Azenta Inc (AZTA) 2011 Q3 法說會逐字稿

Please stand by for real-time transcript. Good day, ladies and gentlemen, and welcome to Brooks Automation third quarter financial results conference call. My name is Kiona and I will be your operator for today. At this time all participants are in listen-only mode, and later we'll conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Martin Headley, Executive Vice President and Chief Financial Officer. Please proceed.

Thank you, Kiona, and good afternoon everybody. I'd like to welcome each of you to the Brooks Automation, Inc, fiscal 2011 third quarter results call. Our press release was issued after the close of markets and is available on our Web site, www.brooks.com, as are the illustrative PowerPoint slides to be used during our call today.

I'd like the remind everybody that during the course of the call we'll be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. There are a number of factors that cause actual financial results or other events to differ significantly from those identified in such forward-looking statements, and I refer you to the section of our earnings release titled Safe Harbor statement, the Safe Harbor slide on our Web site, and to the Company's various filings with the SEC.

I would also note that we also make reference to a number of non-GAAP financial measures which are used in addition to and in conjunction with results presented in accordance with GAAP. And should not be relied upon to the exclusion of GAAP measures. Management believes those financial measures provide an additional way of viewing aspects of our operations, but when viewed with our GAAP results, the reconciliations to GAAP measures provide a more complete understanding of our business.

With me today is Brooks' President and Chief Executive Officer, Steve Schwartz. We will open with some additional color as it relates to some of the significant Brooks strategic activities, particularly providing more depth and understanding to the thinking around our acquisitions in the life science systems space, the opportunities in this exciting area, and some comments on the current business environment. I will then provide an overview of the third quarter fiscal 2011 financials and a summary of our financial outlook for the September quarter and the full fiscal year. We'll then take your questions. During our prepared remarks, we will from time to time make reference to the slides available to everybody on-line at www.brooks.com that are identified to assist in clarifying our comments. With that, let me introduce Steve Schwartz.

Thank you, Martin. In spite of a really rough day in the markets today, we're still pleased to report to you that we made significant progress against strategic initiatives that have been implemented over the last fiscal year. To drive gains in market share and profitability in our current business, to expand our technical capabilities into high-growth markets and to drive gross margin improvements with both funds the development of additional high-value technology products and increases the return to our shareholders. I will now take a moment to update you on our progress against each of these initiatives, then I will turn the call back to Martin so he can give you detail around the financial performance from last quarter, as well as our thoughts on forward guidance.

During the last nine months we've significantly transformed the Company to adapt ourselves to meet our aggressive growth objectives. We've hired extremely strong technical talent and we boosted RD&E spending by more than 30%, directing the bulk of that increased spending towards new product development and design wins. Year-on-year this represents almost a doubling of the spend that is going to new product development with design win activity. We divested our contract manufacturing business to instead focus our efforts on high gross margin, high value technology applications. We've targeted high growth product areas and regions of the world that have become very meaningful in terms of growth. We've expanded our focus to invest in non-front end semiconductor adjacent markets which are being satisfied by a set of customers which include many new equipment makers, that are different from those what traditionally serve front end semi.

Our new product design wins continue to accumulate and are starting to deliver meaningful gains for us. I will highlight a few of the most recent achievements here. On this call last quarter we announced the shipment of our 10,000th vacuum robot form the MagnaTran product line. In the June quarter we passed another meaningful milestone when we shipped our 1,000th MagnaTran 8 vacuum robot. Demand for our vacuum robots remained high as we shipped MagnaTran 7 and 8 designs to nine first-time customers representing equipment makers in six different countries. Included in this number were five new customers for the high capacity version of the Mag 8 robot whose unit shipments in the June quarter were more than double the volume in the March quarter. These new Mag 8 high-capacity robot wins were shipped to customers in Taiwan, China, Europe, and Japan for LED, OLED and another large substrate handling application. We also had new customer demand for atmospheric robots as we shipped our Razor robot to two first-time customers, one in Korea and one in China for semiconductor front end applications, and we received orders from four other first-time customers.

In our vacuum products area, we continued to see very strong demand for our large vacuum chamber pumping solutions which resulted in another record booking level for our Polycold product line of mixed gas cryochillers. The strength of this business is largely being driven by the increase in demand for active touch screens for tablet computers. We also received a new order for several systems that will be used in a solar manufacturing line. We're particularly pleased about our systems win for advanced packaging applications. We won atmospheric systems business from a leading OEM for Electrofill and PVD in next-generation back-end packaging. We also delivered first shipments of atmospheric systems to two leading OEMs for 3-D packaging for use in next generation 300 millimeter production. We won these advanced packaging applications away from two different competitors because of our ability to adapt our proven automation building blocks and quickly deliver a new concept. We are particularly keen to continue to take advantage of the opportunity in this high growth area, and we believe that this has the potential to become a $50 million to $100 million business for us by 2013.

