Brooks Automation, Inc.
Q2 2009 Earnings Call Transcript

Published: 8 May 2009

[Operator:]

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

[Martin Headley:]

Good afternoon, everybody. I would like to welcome each of you to the Brooks Automation Inc. fiscal 2009 second quarter results call. Our press release and Form 10-Q were issued about 4

[Bob Lepofsky:]

Thank you, Martin and good day, ladies and gentlemen. The first comment we would like about the March ending quarter is that we’re pleased to report it’s over and behind us. It was to say the least, the most challenging period. The result of the hard work of the people of Brooks through out this period should be the headline. Our situation in the quarter mirrors the observation of a highly regarded analyst describing another company, near term pain for long-term gain. The bad news is summarized in our financial performance, significant losses, asset impairment charges and cash burn. Not unexpected but still painful. We projected a sequential revenue decline of up to 50% and that’s what we had as revenues fell from $73.4 million in the December quarter to $37.3 million in the March ending quarter. The good news was that our restructuring and repositioning initiatives move forward aggressively throughout the period. We had projected that on a 50% decline in revenues, our efforts could limit the decline in adjusted EBITDA to just 20%. Excluding significant unplanned legal charges associated with the trial of former officer of the company, adjusted EBITDA in the quarter declined just 21.7%. To give you a better feel for how far people have come in implementing the restructuring plans, in the December-ended quarter, we had adjusted EBITDA loss of $20 million. On that same revenue base today, we would be at breakeven and finally, I want to emphasize that the restructuring has not negatively impacted any of our critical new product and market development programs. Across the company, the programs we consider key to our future growth, market position and profitability remained fully supported and on track. Continuous improvement programs, CIPs, that address evolving customer needs and cost reduction for existing products remain a priority, particularly within our automation products. New platform releases within our vacuum product portfolio will ensure our continued leadership position in current markets and product introductions from our instrumentation group will expand our participation in non-semiconductor markets. So, while we adjust to a changing external world, optimize our internal operations, and reduce costs, we believe that we are maintaining the right balance between near-term realities and long-term opportunities. But before I speak to our expectations, let me turn the call back to Martin who will provide you with a detailed review of our financials for the March-ending period. Martin?

[Martin Headley:]

