Brooks Automation, Inc.
Q1 2008 Earnings Call Transcript

Published: 15 May 2008

[Operator:]

Good afternoon and welcome to the Brooks Automation's earnings conference call. Please be aware that today's conference is being recorded. At this time, I would like to turn the call over to your speaker for today, Michael McCarthy, Director of Investor Relations at Brooks Automation. Please go ahead.

[Mike McCarthy:]

Thank you, Sasha, and good afternoon everyone. My name's Mike McCarthy, Director – Investor Relations and Corporate Communications for Brooks Automation. I'd like to welcome each of you who are joining us to discuss our fiscal 2008 second quarter earnings results. Our press release was issued at about 4

[Robert Lepofsky:]

Thank you, Michael. Good day, ladies and gentlemen, and thank you for joining us. Martin Headley and I have a few repaired remarks and then, as Michael said, we will open the lines for your individual questions. Suffice it to say, we are working in a challenging environment. You have already heard commentary on the depressed near-term outlook for front-end semiconductor capital equipment, our principal served market for most of our customers and our peers. That outlook appears to have weakened in the past six weeks, as hopes for any near-term recovery faced the realty of expanded inventories and shrinking order books throughout the food chain. At Brooks, our aggregate performance is heavily dependent on the semiconductor sector, which represents about 80% of our business. The impact, however, of the market is a bit different in individual parts of the company. For example, our UCI Pump joint venture in Japan and our BAK joint venture in Korea are enjoying some benefits from the current high level of investment in new flat-panel manufacturing capacity. In our Critical Components group, performance at our Polycold division is being lifted by strong inventory in the solar sector. On the other hand, as you would expect the extended factory side of our Automated Systems Group is most profoundly impacted by the pull back in tool shipments from OEMs, large and small, throughout the semiconductor sector. As Martin will touch on in a moment, we are adjusting to the current headwinds, taking actions as needed to mitigate at least some of the pressure on our top and bottom line. As depressing as external conditions may be at the present time, we're actually quite enthusiastic about our restructuring and repositioning initiatives. As noted in the press release, we've made substantial progress simplifying our global organization. We've eliminated a number of senior management roles and in the process have become more agile in decision making and more responsive to customers. Our current structure has enhanced cross-divisional and cross-functional interactions while significantly reducing salary, benefit and contingent compensation costs. We have moved forward on our plan to reduce our global footprint, more effectively utilizing some facilities and totally eliminating others. We have realigned our low-cost region strategy to better leverage a global supply chain to be in sync with our customer requirements and to improve our own profitability going forward. Nowhere is the benefit of our new way of thinking more evident than in our Wuxi, China facility. Now operating directly under our Automated Systems Group, we are in the process of downsizing the facility, reducing staff and turning a money loser into a profitable contributor to our success. Today, we're in complete alignment with the needs of our customers who want a supplier located in region to support their own operational and market penetration strategies. New business commitments from two of our major OEM accounts have placed our Wuxi facility in the critical pathway of our customers' success and our plans for revenue and profit growth in our Automated Systems Group. These customers have seen and tested our plants, measured our progress, and have entrusted us with success of their own business in the Asia region. On another front, we are moving forward on the path to reduce our SG&A costs. This week, we passed a major milestone in the deployment of our Oracle-based business system. This is a first step to eliminating the cost and complexity of running multiple legacy information platforms at Brooks. In addition, important milestones have recently been achieved which will result in resolving outstanding legal matters related to past equity incentive practices at Brooks. We expect to announce definitive conclusion of several of these matters during the current quarter. While totally unrelated to current operations, these older matters have burdened our P&L by $1.5 million to $2 million each quarter, so resolution will certainly be welcomed. These costs have been running 7% to 10% of our non-selling G&A costs each quarter. Earlier, I mentioned new customer commitments that align with our reset Wuxi plant strategy. Those particular commitments are reflective of a new view of Brooks in the eyes of many of our customers around the world. Today, we're viewed as more aligned and more responsive and as a result, we're engaged with our customers in discussing a range of new opportunities. Customers are talking about expanded scopes of supply and larger shares of their business with Brooks. They've seen our words turned into action that have improved their own businesses as we improve ours. It is important to realize that our purpose is not just to trim costs, but rather to get our business model right so that we can succeed for the collective benefit of our customers, employees, and shareholders over the long term in a business that despite its cyclicality still offer tremendous opportunity for companies with unique competencies such as Brooks. Against that admittedly optimistic longer-term view, let me turn the call over to Martin, who will focus on the current state of affairs and provide you some additional details and color on the quarter just reported. Martin?