Looking to future system architectures, we shipped the first complete 450-millimeter automation system to a leading OEM. The system is scheduled to be installed in a fab later this month. We've made significant investment in preparation for 450-millimeter applications and we're already working on a second generation tool set. We feel there is a general increase in the level of 450-millimeter activity in the form of OEM inquiry and design reviews at Brooks and we've invested to be in the front of this opportunity whenever it arrives. In our global services operation we also made significant progress by closing three multi-year service agreements that extends our reach into fabs around the world.

Finally, in support of our strategy to enter into growth markets where we are advantaged, we made a significant strategic move last week when we acquired Nexus Biosystems, the leader in the minus 80 degree C automated sample storage This, together with the acquisition of RTS Life Sciences which we made in April, gives us a strong head start into the life sciences automation market. Both of these companies serve the markets for automated systems that are used for cold storage of drug compounds, and the rapidly emerging market for the storage of biological specimens. Simply put, the core capabilities that are necessary for this market are deep cooling, reliable precision robotics that work in extreme temperature environments, and sample tracking logistics. All areas where Brooks has strong technical capability.

The RTS and Nexus acquisitions give us a combined installed base of more than 150 sample management systems with the automated cold storage capacity of more than 300 million compound and biological samples. We estimate our share based on the number of installed systems to be approximately 45% of the global installed base. We include among our customers all 20 of the largest pharmaceutical companies and dozens of research and biotech installations. Products are installed on five continents and the opportunity pipeline is growing each month. At present we're tracking 20 sample storage opportunities around the world where we have competitive offerings. The trailing 12-month revenue for Nexus plus RTS is approximately $48 million and we plan to increase that run rate in 2012.

While we continue to sell our existing product lines, we will simultaneously use our technical strength to supplement the strong engineering and marketing teams at Nexus and RTS to accelerate the next-generation product offerings that are being defined on the combined product road maps of these companies. We're enthusiastic about our ability to meet the next market requirements and we believe that we'll be able to bring offerings that will accelerate the adoption of the automated technology into a much larger market. We estimate the market for sample management at approximately $150 million with a compound annual growth rate of greater than 20%.

In addition to the aggressive market and technology investments, we're focused on continually improving the profitability of the Company to the benefit of our shareholders. In the June quarter, we kicked off an initiative aimed to improve our supply chain and manufacturing operations with the objective to decrease costs and cycle time. We've enlisted the professional services of a leading supply chain consultancy and we've identified programs that are important to implement in the next five quarters that we expect to deliver measurable gross margin improvements by the end of 2012 and into 2013. This is an investment that will allow us to transform not just the cost structure of the Company, but will also align our sourcing to better match the needs of our customers.

As you can tell, it's been another busy and productive quarter at Brooks. In a few quarters we've changed our profile and put ourselves onto an aggressive path to growth. Some differences you'll note include; in the September quarter we anticipate that more than one-third of our revenue will be from markets that are different from pure front end semi applications. We expect our gross margin to increase by more than 500 basis points over the June quarter. After our acquisitions, our RD&E level is at a run rate of approximately $50 million per year, up from approximately $30 million in our fiscal year 2010. We'll manage this carefully going forward as we rationalize the combination of the recent acquisitions, but the amount is both important and adequate for what we plan in the coming year. Our entry into the life sciences automation market has added opportunity for another $150 million market that's growing at greater than 20% per year and has added a customer base whose combined revenue is greater than $500 billion.

While we've been implementing this transition we've continued the grow our cash balance. As we look forward, we're confident that we'll have ample resources available to pursue our organic and inorganic growth plans, fund our gross margin improvement initiatives and begin to return additional value to our shareholders in the form of a quarterly dividend. We're energized and enthusiastic about both the near term and long term opportunities that we've created for ourselves. We're committed to continuing to aggressively pursue high value business and above all to driving additional value to our customers and shareholders. I will now turn the call over to Martin so that he can provide detail about the quarter and our outlook. Martin?

Thank you very much, Steve. Before moving into the financial results for the quarter, I would like to first focus on our initiation of a quarterly cash dividend. We view this as an important third leg to our shareholder value platform. The first leg is our continuing focus on margin improvement in the core business. The initial step in margin enhancement was the significant restructuring in 2009 and the subsequent operation on the sustained variable contribution model. This has been added to by the divestiture of low-margin contract manufacturing operations and will be further enhanced by the engagements of a leading consultancy to drive meaningful future, further growth margin improvements.

The second leg of our shareholder value platform is growth. And the two life science systems acquisitions give us that initial step into a rapid secular growth market. With these foundations becoming readily visible, the Board of Directors concluded that the initiation of a quarterly cash dividend was appropriate. Quarterly dividend has been declared as $0.08 per share payable on September 30, 2011 to shareholders of record on September 9, 2011. Although we have no formal dividend policy, we expect to declare and pay a cash dividend on a quarterly basis going forward.