Thank you, very much Bob. As I mentioned earlier, we’ve again posted slides to the Brook web site that we believe will be useful in getting a clearer understanding of our results. During my prepared comments, I’ll make reference to the appropriate slide number. As laid out in our press release, we took a number of significant special charges in the quarter. Before explaining those charges, I first wanted to look at the underlying business performance without those special charges. On slide number three, you will see the $36.1 million or 49% decline in revenues Bob referred to earlier, only resulted in a $6 million reduction in operating loss before special charges as a result of the significant restructuring and cost control actions triggered during the quarter. In particular, the decline in gross profit before special charges was held to $10 million when the variable contribution to the revenue decline was over $15 million. We cut back on research and development costs by $1.6 million, while retaining all of our critical programs for future growth. These benefits were mostly attained by leveraging our capabilities through the merger of our Pump and Robots Group in Chelmsford, and a redefinition of focus for our systems solution group. We continue to cut back on our continuing selling, general and administrative expenses, reducing them by 15% in the quarter. Further cutbacks were limited by our continued commitment to our Oracle ELP implementation. We were adversely impacted as Bob mentioned, by a high level of expense associated with the equity investigation matters as a former Director Bob Therrien went on trial. With the acquittal of Mr. Therrien in mid April, we’re finally beyond those various legal activities that have been a drain on the financial and cash resources of the company. Slide number four shows in graphical format, the continued accelerating progress in driving down breakeven. In the fourth quarter of fiscal 2007, the net income breakeven on a quarterly basis was approximately $160 million and the adjusted EBITDA or cash breakeven was about $135 million. Going into the second quarter of fiscal 2009, we reduced those break evens to $125 million for net income and $105 million for adjusted EBITDA. Our restructuring actions during this quarter produced a breakeven for the quarter of $100 million and $80 million for net income and cash respectively, without including all of the benefits of our actions. During the quarter, we further reduced headcount to less than 1300 and vacated one of the four remaining buildings on our Chelmsford campus. We have now vacated 22% of the facilities space we occupied 12 months ago. As noted in slide number five, we did not provide specific revenue guidance for the quarter, but referred investors to the projections of our largest customers, and noted we would expect to see our own revenues to thrust below those levels because of inventory holdings of our products of those customers. Unfortunately, this turned out to be a little too accurate and our revenues declined by 49% quarter-over-quarter with the largest decline coming from sales to our nine largest semiconductor OEMs where the decline was 66% from $25.1 million to $8.5 million. Revenues from the balance of our customer base were down 39% in the quarter. We are monitoring those OEM inventory levels with our large intimate customers closely to determine when we would expect to see the benefit of replenishment flow back to us. Sales to semiconductor markets were roughly flat with a percentage of the total at 65% as a result of the lower levels of decline in our service business direct with end users. Away from semiconductor capital equipment, we saw higher declines in our business to data storage end markets, and moderated declines into industrial markets. Industrial sales now comprise close to 20% of our business with semiconductor markets at these lows. Slide number six shows how the revenues and operating profits before special charges bridge from our first quarter of fiscal 2009 to the second quarter. This bridge demonstrates how the quarter reflects over $40 million of annualized cost reductions to the quarter. From a starting point of a loss of $30.5 million on revenues of $73.4 million, we suffered loss variable contribution of $15 million on a $35.5 million lower product and service revenues, and offset this partially with $5 million of manufacturing and service cost reductions. License revenues brought a further reduction of $0.6 million to both revenues and profits. Our restructuring program and cost controls brought down R&D expenses by $1.6 million and continuing SG&A costs by $3 million. We had discretionary external costs of $1.1 million in the first quarter. On a targeted activity completed in that quarter. The other negative during the quarter was the very high level of equity investigation expense associated with a contractual indemnification of Mr. Therrien as he went to trial. This resulted in $1.8 million increase in such costs. A miscellany of other items including the levels of warranty provisioning had a favorable impact on the quarter to the extent of $0.7 million. The impact of special charges on our GAAP net income is identified on slide number seven. Special charges of $116.4 million comprised a goodwill impairment of $71.8 million and a $35.1 million impairment of other long lived assets. The vast majority being amortizable intangibles. We also had $5.9 million of restructuring expenses associated with headcount reductions and $3.6 million of inventory provisions arising from our restructuring activity, whereby a redefinition of business goals will likely impair the carrying value of certain inventories. These charges totaled $166.4 million of which $24.1 million are reflected in cost of goods sold. The impairment of goodwill, another intangible assets was driven by much higher discount rates, low and near term business levels and lower evaluations of comparable companies, all impacting the mechanics of our discounted cash flow based valuation modeling. Net interest income moderated to $0.6 million in the declining rate environment and with reduced investment holdings. For taxes, since we have a valuation allowance against our significant carry-forward tax losses, we do not recognize an income tax benefit related to current period losses and thus the tax provision was a small $200,000 which is all non-cash. Income from our joint ventures was also reduced, as they experienced declining market conditions in Asia. Slide number eight shows the loss per share impact of those special charges driven by the 49% revenue decline, the loss before special charges moved 21% from $0.48 in the first quarter to $0.58 in the second quarter. Long-term asset impairment charges totaled $1.70 per share and the restructuring related charges of $9.5 million were $0.15 per share. The GAAP net loss per share was $2.43. Moving away from accounting gymnastics to the concrete world of cash management, we look to our cash utilization on slide