Azenta, Inc. - Annual Report: 2018 (Form 10-K)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10‑K

(Mark One)

 

Commission File Number: 0‑25434

Brooks Automation, Inc.

(Exact name of Registrant as Specified in Its Charter)

 

978‑262‑2400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  ☑       No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.   Yes  ☐        No  ☑

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☑        No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes  ☑        No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to the Form 10‑K.   ☑

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act. (Check one):

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b‑2).   Yes  ☐         No  ☑

The aggregate market value of the registrant’s Common Stock, $0.01 par value, held by non-affiliates of the registrant as of March 31, 2018, was approximately $1,303,513,402 based on the closing price per share of $27.08 on that date on the Nasdaq Stock Market. As of March 31, 2018, 70,539,856 shares of the registrant’s Common Stock, $0.01 par value, were outstanding. As of November 15, 2018, 71,776,483 shares of the registrant’s Common Stock, $0.01, par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement involving the election of directors, which is expected to be filed within 120 days after the end of the registrant’s fiscal year, are incorporated by reference in Part III of this Report.

 

 

 

 

BROOKS AUTOMATION, INC.

TABLE OF CONTENTS

 

 

Information Relating to Forward-Looking Statements

Certain statements in this Form 10‑K constitute forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Certain, but not all, of the forward-looking statements in this report are specifically identified as forward-looking, by use of phrases and words such as “we believe,” “we estimate,” “we expect,” “may,” “should,” “could,” “intend,” “likely,” and other future-oriented terms. The identification of certain statements as “forward-looking” is not intended to mean that other statements not specifically identified are not forward-looking. Forward-looking statements include, but are not limited to, statements that relate to our future revenue, margin, costs, earnings, product development, demand, acceptance and market share, competitiveness, market opportunities and performance, levels of research and development, or R&D, the success of our marketing, sales and service efforts, outsourced activities and operating expenses, anticipated manufacturing, customer and technical requirements, the ongoing viability of the solutions that we offer and our customers’ success, tax expenses, our management’s plans and objectives for our current and future operations and business focus, the expected benefits and other statements relating to our divestures and acquisitions, the levels of customer spending, general economic conditions, the sufficiency of financial resources to support future operations, and capital expenditures. Such statements are based on current expectations and are subject to risks, uncertainties, and changes in condition, significance, value and effect, including without limitation those discussed within Item 1 A, “Risk Factors” and elsewhere in this report and other documents we file from time to time with the Securities and Exchange Commission, or SEC, such as our quarterly reports on Form 10‑Q and our current reports on Form 8‑K. Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results, performance or achievements to differ materially from those expressed in this report and in ways we cannot readily foresee. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based on information currently and reasonably known to us. We do not undertake any obligation to release the results of any revisions to these forward-looking statements, which may be made to reflect events or circumstances that occur after the date of this report or to reflect the occurrence or effect of anticipated or unanticipated events. Precautionary statements made herein should be read as being applicable to all related forward-looking statements wherever they appear in this report.

Unless the context indicates otherwise, references in this report to "we", "us", "our" and other similar references mean Brooks Automation, Inc. and its consolidated subsidiaries.

PART I

Item 1.    Business

Overview

We are headquartered in Chelmsford, Massachusetts and have operations in North America, Asia, and Europe.  Today we serve two distinct and unrelated markets; the semiconductor capital equipment market and the life sciences sample management market. We believe our leadership positions and our global support capability in each of these markets make us a valued business partner to the largest semiconductor capital equipment device makers, and pharmaceutical and life science research institutions in the world. Our offerings are also applied to other adjacent technology and industrial markets. We provide customer support services for our products globally.  In total, we employ approximately 1,550 regular full-time employees worldwide and have sales in more than 50 countries.

Since our founding in 1978, we have been a leading partner to the global semiconductor manufacturing markets. In our early days of our business, we developed and marketed automated handling equipment for semiconductor manufacturers. Since then, we have expanded our products and services through product development initiatives and acquisitions, and we are now recognized as a leading provider of vacuum robots, vacuum automation systems, wafer carrier contamination control systems, and reticle storage solutions to the global semiconductor capital equipment industry.  Over the last three fiscal years, we acquired one company to support the semiconductor market: Tec-Sem Group AG, a Switzerland-based manufacturer of semiconductor fabrication automation equipment with a focus on reticle storage management, which we acquired in April 2018. Prior to fiscal year 2016, we made several acquisitions to support our business in the semiconductor market, some of which are described further in the Notes to our Consolidated Financial Statements included elsewhere in this Form 10-K.  We have invested in research and development initiatives to advance the offerings acquired in these acquisitions, as well as vacuum automation and services offerings. Our

business supporting the semiconductor capital equipment and adjacent markets provided approximately 69% of our revenue in fiscal year 2018.

In the fourth quarter of fiscal year 2018, we entered into a definitive agreement to sell our semiconductor cryogenics business to Edwards Vacuum LLC (a member of the Atlas Copco Group) for approximately $675.0 million in cash subject to customary adjustments.  We originally acquired the cryogenics business in 2005 as part of the acquisition of Helix Technology Corporation.  The closing of our sale of the cryogenics business is subject to various closing conditions and regulatory approvals.  As part of this sale, we will transfer our intellectual property, or IP, for our cryogenics pump products, but not our IP related to our semiconductor automation or life sciences businesses.  The semiconductor cryogenics business has been classified as discontinued operations and, unless otherwise noted, the description of our business in this report relates solely to our continuing operations and does not include the operations of our semiconductor cryogenics business.  

We have served the life sciences sample management market since 2011.  The original strategic linkage between this business and our semiconductor business was our ability to leverage our core technology competencies in automation and cryogenics.  In life sciences, we applied these competencies to provide automated ultra-cold freezer systems and then to expand into a portfolio of products and services to assist customers in efficiently managing the end-to-end “cold chain of custody” of their compound and biological samples.  Today, we are a leading provider of the life sciences sample management solutions for automated cold sample stores, off-site storage services, and consumables and instruments. We are also a provider of software offerings which enable or enhance our customers’ visibility into their sample inventories, and laboratory services at our storage service locations, both of which are expected to help our customers accelerate their research and development efforts.  Taken together, we believe our life sciences product and services offerings allow our customers to maintain a complete “cold chain of custody” and related workflow solutions for their samples. Our business supporting the life science sample management market provided approximately 31% of our revenue in fiscal year 2018.

Our life sciences sample management product and service solutions portfolio are a result of strategic acquisitions and internal research and development initiatives.  Our competencies in automation and cryogenics provided us a differentiated capability to advance the product set with higher functioning automation, automation-ready consumables, and management of samples and automation in ultra-cold environments.  We leveraged the storage solutions acquired before 2013 and our expertise and developed and commercialized a full line of advanced automated ultra-cold freezer offerings.  The Twinbank™ platform was launched in 2014 and sells under two primary offerings, the SampleStoreTM II which provides -20°C high volume storage for chemical compounds and the BioStoreTM II which provides -80°C high volume storage for biological samples.  In 2016, we launched the BioStoreTM III Cryo, a smaller, automated, liquid nitrogen-cooled freezer that operates at temperatures as low as -196°C for automated storage of the most temperature sensitive of biological samples.  We also expanded our consumables and instruments offerings with development of new products, and have successfully commercialized BioStudies, a bioinformatics software platform that enables customers to manage sample collections and development efforts distributed across the globe.

In the last three fiscal years, we have completed six acquisitions of companies or assets to expand and enhance our life science offerings. These include three companies providing off-site storage and sample management services. 

The recent acquisitions in life sciences also added cryogenic temperature management products, software products and consumable products to our portfolio.

On September 26, 2018, we entered into a definitive agreement to acquire GENEWIZ Group, or GENEWIZ, a leading provider of genomic services, based in New Jersey with operations throughout the United States, Asia, and Europe.  We completed this acquisition on November 15, 2018.  Please refer to Note 23, “Subsequent Events” to our Consolidated Financial Statements included under “Item 8, Financial Statements and Supplementary Data” of this Form 10-K.

Through the acquisitions described above, we have expanded product offerings, accelerated product development cycles, broadened our installed base and added customer relationships to our business. We have also divested certain products that did not hold leadership positions in our core markets.  As such, we use acquisitions and divestitures to strengthen our portfolio and achieve increased growth and profitability. For further information on our acquisitions and equity investments, please refer to Note 4, "Acquisitions," and Note 8, "Equity Method and Other Investments," to our Consolidated Financial Statements included under "Item 8, Financial Statements and Supplementary Data" of this Form 10‑K.

We believe the life science sample management market is generally more stable than the semiconductor capital equipment market and we expect that it will grow more quickly than our semiconductor business as a result of the expanding need for storage and retention of compound and biological samples. In the life science market, revenue streams from storage services are more predictable than the sale of automated freezers and other equipment. As we have expanded our life science offerings of consumables, infrastructure services and storage services, we have seen these more stable revenue streams increase to account for approximately 56% of our Brooks Life Sciences segment revenue in fiscal year 2018.

Segments

We have two operating and reportable segments consisting of Brooks Semiconductor Solutions Group segment and Brooks Life Sciences segment. For further information on our operating segments, please refer to Note 20, "Segment and Geographic Information" to our Consolidated Financial Statements included under "Item 8, Financial Statements and Supplementary Data" of this Form 10‑K. 

Brooks Semiconductor Solutions Group Segment

Brooks Semiconductor Solutions Group is a leader in mission-critical wafer automation and contamination controls solutions and services that are designed to improve throughput, yield, and cost of ownership of complex processing equipment, or tools, in semiconductor fabrication plants, or fabs. Our product offerings include vacuum and atmospheric robots, turnkey vacuum and atmospheric wafer handling systems, as well as wafer carrier clean and reticle storage systems. We also capture the complete life cycle of value through a global service network of expert application and field engineers who are located close to our customers. Our services include rapid refurbishment of robots to stringent specifications, upgrades to improve equipment productivity, and proactive monitoring and diagnostics for predictive risk management and improved up-time of the installed base.

Markets and Customers

The demand for semiconductors and semiconductor manufacturing equipment is cyclical, resulting in periodic expansions and contractions of this market. While the services element of our semiconductor business is generally more stable, the cyclical nature of the capital equipment business causes sales from products to vary quarterly based on short-term market demands. It is not unusual for these variations in sales to be up or down 10% to 20% in sequential quarters.

The principal markets served by the Brooks Semiconductor Solutions Group segment include the following:

Each year, the global semiconductor industry makes significant capital investments in equipment to keep up with advancements in semiconductor technology, to add manufacturing capacity and to improve productivity within existing fabs. We are recognized as a market leader in three critical sub-segments: vacuum automation for wafer handling; contamination control; and automation for advanced packaging. As discussed above, the global semiconductor capital equipment industry is cyclical, but we believe that it possesses a long-term growth profile driven by the demand for increasingly sophisticated consumer electronics, automotive and smart appliance products, growth in data centers, the expansion of the Internet-of-Things which increasingly connects various appliances and devices to servers, and mobile platforms. The demand for higher performance, lower power consumption and reduced size for all of these products is enabled by advancements in the technology and processes used for the manufacturing of the devices. We believe this trend continues to provide market opportunities for the Brooks Semiconductor Solutions Group to be a valued partner in providing vacuum automation, carrier contamination control and automation for advanced packaging to support the industry’s needs.

We have been a long-term partner to device manufacturers and original equipment manufacturers, or OEMs, who are the providers of tools to fabs. We maintain collaborative relationships with our customers for the innovative design of solutions that enable our customers to have a valued wafer process advantage and improved cost of ownership in the fab. Our global network of technical specialists provides extensive support to our customers in all regions, including the key semiconductor markets in Korea, Taiwan, China, Japan, Europe and the United States.

The production of advanced semiconductor chips requires many complex and logistically challenging manufacturing activities. Silicon wafers must go through hundreds of process steps in order to create billions of microscopic transistors and connect them in both horizontal and vertical layers to produce a functioning integrated circuit, or IC. These initial fabrication steps, which are referred to in the industry as front-end processes, are repeated many times on a single wafer to create the desired pattern on the silicon wafer. Up to 50% of these processes are performed in tools that operate under vacuum conditions, such as removing, depositing, or measuring materials on wafer surfaces. As the complexity of semiconductors has increased, the number of process steps that occur in a vacuum environment have also increased, resulting in a greater need for vacuum automation technology solutions.