To summarize the various significant events and accounting treatments that impact the presentation of the June financial quarter results, I would refer you to slide number 5. First, on April 1 we signed and closed the acquisition of RTS Life Sciences, our first acquisition in the life sciences systems space. This is included for a full quarter within the Brooks product solutions segment. On June 28 the contract manufacturing business, the most significant part of which was previously operated as the extended factory group, was sold to Celestica for approximately $79 million, including -- excluding our estimates of the working capital true up. This resulted in a $45 million gain on sale before tax. An additional $2.4 million in income taxes associated with that gain. Because we will still have significant commercial relationships with Celestica, both as a customer and as a supplier, this transaction does not qualify for discontinued operations treatment under the applicable generally accepted accounting principles. Investors should have a clear view of Brooks without this business since the historic results of this business will be reported as a segment in our segment realignment effective with this quarter. Historic segment results are included as an appendix to the conference call slides.

With changes in management reporting responsibilities, we have combined the form of Critical Solutions Group from the remaining elements of the Systems Solutions Group following the contract manufacturing divestiture and merge these into one group, the Brooks Product Solutions Group. During this realignment we have redefined and merged our service and end user [spaz] businesses into a group named Brooks Global Services, and these end user focused operations are presented as our third segment. Finally, the quarter's financials incorporate a $700,000 gain on the settlement by former CEO Bob Therrien of a section 16 case brought in a class action suit. This represents the cash retained by the Company on Mr Therrien's disgorgement of certain shares. Reflecting those non-recurring gains, the diluted earnings per share for the quarter were $1.02, bringing nine-month year-to-date GAAP earnings up to $1.79.

Turning to slide number 6, I will describe how our sequential revenues and operating profits before special charges moved from the March quarter, our second fiscal quarter, to the June quarter, our third fiscal quarter. Revenues of $186.1 million in the June quarter declined $6.6 million, or 3.4% from the March quarter. The biggest variable was a $6.8 million, or 14% decline in the sales of the contract manufacturing business, almost entirely as a result of reductions in demand from their OEM customer base as the larger OEMs pulled back during the quarter. The core Brooks product businesses were impacted to a much smaller extent, down 2.2% sequentially as the diversity of customers and end markets played an important role.

The customer diversification is demonstrated by the following. Overall sales to our three largest customers in total which reduced from 43% of sales in the prior quarter to 40% in the current quarter. However, excluding the contract manufacturing revenues, these three OEMs in total reduced from 27% of sales to just under 25% of sales. The mix of our product sales impact the drop-through of the $2.7 million decline in product sales which resulted in a $1.9 million reduction in profit. There should not be any assumptions regarding the current pricing environment drawn from this impact. This was an impact of the customer profile for specific systems and components going into semiconductor markets. A larger decline in higher margin product families, and a reduction in intellectual property license royalties.

Revenues increased by $2.2 million from the life sciences systems business. This amount is actually about $1 million less than the revenues that would normally have been reported for the activity undertaken as a result of purchase accounting adjustments. The business was break even before any of the various purchase accounting adjustments. The quarter was impacted by exceptional product warranty costs of $800,000 in our products business. Causal factors are understood and continuous improvement program actions implemented to minimize future impacts on customers and return us on the path of improved warranty failure rates that we have been successful in achieving over the past 18 months.

Moving to the Brooks Global Services business, we secured additional growth of $700,000 on which we drove $500,000 of incremental profits. The additional business was mostly in Japan as we assisted the end user customer base in recovery following the March natural disasters. There was a further increase in the rate of engineering investments as the research and development expense for the Brooks Product Solutions business increased by $600,000 on a sequential basis, while our overall operating costs improved by $700,000, mostly from reduction of stock compensation and other variable compensation expense.

Turning to page 7, you will see the impacts of these various items on the above the line income state captions. Gross profits declined sequentially by $4.3 million, reflecting a reduction in gross margin rates of 120 basis points from the mix and warranty expense challenges previously discussed. Research and development spending increased with our continuing commitment to be a leader in innovation in our markets. Excluding the contract manufacturing business, our R&D spend rate for the remainder of the business was 6.6% of sales. Selling, general, and administrative expenses reduced by $0.5 million on the sequential basis with stock compensation and variable compensation cost benefits offsetting increased overhead expense from acquiring RTS. Operating income before special charges declined sequentially by $4.3 million to $22.6 million. Excluding contract manufacturing, the operating income before special charges would have been $20.6 million, a 14.3% operating margin rate and only an absolute sequential decline of $2.4 million.

