our initiatives in the semi-space continue to strengthen our leading position. In the area of robotic handing critical components, we are presently engage in the design and adaptation of systems for customers that includes both large and smaller OEMs. In our CTI-Cryogenics vacuum product family, we've responded to the needs for fabs to dramatically reduce power consumption by developing a Cryogenic pumping system that delivers the same level of performance with significant reduction in power consumption.
Testing at customer sites has begun and the expectations and enthusiasm for our approach are high. In the June quarter, we introduced and begin taking orders for the first offerings in our revolving simplicity solutions product family, then incorporate unique technology to address residual GAAP analysis applications. Our technology provides significant advances in smaller size, much lower power consumption and measurement speeds more than 10 times faster than conventional approaches. Initial customer feedback from valuation units is very positive and our manufacturing is ramping.
We continue to see a broad application of this technology. We also continue to broaden our footprints beyond front-end semi, where our technologies bring benefit to controlled environment manufacturing for other markets. In our system solution group we achieved design wins for two MEMS applications and one for 3D IC advanced packaging technology.
We see these markets evolving to lead more automation and we will pursue our proprietary systems business as these markets continue to grow. We are adapting our market leading Mag 7 and Mag 8 product technologies to extend to additional high capacity applications with a mass and or temperature of the payload of both higher than for conventional semi applications.
Specific products include the applications for display and elimination markets. In our poly coal division, we see that the demand for thin-film display coding, is driving more business for large coding systems that are required to keep up with the high demand for tablet computing. The markets beyond front-end semi are increasingly important to Brooks and we expect to aggressively pursue these opportunities as we move forward.
With that I'd like to turn the call back to Martin to begin the Q&A session.
Thank you, Steve. Operator we are now in a position to take calls?
(Operator Instructions). Your first question comes from the line of Patrick Ho with Stifel Nicolaus. Please proceed.
Patrick Ho - Stifel Nicolaus
And Bob just want to wish you the best in your retirement. In terms of the LED market expansion. Can you just discuss what the margin profile is and whether you are going go through some of the learning curves probably before you get it to your corporate average? Let's kind of like the timeframe to get it to where you would like it to be inline with your corporate average.
I think we actually feel in terms of the margin profile that we have established a business model, that enables us to reflect the pretty much the level of corporate average going out of the gate with the opportunities for expansion thereafter. If there is a investments of the front end, it's probably in the balance sheet side of things rather impacting the P&L. So the moment this opportunity is only accretive to our operating margin. Gross margin and the operating margin profile going forward and is not a wait in any fashion Patrick.
Patrick Ho - Stifel Nicolaus
Okay. That's great to hear. Secondly, in terms of the supply situation in your supply chain we are still hearing at least across the Board that there are constraints on pockets here and there what are you seeing in your supply base and whether any of those constraints are being eleviated on going forward basis.
I think we have continued to see during the course of this quarter constraints that have impacted our ability to be as sufficient as we would like to be and may be pretty close on delivery to customers in certain situations and you work through those I would say that some of those situation when you are knocking some down, we have had situations where others of a risen.
So, whilst I think there have been improvements we would be cautious about whether other ones will arise but we do see broadly an improving position for instance in the last month was compared to what we saw during the course of the third quarter.
Patrick Ho - Stifel Nicolaus
And then just as a follow-up to that, is any of that inventory increase kind of like a strategic decision on your end something sure that you have some components given that the overall demand environment seems to be pretty healthy, are any of the inventory increases related to ensuring that you have the parts necessary should demand continue to grow on your end?
There are some of those elements, but there is a larger element from the supply chain in point of view, you as you tend to get an imbalance and you have those suppliers that are working like clock work and delivering and then you are in a hold position from the missing pieces that are not being delivered to schedule. So it's more that element that's a cause of the inventory build.
Your next question comes from the line of Ben Pang with Caris & Company. Please proceed.