number nine. We take the adjusted loss before income taxes interest, depreciation and amortization as a starting point. Two observations on EBITDA, first, the reconciliation of net loss to adjusted EBITDA, is shown as an appendix to our press release and second, for those modeling the depreciation and amortization, amortization of intangibles was $4.2 million with $2.3 million recognized in cost of goods sold and depreciation was $3.6 million. We incurred restructuring cash flow of $4.9 million, as compared to a $5.9 million provision. Interest income and balance sheet items held the cash outflow from operations to $25.3 million. The cash from our balance sheet is now primarily driven by inventory reductions. Capital expenditures were $4 million with $3.3 million associated with progressing down the final stretch of our Oracle ELP conversion. Finally, we got a couple of hundred thousand dollar cash flow benefit from the currency translation of cash held offshore. On slide number 10, you will note that cash and marketable securities moved from $160 million to $130 million, which includes securities that have a maturity beyond 365 days, but are nevertheless freely marketable and can be considered readily liquid. The cash burn will be adversely impacted in the third quarter by restructuring cash outflows, but moderated by our balance sheet actions. Receivables in the second quarter were driven down from $41 million to $26 million with nominal additional bad debt provisions, despite a customer environment that saw a couple of bankruptcies. Our receivables day sales outstanding moved out to 62 days, as a result of a revenue profile that was back end weighted into March. We expect to see a reduction in our DSO during the June quarter. Inventories reduced by $11 million with a $5.4 million reduction in gross inventories as our reduction program started to take hold. The balance of the reduction was related to reserves, most notably the $3.6 million special charge. The throttling back on our purchases, as we utilize inventories is demonstrated by the $13.6 million reduction in accounts payable. Our days purchases outstanding decreased with a significant quarter and payment made to take advantage of an even more significant negotiated discount. The accrued restructuring cost increased from the significant second quarter actions, approximately 40% of that accrual will be paid out in the June quarter. The next three slides, I’ll briefly cover our sequential segment performance and as an introduction to each, we’ll describe the businesses included within each segment. To assist those of you doing historical modeling, we include, as an appendix to this presentation, the six quarter history for the new segments as reported. With slide number 11, I’ll talk about our critical solutions segment that compromises our newly integrated Pump and Robot businesses based in Chelmsford. The Granville-Phillips branded instrumentation of measurement products based in Colorado, the Polycold branded management solutions, and our small RFID solutions business. The top line decline was 52% driven by inventory holdings at our larger wafer front end equipment customers. Gross profit before amortization and special charges reduced to a $1 million, a 37% flow through. Since this business has variable contributions in the mid-40s, you can see we’re already securing strong fixed cost savings from our restructuring activities. GAAP gross profits turned to a small loss with high end absorption of fixed costs early in the quarter. Sequentially, operating expenses decreased by $2.7 million or 17% with a removal of duplicate infrastructure costs. On slide 12, we review our systems solutions segment. This segment comprises a range of products, manufacturing service, and engineering services that enable our customers to effectively develop a source, high quality, and high reliability process tools. The segment includes our extended factory business that largely builds customer designs, our Chelmsford and Korean-based groups that engineer systems solutions to unique problems, mostly for smaller OEMs, on our various factory automation products that we previously reported within the GCO segment. Revenue declined 64% for this business. Having the highest exposures to the inventory adjustments of major OEMs, who are reconfiguring existing inventories as part of their own cash burn mitigation. Gross margins before amortization and special charges remain negative, but we limited the flow through from the revenue decline to 14%, after restructuring another cost actions. This segment is the segment with the greatest surplus capacity at these very low levels of business activity. Operating expenses were reduced by $2.4 million or 12% sequentially. Slide number 13; we look at the global customer operations that comprise our Global Field Service, and Regional Repair Center activities together with the spare sales of our (IMHS) products. Other spare sales for the other product groups are within those critical solutions and systems solutions groups. 21% decline in revenues reflects a significant reduction in products return for repair, given utilization rates and the ability to defer repairs by cannibalizing idle tools. Also, maintenance spending by fab customers has been pulled back impacting our field service revenues. Gross profit before amortization and special charges reflected a 40% net flow through from revenue declines after cost reductions. Operating expenses were cut by $0.9 million or 15%. Returning to our breakeven chart on page 14, you’ll note that the gap between income and cash breakeven will narrow in the June quarter, as we’ll have approximately $3 million less of quarterly intangibles amortization, as a result of the impairment charge taken this quarter. We will also see the full quarter impact of the actions taken in the June 2nd quarter. So, looking to the near future, what do we see? Slide 15 contains some of those thoughts. Gross bookings for the second quarter were $33.4 million, and our backlog going into the June quarter is $31 million. A number of OEMs have been reassessing requirements and have few firm orders with us but are rebooking those requirements as they assess demand with expectations of a rapid response from us. This makes visibility very limited. However, we are reasonably certain that the rapid downward momentum has ended and that there is a base on which to build incremental business momentum. We are targeting exiting the June quarter at cash breakeven approaching $70 million, and with incremental variable contributions in the mid 40% range gives us a moderated loss from adjusted EBITDA picture. Inventory reduction plans are our regular focus and provide a much reduced cash burn amount for the third fiscal quarter as compared to the $29.5 million in the second fiscal quarter. We are targeting that the cash burn will be less than $10 million a quarter even at trough revenue levels, as we exit the June quarter. With that, I’m going to hand the call back to Bob.