Slide 8 shows the below the line impact of increased special charges by $200,000 from purchase accounting adjustments related to the RTS acquisition. The after tax gain of $42.6 million from sale of the contract manufacturing business and the $1 million increase in other income, including the gain on the section 16 settlement. Income taxes were relatively flat, but strength in our joint venture operations more than doubled that contribution to $900,000 in the quarter. Adjusted diluted earnings per share were $0.36 in the June quarter, down from $0.41 in the March quarter.

Turning to cash flow, we generated $29.5 million of adjusted EBITDA. From a Reg G perspective please note that the adjusted EBITDA reconciliations to GAAP measures are provided as a supplement to each of our quarterly earnings releases and also included in our file to Form 10-Q. We incurred $1.1 million of restructuring cash flow. Most of that cash flow related to a building lease where we made the final payment in July. Moving forward, restructuring will all be related to integration of the recent life science acquisitions. Accounts receivables reduced by $6.6 million benefiting cash flow, but inventory and accounts payable movements offset this benefit. Capital expenditure requirements continue to be modest, $1 million during the quarter, and M&A activity netted $76.7 million of cash. With that, cash and marketable securities increased by $103.9 million over the quarter.

Briefly looking at that time most significant operating balance sheet accounts, as identified on slide 10, that cash flow for increased cash and marketable securities to $282.4 million, and includes those securities classified as long-term on our balance sheet which is nevertheless freely marketable and can thus be considered readily liquid. Of course, over $90 million of this cash was utilized in July for the Nexus Biosystems acquisition. Accounts receivable of $82.5 million represented 52 days of sales adjusting for the impact of the contract manufacturing business. Reductions in both inventories and accounts payable reflect the assets and liabilities divested in that transaction. Our working capital velocity improved by 50 basis points to 16.7% of annualized quarterly sales, largely from -- from the previously mentioned improvement in accounts receivable collection and the timing of the payroll cycle.

Slide number 11 demonstrates the impact of the continued focus on both the balance sheets as well as the income statement, with result in comparable return on invested capital in both the March quarter and the June quarter at an annualized rate of approximately 40%. The next two slides, I'll briefly cover our sequential segment operating performance for the core businesses and services.

On slide number 12, we review the sequential results of our Brooks Product Solutions business by sales of pumps and robots into the semiconductor and data storage markets were in decline, but largely offset by growth into industrial markets from mixed gas cryochillers and the $2.2 million of life science revenues from the RTS acquisition. Overall for the Company as a whole, sales to semi markets were down to 78% of total revenues in the quarter. Gross margins in this segment were adversely impacted by high levels of intangible amortization following the RTS acquisition and additional product warranty costs that we've discussed previously. Sequentially, gross margins were down 180 basis points. We increased engineering from our core products and also took on board the additional RTS operating cost infrastructure. Segment operating income declined with this additional overhead structure to $17.5 million, or 14.5% operating margin rate. The point of comparison, though, this is a comparable margin rate, so that's achieved by the segment in the June quarter of fiscal 2010.

The Brooks Global Services results are set out on slide 13 and show the impact of a double-digit pump service growth, mostly in Japan. The addition of resources to handle future anticipated repair growth offset the variable contributions from the revenue growth, the improvement that would have been driven in this business are best illustrated by comparing the 35% gross margins in the quarter with the significantly lower 27.2% gross margins that this business returned in fiscal 2010. With a lower level of corporate allocations for variable compensation programs, the business reported $3.5 million in segment operating income with an operating margin rate of 15.6%.

Looking forward, I'm going to refer listeners to slide 14 where we've laid out the components embedded within revenue guidance of between $132 million and $140 million for the September quarter. This guidance reflects recently declining business conditions on all the bookings in the June quarter, which excluding life sciences systems orders, were down 2.3% quarter-over-quarter. Within our guidance is an estimate of core business revenues. And for this purpose I define core business as Brooks Product Solutions and Brooks Global Services, but excluding the life science acquisitions. Core business revenues are anticipated to be between $125 million and $130 million (See Presentation Slides) as compared to $141.6 million in revenues for the June quarter. In projecting this 5% to 12% revenue decline, we've incorporated an assumption of a 15% to 25% decline in wafer front end business. Our market diversification and market share growth are the critical factors that reduce the full impact of this industry decline on Brooks. Projection is lower than we anticipated as recently as three weeks ago, as major OEMs have guided downwards and our bookings slowed. We anticipate that the life science systems acquisitions will provide between $6 million and $8 million of additional revenues for the quarter. This estimate reflects the mid-quarter acquisition of Nexus Biosystems the impact of purchase accounting and a seasonal aspect of this business.