Ben Pang - Caris & Company
First, in terms of your comments for calendar 2011, what type of mix you assume between semi and your non-semi business?
I think we see a continuation of trend where semiconductor will have a pace of growth of our non-semiconductor exceeding the semiconductor. I don't know that we have a specific target for the whole of 2011 at this juncture, but you'd see modest improvement and you've seen how it could move just 4% in the course of this quarter.
Ben Pang - Caris & Company
But is it likely to be, I guess, your semi to be below 80%?
I believe our semi will definitely be below 80%, I would necessarily want to paid, where is a particular point below that then.
Ben Pang - Caris & Company
Okay, and then in terms of your new opportunities, which part of the business has a higher growth in terms of your critical systems versus your system solutions in the new businesses.
In the new businesses the growth favors the system solutions by virtue of the growth in the next generation LED platforms which are complete platforms that are going to grow the quickest. So, it will favor about group ahead of the critical solutions although they will also have a nice growth from those initiatives as well.
Ben Pang - Caris & Company
So, in that scenario is there kind of a negative margin impact? Is the system solutions…
As we said the all of the new opportunities represent opportunities that are at least as good as the corporate average if not better, therefore they will boost the margin performance of both of those segments.
Ben Pang - Caris & Company
Okay, and my last question, you kind of mentioned I guess some conservatives about our 2011. Can you share with us what's the most negative thing that you hearing out there from your customers or what do you see out there that makes you more cautious on 2011.
I think the caution will be just that the strength of demand is coming through in this later part of fiscal 2010 what does that do to customers, end customers pulling back some on capital expenditure plans in 2011, particularly if we have an adverse macro economic environment. So, our comment should be taken in the context so that overall view, our visibilities relatively limited in terms of specific order profiles etcetera and thus we are reading [Tilis] as much the same way that you are [banned] its not that we have specific customer insight that give us a situation that's roadmap puts that caution to our comments.
Ben, I think that you could actually look at it that it is the uncertainty and lack of visibility we have that gives us caution and that we are certainly blinded by the strong current activity but it's the lack of visibility that just has a set of caution mode prepared to move forward smartly or pull back if necessary particular in our semiconductor space. We are obviously a lot more optimistic about the non-semiconductors space.
Your next question comes from the line of Hari Chandra with Deutsche Bank. Please proceed.
Hari Chandra - Deutsche Bank
First question is for Rob regarding succession Agustin was with the company for the past few months but what prompted the company to look for someone outside of Brooks?
As you know my original commitment to the company when I was actually come on board was for a two year period that was would have ended a year ago, since that time the Board of Directors conducted a comprehensive review of internal candidates and a nationwide search encompassing external candidates both from within the semiconductor space and outside of the semiconductor space.
And it was the conclusion of the Board and there is a member of the Board and the CEO, mine as well, that Steve had a unique set of characteristics, his deep knowledge of the semiconductor space, but also his views and vision about opportunities beyond the semiconductor space. And he emerged as clearly the strongest candidate for the situation that we had in Brooks. And as I said has been our long standing position and Steve has commented a position he shares will build on our semiconductor space.
But we are also aggressively pursuing the adjacencies and work beyond the current space. Since Steve arrived, all of our work and Steve is worked intensively with members of the Board and myself and the team here. We have just been more and more certain that we as I said in the press release yesterday. We have the right person at the right time to carry Brooks forward.
Hari Chandra - Deutsche Bank
And so my follow-on my question for Steve is what will be your focus of the company growth or cost or if is it both, do you envision acquisitions given that the company has a $200 million shelf offering of that and on the cost side is there much to come or is this has been a company can get?
You kind of touch in all the topics that are dear to the company right now, we spent really most of the last four months going through that conversation internally, we are going to absolutely build on the core technology capabilities we have as a company.
We have very strong customer connections and probably first and foremost as our customers in semi branch out into other areas and other markets, we are there with them. We continue to follow them to support their next requirements for technology applications beyond semiconductor.
