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BRKS > SEC Filings for BRKS > Form 10-Q on 31-Jan-2013All Recent SEC Filings

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Form 10-Q for BROOKS AUTOMATION INC


31-Jan-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Certain statements in this Quarterly Report on Form 10-Q 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 factors include the Risk Factors which are set forth in our Annual Report on Form 10-K for the most recently completed fiscal year and which are incorporated herein by reference. Precautionary statements made in our Annual Report on Form 10-K 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 for multiple markets and are a valued business partner to original equipment manufacturers ("OEMs") and equipment users throughout the world. We serve markets where equipment productivity and availability is a critical factor for our customers' success, typically in demanding temperature and/or pressure environments. Our largest served market is the semiconductor capital equipment industry, which represented approximately 54% and 65% of our consolidated revenues for fiscal years 2012 and 2011, respectively, and 48% of our consolidated revenues for the three months ended December 31, 2012. These decreases are the result of a recent cyclical downturn in the semiconductor capital equipment market, combined with our efforts to target certain non-semiconductor revenue opportunities, including acquisitions and a divestiture which has led to an increase in the non-semiconductor portion of our revenue. The non-semiconductor markets served by us include life sciences, industrial capital equipment and other adjacent technology markets.

Although we have entered into transactions to expand the non-semiconductor portions of our business, we continue to make investments to maintain and grow our semiconductor product and service offerings. In January 2012, we acquired primarily intangible assets from Intevac, Inc. for $3.0 million. We are using these assets in the development of a next generation of semiconductor automation tools. In October 2012, we acquired Crossing Automation Inc. ("Crossing"), a U.S. based provider of automation solutions for the global semiconductor front-end markets. The purchase price was approximately $59.0 million, net of cash acquired.

We report financial results in the following three segments:

• The Brooks Product Solutions segment provides a variety of products critical to technology equipment productivity and availability. Those products include atmospheric and vacuum tool automation systems, atmospheric and vacuum robots and robotic modules and cryogenic vacuum pumping, thermal management and vacuum measurement solutions which are used to create, measure and control critical process vacuum applications.

• The Brooks Global Services 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 end-user customers with spare parts support services to maximize customer tool productivity.

• The Brooks Life Science Systems segment provides automated sample management systems for automated cold sample storage, automated blood fractionation equipment, sample preparation and handling equipment, cellular imaging, consumables, and parts and support services to a wide range of life science customers including pharmaceutical companies, biotechnology companies, biobanks, national laboratories, research institutes and research universities.

Three Months Ended December 31, 2012, Compared to Three Months Ended December 31, 2011

Revenues

We reported revenues of $98.0 million for the three months ended December 31, 2012, compared to $120.2 million in the same prior year period, a decrease of 18%. These decreases were primarily due to reduced demand for our products, primarily due to weakness in demand for semiconductor capital equipment which led to a reduction of $29.1 million in revenues from our Brooks Product Solutions segment and a $2.9 million reduction in revenues from our Brooks Global Services segment. These decreases were partially offset by the acquisition of Crossing which added $8.5 million to our revenues, the acquisition of the Celigo® product line ("Celigo") on December 30, 2011 which contributed an incremental $0.9 million to revenues for the three months ended December 31, 2012, and a $0.4 million increase in revenues for our Brooks Life Science Systems segment as compared to the same prior year period. Demand for semiconductor capital equipment declined during late fiscal 2012 and through our first quarter of fiscal 2013. Based on recent communications with our semiconductor capital equipment customers, we expect moderately higher revenues from this end market in the near term.

Our Brooks Product Solutions segment reported revenues of $62.7 million for the three months ended December 31, 2012, a decrease of 26% from $85.3 million in the same prior year period. These decreases were mostly attributable to lower volumes of shipments to semiconductor capital equipment customers, which decreased by $29.1 million as compared to the same prior year period. This decrease was partially offset by $6.5 million of product revenues contributed by our recent acquisition of Crossing.