The increase in packing density of components in mobile devices has led the industry to devise new advanced packaging techniques for chip interconnectivity using what is called wafer level packaging, or WLP. This advanced packaging technology is a process of combining multiple wafers together prior to cutting them into pieces and then forming them onto a packaging substrate where they are ultimately divided into the multitude of chips. The recent

increased adoption of WLP has increased the need for a contaminant free and high purity manufacturing environment, resulting in higher demand for our semiconductor offerings tailored to handle full wafer forms.

In addition to the more complex automation challenges brought by technology shifts in device and packaging structures, there is also an increased demand for wafer carrier devices that provide safe and clean transport of wafers between tools during the manufacturing process. Large scale semiconductor fabs may use thousands of these carriers. There is also growing demand for wafer carrier cleaning and conditioning tools used to remove microscopic particles, organic compounds and water that are attracted to the inside surface of the carrier. Automated cleaning and conditioning of the carrier devices are also in demand by customers looking to improve yields.  Similarly, as Lithography also requires cleaner controlled environments, our reticles solutions provide contamination control for highly valued reticles or masks that are used in printing the technological features onto the wafer. 

There are a few adjacent and capital equipment markets that use manufacturing processes similar to the semiconductor manufacturing industry. These markets include microelectromechanical devices, or MEMs, light-emitting diodes, or LEDs, Organic Light Emitting Diodes, or OLEDs, and touch screen technology. These markets and semiconductor capital equipment market share common customers and utilize similar technology applications. For example, LEDs are manufactured using vacuum systems and handling processes similar to those used in semiconductor manufacturing.

We believe the desire for efficient, higher throughput and extremely clean manufacturing for semiconductor wafer fabs, the chip packaging process and other industrial or high performance electronic-based products and processes have created a substantial market for us in the following offerings: (i) substrate handling automation, which is related to moving the wafers in a semiconductor fab, (ii) tool automation, which moves wafers from station-to-station, (iii) vacuum systems technology to create and sustain the clean environment necessary for fabricating various products, and (iv) automated contamination control systems to clean and condition wafer carriers.

Product and Service Offerings

The principal offerings of the Brooks Semiconductor Solutions Group segment consist of: (i) wafer handling robotics and systems and (ii) semiconductor contamination control solutions.  The segment also provides support services, including repair, diagnostic and installation, as well as spare parts and productivity enhancement upgrades to enhance tool productivity.

Wafer handling robotics and systems offerings - include vacuum robots, atmospheric robotic modules, and tool automation systems that provide precision handling and clean wafer environments. In the semiconductor industry, wafer handling robotics represents a critical technology in the highly complex production tools in the world’s most advanced wafer fabs. A typical customer tool is designed and built around a process chamber and uses automation technology to move wafers in and out of the chamber. We specialize in developing and building the automated handling systems and the vacuum technologies used in these tools. We provide individual components within an OEM customer system and complete integrated handling systems. We provide automation products that are used for both atmospheric pressure and vacuum-based tools and are designed to improve performance and productivity of the manufacturing process.

Contamination control solutions - include automated cleaning and inspection systems for wafer carriers, reticle pod cleaners, and stockers, which are automated systems that store wafers or reticles. Our products are used to remove critical airborne contamination within the workflow of the manufacturing process. Our solutions contribute to improving yields, productivity and process stability in the manufacturing process which requires an ultra-clean manufacturing environment.

Within the semiconductor industry, we sell our products and services to the world’s major semiconductor chip makers and OEMs, who provide process tools to the IC makers for the manufacture of chips. Our customers outside the semiconductor industry are broadly diversified. We have major customers in North America, Europe and Asia. Although we ship much of our equipment OEMs in the United States, a large percentage of these OEM tools are ultimately

installed in semiconductor fabs that are outside of North America. We also provide support services to leading OEMs, fabs and foundries across the globe.

Brooks Life Sciences Segment

Brooks Life Sciences is a global leader of comprehensive sample management solutions, providing life science and bioscience customers with complete end-to-end “cold chain of custody” solutions to advance scientific research and support drug development. Our sample management solutions are focused on providing customers with the highest level of sample quality, security, availability, intelligence and integrity throughout the life cycle of samples. Our solutions include automated ultra-cold storage systems, off-site storage services, transport services, laboratory services, consumables and instruments. We also provide informatics solutions that manage samples throughout our customers’ research discovery and development work flows. 

As referenced above, we completed the acquisition of GENEWIZ Group on November 15, 2018, subsequent to the end of our fiscal year 2018. GENEWIZ is a leading global provider of genomic analysis and gene synthesis services.  We believe GENEWIZ’s solutions will significantly expand our offerings to our existing sample management customers. GENEWIZ has been in business since 1999 and provides analysis of millions of samples collected by researchers in pharmaceutical, academic, government, and clinical areas. 

Life Science Market

Brooks Life Sciences serves a broad range of end markets within the life sciences industry to address a confluence of life science industry trends, such as technology, information management and new sophisticated tools and applications. With the advent of biologics and personalized medicine, biological samples have become critical assets to the success of drug and therapy pipelines, and the proper management and protection of these samples has gained increased importance to our customers. We believe this trend has created a sizable market opportunity for Brooks Life Sciences to provide comprehensive sample management solutions.

We believe that the total addressable market for sample management solutions is currently expanding as a result of an increasing number of samples being stored globally. The market is fragmented, so we are initially focused on marketing our products and services within biopharma, which encompasses drug discovery research and development along with related clinical research, to government and commercially-sponsored biobanks, as well as to healthcare and academic research institutions. Together, this presents a significant addressable market for our comprehensive sample management solutions.

Brooks Life Sciences currently serves more than 1200 customers around the globe with sample management solutions, including a majority of the top‑20 global bio-pharmaceutical companies. Due to the comprehensive nature of our sample management solutions that include automated ultra-cold storage management systems, consumables and instruments, as well as services and informatics, we are continuing to expand our customer base and geographic reach to increase our revenue streams and to deliver consistent growth over the long-term.  GENEWIZ has more than 4000 customers globally, which includes many of our sample management customers.

Product and Service Offerings

The principal offerings of the Brooks Life Sciences segment include the following:

Automated cold storage systems – provides stand-alone systems that can store up to two million samples each in temperature ranges from +4°C to -196°C. Our systems provide high throughput capability and optimized storage of multi-format tubes and plates, and increased storage capacity while maintaining consistent temperature profiles across stored samples. We also provide support services for our installed base of storage systems.

Sample management services - includes a complete range of services consisting of on-site and off-site sample storage, cold chain logistics, sample transport and collection relocation, bio-processing solutions (inclusive of sample preparation, and genomic and cell culture analysis), disaster recovery and business continuity, as well as project management and consulting.

Consumables and Instruments - includes a complete range of unique consumables, including multiple formats of racks, tubes, caps, plates and foils, which support storage of samples prior to placing them in ultra-cold storage environment. A comprehensive range of instruments used for labeling, bar coding, capping, de-capping, auditing, sealing, peeling, and piercing tubes and plates complement our consumables.  Our newly acquired 4titude offerings include a range of products aimed at the genomic sample preparation and services market for polymerase chain reactions, or PCR, & sequencing, imaging, plate sealing, liquid handling, forensic and next generation sequencing, or NGS, sample processing.

Informatics - provides sample intelligence software solutions and integration of customer technology. Our informatics suite also provides laboratory work flow scheduling for life science tools and instrument work cells, sample inventory and logistics, environmental and temperature monitoring, clinical trial and consent management, as well as planning, data management, virtualization, and visualization of sample collections marketed under the brands of FreezerPro®, BioBankPro® and BioStudies™.

Genomic Services - provides gene sequencing analysis and gene synthesis, a service which enables the fast expanding research of gene-based healthcare discoveries and therapies through our acquisition of GENEWIZ.  GENEWIZ is a full-service provider of genomic services, with offerings including Sanger sequencing, gene synthesis, molecular biology, high throughput and NGS sequencing, bioinformatics, and good laboratory practices, or GLP, regulatory services.

 

Sales, Marketing and Customer Support

We market and sell the majority of our semiconductor products and services in Asia, Europe, the Middle East and North America through our direct sales organization. The sales process for our products is often multilevel, involving a team comprised of individuals from sales, marketing, engineering, operations and senior management. In many cases we assign a team to a customer and that team engages the customer at different levels of its organization to facilitate planning, provide product customization when required, and ensure open communication and support.

The majority of our life sciences sales are completed through our direct Brooks Life Sciences sales force, particularly our store systems and services. In addition, we supplement the sale of consumables and instruments through distributors that reach a broad range of customers. In regions with emerging life science industries such as China, India and the Middle East, we leverage local distributors to assist with the sales process for store systems. The sales process for our larger sample management systems may take 6 to 18 months to complete and it involves a team typically comprised of individuals from sales, marketing, engineering and senior management.

We typically provide product warranties for a period of one to two years depending on the product type.

Our marketing activities include participation in trade shows, delivery of seminars, participation in industry forums, distribution of sales literature and white papers, publication of press releases and articles in business and industry publications. We maintain sales and service centers in Asia, Europe, the Middle East and North America to enhance support and communication with our customers. These facilities, together with our headquarters, house local support capabilities and demonstration equipment for our customers to evaluate. We encourage customers to discuss features and applications of our demonstration equipment with our engineers who are located at these facilities.

Competition

Brooks Semiconductor Solutions Group segment operates in a variety of market segments of varying breadth with differing competitors and competitive dynamics. The semiconductor and adjacent technology markets, as well as process equipment manufacturing industries, are highly competitive and characterized by continual changes and technology improvements. A significant portion of equipment automation is still done by the OEMs themselves. Our competitors among merchant vacuum robot automation suppliers include primarily Japanese companies, such as Daihen Corporation, Daikin Industries, Ltd., Sumitomo Heavy Industries, and Rorze Corporation. Atmospheric tool automation is typically less demanding technologically, has fewer barriers to entry and has a larger field of competitors. We compete directly with other equipment automation suppliers of atmospheric modules and systems, such as Hirata Corporation, Kawasaki

Heavy Industries, Ltd., Genmark Automation, Inc., Rorze Corporation, Sankyo Seisakusho Co., Ltd., TDK Corporation and Sinfonia Technology Co., Ltd.

We believe our customers will purchase our equipment, automation products and vacuum subsystems as long as our products continue to provide the necessary throughput, reliability, contamination control and accuracy at an acceptable price. We believe our semiconductor offerings are competitive with respect to all of these factors. We cannot guarantee, however, that we will be successful in selling our products to OEMs who currently satisfy a portion of their automation needs in-house or from other independent suppliers, regardless of the performance or price of our products.

Given the breadth of Brooks Life Sciences sample management solutions, there are no direct competitors for the comprehensive set of automation, consumables, instruments, services and informatics solutions we provide to our customers. However, each of the business lines within the Life Sciences business has unique competitors. This would include Hamilton Company and Liconic AG for automation systems, Thermo-Fisher for consumables and services, LabCorp and Covance for services, as well as BGI, Integrated DNA Technologies, Eurofins and GenScript for genomic services.

Research and Development

Our research and development efforts are focused on developing new products and enhancing the functionality, degree of integration, reliability and performance of our existing products. Our engineering, marketing, operations and management personnel leverage their close collaborative relationships with their counterparts in customer organizations in an effort to proactively identify market demands that helps us refocus our research and development investment to match our customers’ demands. With the rapid pace of change that characterizes the markets we serve, it is essential for us to provide high-performance, reliable products in order to maintain our leadership position in both our Brooks Semiconductor Solutions Group and Brooks Life Sciences businesses.

Our research and development spending were $46.9 million, $39.9 million and $44.2 million during fiscal years 2018, 2017 and 2016, respectively.

We invest in research and development initiatives within our Brooks Semiconductor Solutions Group segment to maintain continued leadership positions in the markets we serve. We have recently launched our newest Vacuum Automation platform, MagnaTran LEAP™, for the advanced technologies related to manufacturing 10 nanometer deisgn rule semiconductor chips. MagnaTran LEAP is well positioned to deliver clean, accurate and fast wafer transport for the fast growing Deposition and Etch market.