[Bob Lepofsky:]

Thank you, Martin. Clearly, our ability to deliver the kind of results that you on the call, and we expect, will be heavily influenced by the external environment and here we are, encouraged, but cautious looking forward. From December 15th until February 15th, we sustained a period of almost daily hammering down of our orders and revenue forecasts, as our customers began to adjust to the impact of the global economic slowdown. From February 15th through mid April, we saw a period of real stability. No declines, but also no improvement in order rates or shipment schedules. Since mid April, that stability has been marked by what we would call a steady flow of positive upward blips. Some positive momentum in orders and some delivery pull in requests. This positive activity level is increasing our confidence that in up to 10% sequential quarterly revenue increase is achievable for the June ending quarter. For our hardware-oriented product groups, the key to revenue growth is the inventory levels of components, subsystems and complete tools, remaining in our OEM customers. We have completed a detailed assessment of exactly what exists at each of our major customers and we are closely monitoring, reconfiguration and build plans as we converge on the more normal operating mode of new orders received by our customers turning into orders for us. For our services business, the key is fab utilization rates. As fab utilization improves, cannibalization will diminish, the pressure to reduce or eliminate preventive maintenance will no longer be deferred and more normal operating modes will emerge. Internally, our efforts to reduce costs and streamline operations will continue. We will gain increasing leverage through internal integration initiatives and external collaboration with our global business partners. As business improves, our shareholders will see a real return on the investments we have made on their behalf. The investments in restructuring will pay off as the costs we have taken out are mostly permanent. As business recovers, for example, we will not need the space that we have eliminated nor the infrastructure that we have removed. Our significant investment in business systems will allow us to work more effectively and our investments in new product development will broaden our product portfolio, market reach and global position. So, if you note a bit of optimism in our voices this afternoon, despite just closing out a grueling quarter with miserable financial results, you are correct. We actually like where we’re going. The path that we’re on and the incrementally better external world that we are working in. So, allow me to close where I began. By taking note of the superb work of our employees around the world who have worked tirelessly through this difficult period to restructure and reposition Brooks. The returns on their investment will be felt for some time to come. I thank you and now, operator, we would like to open the lines for questions.

[Operator:]

(Operator Instructions) Your first question comes from Vis Manori - Credit Suisse.

[Vis Manori:]

This is Vis Manori for Satya. Yes, you mentioned a 10% revenue increase quarter-over-quarter is possible. Can you kind of give a split between is it mainly from your global operations that you see a significant portion or do you see something coming back from your Systems Solutions Group also?

[Bob Lepofsky:]

Actually, we see it from both sides. What we refer to as our extended factory activity is engaged with our major OEM accounts in reconfiguration of tools initially and now actually the building of some new tools. Similarly, as new tools are built, that has a direct impact on our critical components group.