Slide number 14 shows how the revenue guidance translates into margin and earnings guidance. Pro forma margins, excluding the contract manufacturing business for the June quarter, were 36.8%. We anticipate the September quarter margins will likely be comparable as we will have some fixed overhead absorption of headwinds from reduced activity levels, and surplus capabilities in the life science systems businesses prior to the completion of integration activities. Operating expenses are expected to be in the range of $32 million to $37 million with the operating expenses of the acquired businesses exceeding expenses of the divested business. This guidance also reflects some uncertainty around the timing of cost reduction activities such as the removal of duplicative costs in the life science systems business. The earnings guidance also incorporates a benefit from income taxes, certain liabilities are likely to reverse on the app expiring of applicable statutes. Rolling this all together, our earnings guidance is for adjusted earnings diluted earnings per share, excluding non-recurring items and special charges, of between $0.24 and $0.30. With that, I'll now turn the call over to questions. So, Kiona thank you.

(Operator Instructions) And our first question comes from the line of Edwin Mok.

Thanks for taking my question. Congrats for the acquisition that you have done and the movement on the Company. So, I have a few questions first on the operating expense. If I take what you said, 6.6% of your business excluding contract manufacturing was R&D in last quarter, I got to around $9.5 million in R&D. Is that the run rate excluding the life science business? I want to make sure I got that correct.

The run rate excluding the life science business is going to exit at $10 million, or about $40 million annualized run rate.

On the OpEx guidance that you guys provided, how much -- does that account for a full quarter of life science expenses, or do you expect to have high expense beyond that given that it's not a full quarter?

This is where we've got contrary items going. This guidance includes only two-thirds of a quarter for the Nexus Biosystems part, but it's also -- we will be undertaking some integration activities that will reduce operating costs. The timing of that creates uncertainty. Because of that, though, we would see that the operating expense would likely reduce going forward.

I see. But you mentioned the timing creates some uncertainty. So, if you only have two thirds of the life science expense on the September quarter, does that imply that if everything stays unchanged it would imply December quarter could be higher?

It would imply that, but we will be taking actions. The final timing of those actions is not determined at this time.

That's helpful. I have a question around bookings. Bookings actually went up sequentially in the quarter, can I ask what drove the increase in bookings?

Bookings increased because we have life science bookings in there and so, that offset the reduction elsewhere.

I see. So, mainly coming from life science. Great. Since we are on life science, I guess I have two questions. First, can you describe the kind of the margin profile of that business now that you have both RTS, as well as the new acquisition in combination, if you can describe that? I think you guys talked about this TAM being $150 million growing in the 20% plus CAGR. Is it just a function of how fast you can penetrate a market, or do you actually have to develop more product for you to get -- for you to fully address this $150 million TAM?

I'll start with the margin first. The margin of the business currently, even with some duplicative resources, is in the low 40s. We clearly believe this has the potential to be a 50% kind of margin business before amortization. We don't yet have all the final purchase price allocations to know how much margins will be impacted by amortization. I would suggest to you at this point that you think about this business as being a mid 40s margin business and that we will be in a position, certainly by the next conference call, to give much more refined guidance there.

Edwin, on the market size, it's around $150 million, by our estimate, right now, which is made up of literally the sale of systems, pretty significant amount of consumables, if will you, the plastic storage vials and containers, and the services that go into the servicing of the automated systems. In terms of expanding the market, there is a significant amount of storage of compounds and biological samples that are done in manual freezers today, and a next-generation of product offering we think can accelerate the overall market conversion from storage in manual systems into automated tools.

I see. Very helpful there. One last question. You mentioned around $50 million to $100 million opportunity for the packaging, advanced packaging side of the market. Are you guys selling into that market right now or if you can, what is your business in that market right now? Is that all incremental?

We are selling into it right now and --

Very low levels, Edwin. So, you can think about that as all pretty much all incremental. It is kind of $1 million a quarter maximum size. Currently.

I see. Is that mostly on the system side or mostly on robotics, how do you think about what kind of products go into that?

It is a mixture of both kinds. It is a mixture of both kinds of products depending upon the customer application, there are those that have systems that just want the robotics. There are other customers that need a complete atmospherical, potentially even vacuum solution.

Great, thanks, that's all I have.

And our next question comes from the line of Satya Kumar.

Hi, this is [Feran Emit] calling for Satya. I had a question regarding your 450-millimeter, you mentioned that you are shipping the system this quarter, and actually end of this month. Just wanted to talk a little bit more about it. Can you provide some color on how you are seeing the 450-millimeter transition and what are your expectations for this year and next year?

Sure. So, we shipped the 450 system already. We shipped it to an OEM and the completed system, the completed tool will be installed in a fab later this month. We previously shipped the 450-millimeter system. It would be tough to speculate about when the market will take off. There is an increased level of activity from our customers, people who are interested to know how far along we are in 450-millimeter automation capability and we are quite ready. I think it will be years anyway before this is a large and meaningful market, but as we mentioned, because we've already started to ship a tool, we anticipate that in 2012 we will be shipping more 450-millimeter systems to providers of process who need a system to begin to work on for development at 450.