We have developed and continue to develop automated biological sample storage solutions for operating in ultra-low temperature environments within the Brooks Life Sciences segment. We have developed the Twin-bank platform, including an expansion of the product range for a smaller, more space-efficient automated storage system marketed under the brands of SampleStore™ SE and BioStore™ SE and introduced the BioStore™ III Cryo automated cryogenic sample management system which offer sample automation, cold chain management and improved security and accessibility while maintaining sample protection within the storage environment.

Manufacturing and Service

Our manufacturing operations include product assembly, integration and testing. We implement quality assurance procedures that include standard design practices, reliability testing and analysis, supplier and component selection procedures, vendor controls, manufacturing process controls, and service processes that ensure high-quality performance of our products. Our major manufacturing facilities are located in Chelmsford, Massachusetts; Yongin-City, South Korea; and Manchester, United Kingdom. Our manufacturing operations are designed to provide high quality, low cost, differentiated products to our customers in short lead times through responsive and flexible processes and sourcing strategies. We utilize lean manufacturing techniques for a large portion of our manufacturing, including manufacture of assemblies that we have outsourced to competitive regions, including Asia. We expect to continue to broaden our sourcing of certain portions of our manufacturing process to ensure we continue to provide high quality products at competitive costs. We also believe the continued sourcing of portions of our manufacturing processes in these regions allows us to better serve our customers who have operations in these regions.

We have service and support locations close to our customers to provide rapid response to their service needs. Our principal service and support locations include Chelmsford, Massachusetts; Fremont, California; Chu Bei City, Taiwan; Yongin-City, South Korea; Yokohama, Japan; Shanghai, China; Singapore; Manchester, United Kingdom; and Kiryat-Gat, Israel. Our Brooks Life Sciences segment provides sample management storage and transportation services in Indianapolis, Indiana; Fresno, California; El Segundo, California; Torrance, California; Bronx, New York; Germany, China, and Singapore.

Patents and Proprietary Rights

We rely on patents, trade secret laws, confidentiality procedures, copyrights, trademarks and licensing agreements to protect our technology. Due to the rapid technological change that characterizes the life sciences, semiconductor, adjacent technology markets and related process equipment industries, we believe that the improvement of existing technology, reliance upon trade secrets, unpatented proprietary know-how and the development of new products may be as important as patent protection in establishing and maintaining a competitive advantage. Our policy is to require all employees to enter into proprietary information and nondisclosure agreements to protect trade secrets and know-how. We cannot guarantee that these efforts will meaningfully protect our trade secrets.

As of September 30, 2018, we owned approximately 365 issued U.S. patents, with various corresponding patents issued in foreign jurisdictions. We also had approximately 90 pending U.S. patent applications, with foreign counterparts of certain of these applications having been filed or which may be filed at the appropriate time. Our patents will expire at various dates through 2036.

Backlog

Backlog for the Brooks Semiconductor Solutions Group segment offerings totaled approximately $124 million as of September 30, 2018 as compared to approximately $86 million at September 30, 2017. Backlog for the Brooks Semiconductor Solutions Group segment includes all purchase orders for which our customers have scheduled delivery, regardless of the expected delivery date, and consists principally of orders for products and service agreements. Substantially all of this backlog consists of orders scheduled to be delivered within the next 12 months.

Backlog for the Brooks Life Sciences segment offerings totaled $273 million as of September 30, 2018 as compared to approximately $250 million at September 30, 2017. Backlog for the Brooks Life Sciences segment includes all purchase orders for which customers have scheduled delivery, regardless of the expected delivery date, and consists of orders for products and service agreements. In addition, it includes estimated revenue for future services related to our BioStorage business for which contracts have been secured. Final revenue realized will vary based on volumes, prices, duration, and other factors. Storage contracts vary in length of time, with some being short term and some indefinite. We include the estimated value for time periods in the contract up to a maximum of 5 years.

Geographic Information

Our top 10 customers accounted for approximately 34% of our consolidated revenue in fiscal year 2018. No customers accounted for more than 10% of our consolidated revenue for fiscal year 2018.

Net revenue for the fiscal years ended September 30, 2018, 2017 and 2016 based upon the source of the order by geographic area is as follows (in thousands):

 

The majority of our net revenue in North America is generated in the United States which amounted to $232.7 million, $172.9 million and $156.9 million, respectively, during fiscal years ended September 30, 2018, 2017 and 2016.

The geographic location of an OEM is not indicative of where our products will eventually be used. The geographic area for our orders is determined by the onward sale of an OEM system which incorporates our sub-systems and/or components.

Property, plant and equipment by geographic area as of September 30, 2018 and 2017 are as follows (in thousands):

 

Property, plant and equipment located in the United States amounted to $50.5 million and $50.7 million, respectively, at September 30, 2018 and 2017.

Environmental Matters

We are subject to federal, state, local environmental laws and regulations, and the environmental laws and regulations of the foreign national and local jurisdictions in which we have manufacturing facilities. We believe we are materially in compliance with all such laws and regulations.

Compliance with foreign, federal, state, and local laws and regulations has not had, and is not expected to have, an adverse effect on our capital expenditures, competitive position, financial condition or results of operations.

Employees

At September 30, 2018, we had 1,548 full time employees. In addition, we employ part time workers and contractors. We consider our relationships with our employees to be good.

Available Information

We file annual, quarterly, and current reports, proxy statements, and other documents with the SEC, under the Securities Exchange Act of 1934, as amended, or the Exchange Act. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1‑800‑SEC‑0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including Brooks Automation, Inc., that file electronically with the SEC. The public can obtain any documents that we file with the SEC at www.sec.gov.

Our internet website address is http://www.brooks.com. Through our website, we make available, free of charge, our annual reports on Form 10‑K, quarterly reports on Form 10‑Q, current reports on Form 8‑K and any amendments to those reports, as soon as reasonably practicable after such materials are electronically filed, or furnished to, the SEC. These SEC reports can be accessed through the investors section of our website. The information found on our website is not part of this or any other report we file with or furnish to the SEC.

 

Item 1A.    Risk Factors 

Factors That May Affect Future Results

You should carefully consider the risks described below and the other information in this report before deciding to invest in shares of our common stock. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer. In that event, the market price of our common stock could decline and you could lose all or part of your investment.

Risks Relating to Our Industry

Due in part to the cyclical nature of the semiconductor manufacturing industry and related industries, as well as due to volatility in worldwide capital and equity markets, we have previously incurred operating losses and may have future losses.

Our business is largely dependent on capital expenditures in the semiconductor manufacturing industry and other businesses employing similar manufacturing technologies. The semiconductor manufacturing industry in turn depends on current and anticipated demand for integrated circuits and the products that use them. In recent years, these businesses have experienced unpredictable and volatile business cycles due in large part to rapid changes in demand and manufacturing capacity for semiconductors, and these cycles have had an impact on our business, sometimes causing declines in revenue and operating losses. We could experience future operating losses during an industry downturn. If an industry downturn continues for an extended period of time, our business could be materially harmed. Conversely, in periods of rapidly increasing demand, we could have insufficient inventory and manufacturing capacity to meet our customers’ needs on a timely basis, which could result in the loss of customers and various other expenses that could reduce gross margins and profitability.

We face competition which may lead to price pressure and otherwise adversely affect our sales.

We face competition throughout the world in each of our product and service areas, including from the competitors discussed in Part I, Item 1, “Business - Competition” as well as from internal automation capabilities at larger OEMs. Many of our competitors have substantial engineering, manufacturing, marketing and customer support capabilities. In addition, strategic initiatives in China to encourage local semiconductor manufacturing and supply chain could increase competition from domestic equipment manufacturers in China. We expect our competitors to continue to improve the performance of their current products and services and to introduce new products, services and technologies that could adversely affect sales of our current and future products and services. New products, services and technologies developed by our competitors or more efficient production of their products or provisions of their services could require us to make significant price reductions or decide not to compete for certain orders. If we fail to respond adequately to pricing pressures or fail to develop products with improved performance or better quality services with respect to the other factors on which we compete, we could lose customers or orders. If we are unable to compete effectively, our business and prospects could be materially harmed.

Risks Relating to Our Operations

Our operating results could fluctuate significantly, which could negatively impact our business.

Our revenue, operating margins and other operating results could fluctuate significantly from quarter to quarter depending upon a variety of factors, including:

As a result of these risks, we believe that reference to past performance for comparisons of our revenue and operating results may not be meaningful, and that these comparisons may not be an accurate indicator of our future performance.

If we do not continue to introduce new products and services that reflect advances in technology in a timely and effective manner, our products and services may become obsolete and our operating results will suffer.

Our success is dependent on our ability to respond to the technological changes present in the markets we serve. The success of our product development and introduction of products to market depends on our ability to:

If we cannot succeed in responding in a timely manner to technological and/or market changes or if the new products and services that we introduce do not achieve market acceptance, our competitive position would diminish which could materially harm our business and our prospects.

The global nature of our business exposes us to multiple risks.

During fiscal years ended September 30, 2018 and 2017, approximately 63% and 67% of our revenue was derived from sales outside of North America. We expect that international sales, including increased sales in Asia, will continue to account for a significant portion of our revenue. We maintain a global footprint of sales, service and repair operations. As a result of our international operations, we are exposed to many risks and uncertainties, including:

Negative developments in any of these areas in one or more countries could result in a reduction in demand for our products, the cancellation or delay of orders already placed, threats to our intellectual property, difficulty in collecting receivables, and a higher cost of doing business, any of which could materially harm our business and profitability.

Our business could be materially harmed if we fail to adequately integrate the operations of the businesses that we have acquired or may acquire.

We have made in the past, and may make in the future, acquisitions or significant investments in businesses with complementary products, services and/or technologies. Our acquisitions present numerous risks, including:

If we acquire a new business, we may expend significant funds, incur additional debt or issue additional securities, which may negatively affect our operations and be dilutive to our stockholders. In periods following an acquisition, we

will be required to evaluate goodwill and acquisition-related intangible assets for impairment. If such assets are found to be impaired, they will be written down to estimated fair value, with a charge against earnings. The failure to adequately address these risks or the impairment of any assets could materially harm our business and financial results.

The announcement and pendency of the sale of our semiconductor cryogenics business to Atlas Copco could have an adverse effect on our stock price and/or our business, results of operations, financial condition and prospects.

 

The announcement and pendency of the sale of our semiconductor cryogenics business to Edwards Vacuum LLC (a member of the Atlas Copco Group) pursuant to the asset purchase agreement we entered into on August 27, 2018 could disrupt our business in the following ways, among others:

 

 

Should any of these matters occur, they could adversely affect our stock price or harm our business, results of operations, financial condition and prospects.

 

Obtaining required approvals necessary to satisfy the conditions to the completion of the sale of our semiconductor cryogenics business may delay or prevent completion of the pending sale.

 

The completion of the sale of our semiconductor cryogenics business to Atlas Copco is conditioned upon the approval of the Committee on Foreign Investment in the United States (CFIUS). We intend to pursue all required approvals in accordance with the terms of the asset purchase agreement. No assurance, however, can be given that the required approvals will be obtained and, even if all such approvals are obtained, no assurance can be given as to the terms, conditions and timing of the approvals or that the approvals will satisfy the terms of the asset purchase agreement.

 

Inability to complete the sale of our semiconductor cryogenics business could negatively impact our business, financial condition, results of operations or our stock price.

 

The completion of the sale of our semiconductor cryogenics business to Atlas Copco is subject to a number of conditions, including, among others, clearance under the HSR Act, approval of CFIUS, the receipt of any required third party consents and there not having been a material adverse effect with respect to such business, and there can be no assurance that the conditions to the completion of the pending sale will be satisfied. The asset purchase agreement may also be terminated by us and Atlas Copco in certain specified circumstances, including if the sale has not been consummated by April 15, 2019. While the potential sale is pending and if the pending sale is not completed, we will be subject to several risks, including:

 

Any of these risks could have a material adverse effect on our business, financial condition, results of operations and stock price.