[Operator:]

Your next question comes from Jamil Ahmed – Citi

[Jamil Ahmed:]

Thanks for taking my questions. My first question is how is your the solar market going for you guys and could there be any inventory write-downs, because of the slowdown in that margin? Then I have a follow-up.

[Martin Headley:]

We have found the solar activity to be very slow, because inventory had built up in the channel there. It’s difficult for me to speculate what might happen in terms of somebody else’s inventory issues. We certainly have no inventory issues as it relates to purely servicing the solar piece. So, I don’t know if that answers the question for you.

[Jamil Ahmed:]

Sure and how is the outlook for the non-semi bus overall?

[Martin Headley:]

I would say that as we talked in the prepared comments, the non-semi pieces, the industrial markets have been a moderated, but declining market as compared to semiconductor and made note that data storage is very lumpy and happened to have a down quarter for us. Solar markets, the inventory issues we previously referred to. So, it can be very particular, as people are addressing their inventory issues during this time of decline.

[Jamil Ahmed:]

Ok and if I could just have one last question, in the last call it was mentioned that if utilizations head up towards mid 60% range, that’s when you could maybe see a decent pickup in spares and service. With the pickup we’ve seen recently, utilizations and that’s the kind of range that’s been predicted for the next quarter. Are you seeing that pick up?

[Martin Headley:]

We certainly are seeing some pickup and again, as we did in today’s remarks, we think that there is a direct correlation between utilization rates, cannibalization, the return to preventive maintenance protocols, and then a more normalized our relationship for ongoing service and service activities.

[Jamil Ahmed:]

Okay, but could you guide to like what type of incremental growth in the service for you could be seen in the next quarter?

[Martin Headley:]

We would not like to provide that level of granularity and obviously the issue of utilization rates are very fab specific and therefore, the impact on us is also fab specific.

[Operator:]

(Operator Instructions) Your next question comes from Tim summers - Wunderlich securities.

[Timothy Summers:]

You had given your guidance two weeks ago instead of today, would you have the confidence to say business is up 10% or has something changed in the last couple of weeks?

[Martin Headley:]

Tim, I think two observations. In my prepared remarks, I actually put the marker of a changed climate at the April 15th point and so, since April 15th, on a steady and continuous basis, we’ve seen these upward blips. That’s a change from where it was from the February to mid April, where it was merely stability. We would then like to reiterate that we say we are optimistic. We’re cautious and we’ve taken a position of up to 10%. Could it be 5%, could it be 15%? There’s still a lot of weeks ahead of us in the quarter, but, as you know, we also have the potential of at least one major plant shutdown in the OEM domain during our current quarter. So, we’ve all together, we think 10% is the right place to put the marker at today’s information point.

[Timothy Summers:]

Bob, as a follow on as you look at the June quarter, do you anticipate the semi or the non-semi revenue, the increase quarter-over-quarter to be greater?

[Bob Lepofsky:]

I think we’re really focused on the increases in the current quarter coming from the semi. You should not read that there isn’t anything non-semi, but I think we’re probably, you could almost accuse us of being myopically focused on what’s going on with our semi customers, because that’s going to move the dial the fastest for us, particularly because of their inventory situation and the inventory burn at the OEM level.

[Operator:]

Your next question comes from Hari Chandra - Deutsche Bank.

[Hari Chandra:]

Thank you. Question is relating to the positive incremental data points that you’re seeing and you made a comment regarding that things would improve and the companies would be back to ordering on a normalized level. I just wanted to know what is that range of the new normal would be in terms of revenue or in terms of the margin profile that we would be seeing.

[Martin Headley:]

Yes, I’m not today in a position to define the new normal. My reference to a return to normal was relative to the process. Clearly, today when one of our OEM customers gets an order, we don’t see the impact of that because of his inventory position and that inventory position might be comprised of a complete tool, a subsystem, or a component. So, what we will see, first, is that that additional pressure on us is being mitigated over time as they receive orders. We look forward to the period that they have gone through that burn and then we’ll be in a normal operating mode, which means they get an order, we get an order, and you really have the flow. We are also encouraged that in many of our larger OEMs, that that burn is going at a reasonable pace.

