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| BRKS > SEC Filings for BRKS > Form 10-K on 18-Nov-2009 | All Recent SEC Filings |
18-Nov-2009
Annual Report
Certain statements in this Form 10-K constitute "forward-looking statements" which involve known risks, uncertainties and other factors which may cause the actual results, our performance or our achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements such as estimates of future revenue, gross margin, and expense levels as well as the performance of the semiconductor industry as a whole. Such factors include the "Risk Factors" set forth in Part I, Item 1A. Precautionary statements made herein should be read as being applicable to all related forward-looking statements whenever they appear in this report.
Overview
We are a leading provider of automation, vacuum and instrumentation solutions and are a highly valued business partner to original equipment manufacturers (OEM) and equipment users throughout the world. We serve markets where equipment productivity and availability is a critical factor for our customers' success. Our largest served market is the semiconductor manufacturing industry, which represented 71% of our consolidated revenues for fiscal year 2009. We also provide unique solutions to customers in data storage, advanced display, analytical instruments and solar markets. We develop and deliver differentiated solutions that range from proprietary products to highly respected manufacturing services.
The demand for semiconductors and semiconductor manufacturing equipment is cyclical, resulting in periodic expansions and contractions. Demand for our products has been impacted by these cyclical industry conditions. During fiscal year 2006 and throughout most of fiscal year 2007, we benefited from an industry expansion. That cyclical expansion turned to a downturn in the fourth quarter of fiscal year 2007 that continued through the second quarter of fiscal year 2009. The decline was particularly pronounced in the first two quarters of fiscal year 2009 with a sharp contraction of capital spending in all of our served markets as well as reduced demand by OEMs as a result of inventory corrections. Throughout the second half of fiscal year 2009, demand for our products began to improve. Our revenues for our third quarter of fiscal year 2009 increased 18% from the second quarter of fiscal year 2009, and our revenues for our fourth quarter of fiscal 2009 increased 46% from the third quarter of fiscal year 2009.
Throughout fiscal years 2008 and 2009, we have implemented a number of cost reduction programs to align our cost structure with a reduced demand environment. Since the end of fiscal year 2007, we have reduced our headcount by approximately 40% and closed redundant facilities.
In connection with our restructuring programs, we have realigned our management structure and our underlying internal financial reporting structure. Effective as of the beginning of our second quarter of 2009, we implemented a new internal reporting structure which includes three segments: Critical Solutions Group, Systems Solutions Group and Global Customer Operations.
The Critical Solutions Group segment provides a variety of products critical to technology equipment productivity and availability. Those products include robots and robotic modules for atmospheric and vacuum applications and cryogenic vacuum pumping, thermal management and vacuum measurement solutions used to create, measure and control critical process vacuum applications.
The Systems Solutions Group segment provides a range of products and engineering and manufacturing services, which include our Extended Factory services, that enable our customers to effectively develop and source high quality, high reliability, process tools for semiconductor and adjacent market applications.
The Global Customer Operations segment provides an extensive range of support services including on and off-site repair services, on and off-site diagnostic support services, and installation services to enable our customers to maximize process tool uptime and productivity. This segment also provides services and spare parts for our Automated Material Handling Systems ("AMHS") product line. Revenues from the sales of spare parts that are not related to a repair or replacement transaction, or are not AMHS products, are included within the product revenues of the other operating segments.
As a result of our acquisitions, we have identified intangible assets and generated significant goodwill. Intangible assets are valued based on estimates of future cash flows and amortized over their estimated useful life. Goodwill is subject to annual impairment testing as well as testing upon the occurrence of any event that indicates a potential impairment. Intangible assets and other long-lived assets are subject to an impairment test if there is an indicator of impairment. We conduct our annual goodwill impairment test as of our fiscal year end, or September 30th.
Our annual goodwill impairment test as of September 30, 2007 indicated no impairment to our goodwill. Market conditions changed dramatically near the end of fiscal 2008 as a result of the global economic downturn. These market changes reduced the fair value of our reporting units, which ultimately resulted in a $197.9 million impairment to our goodwill as of September 30, 2008. Our significant restructuring actions implemented during the first half of fiscal 2009 changed our internal management structure and our internal financial reporting structures, which further led to a change to our reporting units and operating segments as of March 31, 2009. We are required to reallocate goodwill among these newly formed reporting units. This reallocation, in conjunction with the continued downturn in the semiconductor markets indicated that a potential impairment did exist at March 31, 2009. As such, we tested goodwill and other long-lived assets for impairment at March 31, 2009 and recorded an additional goodwill impairment charge of $71.8 million. The details of these goodwill impairment charges are discussed further under the Impairment Charges caption. Our test of goodwill as of September 30, 2009 indicated that we did not have any further impairment to goodwill.