 

Expanding within current markets introduces new competitors and commercial risks.

A key part of our growth strategy is to continue expanding within the life sciences sample management market. As part of this strategy, we expect to diversify our product sales and service revenue by leveraging our core technologies, which requires investments and resources which may not be available as needed. We cannot guarantee that we will be successful in leveraging our capabilities into the life sciences sample management market to meet all the needs of new customers and to compete favorably. Because a significant portion of our growth potential may be dependent on our ability to increase sales within the life science sample management market, our inability to successfully expand within such market may adversely impact future financial results.

Changes in key personnel could impair our ability to execute our business strategy.

The continuing service of our executive officers and essential engineering, technical and management personnel, together with our ability to attract and retain such personnel, is an important factor in our continuing ability to execute our strategy. There is substantial competition to attract such employees and the loss of any such key employees could have a material adverse effect on our business and operating results. The same could be true if we were to experience a high turnover rate among engineering and technical personnel and we were unable to replace them.

Our failure to protect our intellectual property could adversely affect our future operations.

Our ability to compete is significantly affected by our ability to protect our intellectual property. We rely upon patents, trade secret laws, confidentiality procedures, copyrights, trademarks and licensing agreements to protect our technology. Existing trade secret, trademark and copyright laws offer only limited protection. Our success depends in part on our ability to obtain and enforce patent protection for our products both in the United States and in other countries. We own numerous U.S. and foreign patents, and we intend to file additional applications, as appropriate, for patents covering our products and technology. Any issued patents owned by or licensed to us may be challenged, invalidated or circumvented, and the rights under these patents may not provide us with competitive advantages. In addition, the laws of some countries in which our products are or may be developed, manufactured or sold may not fully protect our products. Due to the rapid technological change that characterizes the semiconductor and adjacent technology markets, we believe that the improvement of existing technology, reliance upon trade secrets and unpatented proprietary know-how and the development of new products may be as important as patent protection in establishing and maintaining competitive advantage. To protect trade secrets and know-how, it is our policy to require all technical and management personnel to enter into nondisclosure agreements.

We cannot guarantee that the steps we have taken to protect our intellectual property will be adequate to prevent the misappropriation of our technology. Other companies could independently develop similar or superior technology without violating our intellectual property rights. In the future, it may be necessary to engage in litigation or like activities to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of proprietary rights of others, including our customers. This could require us to incur significant expenses and to divert the efforts and attention of our management and technical personnel from our business operations.

The expiration of our patents over time could lead to an increase of competition and a decline in our revenue.

One of our main competitive strengths is our technology, and we are dependent on our patent rights and other intellectual property rights to maintain our competitive position. Our current patents will expire from time to time through 2035 which could result in increased competition and declines in product and service revenue.

We may be subject to claims of infringement of third-party intellectual property rights, or demands that we license third-party technology, which could result in significant expense and prevent us from using our technology.

There has been substantial litigation regarding patent and other intellectual property rights in the semiconductor-related industries. We have in the past been, and may in the future be, notified that we may be infringing intellectual property rights possessed by third parties. We cannot guarantee that infringement claims by third parties or other claims for indemnification by customers or end-users of our products resulting from infringement claims will not be asserted in the future or that such assertions, whether or not proven to be true, will not materially and adversely affect our business, financial condition and results of operations.

We cannot predict the extent to which we might be required to seek licenses or alter our products so that they no longer infringe the rights of others. We also cannot guarantee that licenses will be available or the terms of any licenses we may be required to obtain will be reasonable. Similarly, changing our products or processes to avoid infringing the rights of others may be costly or impractical and could detract from the value of our products. If a judgment of infringement were obtained against us, we could be required to pay substantial damages and a court could issue an order preventing us from selling one or more of our products. Further, the cost and diversion of management attention brought about by such litigation could be substantial, even if we were to prevail. Any of these events could result in significant expense to us and may materially harm our business and our prospects.

Unexpected events could disrupt our sample storage operations and adversely affect our reputation and results of operations.

Unexpected events, including fires or explosions at our facilities, natural disasters, such as tornadoes, hurricanes and earthquakes, war or terrorist activities, unplanned power outages, supply disruptions and failure of equipment or systems, could adversely affect our reputation and results of operations. Our Brooks Life Sciences’ service customers rely on us to securely store and timely retrieve and transport their critical samples, and these events could result in service disruptions, physical damage to one or more key storage facilities and the customer samples stored in those facilities, the temporary closure of one or more key operating facilities or the temporary disruption of service, each of which could negatively impact our reputation and results of operations. Our primary storage facility is located in Indianapolis, Indiana, an area of the United States that can be prone to tornado and other severe weather events.

If our manufacturing sites were to experience a significant disruption in operations, our business could be materially harmed, while the failure to estimate customer demand accurately could result in excess or obsolete inventory.

We have a limited number of manufacturing facilities for our products and we have moved portions of our manufacturing to third parties, including some in lesser developed countries. If the operations at any one of these facilities were disrupted as a result of a natural disaster, fire, power or other utility outage, work stoppage or other similar event, our business could be seriously harmed because we may be unable to manufacture and ship products and parts to our customers in a timely fashion. The impact of any disruption at one of our facilities may be exacerbated if the disruption occurs at a time when we need to rapidly increase our manufacturing capabilities to meet increased demand or expedited shipment schedules.

Moreover, if actual demand for our products is different than expected, we may purchase more/fewer component parts than necessary or incur costs for canceling, postponing or expediting delivery of such parts. If we purchase inventory in anticipation of customer demand that does not materialize, or if our customers reduce or delay orders, we may incur excess inventory charges. Any or all of these factors could materially and adversely affect our business, financial condition and results of operations.

Our business could be materially harmed if one or more key suppliers fail to continuously deliver key components of acceptable cost and quality.

We currently obtain many of our key components on an as-needed, purchase order basis from numerous suppliers. In some cases we have only a single source of supply for key components and materials used in the manufacturing of our products. Further, we are increasing our sourcing of products in Asia, and particularly in China, and we do not have a previous history of dealing with many of these suppliers. Our inability to obtain components or materials in required quantities or of acceptable cost and quality and with the necessary continuity of supply could result in delays or reductions in product shipments to our customers. In addition, if a supplier or sub-supplier suffers a production stoppage or delay for any reason, including natural disasters such as the tsunamis that affected Japan and Thailand, this could result in a delay or reduction in our product shipments to our customers. Any of these contingencies could cause us to lose customers, result in delayed or lost revenue and otherwise materially harm our business.

Our business could be adversely affected by a decline in the availability of raw materials.

We are dependent on the availability of certain key raw materials and natural resources used in our products and various manufacturing processes, and we rely on third parties to supply us with these materials in a cost-effective and timely manner. Our access to raw materials may be adversely affected if our suppliers’ operations were disrupted as a result of limited or delayed access to key raw materials and natural resources which may result in increased cost of these items. While most of the raw materials used in our products and various manufacturing processes are commercially available, we rely in some cases on materials that have a limited supply and are considered rare Earth elements, such as helium. If the supply of these elements is drastically reduced, it may lead to price increases which could result in higher costs of our products and corresponding revenue declines and have a material adverse impact on our business, financial condition and results of operations.

Our outsource providers may fail to perform as we expect.

Outsource providers have played and will continue to play a key role in our manufacturing operations and in many of our transactional and administrative functions, such as information technology and facilities management. Although we attempt to select reputable providers and secure their performance on terms documented in written contracts, it is possible that one or more of these providers could fail to perform as we expect and such failure could have an adverse impact on our business.

Our business relies on certain critical information systems and a failure or breach of such a system could harm our business and results of operations and, in the event of unauthorized access to a customer’s data or our data, incur significant legal and financial exposure and liabilities.

We maintain and rely upon certain critical information systems for the effective operation of our business. These information systems include telecommunications, the internet, our corporate intranet, various computer hardware and software applications, network communications and e-mail. These information systems may be owned and maintained by us, our outsource providers or third parties such as vendors and contractors. These information systems are subject to attacks, failures, and access denials from a number of potential sources including viruses, destructive or inadequate code, power failures, and physical damage to computers, hard drives, communication lines and networking equipment. To the extent that these information systems are under our control, we have implemented security procedures, such as virus protection software and emergency recovery processes, to mitigate the outlined risks. However, security procedures for information systems cannot be guaranteed to be failsafe and our inability to use or access these information systems at critical points in time, or unauthorized releases of confidential information, could unfavorably impact the timely and efficient operation of our business.

Confidential information stored on these information systems could also be compromised. If a third party gains unauthorized access to our data, including any information regarding our customers, such security breach could expose us to a risk of loss of this information, loss of business, litigation and possible liability. These security measures may be breached as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance or otherwise. Additionally, third parties may fraudulently attempt to induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our

customers’ data or our data, including our intellectual property and other confidential business information, or our information technology systems. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any security breach could result in a loss of confidence by our customers, damage our reputation, disrupt our business, lead to legal liability and negatively impact our future sales.

Our goodwill and intangible assets may become impaired.

As of September 30, 2018, we had $255.9 million of goodwill and $100.0 million in net intangible assets as a result of our acquisitions. We periodically review our goodwill and the estimated useful lives of our identifiable intangible assets, taking into consideration any events or circumstances that might result in either a diminished fair value, or for intangible assets, a revised useful life. These events and circumstances include significant changes in the business climate, legal factors, operating performance indicators, advances in technology and competition. Any impairment or revised useful life could have a material and adverse effect on our financial position and results of operations, and could harm the trading price of our common stock.

Changes in tax rates or tax regulation could affect results of operations.

As a global company, we are subject to taxation in the United States and various other countries. Significant judgment is required to determine and estimate worldwide tax liabilities. Our future annual and quarterly effective tax rates could be affected by numerous factors, including changes in the: applicable tax laws; composition of pre-tax income in countries with differing tax rates; and/or establishment of a valuation allowance against deferred tax assets based on the assessment of their realizability prior to expiration. In addition, we are subject to regular examination by the Internal Revenue Service and state, local and foreign tax authorities. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Although we believe our tax estimates are reasonable, there can be no assurance that any final determination will not be materially different from the treatment reflected in our historical income tax provisions and accruals, which could materially and adversely affect our financial condition and results of operations.

The implementation of tariffs and export controls on our products may have a material impact on our business.

Our global business operations and supply chain may be disrupted by the additional tariffs imposed on our products.

As of July 6, 2018, the United States imposed a 25% tariff on a list of products that included certain parts and components made in China and imported into the United States for incorporation with our products.  We are implementing operational changes that should mitigate the impact of the 25% tariff on our imports into the United States from China.  As a result of these operational changes, we do not expect that the increase in these tariffs will have a significant impact on our business, supply chain, operations or financial results.  However, if the United States increases the amount of these tariffs or adds additional items to the list of products subject to tariff, tariffs could materially adversely affect our business, financial results and operations.

In addition to the increased tariffs imposed by the United States, China has implemented additional retaliatory tariffs on products made in the United States.  While these tariffs currently do not materially impact us, if China increases its tariffs or places additional tariffs or other nations impose tariffs on our products, it could materially adversely affect our business, financial results and operations.

We are subject to numerous governmental regulations.

We are subject to federal, state, local and foreign regulations, including environmental regulations and regulations relating to the design and operation of our products and control systems. We might incur significant costs as we seek to ensure that our products meet safety and emissions standards, many of which vary across the states and countries in which our products are used. In the past, we have invested significant resources to redesign our products to comply with these directives. Compliance with future regulations, directives, and standards could require us to modify or redesign

some products, make capital expenditures, or incur substantial costs. If we do not comply with current or future regulations, directives, and standards:

Any of these events could materially and adversely affect our business, financial condition and results of operations.

Regulations and customer demands related to conflict minerals may adversely affect us.

The Dodd-Frank Wall Street Reform and Consumer Protection Act imposes disclosure requirements regarding the use in components of our products of “conflict minerals” mined from the Democratic Republic of Congo and adjoining countries, whether the components of our products are manufactured by us or third parties. This requirement could affect the pricing, sourcing and availability of minerals used in the manufacture of components we use in our products. In addition, there are additional costs associated with complying with the disclosure requirements and customer requests, such as costs related to our due diligence to determine the source of any conflict minerals used in our products. We may face difficulties in satisfying customers who may require that all of the components of our products are certified as conflict mineral free and/or free of numerous other hazardous materials.