And 450-millimeter, the fab later this month starting at basically a customer site, not an OEM location. Is that correct or is it a OEM location?

Our understanding is that it's going into a site that's capable of running process that is not an OEM facility, but literally a fab created for this purpose.

Got it. And is it a metrology tool, or is it a vacuum tool or a metrology tool? Just want to get an understanding on where -- is it at a very early stage or are people already at a stage where they are building their tool?

It's a process tool. It's not metrology, but that's what we know.

Thank you. And one more question is regarding your acquisitions. You did two acquisitions on bio sciences side already, do you think -- do you see that you would continue looking for more or do you think you are at a point that you would just start focusing on the business that you have already acquired?

We'll likely do both. We are in conversation with a number of companies right now, but we are also very focused on the continued product development of the products that exist in the two acquisitions. You will see likely both from us.

Okay. And just one last question regarding that. In terms of your synergies for the businesses that you're acquiring, I think more stuff would be product synergies. Just want to get an understanding on when do you see that some of the core products or some of the technologies that you have in Brooks Automation core businesses being implemented on the acquisitions that you have made? Is it going to be a long time or how are you thinking about -- how much commonality is there basically?

We have -- we forecasted into the development activities that we will put some critical resources from Brooks in a combined product development effort with the teams that exist from Nexus and RTS. So, that's already something contemplated even before we were closed with the Nexus acquisition.

There are also some components of the existing Nexus products that we are in a position to build our Polycold facilities as well. There will be increasing levels of synergies over the course of the year.

Okay. But in terms of -- is there a three year timeline you could say you expect a product that would -- that you have currently to be used in the other market in one year, or is that how you should think about, or it's going to be longer time?

Just roughly, we'd anticipate that we would have completed units that customers could begin to test sometime in 2012.

Okay. Thank you. And one final question. Regarding the LED market, is that something that you account in your semi business or is it something that you --

No, LED is not included within our semi business. That's an adjacent market for us because we believe the dynamic with general illumination is somewhat different in the longer term.

And how are you seeing that -- how did you see the demand in that market? We saw a lot of announcements on multi-chamber systems recently, and in your last call you had highlighted that, that was one of the areas which was kind of slow for you because you didn't see that option of multi-chamber systems going into the market as fast as you had anticipated. Is that something that you see reversing now or can you comment on that a little bit?

I will just continue to say maybe the pace is disappointing. It is progressing, but the pace is disappointing by our original standards.

Thank you.

And our next question comes from the line of Patrick Ho. Please proceed.

Thanks a lot. Martin, first a quick housekeeping question. On the purchase accounting impact, as well as the litigation settlement, am I right to assume that those are in the SG&A line?

The settlement of the litigation is within other income.

Okay.

The purchase accounting impacts the step up adjustments of about $400,000 they're in the gross margin line. And the amortization impacts are in the SG&A.

Okay, great, that's helpful. Thanks a lot. Just going to your core business on the semiconductor side of things, given that obviously there's a lot of negative sentiment out there right now, how prepared are you as a company should the environment turn and some of your OEM customers require a quick turnaround? Again, if business conditions turn more positive in the quarter.

I think we're very well positioned, because at this stage we've made nothing that impacts our capacity because of the other elements of our business that are going well. So, we've shown that we can flex, and I think we would be in a very good position if other elements of our business show a much stronger situation. And you're right to comment, it's a very unclear situation. Whilst we have seen generally a negative trend, I can say that equally we've seen suggestions of some CapEx pick up from one source as well. So, it's just the uncertainty of macroeconomic conditions at the moment cause us to perhaps look more on the pessimistic side, but there could well be opportunities for an upside as well. But those are not baked in our guidance.

Okay, great. I guess I was looking, there's been a lot of movements obviously with your divestiture as well as the acquisitions, the life sciences business. It was just harder for me to look at the inventory to see if you guys were prepared for any quick turnaround. So, it sounds like you guys are flexible.

I have more inventory than I would absolutely like for a quick turnaround, so that's not a problem, Patrick.

Great. Going to the life sciences, I know it's really early in the strategy for you guys. But just looking at how you've broken down your businesses between product and services, could there be a lot more synergies in terms of the integration on the services side, or is that something where over the long term you're going to have to need to keep separate kind of services groups for your respective businesses, or do you see that as a bigger opportunity getting some of the costs down in one of the segments?

I think that is an interesting and attractive synergy that's maybe not a day one or day 90 or maybe even a day 180 synergy, but certainly in the not too far distant future, after training, the utilization of our global capabilities is something we ought to be able to leverage off of. So, it's not something I bake into thinking, as I say, for maybe the first two or three-quarters, but it's something that's very interesting to us beyond that. And particularly in areas where, frankly, smaller organizations, companies like Nexus and RTS who maybe struggle to be as responsive as we could be with the feet on the ground that we have.