Under U.S. Generally Accepted Accounting Principles ("US GAAP"), we are required to test long-lived assets, which exclude goodwill and intangible assets that are not amortized, when indicators of impairment are present. We recorded an impairment charges for certain long-lived assets of $5.7 million as of September 30, 2008, and we recorded an additional long-lived asset impairment charge of $35.1 million as of March 31, 2009. These impairment charges were related to the same declining market conditions that resulted in impairments to our goodwill. We recorded an additional impairment charge of $0.4 million for certain long-lived assets as of June 30, 2009, which relates to the closure and outsourcing of a small manufacturing operation located in the United States. We discuss these charges in further detail under the Impairment Charges caption.
On March 30, 2007, we completed the sale of our software division, Brooks Software, to Applied Materials, Inc. ("Applied") for cash consideration and the assumption of certain liabilities related to Brooks Software. Brooks Software provided real-time applications for greater efficiency and productivity in collaborative, complex manufacturing environments. We transferred to Applied substantially all of our assets primarily related to Brooks Software, including the stock of several subsidiaries engaged only in the business of Brooks Software, and Applied assumed certain liabilities related to Brooks Software. We sold our software division in order to focus on our core semiconductor-related hardware businesses. We recognized a gain on disposal of the software division. Our consolidated financial statements and notes have been reclassified to reflect this business as a discontinued operation.
Critical Accounting Policies and Estimates
The preparation of the Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, goodwill, income taxes, warranty obligations and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, including current and anticipated worldwide economic conditions both in general and specifically in relation to the semiconductor industry, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. As discussed in the year over year comparisons below, actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.
Revenues
Product revenues are associated with the sale of hardware systems, components and spare parts as well as product license revenue. Service revenues are associated with service contracts, repairs, upgrades and field service. Shipping and handling fees, if any, billed to customers are recognized as revenue. The related shipping and handling costs are recognized in cost of sales.
Revenue from product sales that do not include significant customization is recorded upon delivery and transfer of risk of loss to the customer provided there is evidence of an arrangement, fees are fixed or determinable, collection of the related receivable is reasonably assured and, if applicable, customer acceptance criteria have been successfully demonstrated. Customer acceptance provisions include final testing and acceptance carried out prior to shipment. These pre-shipment testing and acceptance procedures ensure that the product meets the published specification requirements before the product is shipped. In the limited situations where the arrangement contains extended payment terms, revenue is recognized as the payments become due. When significant on site customer acceptance provisions are present in the arrangement, revenue is recognized upon completion of customer acceptance testing.
Revenue associated with service agreements is generally recognized ratably over the term of the contract. Revenue from repair services or upgrades of customer-owned equipment is recognized upon completion of the repair effort and upon the shipment of the repaired item back to the customer. In instances where the repair or upgrade includes installation, revenue is recognized when the installation is completed.
Intangible Assets, Goodwill and Other Long-Lived Assets
As a result of our acquisitions, we have identified general intangible assets other than goodwill and generated significant goodwill. General intangible assets other than goodwill are valued based on estimates of future cash flows and amortized over their estimated useful life. Goodwill is subject to annual impairment testing as well as testing upon the occurrence of any event that indicates a potential impairment. General intangible assets other than goodwill and other long-lived assets are subject to an impairment test if there is an indicator of impairment. We conduct our annual goodwill impairment test as of our fiscal year end, or September 30th.
Under US GAAP, the testing of goodwill for impairment is to be performed at a level referred to as a reporting unit. A reporting unit is either the "operating segment level" or one level below, which is referred to as a "component". The level at which the impairment test is performed requires an assessment as to whether the operations below the operating segment constitute a self-sustaining business, testing is generally required to be performed at this level; however, if multiple self-sustaining business units exist within an operating segment, an evaluation would be performed to determine if the multiple business units share resources that support the overall goodwill balance. In response to the global economic downturn, we have restructured our business, which has resulted in a change to our reporting units and operating segments. The recent changes to our internal reporting structure and to how we operate our business resulted in the identification of seven reporting units, which include components of our business that are one level below the operating segment level. As of March 31, 2009, we re-allocated our goodwill to five of the seven newly identified reporting units principally based on the relative fair values of these reporting units. This reallocation, in conjunction with the continued downturn in the semiconductor markets indicated that a potential impairment may have existed at March 31, 2009. As such, we tested goodwill and other long-lived assets for impairment at March 31, 2009.