Unfavorable currency exchange rate fluctuations may lead to lower operating margins, or may cause us to raise prices, which could result in reduced sales.

Currency exchange rate fluctuations could have an adverse effect on our sales and results of operations and we could experience losses with respect to forward exchange contracts into which we may enter. Unfavorable currency fluctuations could require us to increase prices to foreign customers, which could result in lower net sales by us to such customers. Alternatively, if we do not adjust the prices for our products in response to unfavorable currency fluctuations, our results of operations could be materially and adversely affected. In addition, most sales made by our foreign subsidiaries are denominated in the currency of the country in which these products are sold and the currency they receive in payment for such sales could be less valuable as compared to the U.S. dollar at the time of receipt as a result of exchange rate fluctuations. From time to time, we enter into forward exchange contracts to reduce currency exposure. However, we cannot be certain that our efforts will be adequate to protect us against significant currency fluctuations or that such efforts will not expose us to additional exchange rate risks, which could materially and adversely affect our results of operations.

Risk related to the referendum of the United Kingdom’s membership in the European Union

In June 2016, a majority of voters in the United Kingdom voted “for” the Referendum of the United Kingdom’s Membership in the European Union, referred to as Brexit, approving the exit of the United Kingdom from the European Union, which triggered volatility in exchange rate fluctuations of the U.S. dollar against foreign currencies in which we conduct our business. We may experience volatility in exchange rates as the United Kingdom negotiates its exit from the European Union. As described in Item 7A, "Quantitative and Qualitative Disclosures About Market Risk", of this Form 10‑K, most of our foreign currency denominated transactions are conducted in Euros, British Pounds and a variety of Asian currencies. Sales in currencies other than the U.S. dollar were approximately 34% and 38%, respectively, of our total sales during fiscal years 2018 and 2017. If a dollar strengthens, our revenue denominated in foreign currencies may be adversely affected when translated into U.S. dollars.

The announcement of Brexit has also created global economic uncertainty, which may cause our customers to closely monitor their costs and reduce their spending on our products and services. The effects of Brexit depend on any agreements the United Kingdom makes to retain access to European Union markets either during a transitional period or more permanently. The measures could potentially disrupt the markets we serve and may cause us to lose customers and employees. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which E.U. laws to replace or replicate. Any of these effects of Brexit, among others, could adversely affect our business, results of operations and financial condition.

Our indebtedness may adversely affect our ability to operate our business, generate cash flows and make payments on such indebtedness

On October 4, 2017, we entered into a $200.0 million Senior Secured Term Loan Facility, or term loan, with Morgan Stanley Senior Funding, Inc., JPMorgan Chase Bank, N.A. and Wells Fargo Securities, LLC. The term loan matures and becomes fully payable on October 4, 2024. We would be required to redeem the term loan at the principal amount then outstanding upon occurrence of certain events, as described in the term loan agreement. For further information on this transaction, please refer to Note 11, "Debt" to our Consolidated Financial Statements included in Item 8 "Financial Statements and Supplementary Data" of this Form 10‑K.

Our ability to pay interest and repay the principal for our indebtedness is dependent upon our ability to manage our business operations and maintain sufficient liquidity to service such debt. The loan borrowings are subject to variable interest rates which create exposure to interest rate risk. Interest rate increases may result in higher cost of servicing the loan and reduce our profitability and cash flows. The terms of our debt covenants could limit our ability to raise additional funds and the manner in which we conduct our business. We have the ability to refinance the term loan and obtain additional indebtedness as long as we maintain a certain level of liquidity and earnings, as specified in the loan agreement. If our liquidity and earnings are reduced below a certain level, we will have limited ability to service the term loan and obtain additional debt financing. Our failure to comply with these restrictive covenants could also result in an event of default which, if not cured or waived, could result in the acceleration of all or a portion of our indebtedness.  Accordingly, a default would have a material adverse effect on our business and our lender would have the right to exercise its rights and remedies to collect, which would include the right to foreclose on our assets.

 

Risks Relating to Our Customers

Because we rely on a limited number of customers for a large portion of our revenue, the loss of one or more of these customers could materially harm our business.

We receive a significant portion of our revenue in each fiscal period from a relatively limited number of customers, and that trend is likely to continue. Sales to our ten largest customers accounted for approximately 34%, 35% and 35%, respectively, of our total revenue in the fiscal years ended September 30, 2018, 2017 and 2016. The loss of one or more of these major customers, a significant decrease in orders from one of these customers, or the inability of one or more customers to make payments to us when they are due could materially affect our revenue, business and reputation. In addition, there has been and may continue to be significant consolidation among some of our largest OEM customers, which could lead to increased pressure to reduce the price of our products and/or decreased market share of our products with the combined companies.

Because of the lengthy sales cycles of many of our products, we may incur significant expenses before we generate any revenue related to those products.

Our customers may need several months to test and evaluate our products. This increases the possibility that a customer may decide to cancel an order or change its plans, which could reduce or eliminate our sales to that customer. The impact of this risk can be magnified during the periods in which we introduce a number of new products, as has been the case in recent years. As a result of this lengthy sales cycle, we may incur significant research and development expenses, and selling, general and administrative expenses before we generate the related revenue for these products, and we may never generate the anticipated revenue if our customer cancels an order or changes its plans.

In addition, many of our products will not be sold directly to the end-user but will be components of other products manufactured by OEMs. As a result, we rely on OEMs to select our products from among alternative offerings to be incorporated into their equipment at the design stage; so-called design-ins. The OEMs’ decisions often precede the generation of volume sales, if any, by a year or more. Moreover, if we are unable to achieve these design-ins from an OEM, we would have difficulty selling our products to that OEM because changing suppliers after design-ins involves significant cost, time, effort and risk on the part of that OEM.

Customers generally do not make long term commitments to purchase our products and our customers may cease purchasing our products at any time.

Sales of our products are often made pursuant to individual purchase orders and not under long-term commitments and contracts. Our customers frequently do not provide any assurance of minimum or future sales and are not prohibited from purchasing products from our competitors at any time. Accordingly, we are exposed to competitive pricing pressures on each order. Our customers also engage in the practice of purchasing products from more than one manufacturer to avoid dependence on sole-source suppliers for certain of their needs. The existence of these practices makes it more difficult for us to increase price, gain new customers and win repeat business from existing customers.

We may face claims for liability related to damages of customer materials attributed to the failure of our products or services, exposing us to significant financial or reputational harm.

Our automation products for the semiconductor manufacturing market are used in the handling and movement of silicon wafers at various points in the production process, and our automated cold storage systems for the life sciences sample management market are used in the handling, movement and storage of biological and chemical samples. We also provide sample storage services to customers where we store their biological and chemical samples at our facilities. In any case, damage to our customers’ materials may be attributed to a failure of our products or services which could lead to claims for damages made by our customers and could also harm our relationship with our customers and damage our reputation in each of these industries, resulting in material harm to our business.

Risks Relating to Owning Our Securities

Our stock price is volatile.

The market price of our common stock has fluctuated widely. From the beginning of fiscal year 2017 through the end of fiscal year 2018, our stock price fluctuated between a high of $39.60 per share and a low of $12.89 per share. Consequently, the current market price of our common stock may not be indicative of future market prices, and we may be unable to sustain or increase the value of an investment in our common stock. Factors affecting our stock price may include:

In addition, the stock market has in the past experienced significant price and volume fluctuations. These fluctuations have particularly affected the market prices of the securities of high technology companies like ours. These market fluctuations could adversely affect the market price of our common stock.

We may not pay dividends on our common stock.

Holders of our common stock are only entitled to receive dividends when and if they are declared by our Board of Directors. Although we have declared cash dividends on our common stock for the past several years, we are not

required to do so and may reduce or eliminate our cash dividends in the future. This could adversely affect the market price of our common stock.

Provisions in our charter documents and, Delaware law may delay or prevent an acquisition of us, which could decrease the value of your shares.

Our restated certificate of incorporation and by-laws and Delaware law contain provisions that could make it harder for a third party to acquire us without the consent of our Board of Directors. These provisions include limitations on actions by our stockholders by written consent, the inability of stockholders to call special meetings and the potential for super majority votes of our stockholders in certain circumstances. In addition, our Board of Directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer.

Our restated certificate of incorporation makes us subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits publicly held Delaware corporations to which it applies from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. This provision could discourage others from bidding for our shares of common stock and could, as a result, reduce the likelihood of an increase in the price of our common stock that would otherwise occur if a bidder sought to buy our common stock.

Delaware law also imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. Although we believe these provisions provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our Board of Directors, these provisions apply even if the offer may be considered beneficial by stockholders. If a change of control or change in management is delayed or prevented, the market price of our common stock could decline.

Our certificate of incorporation authorizes the issuance of shares of blank check preferred stock.

Our certificate of incorporation provides that our Board of Directors is authorized to issue from time to time, without further stockholder approval, up to 1,000,000 shares of preferred stock in one or more series and to fix and designate the rights, preferences, privileges and restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, redemption rights and terms of redemption and liquidation preferences. Such shares of preferred stock could have preferences over our common stock with respect to dividends and liquidation rights. Our issuance of preferred stock may have the effect of delaying or preventing a change in control. Our issuance of preferred stock could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of common stock. The issuance of preferred stock could have the effect of decreasing the market price of our common stock.

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

Our corporate headquarters and primary manufacturing/research and development facilities are currently located in three buildings in Chelmsford, Massachusetts.

We maintained the following principal facilities as of September 30, 2018:

 

Our Brooks Semiconductor Solutions Group segment utilizes the facilities in Chelmsford, Massachusetts; Fremont, California; South Korea, Germany and Taiwan. Our Brooks Life Sciences segment utilizes the facilities in Manchester, United Kingdom; Indianapolis, Indiana; Chelmsford, Massachusetts; Bronx, New York; and Fremont, California.

We maintain additional sales, support and training offices in Texas, Europe (France and Germany), Asia (China, Japan and Singapore) and the Middle East (Israel). We also maintain sample storage facilities in China, Germany and Singapore.

 

Item 3.    Legal Proceedings 

We are subject to various legal proceedings, both asserted and unasserted, that arise in the ordinary course of business. We cannot predict the ultimate outcome of such legal proceedings or in certain instances provide reasonable ranges of potential losses. However, as of the date of this report, we believe that none of these claims will have a material adverse effect on our consolidated financial condition or results of operations. In the event of unexpected subsequent developments and given the inherent unpredictability of these legal proceedings, there can be no assurance that our assessment of any claim will reflect the ultimate outcome and an adverse outcome in certain matters could, from time-to-time, have a material adverse effect on our consolidated financial condition or results of operations in particular quarterly or annual periods.

Item 4.    Mine Safety Disclosures

Not applicable.

PART II

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the Nasdaq Stock Market LLC under the symbol “BRKS.” The following table sets forth the high and low intraday sales prices per share of our common stock as reported by the Nasdaq Stock Market LLC and the cash dividends declared per common share for the periods indicated:

 

Number of Holders

As of November 9, 2018, there were 535 holders of record of our common stock.

Dividend Policy

Dividends are declared at the discretion of our Board of Directors and depend on actual cash flow from operations, our financial condition, capital requirements and any other factors our Board of Directors may consider relevant. Future dividend declarations, as well as the record and payment dates for such dividends, will be determined by our Board of Directors on a quarterly basis.

On November 6, 2018, our Board of Directors approved a cash dividend of $0.10 per share payable on December 20, 2018 to common stockholders of record on December 7, 2018.

Comparative Stock Performance

The following graph compares the cumulative total shareholder return (assuming reinvestment of dividends) from investing $100 on September 30, 2013, and plotted at the last trading day of each of the fiscal years ended September 30, 2014, 2015, 2016, 2017 and 2018, in each of (i) our Common Stock; (ii) the Nasdaq/NYSE MKT/NYSE Index of companies; (iii) a peer group for the fiscal year ended September 30, 2018 (“Current Peer Group”), and  (iv) a peer group for the fiscal year ended September 30, 2016 (“Prior Peer Group”).