Our Brooks Global Services segment reported revenues of $21.2 million for the three months ended December 31, 2012, a 4% decrease from $22.1 million in the same prior year period. This segment earns revenues from services, including the service contract


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and repair services, and revenues from the sale of spare parts. Total service revenues for this segment were $17.7 million for the three months ended December 31, 2012, and include $1.2 million of service revenues contributed by the acquisition of Crossing. For the prior year period, service contract and repair revenues were $19.7 million. Excluding the acquisition of Crossing, service revenues for this segment declined $3.2 million for the three months ended December 31, 2012 as compared to the same prior year period. Total spare parts revenues were $3.5 million for the three months ended December 31, 2012, and include $0.8 million of spare parts revenues contributed by the acquisition of Crossing. For the prior year period, spare parts revenues were $2.4 million. Excluding the acquisition of Crossing, spare parts revenues increased $0.3 million for the three months ended December 31, 2012 as compared to the same prior year period.

Our Brooks Life Science Systems segment reported revenues of $14.1 million for the three months ended December 31, 2012, a 10% increase from $12.8 million in the same prior year period. The increase was the result of the Celigo acquisition which generated $0.9 million of incremental revenues during the three months ended December 31, 2012, and an increase in the volume of sales of life science system products.

Gross Margin

Gross margin percentage decreased to 29.7% for the three months ended December 31, 2012, compared to 33.6% for the same prior year period. This decrease was attributable to acquisition related charges of $2.1 million related to the acquisition of Crossing, which reduced gross margin by 2.1%, higher charges for amortization of intangible assets due to our acquisitions of Crossing and Celigo which reduced gross margin by 0.5%, with the balance of the reduction primarily related to a reduction in demand for our products from semiconductor equipment customers, which led to reduced production and lower absorption of our fixed costs.

Gross margin percentage for our Brooks Product Solutions segment decreased to 28.3% for the three months ended December 31, 2012 as compared to 33.3% in the same prior year period. The decrease in gross margin percentage was caused by $1.1 million of charges related to the acquisition of Crossing, mainly related to the sale of acquired inventory to which a step up in value had been applied in purchase accounting, which reduced gross margin by 1.7%, increased charges for amortization of intangible assets due to the Crossing acquisition, which reduced gross margin by 0.5%, with the balance of the lower gross margin attributable to the reduction in demand for our products, which led to reduced production and lower absorption of our fixed costs.

Gross margin percentage for our Brooks Global Services segment decreased to 24.1% for the three months ended December 31, 2012 as compared to 32.3% in the same prior year period. The decrease in gross margin percentage was caused by $1.0 million of charges related to the acquisition of Crossing, mainly related to the sale of acquired inventory to which a step up in value had been applied in purchase accounting, which reduced gross margin by 4.9%, with the balance of the decrease attributable to the reduction in demand for our services by semiconductor customers, which led to reduced repair activity and lower absorption of our fixed costs.

Gross margin percentage for our Brooks Life Science Systems segment increased to 44.5% for the three months ended December 31, 2012 as compared to 37.5% in the same prior year period. This increase was primarily attributable to a more favorable product mix in the three months ended December 31, 2012, including a firmware upgrade project which increased the three months ended December 31, 2012 gross margin percentage by 3.8%.

Research and Development

Research and development, or R&D, expenses for the three months ended December 31, 2012 were $11.5 million, a decrease of $0.4 million, compared to $11.9 million in the same prior year period. This decrease includes $1.7 million of lower labor and labor-related costs due to cost reduction programs implemented in the latter half of fiscal year 2012 and the first quarter of fiscal year 2013, which was partially offset by $1.3 million of R&D expenses for Crossing, which were not included in the same prior year period.

Selling, General and Administrative

Selling, general and administrative, or SG&A expenses were $26.0 million for the three months ended December 31, 2012, a decrease of $0.7 million compared to $26.7 million in the same prior year period. This decrease includes $1.8 million of lower consulting costs in connection with our initiatives to improve certain operating efficiencies and $1.1 million of lower labor and labor-related costs due to cost reduction programs implemented in the latter half of fiscal year 2012 and the first quarter of fiscal year 2013. These reductions were partially offset by $1.6 million of SG&A expenses for Crossing, which were not included in the same prior year period and $0.3 million of increased amortization of intangible assets related to the Crossing acquisition.