Great. Thanks a lot, guys, and good luck.

Thank you.

Our next question comes from the line of Wenge Yang.

Thank you for taking my questions. A couple of things. For life science, just want to get your view on what's a steady state quarterly numbers. I was looking at around $15 million in terms of revenues and close to high 40s in gross margins. Is that a fair assumption?

We've said that the $48 million trailing 12-month revenues. It's 20% growth. So, I would be saying your not too far off with that $15 million. There is a degree of seasonality to the business because a portion of the business is either grant funded or funded through government programs around the globe. There is a tendency for that to be a cycle whereby the actual shipments, and therefore the larger parts of the revenues get recognized in the fourth calendar quarter, i.e., our first fiscal quarter. So, you might see that being tend to be on average the higher revenue quarter for us. And I wouldn't disagree with your -- kind of your margin observations.

Okay. In terms of integration efforts, how much do you think you could cut in terms of OpEx after you fully integrate the two acquisitions into the operation?

It isn't just operating expenses. It is our total infrastructure, duplicative expenses. We've got some fairly significant goals. I don't think I would want to specifically talk about those at this juncture, given the nature, the early nature and the early time frame we are at, and the impact that our employees ought to hear this first us from rather than from other parties. What we're suggesting is if you think about this business, probably having something of the order of a $5 million amortization burden, and being break even after that amortization burden, I think it gives you a pretty good idea as to what the -- that it's basically at the moment, even before restructuring, a 10% margin business excluding amortization, and we think it can be significantly more than that, both from integration efforts, as well as from leveraging growth.

That's helpful. In terms of the dividend, at this stock level, I would -- someone could argue that it could be a better choice of cash usage by buying back some of the stocks. Just want to hear your approach on how to contemplate buy back versus dividend and how do you come up with the decision to issue the dividend instead of buy back?

It's really a Board decision. I would say that the factors that come into play are a dividend is rewarding the shareholders going forward, not necessarily rewarding the shareholders exiting. I would also say that our observations that timing of any buy backs is very difficult to optimize, and seems to be a difficulty in getting that right timing, and we felt that it was just an important part of the shareholder return premise was that a dividend return is highly favored and tends to drive significant shareholder value in the long term, and we're looking for long-term shareholder growth.

Just a couple of clarifications. The dividend is going to be quarterly based, right?

Yes.

And also, when you made a comment on 450, when did you say that shipment will happen for the first fab related shipment?

When we ship the 450-millimeter system already, our understanding is that it will go from the OEM, it will be shipped into a fab this month.

Okay, that's helpful. Thank you, gentlemen.

Thank you.

And our next question comes from the line of C.J. Muse. Please proceed.

Hi, this is Olga. Thanks for taking my question. I wanted to probe a little bit more on some of the adjacent markets, excluding the life sciences business. You mentioned that it's going to be a third of your revenues coming into the September quarter. Can you -- so that we can compare the trajectory there, can you help us -- can you discuss what the revenue run rate was for the range in the first half of the year and how you see that trending beyond the September quarter?

Olga, give us just a second here.

What we're talking about is that our industrial business, which if I look at this excluding our contract manufacturing business in the current quarter is about 15% of our business, that will trend upwards from continued strength in the Polycold businesses. That's where the vast majority of those mixed gas cryochillers are regarded as industrial shipments in the way that we classify things. We also see an uptick in our men's business that's kind of been running at a 3% or so of sales, excluding contract manufacturing business to have a potential for ticking up into the 4%, 5% range. There's growth in LED as well, which will probably double in size from its current size. And so it's those areas where we see the growth filling in for the semiconductor declines.

Olga, we do include the life sciences as part of the non-semiconductor portion.

Got it.

And as well, our actual semiconductor business will not decline as much as our overall view of what will happen with the wafer front end market, because we know that there are certain OEMs with certain projects that are -- have already placed orders, we're already building product, and they have no intention of canceling. So, although we talk about a 15% to 25% decline in semiconductor, we don't believe we'll see that level of decline in our semiconductor business.

And then regarding your comments on the life sciences business, you mentioned that on an installed basis, it's actually -- the market share was around 45%. It seems like the $45 million to $50 million run rate is only about a third of the TAM that you talked about. Can you talk about what the disconnect there is and was there some incremental share loss over the last year, and how you see that trending forward?

Sure. So, we -- again, our estimate is 45% of the units that are installed. There's a very significant portion of the revenue associated with bio and compound storage that's related to consumables and to services business. And so we have some consumables business, it's pretty significant. I would say in the acquisition of Nexus, we're of the order of half the revenue is systems related, half -- and then pretty significant part of the rest of it is consumables and services.