The Current Peer Group for the year ended September 30, 2018 is comprised of Advanced Energy Industries, Inc., Axcelis Technologies Inc., Bio Rad Laboratories Inc., Bruker Corp., Cabot Microelectronics Corp., Coherent Inc., Entegris, Inc., Formfactor Inc., Haemonetics Corp., MKS Instruments, Inc., MTS Instruments, Inc., Novanta Inc., Rudolph Technologies Inc., Ultra Clean Holdings, Inc., Varex Imaging Corp. and Veeco Instruments Inc. The Prior Peer Group is comprised of Advanced Energy Industries, Inc., Bruker Corp., Entegris, Inc., Formfactor Inc., MKS Instruments, Inc., Photronics, Inc., Teradyne Inc., Ultra Clean Holdings, Inc., Veeco Instruments Inc. and Xcerra Corp. The Current Peer Group was expanded to include life sciences companies due to the growing percentage of our revenue from the Brooks Life Sciences segment.

The stock price performance on the graph below is not necessarily indicative of future price performance.

 

The information included under the heading “Comparative Stock Performance” in Item 5 of "this report" shall not be deemed to be “soliciting material” or subject to Regulation 14A, shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act.

Issuer’s Purchases of Equity Securities

On September 29, 2015, our Board of Directors approved a share repurchase program for up to $50.0 million worth of our common stock. The timing and amount of any shares to be repurchased under this program will be based on market and business conditions, legal requirements and other factors and may be commenced or suspended at any time at our discretion. There were no shares repurchased under this program during fiscal year ended September 30, 2018.

Item 6.    Selected Financial Data 

The selected consolidated financial data (1)(5) set forth below should be read in conjunction with our Consolidated Financial Statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere in this report.

 

 

 

 

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, describes principal factors affecting the results of our operations, financial condition and liquidity, as well as our critical accounting policies and estimates that require significant judgment and thus have the most significant potential impact on our Consolidated Financial Statements. Our MD&A is organized as follows:

You should read the MD&A in conjunction with our Consolidated Financial Statements and related notes in this Form 10-K. In addition to historical information, the MD&A contains forward-looking statements that involve risks and uncertainties. You should read “Information Related to Forward-Looking Statements” included above in this Form 10‑K and "Item 1A. Risk Factors" for a discussion of important factors that could cause our actual results to differ materially from our expectations.

OVERVIEW

General

We are a leading global provider of automation and cryogenic solutions for multiple markets. We primarily serve two distinct and unrelated markets: the semiconductor capital equipment market and the life sciences sample management market. We believe our leadership positions and our global support capability in each of these markets makes us a valued business partner to the largest semiconductor capital equipment and device makers, and pharmaceutical and life science research institutions in the world. Our offerings are also applied to other adjacent technology and industrial markets, and we provide customer support services globally.

In the semiconductor capital equipment market, equipment productivity and availability are critical factors for our customers, who typically operate equipment under demanding temperature and/or pressure environments. We are a leader in wafer automation and contamination controls solutions and services that are designed to improve throughput, yield, and cost of ownership of tools in semiconductor fabs. Our product offerings include vacuum and atmospheric robots, turnkey vacuum and atmospheric wafer handling systems, as well as wafer carrier cleaning and reticle storage systems. We also capture the complete life cycle of value through our global service network of expert application and field engineers who are located close to our customers. Our services include rapid refurbishment of robots to stringent specifications, upgrades to improve equipment productivity, and proactive monitoring and diagnostics for predictive risk management and improved up-time of the installed base.  Although the demand for semiconductors and semiconductor manufacturing equipment is cyclical resulting in periodic expansions and contractions, we expect the semiconductor equipment market to remain one of our principal markets as we continue making investments to maintain and grow our semiconductor product and service offerings. A majority of our research and development spending advances our current product lines and drives innovations for new product offerings. We invest in research and development initiatives within the Brooks Semiconductor Solutions Group segment to maintain continued leadership position in the markets we serve. We have recently launched our newest Vacuum Automation platform, MagnaTran LEAP™, for the rapidly emerging advanced technologies related to manufacturing 10 nanometer design rul semiconductor chips. MagnaTran LEAP is well positioned to deliver clean, accurate and fast wafer transport available for the fast-growing Deposition and Etch markets. In addition, we expect to continue to support and expand our technology and product offerings for the semiconductor market through acquisitions. In 2018, we acquired Tec-Sem Group AG, or Tec-Sem, a Switzerland-based provider of semiconductor fabrication automation equipment with a focus on reticle management.  The acquisition is expected to enhance our contamination controls solutions offerings.

In the life sciences sample management market, we utilize our core competencies and capabilities in automation and cryogenics to provide comprehensive bio-sample management solutions to a broad range of end markets within the life sciences industry. Our offerings include automated ultra-cold storage freezers, consumable sample storage containers, instruments which assist in the workflow of sample management, and both on-site and off-site full sample management services. We expect the life sciences sample management market to remain one of our principal markets for our product and service offerings and provide favorable opportunities for the growth of our overall business. Over the past several years, we have acquired and developed essential capabilities required to strategically address the sample management needs across multiple end markets within the life sciences industry.

In November of 2015, we acquired BioStorage Technologies, a full-service outsourcing sample management business, for a total purchase price of $125.2 million, net of cash acquired. The acquisition provided us with the capability to support customers with an integrated, comprehensive set of sample management products, services and solutions. In July 2017, we acquired substantially all of the assets and liabilities of Pacific Bio-Material Management, Inc., or PBMMI, and Novare, LLC, or Novare, for a total purchase price of $34.1 million, net of cash acquired. PBMMI and Novare provide storage, transportation, management, and cold chain logistics of biological materials. The acquisition is expected to expand our existing capabilities with respect to sample management and integrated cold chain storage and transportation solutions. We acquired Cool Lab, LLC, a subsidiary of BioCision, LLC, which provides a range of cryogenic product solutions that assist in managing the temperature stability of therapeutics, biological samples and related biomaterials in ultra-cold environments, in November 2016. We held an equity interest in BioCision prior to the acquisition of Cool Lab and collaborated in the development of advanced solutions in temperature-controlled environments.  The aggregate purchase price of $15.2 million consisted of a cash payment of $4.8 million, a liability to the seller of $0.1 million and a non-cash consideration of $10.3 million measured at fair value on the acquisition date. We have made several investments in developing new consumable and instrument offerings since the acquisitions of FluidX and Cool Lab.

In fiscal year 2017, we launched BioStudies, a bioinformatics sample intelligence software platform that enables customers to manage their global samples. In August 2017, we acquired certain assets and liabilities related to FreezerPro® web-based software platform from RURO, Inc. for a total purchase price of $5.5 million. RURO, Inc. provides sample management software across multiple end markets, including academic research, government, pharmaceutical, biotech, and healthcare. We expect the acquisition of FreezerPro to complement our BioStudies offerings and extend our informatics solutions to address laboratories, biobanks or enterprises that manage biological samples. In October 2017, we acquired all of the outstanding capital stock of 4titude Limited, or 4titude, a U.K.-based manufacturer of scientific consumables for biological sample materials used in a variety of genomic and DNA analytical applications, for a total purchase price of $65.1 million, net of cash acquired. The acquisition has expanded our existing offerings of consumables and instruments within the Brooks Life Sciences segment. In April 2018, we acquired BioSpeciMan Corporation, or BioSpeciMan, a Canadian provider of storage services for biological sample materials.  We made a total cash payment of $5.2 million, net of cash acquired and subject to working capital adjustments. The acquisition is expected to expand customer relationships and geographic reach within our growing sample management storage services business.

On September 26, 2018, we entered into a definitive agreement to acquire GENEWIZ, a leading provider of genomic services, based in New Jersey with operations throughout the United States, Asia, and Europe for a cash price of $450.0 million, subject to customary adjustments.  We completed this acquisition on November 15, 2018.  Please refer to Note 23, “Subsequent Events” to our Consolidated Financial Statements included under “Item 8, Financial Statements and Supplementary Data” of this Form 10-K.

Since entering the life sciences industry, we have also strengthened and broadened our product portfolio and market reach by investing in internal product development. During fiscal years 2018, 2017 and 2016, more than 24% of our cumulative research and development spending was focused on innovating and advancing solutions in the life sciences sample management market. We expect to continue investing in research and development and making strategic acquisitions with the objective of expanding our offerings in the life sciences sample management market. Within the Brooks Life Sciences segment, we have developed and continue to develop automated biological sample storage solutions for operating in ultra-low temperature environments. We have developed the Twin-bank platform which provides -20°C and -80°C ultracold storage and the BioStore™ III Cryo for -190°C cyrogenic storage.

Recent Developments

In the fourth quarter of fiscal year 2018, we entered into a definitive agreement to sell our semiconductor cryogenics business to Edwards Vacuum LLC (a member of the Atlas Copco Group) for approximately $675.0 million in cash, subject to customary adjustments.  We originally acquired the cryogenics business in 2005 as part of the acquisition of Helix Technology Corporation.  The closing of our sale of the cryogenics business is subject to various closing conditions and regulatory approvals. The semiconductor cryogenics business has been classified as discontinued operations and, unless otherwise noted, the description of our business in this report relates solely to our continuing operations and does not include the operations of our semiconductor cryogenics business.

 

As discussed above, on November 15, 2018, we completed our acquisition of GENEWIZ for a cash purchase price of $450.0 million, which is subject to customary adjustments. We financed a portion of the cash purchase price through a new $350.0 million senior secured incremental term loan, under our Credit Agreement, dated October 4, 2017. Please refer to the "Liquidity and Capital Resources" section below for a detailed description of the senior secured incremental term loan.

Segments

We have two operating and reportable segments consisting of Brooks Semiconductor Solutions Group and Brooks Life Sciences. For additional information on our operating segments and the related restructuring actions, as well as segment revenues and their operating results, please refer to Note 17, "Restructuring and Other Charges" and Note 20, "Segment and Geographic Information" to our Consolidated Financial Statements included in Item 8 "Financial Statements and Supplementary Data" of this Form 10‑K.

The Brooks Semiconductor Solutions Group segment provides a variety of products, services and solutions that enable improved throughput and yield in controlled operating environments, as well as an extensive range of support services. The solutions include atmospheric and vacuum robots, robotic modules, tool automation systems, and contamination control of wafer carrier front opening unified pods. The support services include repair services, diagnostic support services, and installation services in support of the products, which enable our customers to maximize process tool uptime and productivity. This segment also provides end-user customers with spare parts and productivity enhancement upgrades to maximize tool productivity.

The Brooks Life Sciences segment provides comprehensive life cycle sample management solutions for life science and bioscience customers to advance scientific research and support drug development. The segment’s product offerings include automated cold sample management systems for compound and biological sample storage, equipment for sample preparation and handling, consumables, and informatics that help customers manage samples throughout their research discovery and development work flows. The segment’s service offerings include sample storage and support services provided to a wide range of life science customers, including pharmaceutical companies, biotechnology companies, biobanks and research institutes.

Business and Financial Performance

Fiscal Year Ended September 30, 2018 Compared to Fiscal Year Ended September 30, 2017

Results of Operations - We reported revenue of $631.6 million for fiscal year 2018 compared to $527.5 million for fiscal year 2017, an increase of $104.1 million, or 20%.  Gross margin was 39.0% for fiscal year 2018 compared to 37.7% for fiscal year 2017, an increase in gross profit of $47.2 million. Operating expenses were $214.7 million for fiscal year 2018 compared to $184.6 million for fiscal year 2017, an increase of $30.1 million.  Operating income was $31.4 million for fiscal year 2018 compared to $14.3 million for fiscal year 2017, an increase of $17.1 million, which was primarily attributable to the revenue growth and gross margin improvement, partially offset by higher operating expenses.  We generated income from continuing operations of $67.7 million during fiscal year 2018 as compared to $10.7 million in fiscal year 2017.  This increase was primarily attributable to the decrease in income taxes of $50.6 million driven by the release of the tax valuation allowance of $77.2 million and an increase in operating income of $17.1 million.  These increases were partially offset by higher net non-operating expenses of $11.2 million compared to the prior fiscal year, primarily related to increased interest expense of $9.1 million due to the term loan, higher foreign exchanges losses of $1.0 million and the impact of a $1.8 million gain recorded on the settlement of our investment in Biocision, LLC, during fiscal year 2017.  Please refer to the "Results of Operations" section below for a detailed discussion of our financial results for the fiscal year 2018 compared to fiscal year 2017.