Restructuring and Other Charges

We recorded a restructuring charge of $4.7 million for the three months ended December 31, 2012. These costs consisted of $4.1 million of severance costs for workforce reductions implemented to consolidate our operations with Crossing, to transition internal manufacturing of our Polycold product line to a third party contract manufacturer and other programs designed to improve our cost structure. Restructuring charges also included $0.6 million of facility related costs to consolidate two facilities in California. The Brooks Product Solutions segment incurred a severance charge of $2.2 million to eliminate 128 positions, including approximately 30 related to the acquisition of Crossing; Brooks Global Services segment incurred a severance charge of $1.1 million to eliminate 19


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positions, and the Company incurred $0.6 million to eliminate 11 corporate positions. The Brooks Life Science Systems segment incurred severance charges of $0.2 million to eliminate 6 positions, mainly due to the consolidation of administrative functions. All unpaid severance charges as of December 31, 2012 are expected to be paid during the next twelve months, with a significant majority expected to be paid by June 30, 2013.

Total severance charges related to the outsourcing of our Polycold manufacturing operation are expected to be $1.4 million, including severance and stay bonuses. This charge will be amortized over the period from notification of the closing to the actual service end date. We have expensed $0.3 million of this charge as of December 31, 2012, and will expense the balance over the remainder of fiscal year 2013.

Restructuring and other charges for the three months ended December 31, 2012 also includes $0.1 million related to a partial settlement of a defined benefit pension plan that covers substantially all of our Swiss employees.

The restructuring plans implemented by us during the three months ended September 30, 2012 and December 31, 2012 will reduce the combined cost structure of Brooks and Crossing by approximately $23.0 million. Approximately $4.0 million of that savings is the result of a reduction in temporary staffing, primarily in production positions, for which the Company did not incur severance charges. The temporary workforce may return as we see semiconductor capital equipment spending recover. The balance of our cost savings are expected to be more permanent, with approximately 33% of the savings reducing our cost of sales and the balance reducing operating expenses. In addition, our decision to outsource production of our Polycold product line will bring the manufacturing of this product closer to a majority of the end users. The impact on gross margin from this production move will be dependent on the mix of our revenues, the timeline for our transition and completion of supply chain activities that are still underway.

We recorded charges to operations of $0.2 million in the three months ended December 31, 2011 for severance costs related primarily to a limited workforce reduction for the Brooks Product Solutions segment in response to the decline in demand from semiconductor equipment customers.

Interest Income

Interest income was $0.3 million for each of the three month periods ended December 31, 2012 and 2011.

Other Income (Expense), Net

Other expense, net, was $93,000 for the three months ended December 31, 2012 and consists primarily of foreign exchange losses of $312,000 which has been partially offset by joint venture management fee income of $129,000.

Other income, net, was $346,000 for the three months ended December 31, 2011 and consists primarily of joint venture management fee income.

Income Tax Provision (Benefit)

We recorded an income tax benefit of $3.7 million for the three months ended December 31, 2012. This benefit substantially consists of U.S. deferred tax benefits partially offset by foreign taxes, certain state income taxes and interest related to unrecognized tax benefits.

We recorded an income tax provision of $0.3 million for the three months ended December 31, 2011. This provision substantially consists of foreign income taxes arising from our international sales mix, certain state income taxes and interest related to unrecognized tax benefits.

As of December 31, 2012, we continued to maintain a valuation allowance in the U.S. against certain tax credits and state net operating losses due to the uncertainty of their realization based on long-term Company forecasts and the expiration dates on these attributes. We also continued to maintain a valuation allowance in certain jurisdictions that have not generated historical cumulative profitability.