We determine the fair value of our reporting units using the Income Approach, specifically the Discounted Cash Flow Method ("DCF Method"). The DCF Method includes five year future cash flow projections, which are discounted to present value, and an estimate of terminal values, which are also discounted to present value. Terminal values represent the present value an investor would pay today for the rights to the cash flows of the business for the years subsequent to the discrete cash flow projection period. Given the cyclical nature of the industry, a revenue multiple is used to determine terminal value as it represents a more stable multiple over time. We consider the DCF Method to be the most appropriate valuation indicator as the DCF analyses are based on management's long-term financial projections. Given the dynamic nature of the cyclical
semiconductor equipment market, management's projections as of the valuation date are considered more objective since other market metrics for peer companies fluctuate over the cycle.
Goodwill impairment testing is a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of each reporting unit to its respective carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the reporting unit's carrying amount exceeds the fair value, the second step of the goodwill impairment test must be completed to measure the amount of the impairment loss, if any. The second step compares the implied fair value of goodwill with the carrying value of goodwill. The implied fair value is determined by allocating the fair value of the reporting unit to all of the assets and liabilities of that unit, the excess of the fair value over amounts assigned to its assets and liabilities is the implied fair value of goodwill. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference. We recorded goodwill impairment charges of $197.9 million and $71.8 million in the three month periods ended September 30, 2008 and March 31, 2009, respectively. The details of these goodwill impairment charges are discussed further under the Impairment Charges caption. Our test of goodwill as of September 30, 2009 indicated that we did not have any further impairment to goodwill.
Under US GAAP, we are required to test long-lived assets, which exclude goodwill and intangible assets that are not amortized, when indicators of impairment are present. For purposes of this test, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. When we determine that indicators of potential impairment exist, the next step of the impairment test requires that the potentially impaired long-lived asset group is tested for recoverability. The test for recoverability compares the undiscounted future cash flows of the long-lived asset group to its carrying value. The future cash flow period is based on the future service life of the primary asset within the long-lived asset group. In most cases, we have determined that either customer based or technology based intangible assets are the primary asset of each long-lived asset group. If the future cash flows exceed the carrying values of the long-lived assets, the assets are considered not to be impaired. If the carrying values of the long-lived asset group exceed the future cash flows, the assets are considered to be potentially impaired. The next step in the impairment process is to determine the fair value of the individual net assets within the long-lived asset group. If the aggregate fair values of the individual net assets of the group exceed their carrying values, then no impairment loss is recorded. If the aggregate fair values of the individual net assets of the group are less then their carrying values, an impairment is recorded equal to the excess of the aggregate carrying value of the group over the aggregate fair value. The loss is allocated to each asset within the group based on their relative carrying values, with no asset reduced below its fair value. We recorded an impairment charge of $5.7 million, $35.1 million and $0.4 million related to certain long-lived assets in the three month periods ended September 30, 2008, March 31, 2009 and June 30, 2009, respectively, which we discuss in further detail under the Impairment Charges caption.
Accounts Receivable
We record trade accounts receivable at the invoiced amount. Trade accounts receivables do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on historical write-off experience by customer. We review our allowance for doubtful accounts quarterly. Past due balances are reviewed individually for collectibility. Account balances are charged off against the allowance when we feel it is probable the receivable will not be recovered. We do not have any off-balance-sheet credit exposure related to our customers.
Warranty
We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is estimated by assessing product failure rates,
material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required and may result in additional benefits or charges to operations.
Inventory
We provide reserves for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. We fully reserve for inventories and noncancelable purchase orders for inventory deemed obsolete. We perform periodic reviews of all inventory items to identify excess inventories on hand by comparing on-hand balances to anticipated usage using recent historical activity as well as anticipated or forecasted demand, based upon sales and marketing inputs through our planning systems. If estimates of demand diminish further or actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Deferred Taxes
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance. In the event we determine that we would be able to realize our deferred tax assets in excess of their net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we subsequently determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.
Management has considered the weight of all available evidence in determining whether a valuation allowance remains to be required against its deferred tax assets at September 30, 2009. Given the losses incurred in fiscal year 2009 combined with the cyclical nature of our business as well as the uncertainties currently impacting the global economy, we have determined that it is more likely than not that the net deferred tax assets will not be realized. The amount of the deferred tax asset considered realizable is subject to change based on future events, including generating taxable income in future periods. We continue to assess the need for the valuation allowance at each balance sheet date based on all available evidence.
Stock-Based Compensation
We measure compensation cost for all employee stock awards at fair value on date of grant and recognize compensation expense over the service period for awards expected to vest. The fair value of restricted stock is determined based on the number of shares granted and the excess of the quoted price of our common stock over the exercise price of the restricted stock on the date of grant, if any, and the fair value of stock options is determined using the Black-Scholes valuation model. Such value is recognized as expense over the service period, net of estimated forfeitures. The estimation of stock awards that will ultimately vest requires significant judgment. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. In addition, for stock-based awards where vesting is dependent upon achieving certain operating performance goals, we estimate the likelihood of achieving the performance goals. Actual results, and future changes in estimates, may differ substantially from our current estimates. Restricted stock with market-based vesting criteria is valued using a lattice model.