Cash Flows and Liquidity - Cash and cash equivalents and marketable securities were $251.2 million at September 30, 2018 as compared to $104.3 million at September 30, 2017. The increase in cash and cash equivalents and marketable securities of $146.9 million was primarily attributable to cash inflows of $197.6 million related to proceeds from the term loan and cash inflows of $74.0 million generated from our operating activities, partially offset by cash payments of $85.8 million related to acquisitions, cash outflows of $28.3 million related to dividend payments made to

our shareholders, as well as capital expenditure payments of $12.8 million.  Please refer to the "Liquidity and Capital Resources" section below for a detailed discussion of our liquidity and changes in cash flows for fiscal year 2018 compared to fiscal year 2017.

Fiscal Year Ended September 30, 2017 Compared to Fiscal Year Ended September 30, 2016

Results of Operations- We generated revenue of $527.5 million during fiscal year 2017 compared to $434.0 million during fiscal year 2016, an increase of $93.5 million, or 22%. Gross margin was 37.7% for fiscal year 2017 as compared to 36.1% for fiscal year 2016, an increase in gross profit of $42.2 million. Operating expenses were $184.6 million during fiscal year 2017 as compared to $173.7 million during fiscal year 2016, an increase of $10.8 million. Operating income was $14.3 million during fiscal year 2017 as compared to a loss of $17.1 million during fiscal year 2016, an increase of $31.4 million, which was primarily attributable to the revenue growth and gross margin improvement, partially offset by higher operating expenses. We generated income from continuing operations of $10.7million during fiscal year 2017 as compared to a loss of $85.4 million during fiscal year 2016. This increase of $96.1 million was primarily attributable to a lower income tax provision of $62.9 million which is mostly due to a $76.5 million valuation allowance recorded against U.S. net deferred tax assets during fiscal year 2016, as well as higher operating income of $31.4 million during fiscal year 2017. Please refer to the "Results of Operations" section below for a detailed discussion of our financial results for the fiscal year 2017 compared to fiscal year 2016.

Cash Flows and Liquidity - Cash and cash equivalents and marketable securities were $104.3 million at September 30, 2017 as compared to $91.2 million at September 30, 2016. The increase in cash and cash equivalents and marketable securities of $13.1 million was primarily attributable to cash inflows of $96.2 million generated from our operating activities, partially offset by cash outflows related to acquisitions of $44.8 million, dividends payments to our shareholders of $27.9 million, and capital expenditure payments of $12.7 million during fiscal year 2017.  Please refer to the "Liquidity and Capital Resources" section below for a detailed discussion of our liquidity and changes in cash flows for fiscal year 2017 compared to fiscal year 2016.

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, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue, intangible assets, goodwill, inventories, income taxes, and stock-based compensation. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. We evaluate current and anticipated worldwide economic conditions, both in general and specifically in relation to the semiconductor and life science industries, that serve as a basis for making judgments about the carrying values of assets and liabilities that are not readily determinable based on information from other sources. Actual results may differ from these estimates under different assumptions or conditions that could have a material impact on our financial condition and results of operations.

We believe that the assumptions and estimates associated with the following critical accounting policies involve significant judgment and thus have the most significant potential impact on our Consolidated Financial Statements.

Revenue Recognition

We generate revenue from the sale of products and services. A description of our revenue recognition policies is included in the Note 2, “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements included in Item 8 "Financial Statements and Supplementary Data" of this Form 10‑K.

Although most of our sales agreements contain standard terms and conditions, certain agreements contain multiple elements or non-standard terms and conditions. We exercise judgment in interpreting the commercial terms and determining when all revenue recognition criteria have been met to ensure revenue was recognized in the appropriate accounting period. Moreover, judgment is required to properly identify the units of accounting in multiple element arrangements and determine the manner in which revenue should be allocated among separate units of accounting. We exercise judgment in determining whether the deliverables specified in these arrangements should be treated as separate

units of accounting for revenue recognition purposes, and, if so, how the consideration should be allocated among the elements and when revenue for each element should be recognized. We allocate revenue to each element in the contractual arrangement based on the selling price hierarchy that may require us to estimate the selling price of certain deliverables that are not sold separately or where third-party evidence of pricing is not observable. Our estimate of selling price impacts the amount and timing of revenue recognized in multiple element arrangements. While changes in the allocation of the estimated sales price between the units of accounting will not affect the total revenue amount recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition that could have a material effect on our financial condition and results of operations.

We recognize revenue for certain arrangements based on the percentage of completion method and develop profit estimates for long-term contracts based on total revenue expected to be generated from the project and total costs anticipated to be incurred. Significant judgment is required in estimating such total costs and measuring the progress of the project completion, as well as whether a loss is expected to be incurred on the contract. We use certain assumptions and develop estimates based on a number of factors, including the degree of required product customization and the customer’s existing environment based on installation work, as well as our historical experience, project plans and an assessment of the risks and uncertainties inherent in the contract related to implementation delays or performance issues that may or may not be within our control. We estimate a loss on a contract by comparing total estimated contract revenue to the total estimated contract costs and recognize a loss during the period in which it becomes probable and can be reasonably estimated. We review profit estimates for long-term contracts during each reporting period and revise them based on changes in circumstances.

If our judgment regarding revenue recognition proves incorrect, our revenue in particular periods may be adversely affected and could have a material impact on our financial condition and results of operations.

Business Combinations

We account for business acquisitions using the purchase method of accounting, in accordance with which assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date. The fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities assumed based on their respective fair values. Goodwill represents the excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed.

Significant judgment is used in determining fair values of assets acquired and liabilities assumed, as well as intangibles and their estimated useful lives. Fair value and useful life determinations are based on, among other factors, estimates of future expected cash flows, royalty cost savings and appropriate discount rates used in computing present values. These judgments may materially impact the estimates used in allocating acquisition date fair values to assets acquired and liabilities assumed, as well as our current and future operating results. Actual results may vary from these estimates that may result in adjustments to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination of asset and liability fair values, whichever occurs first. Adjustments to fair values of assets and liabilities made after the end of the measurement period are recorded within our operating results.

Changes in the fair value of a contingent consideration resulting from a change in the underlying inputs are recognized in results of operations until the arrangement is settled.

Intangible Assets, Goodwill and Other Long-Lived Assets

We have identified intangible assets and generated significant goodwill as a result of our acquisitions. Intangible assets other than goodwill are valued based on estimated future cash flows and amortized over their estimated useful lives. Goodwill is tested for impairment annually or more often if impairment indicators are present, at the reporting unit level. Intangible assets other than goodwill and long-lived assets are subject to impairment testing if events and circumstances indicate that the carrying amount of an asset or a group of assets may not be recoverable.

The goodwill impairment test is performed at the reporting unit level. A reporting unit is either an operating segment or one level below it, which is referred to as a “component.” The level at which the impairment test is

performed requires an assessment of whether the operations below an operating segment constitute a self-sustaining business, in which case testing is generally performed at this level.

We have two operating and reportable segments consisting of Brooks Semiconductor Solutions Group and Brooks Life Sciences. We have five reporting units, including four reporting units within the Brooks Semiconductor Solutions Group operating segment and one reporting unit which is the Brooks Life Sciences operating segment.

We perform our annual goodwill impairment assessment on April 1st of each fiscal year. In accordance with ASC 350, Intangibles- Goodwill and Other, we initially assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value. If we determine, based on this assessment, that it is more likely than not that the fair value of the reporting unit is less than its carrying value, we perform a quantitative goodwill impairment test by comparing the reporting unit’s fair value with its carrying value. An impairment loss is recognized for the amount by which the reporting unit’s carrying value exceeds its fair value, up to the total amount of goodwill allocated to the reporting unit. No impairment loss is recognized if the fair value of the reporting exceeds its carrying value.

We determine fair values of our reporting units based on an income approach in accordance with the discounted cash flow method, or DCF Method. The DCF Method is based on projected future cash flows and terminal value estimates discounted to their present values. Terminal value represents a present value an investor would pay on the valuation date for the rights to the cash flows of the business for the years subsequent to the discrete cash flow projection period. We consider the DCF Method to be the most appropriate valuation technique since it is based on management’s long-term financial projections. Due to the cyclical nature of the semiconductor equipment market, management’s projections as of the valuation date are considered more objective since market metrics of peer companies fluctuate during the cycle. In addition, we also compare aggregate values of our net corporate assets and reporting unit fair values to our overall market capitalization and use certain market-based valuation techniques to test the reasonableness of the reporting unit fair values determined in accordance with the DCF Method. The observable inputs used in the DCF Method include discount rates that are at or above our weighted-average cost of capital. We derive discount rates that are commensurate with the risks and uncertainties inherent in the respective businesses and our internally developed projections of future cash flows.

We completed the annual goodwill impairment test for our five reporting units as of April 1, 2018 and determined that no adjustment to goodwill was necessary since the fair value of each reporting unit was significantly in excess of the carrying value of each reporting unit. We conducted a qualitative assessment for three reporting units within the Brooks Semiconductor Solutions Group segment and determined that it was not likely that their fair values were less than their carrying values. As a result of the analysis, we did not perform the quantitative assessment for these reporting units and did not recognize impairment losses. We also performed the quantitative goodwill impairment test for the fourth reporting unit within the Brooks Semiconductor Solutions Group segment and for the Brooks Life Sciences reporting unit. We determined that no adjustment to goodwill was necessary for these two reporting units since their fair values significantly exceeded their respective carrying values. We evaluate a reporting unit’s goodwill for impairment between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of such reporting unit below its carrying value.

Application of the goodwill impairment test requires judgment based on market and operational conditions at the time of the evaluation, including management’s best estimates of the reporting unit’s future business activity and the related estimates and assumptions of future cash flows from the assets that include the associated goodwill. Different assumptions of forecasted sales volumes, product costs, future cash flows, risk-adjusted weighted average cost of capital discount rate, as well as long-term growth rate projections used in the DCF model could results in different estimates of the reporting unit’s fair value as of each testing date.

We are required to test long-lived assets, other than goodwill, for impairment when impairment indicators 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. If we determine that indicators of potential impairment are present, we assess the recoverability of the long-lived asset group by comparing its undiscounted future cash flows to its carrying value. If the carrying value of the long-lived asset group exceeds its future cash flows, we determine fair values of the individual net assets within the long-lived asset group to

assess potential impairment. If the aggregate fair values of the individual net assets of the group are less than their carrying values, an impairment loss is recognized for an amount in excess of the group’s aggregate carrying value over its fair value. The loss is allocated to the assets within the group based on their relative carrying values, with no asset reduced below its fair value. We did not test our long-lived assets for impairment during fiscal years 2018, and 2017 since no events indicating impairment occurred during the periods then ended.

Inventory

We state our inventory at the lower of cost or market amount and make adjustments to reduce the inventory cost to its net realizable value by providing estimated reserves for obsolete or unmarketable inventory. The reserves are established for the difference between the cost of inventory and its estimated market value based on assumptions related to future demand and market conditions. We fully reserve for inventories and non-cancelable purchase orders for inventory deemed obsolete. We perform periodic reviews of our inventory to identify excess inventories on hand. We compare on-hand inventory balances to anticipated inventory usage based on our recent historical activity and anticipated or forecasted demand for our products developed through our planning systems and sales and marketing inputs.

We adjust the reserves for obsolete or unmarketable inventory and record additional inventory write downs based on unfavorable changes in estimated customer demand or actual market conditions that may differ from management projections.