Equity in Earnings (Losses) of Joint Ventures

Income associated with our 50% interest in ULVAC Cryogenics, Inc., or "UCI", a joint venture with ULVAC Corporation of Japan, was $78,000 and $866,000 for the three months ended December 31, 2012 and 2011, respectively. This decrease was the result of the decline in demand for semiconductor capital equipment. The income (loss) associated with our 50% interest in Yaskawa Brooks Automation, Inc., a joint venture with Yaskawa Electric Corporation of Japan was ($84,000) and $184,000 for the three months ended December 31, 2012 and 2011, respectively.

Liquidity and Capital Resources

A considerable portion of our revenues are dependent on the demand for semiconductor capital equipment. Demand for this

equipment has historically experienced periodic downturns. This cyclicality makes estimates of a considerable portion of our future revenues and cash flows inherently uncertain.

At December 31, 2012, we had cash, cash equivalents and marketable securities aggregating $142.0 million. This amount was comprised of $54.9 million of cash and cash equivalents, $48.1 million of investments in short-term marketable securities and $39.0 million of investments in long-term marketable securities.


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Cash and cash equivalents were $54.9 million at December 31, 2012, an increase of $0.3 million from September 30, 2012. The increase in cash was primarily due to $57.5 million of net sales of marketable securities and $5.1 million of cash flow from operations. These sources of cash were partially offset by $56.0 million used in connection with the acquisition of Crossing and $5.3 million of cash used for dividends.

Cash provided by operating activities was $5.1 million for the three months ended December 31, 2012, and was comprised of a net loss of $9.2 million offset by $5.1 million for non-cash related charges. Non-cash related charges consisted of items such as $6.4 million of depreciation and amortization and $2.5 million of stock-based compensation offset by a deferred income tax benefit of $4.3 million. The net loss adjusted for non-cash items for the three months ended December 31, 2012 was offset by a $9.2 million decrease in working capital, primarily due to a $20.2 million decrease in accounts receivable and $6.8 million decrease in inventory partially offset by a $10.8 million decrease in accounts payable, a $4.1 million decrease in accrued compensation and $2.4 million in payments of merger related costs accrued by Crossing prior to the acquisition which were paid by us either at the acquisition closing or shortly thereafter. These costs included a banking fee of $1.5 million and $0.9 million of professional fees.

Cash provided by investing activities was $0.1 million for the three months ended December 31, 2012, and is comprised of net sales of marketable securities of $57.5 million offset by $56.0 million used in connection with the acquisition of Crossing, $0.6 million of capital expenditures and $0.7 million of deferred leasing costs incurred by us in connection with the leasing of a recently vacated building owned by us that we have agreed to lease to a third party.

Cash used in financing activities for the three months ended December 31, 2012 is comprised of $5.3 million for our quarterly cash dividend paid on December 28, 2012.

At December 31, 2012, we had approximately $3.1 million of letters of credit outstanding.

On June 21, 2010, we filed a registration statement on Form S-3 with the SEC to sell up to $200 million of securities, before any fees or expenses of the offering. Securities that may be sold include common stock, preferred stock, warrants or debt securities. Any such offering, if it does occur, may happen in one or more transactions. Specific terms of any securities to be sold will be described in supplemental filings with the SEC. This registration statement will expire on July 1, 2013.

On January 30, 2013, our Board of Directors approved a cash dividend of $0.08 per share of the Company's common stock. The total dividend of approximately $5.3 million will be paid on March 29, 2013 to shareholders of record at the close of business on March 8, 2013. Dividends are declared at the discretion of our Board of Directors and depend on actual cash from operations, our financial condition and capital requirements and any other factors our Board of Directors may consider relevant. We intend to pay quarterly cash dividends in the future; however, the amount and timing of these dividends may be impacted by the cyclical nature of certain markets that we serve. We may reduce, delay or cancel a quarterly cash dividend based on the severity of a cyclical downturn.