Okay. And then just a housekeeping question. What sort of tax rate are you embedding in the September quarter guidance and how should we think about that heading into December?

In the September quarter guidance, I'm embedding a tax benefit of about $2 million from the items I referred to in my prepared comments. Liabilities that will no longer be required by expiring statute. For the full year of 2012, in fact, we kind of refined our thinking. We would anticipate a 3% to 4% tax rate being applied for every quarter through the year even if we released the valuation allowance during the course of the year. So, you can model that there will just be a tax rate of 3% to 4% in fiscal '12.

Got it. Thank you.

Okay.

And our next question comes from Ben Pang. Please proceed.

Thanks for taking my question. Just a couple of questions on the life sciences. You talked about the kind of the overall gross margin, 40% range. But is there a high and a low? Because you're selling consumables and things like that. What's the lowest gross margin products that we would to have worry about in that area?

I wish I could I tell you with great exactitude, but these are young entrepreneurial companies where that granularity is a little missing at the moment, as one of the enhancements we have to bring to business. And the very thorough due diligence we did, we could get comfortable about the business as a whole, but I couldn't answer that granular question today. I would hope that in six months I am definitely able to answer that then.

Okay. And then kind of a similar type of question as a follow-on to a previous one. The $150 million opportunity, how much of that is systems versus consumable?

Ben, again, these are our estimates. I'd say something less than 100 at the systems level, and the remainder would be consumable and service.

Okay. And the final question is on the semiconductor side. You talked a little bit about what the business conditions are and things. Are you concerned about the inventory level of your products at your customers, or you think you have pretty good visibility at this point?

We clearly, in an environment such as this, take an extra level of interest in that very question. And what we have found is there is very little of our inventory at the OEM level. So, we are in a position that when we're not being swung by the additional OEM inventory holding issue that can come into play for sub system suppliers.

Okay. And between the subsystems and the automation products and the semiconductor, are they both going down at about to same rate?

Sorry, Ben, one more time.

Would you repeat it?

I guess if I look at your robotics, your traditional robotics tool automation versus your pumps and stuff, are they kind of going down at the same rate?

Yes, very similar rates. What we're finding is the components have gone down more than our systems because we have components that are going to the larger OEMs who don't take our systems, but incorporated them into their own systems, and as we suggested those larger OEMs as compared to some of our smaller OEMs have actually seen a steeper downturn.

Thank you very much.

Okay.

And our last question comes from David Duley.

Thanks for taking my question. Just a clarification. I think when you sold the contract manufacturing business, you gave guidance of, at that point, roughly thought your revenue would be flattish in your September quarter, and how you got there was down in semi, offset by some life science in some other markets. And now I think the mid-point of your guidance range is down about $6 million from that core business. Is that kind of the incremental delta since you sold the contract manufacturing business is only about $6 million in your semi business?

That really represents the additional downturn in semi that we've seen over the last three weeks, yes, David.

Okay. I just want to make sure, remember -- recollected how the guidance came about before and what it means now.

What it means is that three weeks have seen a significantly bleaker picture for semiconductor than we had imagined for the current quarter.

It seems other companies have a larger impact from those three weeks.

Yes.

Congratulations on it being a fairly small impact for you. One of the -- two other questions from me is and I think you already mentioned it, roughly what is the overall chiller revenue or whatever -- however you want to describe the Polycold product, if you could just give us an idea of the size of that business, and I think you give us a percentage but I wasn't sure what it meant before.

Okay. That business is currently running at $50 million to $55 million in revenues, David. So -- and that's roughly represents a doubling of its run rate as compared to six to nine months ago.

That's an annual run rate.

Yes.

Okay. And then you mentioned warranty expenses and what not. Will there be an impact going forward from that, or are we done with those incremental warranty expenses?

I would -- I would certainly hope we're done with them at the level they are. I think the reality is when you get warranty situations such as this, there's a little bit of leakage on a continuing basis, but I don't see anything like the $800,000 impact that we saw in the products business this quarter. This is an area of focus, and will be increasingly an area of focus. Just to give you the -- we have been continuing to improve the warranty rates of our product, and the failure rates have been increasingly declining. They were actually reached the low in the March quarter, and this came back, came back to levels -- that are still lower than where we'd have them historically. I believe that we should continue to -- because you have a catch up when you have an increase in the failure rate. So, you won't have that impact going forward, even if we were to stay at the failure rate it's at in this quarter, you wouldn't have the same charge to the quarter.

Because you kind of overshot the charges.

Yes.

Got you. Thank you.

And we have no further questions in queue. I will turn it back over to Martin Headley for closing remarks.

Okay, thank you very much, operator. We thank you all for your interest in Brooks on what's been a very grisly day on the markets, and we trust you see an opportunity with Brooks. Thank you very much.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.