[Martin Headley:]

Thank you, Bob. As Mike mentioned earlier, we've posted slides to the Brooks' web site that we believe will be useful in getting a clearer understanding of our results. During my prepared comments, I'll be making reference to the appropriate slide. Turning to slide two, I will begin by walking you through how our results compared with our guidance provided in February. At that time, we indicated that our diluted loss from continuing operations should be between $0.10 per share and a break-even situation. We reported a GAAP loss from continuing operations of $8.6 million or $0.14 per share. This loss included restructuring expenses of $2.5 million or $0.04 per share and a non-cash impairment loss from a minority interest in a publicly traded investment amounting to $2.9 million or $0.05. This results in a loss before special charges of $3.2 million or $0.05 per diluted share, in the middle of our guidance range. Looking at slide three, you can see we're approximately flat on the top line as compared to the first quarter of fiscal 2008. The dynamics here were a reduction in license revenues recognized on our Automated Systems products, offset by robust performance in the early part of the quarter from our Critical Components businesses. Sequentially, gross margins declined by $2 million as a result of mix factors, most notably the impact of lower license revenues, on which there is a 100% margin, as well as a higher incidence of warranty and customer accommodation costs. Those additional costs arose with respect to our Automated Systems products and reflect our working through some specific issues associated with newer products and some component retrofit activities. Research and development expenses declined sequentially by $0.9 million as we are cycling to the end of a number of development programs, as well as improving efficiencies. Selling, general and administrative expenses increased by $0.8 million with higher levels of activity and legal costs expended on addressing the legal options matters and $0.6 million charge associated with recovering a foreign VAT receivable. The additional SG&A costs and customer accommodation and warranty costs pulled us back from achieving the near break-even results we would have expected at these volume levels. Slide four shows what happened under the operating profit line, with lower net interest income sequentially driven by lower return rates, lower average cash holdings, following the stock repurchase activities early in the quarter. The permanent impairment charge of $2.9 million was a write-down of the $5.1 million investment recognized during the third quarter of fiscal 2007. We determined the impairment in value to be other than temporary, as they reported expectations of further losses for 2008. Finally, foreign currency impacts have a favorable impact on our other income. In the next three slides, I'll briefly cover the sequential segment performance. On slide five, we set out the sequential performance of our Critical Components segment. Business started out strongly in January and February, before experiencing a weaker March, as revenues from installations in new fabs pulled back significantly. Overall, the segment has benefited from some end market diversification. Gross margins improved from the volume fall-through and manufacturing effectiveness that reduced expediting costs. The margins of the Critical Components segment remained below historic and target levels with under absorption at current volume levels. Operating expenses increased with higher research and development costs on new vacuum product programs and the corporate allocation of those unusual costs previously described. On slide six, we see the sequential performance of the Automated Systems segment. Here the lower license revenues impacted both revenues and gross profit to the extent of $1.5 million. Our extended factory revenues held up well during the early parts of the quarter, with revenues that had been pushed out from December. This had the impact of maintaining a poorer gross margin mix profile for the quarter. We've already talked about some of our cost pressures. I'd perhaps also add the continuing challenge of escalating freight costs, which particularly face this business as we balance lower-cost sourcing and manufacturing models with delivery to U.S. customer locations. Operating expenses declined, primarily from lower research and development spending. On slide seven, you can see that the strong March service revenues boosted sequential top line performance of the Global Customer Support segment. The segment continues to show lower revenues as compared to a year ago, as our customers' cost containment strategies have included a changed approach to preventative maintenance cycles. The gross margins benefited slightly from the volume fall-through and cost control in operating expenses helped turn this segment around to profitability. A number of operational task forces in this business should deliver further cost reduction programs through the balance of the fiscal year. Turning to slide eight, we see that we continue to report positive adjusted EBITDA and cash flows, even at these depressed business levels and before all our actions to improve profitability have rolled through. Cash flows from continuing operations were $11.3 million in the quarter, with adjusted EBITDA of $7.2 million and solid balance sheet control contributing to that performance. Our net working capital as a percentage of annualized sales improved to 18.3% at March 31, 2008 from 19.0% at December 31, 2007. This improvement came despite some increases in inventory associated with the late quarter top line decline. Capital expenditures during the quarter were $6.2 million, with approximately $4 million of that associated with investments in our Oracle ERP implementation, the first phase of which went live earlier this week. Stock repurchases during the quarter were $61 million. Turning to slide nine, we can see that that represented a repurchase of 5.1 million shares, bringing the total repurchase under the program to 7.4 million shares at an average purchase price of $12.19. Since we last communicated the status of this program in our first quarter conference call, we've made minimal repurchases, 413,000 shares at an average price of $9.77. We would anticipate the participation will continue to be modest in the current climate. Slide ten sets out our guidance for the June 2008 quarter. The semiconductor wafer fab equipment market conditions continue to soften and that has an immediate impact on us, as we are at the leading edge of those directional changes. We see the revenues could be in the range of between $125 million and $140 million, and this will translate into a loss from continuing operations before special charges of between breakeven and $0.12. The flow-through from a significant decline in the top line and the impacts of some cost inflation take away from the benefits of our ongoing restructuring activities. Bookings in the second fiscal quarter of 2008 were $133.2 million, down 6% on a sequential basis. That weakness was greatest at the back end of the quarter and (inaudible) the pull down in major OEM forecasts that have come through after their quarter-end earnings announcements. We expect sequential weakness coming through in both of our product groups. Rising costs in areas such as freight surcharges, employee medical plan costs, annual wage increases will continue to eat away at some of the real gains from our time-phased restructuring efforts. We'll be counteracting these with aggressive discretionary cost controls, work schedule changes and further steps in our restructuring activities. I'll now turn the call back to Sasha for the Q&A segment of our call.