We will absolutely leverage the core technical capabilities we have into other market because of the status of the balance sheet, the cash position, the fact that we have self registration, it gives the company opportunities to consider things that will more quickly grow market, grow market opportunity for us. So, we are thinking through those plans of the things they were underway long before I came to the company but it does give us opportunities that we didn't have even a couple of years ago and we are certainly not ready to comment on some other specifics but we do have opportunities that we will exploit as a company as we think through the specifics of the strategy over the next couple of months.
From the cost standpoint there are opportunities from our cost reduction standpoint, we will continue on the path of cost reduction and efficiency improvement as Martin and Bob has been describing to you over the quarter is that we will continue on those paths and take advantage of those opportunities but the strategy we are putting together is really related to growth opportunities for the company, the tactical actions that we are taking are dedicated to the improvement from the cost structure.
(Operator Instructions) your next comes from the line of (inaudible) with Barclays Capital. Please proceed
Hi Martin, my first question is to your Martin how closed the target model for Brooks looking these days that is what kind of revenues can we expect what kind of gross margins and operating margins assuming that the 2011 is it a good year or a bad year? And where is the breakeven currently?
Okay. A number of questions, where is the target model well I think that the revenue potential for this business is clearly depended upon market activities and where one might project in particular semiconductor but also the other markets that we participate in to the extent the cyclical where do they peak out.
We can clearly see with the business that we have if there were favorable trailing winds. This is a good deal of runway above the current levels of revenues that we currently have and that we probably have with this business today. Revenue levels that will be nicely above the peak as in the past.
In terms of the breakeven, I would like to look at the adjusted EBITDA breakeven as the critical breakeven point as being the best proxy of cash breakeven. And our current mix of products and our current performance that's round about $95 million plus or minus in the mid 90s and that includes as a counting within the fixed cost structure a number of positions that are actually temporary or contracting positions, so we can adjust that to the market conditions and requirements and how the degree of flexibility there.
In terms of the business model where we've talked about, what's the marginal drop through the contribution I think the charts that we've included in the conference call are totally cool they basically show that with a heavy extended factory content currently running about the order of 34%, we've averaged a variable contribution or variable drop through to the bottom line of about 36%, 37%. And so that's well as that contribution that percentage is being growing, so we believe the model we set out before which is would be with a lower extended factory percentage and 40% drop through we still remain entirely intact.
I just have one follow-up regarding 450 millimeter and how do you plan to do R&D on that, would you be requesting some funds from your OEM customers or would it be completely yourself financed?
We have over the last couple of years continued to support customer requirements the 450, we were very well positioned because existing products had been designed for that extension with minimal incremental investment and so most of the prototype hardware that's out there today was extension of existing products supplemented by customer funds.
I would now like to turn the call back over to Mr. Martin Headley for concluding remarks.
And I'll turn it to Steve who will have some concluded remarks.
Thanks Martin, thank you operator. With yesterdays press announcement on Bob's decision to retire, I'd like to take a moment to say a few words about Bob Lepofsky and his impact on Brooks during the last three years. I'm new to Chelmsford, but not new to Brooks, it's the company that I've known for many years.
During the last four months here at Brooks I met with customers, investors, visited most of our facilities around the world and one thing I can say that's abundantly clear Bob has grown a strong culture that emphasizes value to our customers and our shareholders.
It's because of Bob's vision, steady hand and exceptional leadership that we have emerged strongly from the worst downturn in our industry in a generation. We have record profitability, a stronger market position then ever before and a substantial and solid platform on which to continue to grow the company. I know that I represent all Brooks employees when I express our deep and heartfelt gratitude for all that Bob has done for the company.
From all of us thank you your time today and we look forward to speaking with at our earnings call following the fiscal fourth quarter. Thank you.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation, you may now disconnect. Have a great day.
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