[Hari Chandra:]

As a follow-up, can you comment on the fab utilization rates? I know you said maybe fab to fab but in a general industry basis.

[Martin Headley:]

Yes, again, I would rather refer you to externally published data than be in a position of commenting on utilization rates in any specificity.

[Hari Chandra:]

Okay and one final question on the new products, can we just elaborate a little bit on that vacuum products and the instrumentation products you refer to?

[Martin Headley:]

Yes. We have, in previous calls, and public statements, made it clear that we have a major cryopump platform that will continue to ensure our global leadership there. That is a platform that currently has systems in beta sites and is on target. The implications on our top and bottom lines for our shareholders there, again are protecting market position, and in fact, improved cost price targets. In our instrumentation area, we have made reference to instrumentation products that have a scheduled release later this year. It is a product family principally in the gas analysis area, and it has some very interesting opportunities that have been identified and validated, both in semiconductor applications with traditional customers, but equally importantly, in our non-semiconductor space. So, this is a program that we’ve been talking about through our calls this fiscal year and we’ll start to see the roll-out and the initial impact on top and bottom line in the latter part of the calendar year ‘09 and we think this is an important product family.

[Operator:]

Your next question comes from Mary - Stifel Nicolaus.

[Mary:]

Thank you for taking my questions. A couple of questions. First, given you’ve burned about almost $30 million this quarter in terms of cash, how many quarters of cushion are you comfortable with, you know, before a capital infusion needed or, you know, if you can give us an idea of what you think the cash maintenance level would be?

[Martin Headley:]

I think clearly, where we’re aiming to be when we’re beyond the end of the June quarter is using no more than $10 million of cash, even at the worst situation. So, that would be no recovery from current trough levels. So, if you look at that situation, and you talk about the minimum cash that we would need to conduct operations very comfortably, we clearly see that we have something of the order of six; seven, eight kinds of quarters, at a minimum, if this were the worst situation. If this were to extend for that length of time, you can be assured we would not be standing still and just looking at the company as we are today, but, we do not see the need to do so until we see how things develop for the next couple of quarters.

[Mary:]

Okay, great and can you give us an idea of the percentage of turns business this quarter?

[Martin Headley:]

Percentage of turns business. As in spare?

[Mary:]

Do you have a percentage number for the amount of turns business?

[Martin Headley:]

Frankly, we don’t tend to monitor in that situation, because the vast majority of our business is with the lead times that we have, is in essence, a turns business within the quarter. There’s very little that’s coming in and has a lead time for us that goes beyond that. So, that’s why although we have a backlog of $31 million, we’re not concerned because the vast majority of our business coming through that way. So, we don’t tend to look at our business in that fashion.

[Bob Lepofsky:]

It is the derivative of our high inventory levels coming into this calendar year, positions us that across the board, component systems, spare parts and services all as Martin say, become a quote turns business.

[Mary:]

Okay, great and final question, in terms of your R&D investments for the rest of ‘09 and maybe into early 2010, have you changed your priorities since last quarter?

[Bob Lepofsky:]

Not changed priorities at all. I think what we have is we have these key strategic programs. That have continued to be funded, continue to have an intensity of effort and oversight. Where we’ve been able to pull back and we’re now at a level that we’re reasonably comfortable with. As focused and programs and it is probably more about how we’re doing the work than what work we’re doing.

[Operator:]

Your next question comes from [Oboh Laminzen] with Barclays.

[Oboh Laminzen:]

Hi. Thanks for taking my questions. Just to go back on the cost side, you outlined EBITDA breakeven, but I guess can you talk about where you see cogs and OpEx for the June quarter and how you see that exiting calendar ‘09.