[Operator:]

(Operator instructions) Our first question comes from C.J. from Lehman Brothers. Please proceed with your question.

[C.J. Muse:]

Yes, good afternoon. Thank for taking my question. I guess my first question here is, as you look into June and beyond, do you expect sort of the same declines across all three market segments or do you see more weakness in the Automations versus the Critical Components and Global? Whatever color you could provide would be helpful.

[Robert Lepofsky:]

Sure, thank you. I think that what you will find as we go through this cycle, as we've noted in previous calls, our extended factory activities in the Automated Systems Group really see the decline first and the recovery first. Literally, we're closely coupled with tool makers' shipment schedules. And as Martin noted, the falloff that we saw in March is reflective of what you've heard from individual tool makers. So, that one is probably the area that changes the fastest. Clearly, our Critical Components activity is fairly short cycle time, but with a little bit longer lead time from the time a tool maker ships to a chip maker.

[C.J. Muse:]

Okay. I guess when you think about that change of mix, how do you think about gross margin in terms of both? Could you guide for June and how do you see that trending throughout the rest of the calendar year?

[Martin Headley:]

I think that we would see that we would be bottoming out at the kind of gross margin levels that we're at now because we have some of our restructuring benefits come into play. I don't see that mix really drives us to any adverse situation from where we are today.

[C.J. Muse:]

Thank you.

[Operator:]

Next question comes from Brett from Caris & Company. Please go ahead with your question. Next question comes from Jim from Goldman Sachs.

[Kate Kotlarsky:]

Hi, this is Kate Kotlarsky on behalf of Jim Covello. I have a couple of questions. First, you mentioned there were a couple of customer order revisions that you witnessed towards the end of the quarter. I was just wondering if those came primarily from your memory customers. And then, I have a couple of other questions.

[Michael Pippins:]

We saw pushes from certainly memory, but also some non-memory, primarily Asia-based.

[Kate Kotlarsky:]

Okay, that's helpful. And then, just on your profitability outlook, I know that last quarter you talked about having a break-even target of about $130 million, $135 million. Given the deteriorating environment in the industry, have those targets changed at all or do you expect it to remain at current levels?

[Robert Lepofsky:]

No, actually, it's part of what you could take away from our comments on our restructuring and our pace of restructuring. We had set initially a target at the $150 million level. We then revised that downward going through the course of the year. You could infer from our guidance that in the current quarter, we will have driven the breakeven to the 540 or below level and will continue to drive it through the balance of the year. Our target is still to get to a break-even level that's closer to 500, but that's later in the year.

[Kate Kotlarsky:]

Okay.

[Robert Lepofsky:]

So we're on cost take-out track that we expected to be on at this time.

[Kate Kotlarsky:]

Okay. And then just on the administrative side, could you break out what your amortization of intangibles were during the quarter and how that broke out between COGS and SG&A?

[Martin Headley:]

Yes, if you look to the supplemental information in the press release, the table that shows how you come to adjusted EBITDA, you will see that amortization of completed technology which goes to cost of goods sold was $2.3 million and the amortization of acquired intangible costs which goes to SG&A was $1.8 million.

[Kate Kotlarsky:]

Thank you so much, that's it from me.

[Operator:]

Our next question comes from Brett [ph] from Caris & Co.

[Brett:]

Hey, can you guys hear me?

[Robert Lepofsky:]

Yes.

[Brett:]

Okay. Thanks for taking my question. This is Brett for Ben Pang. Just wondering, you had mentioned inventory levels at your customers, did I hear you say that they were high? Can you give us some details on that?