We believe that we have adequate resources to fund our currently planned working capital and capital expenditure requirements for the next twelve months. The cyclical nature of our served markets and uncertainty with the current global economic environment makes it difficult for us to predict longer-term liquidity requirements with certainty. We may be unable to obtain any required additional financing on terms favorable to us, if at all. If adequate funds are not available on acceptable terms, we may be unable to successfully develop or enhance products, respond to competitive pressure or take advantage of acquisition opportunities, any of which could have a material adverse effect on our business.

Other Key Indicators of Financial Condition and Operating Performance

EBITDA and Adjusted EBITDA presented below are supplemental measures of our performance that are not required by, or presented in accordance with GAAP. EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income (loss) or any other performance measures derived in accordance with GAAP.

EBITDA represents net income (loss) before interest income, income tax provision (benefit), depreciation and amortization. Adjusted EBITDA is defined as EBITDA further adjusted to give effect to certain non-recurring and non-cash items and other adjustments. We believe that the inclusion of EBITDA and Adjusted EBITDA in this Form 10-Q is appropriate because we consider it an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors and other interested parties. We use Adjusted EBITDA internally as a critical measurement of operating effectiveness. We believe EBITDA and Adjusted EBITDA facilitates operating performance comparison from period to period and company to company by backing out potential differences caused by variations in capital structures, tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense).

In determining Adjusted EBITDA, we eliminate the impact of a number of items. For the reasons indicated herein, you are encouraged to evaluate each adjustment and whether you consider it appropriate. In addition, in evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses similar to the adjustments in the presentation of Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.


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EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

• they do not reflect our cash expenditures for capital expenditure or contractual commitments;

• they do not reflect changes in, or cash requirements for, our working capital requirements;

• other companies, including other companies in our industry, may calculate these measures differently than we do, limiting their usefulness as a comparative measure.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. For these purposes, we rely on our GAAP results. For more information, see our consolidated financial statements and notes thereto appearing elsewhere in this report.

The following table sets forth a reconciliation of net (loss) income to EBITDA for the periods indicated (in thousands):

                                                               Three Months Ended
                                                                  December 31,
                                                                2012          2011
 Net (loss) income attributable to Brooks Automation, Inc.   $   (9,236 )    $ 2,823
 Interest income, net                                              (274 )       (272 )
 (Benefit) provision for income taxes                            (3,670 )        300
 Depreciation and amortization                                    6,441        5,268

 EBITDA                                                      $   (6,739 )    $ 8,119

The following table sets forth a reconciliation of EBITDA to Adjusted EBITDA for the periods indicated (in thousands):

                                                                        Three Months Ended
                                                                           December 31,
                                                                      2012              2011
EBITDA                                                              $  (6,739 )       $  8,119
Stock-based compensation                                                2,511            1,743
Restructuring and other charges                                         4,757              203
Purchase accounting impact on inventory and contracts acquired          2,102              360
Merger costs                                                              634              221

Adjusted EBITDA                                                     $   3,265         $ 10,646

The decrease in EBITDA for the three months ended December 31, 2012 as compared to the same prior year period was primarily related to the $22.2 million decrease in revenues and the $4.6 million increase in restructuring costs. For a further discussion of the factors impacting our revenues and costs, see the discussion of our results of operations above.

Stock-based compensation increased for the three months ended December 31, 2012 as compared to the same prior year period due to the granting of additional awards during the first quarter of fiscal year 2013.

In connection with our acquisitions, we have valued acquired inventories at fair value, which results in a higher inventory cost charged to cost of sales in the periods shortly after the acquisition closes. These charges were $2.1 million in the period ended December 31, 2012, and related primarily to the acquisition of Crossing. The charges in prior year period related to our life science acquisitions.

Merger costs consist of professional fees to complete the acquisition of Crossing and the life science companies for the period ended December 31, 2012 and 2011, respectively.

Recently Enacted Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board issued an amendment to the accounting guidance for presentation of comprehensive income. Under the amended guidance, a company may present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This authoritative guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. On October 1, 2012 we adopted this guidance, and elected to present two separate but consecutive statements.

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