Year Ended September 30, 2009, Compared to Year Ended September 30, 2008
Revenues
We reported revenues of $218.7 million for fiscal year 2009, compared to $526.4 million in the previous year, a 58% decrease. The total decrease in revenues of $307.7 million impacted all of our operating segments. Our Critical Solutions Group segment revenues decreased by $157.2 million, our System Solutions Group segment revenues decreased by $127.2 million and our Global Customer Operations segment revenues decreased by $23.3 million. These decreases were the result of lower volume shipments in response to
declining demand for capital equipment in all the markets we serve. Starting in the third quarter of fiscal 2009, we began to experience an increase in demand for our products from our semiconductor capital equipment customers. Our revenues for our third quarter of fiscal 2009 increased 18% from the second quarter of fiscal 2009, and our revenues for our fourth quarter of fiscal 2009 increased 46% from the third quarter of fiscal 2009. We expect our revenues for our first quarter of fiscal 2010 to increase at least 45% from the $64.1 million in revenues recognized for our fourth quarter of fiscal 2009.
Our Critical Solutions Group segment reported revenues of $95.4 million for fiscal year 2009, a decrease of 62% from $252.6 million in the prior year. This decrease is attributable to lower volume of shipments for all end markets served by this segment, including a decrease of $112.5 million in revenues to the semiconductor end market, a decrease of $19.9 million in revenues to the industrial end market and a $24.7 million decrease in revenues to all other end markets served by this segment. This segment experienced an improvement in revenues of 52% for the fourth quarter of fiscal 2009 as compared to the prior sequential quarter, with the increase attributable primarily to semiconductor end market revenues.
Our System Solutions Group segment reported revenues of $69.9 million for fiscal year 2009, a 65% decrease from $197.1 million in the prior year. This decrease is attributable to weaker demand for semiconductor capital equipment. This segment experienced an improvement in revenues of 72% in the third quarter of fiscal 2009 as compared to the prior sequential quarter, and an additional 74% improvement in the fourth quarter as compared to the prior sequential quarter.
Our Global Customer Operations segment reported revenues of $53.4 million for fiscal year 2009, a 30% decrease from $76.6 million in the prior year. This decrease is attributable to lower AMHS spare parts revenue of $4.4 million and lower service contract and repair revenues of $18.8 million. All service revenues, which include service contract and repair services, are related to our Global Customer Operations segment. This segment experienced an improvement in revenues of 7% in the fourth quarter of 2009 as compared to the prior sequential quarter.
Revenues outside the United States were $103.0 million, or 47% of total revenues, and $189.5 million, or 36% of total revenues, for fiscal years 2009 and 2008, respectively. We expect that foreign revenues will continue to account for a significant portion of total revenues.
Gross Margin
Gross margin dollars decreased to a loss of $6.0 million for fiscal year 2009, a decrease of 105% from $126.8 million for the prior year. This decrease was attributable to lower revenues of $307.7 million, an impairment of long-lived assets of $20.9 million and increased charges for excess and obsolete inventory of $8.2 million. These decreases were partially offset by $3.7 million of reduced amortization expense for completed technology intangible assets, due primarily to the impairment recorded for those assets during the second quarter of fiscal 2009. Gross margin was reduced by $5.6 million and $9.3 million for fiscal years 2009 and 2008, respectively, for amortization of completed technology, which relates primarily to the acquisition of Helix Technology Corporation in October 2005. Gross margin percentage decreased to (3)% for fiscal year 2009, compared to 24% for the prior year. This decrease was attributable to the impairment of long-lived assets which reduced gross margin percentage by 10%, increased charges for excess and obsolete inventory which decreased gross margin percentage by 5%, with the balance of the decrease related primarily to the lower absorption of indirect factory overhead on lower revenues.
Gross margin percentage for the fourth quarter of fiscal 2009 was 19% as compared to 8% for the prior sequential quarter. The increase was primarily attributable to higher revenues of $20.2 million. These higher revenues increased our gross margin dollars by $8.3 million, or approximately 39%. We expect our gross margin percentage to further increase in the first quarter of fiscal year 2010 compared to the fourth quarter of fiscal 2009 due to higher revenues, which lead to improved absorption of indirect factory overhead costs.
Gross margin of our Critical Solutions Group segment decreased to $14.5 million for fiscal year 2009, a decrease of 83% from $85.4 million in the prior year. . . .
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