[Martin Headley:]

No, there are a couple things. In my comments, I made reference to the fact that our inventory levels had gone up slightly during the course quarter and that that was in part due to the fact that our activities reduced towards the end of the quarter and caused us to be caught with slightly more inventory than we would have planned for. That was the principal thrust of my comment.

[Brett:]

And then just real quickly, are you able to give us a cash tax rate going forward?

[Martin Headley:]

The cash tax rate is in essence the rate at which we are booking taxes, which is not so much a rate, but it runs at about $0.5 million to $0.75 million per quarter. Flux is dependent upon where we get caught with some withholding taxes in foreign jurisdictions.

[Brett:]

Okay, thanks a lot.

[Operator:]

Next question comes from Hari from Deutsche Bank. Please go ahead with your question. Excuse me, Chandra, Mr. Chandra?

[Hari Chandra:]

Hello?

[Robert Lepofsky:]

Hello?

[Hari Chandra:]

Yes, sorry. You mentioned about your financial results masking the underlying operational progress. Can you quantify the benefits of that progress, either in terms of revenue or margin benchmarks, either now or when the cyclical revenue comes in?

[Martin Headley:]

I think the way to best look at the benchmarks that we're driving towards is what Bob previously referred to, which is the break-even level and the level to which we're reducing fixed cost in the business to that break-even level. As you would infer from our guidance, we're essentially at an annualized break-even level of $560 million, which compares probably going into the quarter at something just slightly over $600 million. But, it's our target as we move through the rest of our phased restructuring plan to drive it down closer towards $500 million over the next two or three quarters.

[Hari Chandra:]

Okay, thank you. And I have a couple of follow-up questions. The $1.5 million to $2 million in legal costs that you talked about, when will they be gone?

[Martin Headley:]

I think what we've indicated in our comments today is that we're very hopeful that the bulk of those should disappear either in the current quarter or very shortly thereafter.

[Hari Chandra:]

Okay. How about the restructuring charges from the third quarter?

[Martin Headley:]

We're still evaluating exactly all the particular details of the programs and we're not really in a position to give an exact amount of the restructuring charge that we anticipate taking at this juncture, I'm afraid.

[Hari Chandra:]

Okay. Thank you.

[Martin Headley:]

Thank you.

[Operator:]

And your next question comes from John from Kennedy Capital. Please proceed with your question.

[John:]

Thanks for taking my questions. Just a quick one for you. Can you give me an insight as to what the vision of Brooks will be like after the restructuring? And also, you'd mentioned the break-even levels, I was curious if you had any insight as to when there would be an uptick in revenues? Thanks.

[Robert Lepofsky:]

Could we ask you to repeat the first part of your question?

[John:]

Sure, sure. I was just curious as to what the vision of Brooks would be like after the restructuring. And the second part was when you guys might see an uptick in your revenues.

[Robert Lepofsky:]

Right. I think the answer to your question about the vision is already emerging. You can look at Brooks as an organization that has two centers of activity

[Operator:]

Your next question comes from Mona from TCW. Please proceed with your question.

[Mona:]

In the opening remarks, I think it what mentioned something about inventory in the channel. I just would like to know what you were referring to. Are you referring to component inventory or what exactly?

[Robert Lepofsky:]

Yes, that opening comment was referring to the many comments throughout the industry in the food chain at the chip maker level, which is affecting their decisions about capital investments and the timing of new tool deliveries.

[Mona:]

Okay. And then, you mentioned that the weakness is not just memory but some of the Asian foundry people or what is the other segment that's weaker for you?

[Michael Pippins:]

We have also seen pushes, not just from memory in Asia.

[Mona:]

So pushes in which area?

[Michael Pippins:]

In the foundry space.

[Mona:]

In the foundry space. Thank you.

[Operator:]

Next question comes from Jenny from JPMorgan. Please proceed.

[Jenny:]

Not to beat a dead horse but, when you say the outlook weakened in the last six weeks at OEMs, was that their shipments or their order books?

[Robert Lepofsky:]

We were specifically referring to shipment levels. Remember that we get releases, particularly in our extended factory part of the business, that are very, very closely aligned with the tool maker shipment schedules. So, as we went into this quarter, we had suggested that we would have an uptick at the beginning of the quarter coming off of the end-of-year planned shutdowns. As we ended the quarter in the month of March, we saw the pull back in those shipments consistent with what you've heard from the OEM accounts. So the close alignment really plays out and that's the reference to the end-of-quarter results.

[Operator:]

Thank you, sir. There are no further questions at this time.

[Robert Lepofsky:]

Okay, thank you very much for participating. If there are any additional questions, please feel free to give me a call in the office and we look forward to seeing you soon. Thank you again.