[Martin Headley:]

We’re careful about defining the breakeven because the level of cogs or the level that one has is going to be dependent upon the level of activity and as we say, visibility is very cloudy, and we don’t really want to get in the business of crystal balling that. I think you would say that if you look at our engineering expense for the second quarter, you would expect that our engineering expenses would move forward at that or very slightly moderated levels. If you look at our SG&A expenses, you could see some fairly substantial reductions by virtue of being beyond some of the issues associated with the equity investigation. The full quarter impact of some of the actions that we took in the second quarter and the fact that there would be a fairly substantial reduction in the amortization, as I indicated taking about $3 million of amortization out of which about two third of it will come out of cost of goods sold and the third out of SG&A. So, if you build all of those in, you see a reduction to the OpEx expenses and the gross profit, cost of goods sold comes by virtue of looking at where we are today. Adjusting for the special charges in the intangibles and assuming that a mid-40s variable contribution currently with the current mix of products that we have.

[Oboh Laminzen:]

Okay. So, given that on the SG&A side, do you see that, I guess, level that you’re thinking of is around $20 million, or little less?

[Martin Headley:]

Probably less.

[Oboh Laminzen:]

Okay. Got you and then in terms of the drivers for your off hand guidance, you mentioned that’s primarily driven by your nine OEMs, out of that 8.5 million level?

[Martin Headley:]

That’s one factor, but we’re seeing blips of improvement across the board, not just in those OEMs but in a variety of our other customers as well. We see it probably as Bob referred to as more in our semiconductor business than we do in the other areas of our business and that’s largely because that’s taken the biggest decline because of the customer’s inventory holdings. So, it is largely those factors where we would expect to see the largest gains.

[Oboh Laminzen:]

Then just one last question. I guess given, you know if you take assuming that level of revenue growth, where do you see inventories exiting June quarter?

[Martin Headley:]

Our targets are to see $5 to $7 million reduction in inventories per quarter for a little while yet. So, that’s where our kind of focus is at.

[Operator:]

(Operator Instructions) Your next question comes from Timothy Arcuri - Citi.

[Timothy Arcuri:]

Just a quick follow-up. Could you outline the special charges with reference to the cost and OpEx lines?

[Martin Headley:]

Yes. In the cogs line, you have 3.6 million of inventory, E and O and then the other item, the $20.5 million is the impairment of completed technology intangible assets, which since those assets amortized through cost of goods sold, we’re required to put the impairment charge through that and that’s separate line item on the face of our income statement to our press release. Then, within operating expenses, you have $71.8 million impairment of goodwill. The balance of the impairments of intangibles, which is $14.6 million which relates to other intangibles that would normally amortize through operating expenses and a restructuring charges which are mostly severance-related of $5.9 million.

[Timothy Arcuri:]

And $5.9, could you give how it distributes between R&D and SG&A?

[Martin Headley:]

No, no we haven’t --

[Timothy Arcuri:]

It is not at that level. Okay, I understand.

[Operator:]

Your next question is from Patrick Ho - Stifel Nicolas.

[Patrick Ho:]

Do you have any top 10% customers this quarter?

[Bob Lepofsky:]

We have one 10% customer in the quarter, yes.

[Patrick Ho:]

Okay, and are you able to name that customer?

[Martin Headley:]

It is the same customer that was our top 10% customer last quarter. So, that’s supplied materials.

[Operator:]

Your final question comes from Tim Summers - Wunderlich Securities.

[Tim Summers:]

Hi, Bob, you may have hit on this before. Assuming your business is up revenue is up 10% in the June quarter, is any of that related to restocking components that might be in what I would call field service as opposed to just true end demand?

[Bob Lepofsky:]

True end demand as opposed to the service stocking.

[Tim Summers:]

I’m sorry. I didn’t follow your answer.

[Bob Lepofsky:]

We are look at true end demand, not service restocking.

[Operator:]

That is all the questions I have at this time. I would like to turn the conference back over to you for closing remarks.

[Martin Headley:]

We thank you very much for participating in our call this evening and that will conclude the call for today.

[Operator:]

That concludes today’s conference. We thank for your participation and hope you have a wonderful day. You may now disconnect.