Deferred Income Taxes

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not will be realized. We consider recent historical income, estimated future taxable income, carry-forward periods of tax attributes, the volatility of the semiconductor industry and ongoing tax planning strategies in assessing the need for the valuation allowance. Throughout fiscal year 2017 we maintained a full valuation allowance against our U.S. net deferred tax assets along with those of certain foreign tax-paying components. We evaluate the realizability of our deferred tax assets by tax-paying component and assess the need for a valuation allowance on an annual and quarterly basis. We evaluate the profitability of each tax-paying component on a historic cumulative basis and on a forward-looking basis while performing this analysis.  After evaluating all the relevant positive and negative evidence as of March 31, 2018, we concluded that it was more likely than not that a substantial portion of the U.S. deferred tax assets would be realized. In the second quarter of fiscal year 2018 we reached a significant level of cumulative profitability in the U.S., coupled with an improved outlook of U.S. earnings. During the full fiscal year 2018, we reduced our U.S. valuation against our U.S. net deferred tax assets resulting in a tax benefit of $77.2 million.  The remaining portion of our U.S. valuation allowance is related to the realizability of certain state tax credits and net operating loss carry-forwards. We continue to maintain valuation allowances against net deferred tax assets in certain foreign tax-paying components as of the end of fiscal year 2018.

Stock-Based Compensation

We measure compensation cost for all employee stock awards at fair value on the date of grant and recognize compensation expense over the service period for awards expected to vest. The fair value of restricted stock units is determined based on the number of shares granted and the closing price of our common stock quoted on Nasdaq on the date of grant, and the fair value of stock options is determined using the Black-Scholes valuation model. Such fair values are 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 from our current estimates.

Recently Issued Accounting Pronouncements

For a summary of recently issued accounting pronouncements applicable to our Consolidated Financial Statements which is incorporated here by reference, please refer to Note 2, "Summary of Significant Accounting Policies" in the

Notes to the Consolidated Financial Statements included in Item 8 "Financial Statements and Supplementary Data" of this Form 10‑K.

RESULTS OF OPERATIONS

Fiscal Year Ended September 30, 2018 Compared to Fiscal Year Ended September 30, 2017

Revenue

We reported revenue of $631.6 million for fiscal year 2018 compared to $527.5 million for fiscal year 2017, an increase of $104.1 million, or 20%.

Our Brooks Semiconductor Solutions Group segment reported revenue of $435.0 million for fiscal year 2018 compared to $378.8 million for fiscal year 2017. The increase of $56.2 million, or 15%, reflects increases in revenues from robotic automation products, systems and related services business, partially offset by a decline in revenues from our contamination control systems. These increases include revenues generated by the Tec-Sem acquisition of $11.6 million which we acquired in the third quarter of fiscal year 2018.

Our Brooks Life Sciences segment reported revenue of $196.5 million for fiscal year 2018 compared to $148.7 million for fiscal year 2017. The increase of $47.8 million, or 32%, included organic growth of $22.6 million, or 14%. The organic growth was broad-based across all major product lines, including sample storage services, automated storage systems, including the BioStore III Cryo, consumables, instruments and informatics. Acquisitions accounted for $25.2 million of the increase compared to fiscal year 2017, which consisted of $15.6 million from the acquisition of 4titude, $8.1 million from the acquisition of PBMMI, and $0.5 million from the acquisition of BioSpeciMan.

We anticipate continued growth in revenue from our Brooks Life Sciences segment through our internally-developed products and services and through our acquired businesses.  We will continue to seek opportunities to expand our market share in the semiconductor and adjacent technology markets served by our Brooks Semiconductor Solutions Group segment. These markets are cyclical, and often fluctuate significantly from quarter to quarter. Demand for our Brooks Semiconductor Solution Group products is affected by these cycles.

Revenue generated outside the United States amounted to $398.9 million, or 63% of total revenue, for fiscal year 2018 compared to $354.6 million, or 67% of total revenue, for fiscal year 2017.

Gross Margin

We reported gross margins of 39.0% for fiscal year 2018 compared to 37.7% for fiscal year 2017. Gross margin increased 1.9% in the Brooks Semiconductor Solutions Group segment and decreased 0.1% in the Brooks Life Sciences segment. Cost of revenue for fiscal year 2018 included $4.9 million of charges for amortization related to completed technology as compared to $3.9 million incurred during fiscal year 2017. Additionally, cost of revenue for fiscal year 2018 also included $1.9 million of inventory step-up charges, compared to $0.5 million for fiscal year 2017.

Our Brooks Semiconductor Solutions Group segment reported gross margins of 40.0% for fiscal year 2018 compared to 38.0% for fiscal year 2017.   Margins improved on the impact of product mix, volume leverage of fixed costs, and lower charges related to warranty and excess and obsolete inventory. Cost of revenue during fiscal year 2018 included $3.4 million of amortization related to completed technology compared to $2.5 million during fiscal year 2017. During fiscal years 2018 and 2017, cost of revenue included $0.7 million and $0.1 million, respectively, of inventory step-up charges.

Our Brooks Life Sciences segment reported gross margins of 36.7% for fiscal year 2018 compared to 36.8% for fiscal year 2017. Margins benefitted from recent acquisitions and the continued growth of our BioStorage services, which carries higher than average gross margins.  These benefits were offset by lower margins in our manufactured automated stores business, which experienced cost overruns in the areas of production and project management.  Cost of revenue during fiscal year 2018 included $1.5 million of amortization related to completed technology as compared to $1.4 million incurred during fiscal year 2017. During fiscal year 2018 and 2017, cost of revenue included $1.2 million and $0.4 million, respectively, of inventory step-up charges.

Research and Development

Research and development expenses were $46.9 million in fiscal year 2018 compared to $39.9 million in fiscal year 2017. The increase of $7.1 million was due to increased expense of $4.2 million within the Brooks Semiconductor Solutions Group segment and $2.8 million within the Brooks Life Sciences segment. Higher research and development expenses during fiscal year 2018 as compared to fiscal year 2017 were primarily attributable increased investments for new product development in both of our segments.

Selling, General and Administrative

Selling, general and administrative expenses were $167.0 million in fiscal year 2018 compared to $141.5 million in fiscal year 2017. The increase of $25.5 million was primarily attributable to: (i) higher employee-related costs driven by increased incentive bonuses and higher salaries resulting from hiring additional personnel to support the growth of our business, (ii) higher amortization costs due to acquisitions during the period, (iii) higher operating expenses related to the acquisitions of PBMMI, 4titude, Tec-Sem and BioSpeciMan and (iv) higher stock-based compensation expense driven mostly by higher estimates of the expected payout related to the achievement of performance goals for our performance-based awards.  Fiscal year 2018 also included a loss recovery from an insurance claim which partially offset the increases described above.

Amortization expense related primarily to customer relationships was $19.3 million and $13.2 million, respectively, during fiscal years 2018 and 2017.

Restructuring Charges

We recorded restructuring charges of $0.7 million during fiscal year 2018 as compared to $3.1 million during fiscal year 2017.

Restructuring Charges Incurred During Fiscal Year Ended September 30, 2018

       Restructuring charges of $0.7 million incurred during fiscal year 2018 were related to severance costs and consisted primarily of actions initiated during the fourth quarter of fiscal year 2018. Of these charges, $0.3 million related to the integration of Tec-Sem which was acquired during fiscal year 2018 as part of our Brooks Semiconductor Solutions Group segment and $0.3 million related to the announced closure of our Denmark facility which will eliminate redundancies in our Brooks Life Sciences segment.  Cost savings realized during fiscal year 2018 related to these actions were nominal as these actions were initiated during the fourth quarter of fiscal year 2018.

Restructuring Charges Incurred During Fiscal Year Ended September 30, 2017

Restructuring charges of $3.1 million incurred during fiscal year 2017 were related to severance costs and consisted of $1.7 million related to restructuring actions initiated during fiscal year 2017 and $1.4 million related to restructuring actions initiated in prior periods.

The charges from restructuring actions initiated during fiscal year 2017 were primarily related to the action to streamline field service operations in our Brooks Semiconductor Solutions Group segment. This action had been completed as of September 30, 2017 and resulted in approximately $1.9 million in annualized cost of revenue reductions. We realized approximately $1.9 million and $0.8 million, respectively, of cost savings related to this action during fiscal year 2018 and 2017.

The charges from actions initiated prior to fiscal year 2017 was primarily related to the consolidation of the Jena, Germany repair facility into the Chelmsford, Massachusetts repair operation. This restructuring action was initiated to streamline the service repair operations and reduce the overhead cost structure within our Brooks Semiconductor Solutions Group segment. This restructuring action was substantially completed as of September 30, 2017. We recognized $0.8 million cost savings related to this action during the fiscal year 2017 and $1.5 million during fiscal year 2018. Total cost savings from this action consisted of $1.0 million of cost of revenue reductions and $0.6 million of selling, general and administrative expense reductions.

The charges from actions initiated prior to fiscal year 2017 also include a small portion of charges from the company-wide restructuring action initiated in fiscal year 2016 to streamline business operations and improve competitiveness and overall profitability. This action had been completed as of September 30, 2017. Cost savings from this action were $13.1 million during fiscal year 2017. Savings realized during fiscal year 2017 consisted of $4.3 million of cost of revenue reductions, $2.6 million of research and development expense reductions, and $6.1 million of selling, general and administrative expense reductions.

Non-Operating Income (Expenses)

Gain on Settlement of Equity Method Investment - During fiscal year 2017, we recognized a gain of $1.8 million on the settlement of the equity method investment in BioCision which was included as a part of the non-cash consideration for an acquisition of Cool Lab.

Interest income – During fiscal years 2018 and 2017, we recorded interest income of $1.9 million and $0.5 million respectively, which represented interest earned on our marketable securities. 

Interest expense – During fiscal years 2018 and 2017, we recorded interest expense of $9.5 million and $0.4 million, respectively.  The increase in interest expense during fiscal year 2018 primarily related to the term loan originated in October 2017. Please refer to the “Liquidity and Capital Resources” section below for further information on the term loan.

Other expenses, net – During fiscal years 2018 and 2017 we recorded other expenses, net of $3.3 million and $1.7 million, respectively. The $1.6 million increase in expense was primarily attributable to higher foreign currency exchange losses of $1.0 million recognized during fiscal year 2018 as compared to the corresponding period of the prior year, as well as gains recognized in fiscal year 2017 related to a pension settlement of $0.3 million and sale of property, plant and equipment of $0.2 million.  Please refer to Item 7A. “Quantitative and Qualitative Disclosures About Market Risk – Currency Rate Exposure” in this Annual Report on Form 10-K for additional information about these currency exchange losses. 

Income Tax Provision

We recorded an income tax benefit on continuing operations of $47.3 million in fiscal year 2018 compared to an income tax provision of $3.4 million in fiscal year 2017. The income tax benefit during fiscal year 2018 was driven primarily by the reversal of the valuation allowance against a substantial portion of the U.S. net deferred tax assets.  We have estimated the toll charge on our taxable foreign earnings, net of foreign tax credits, associated with the enactment of the Tax Cuts and Jobs Act during fiscal year 2018 to be $8.0 million. This amount is an offset to the valuation allowance reversal recorded during the year and is included in the full year tax benefit reported. The tax benefit for fiscal year 2018 also included a $0.7 million tax benefit related to the re-measurement of net U.S. deferred tax liabilities to account for the reduced 21 percent statutory Federal income tax rate. The overall benefit for fiscal year 2018 was partially offset by the tax provisions on earnings in our foreign jurisdictions during the year.

Equity in Earnings of Equity Method Investments

We incurred losses of $0.5 million from our investment in BioCision during fiscal year 2017. Our investment in BioCision was settled during the first quarter of fiscal year 2017 as a part of the non-cash consideration for the acquisition of Cool Lab on November 28, 2016. Prior to closing the equity investment, we traditionally recorded the income and losses related to the equity method investment in BioCision one quarter in arrears. During fiscal year 2017, we recorded two additional months of activity in the carrying value of the investment as a result of its settlement. We deemed the amount of $0.2 million related to two additional months of activity to be insignificant.

Discontinued Operations

We incurred revenue and net income from discontinued operations of $196.1 million and $48.7 million, respectively for fiscal year 2018 related to our semiconductor cryogenics business as compared to $165.4 million and $51.9 million, respectively for fiscal year 2017. The net income is inclusive of income from the UCI joint venture in 2018 and 2017.   The income from discontinued operations only includes direct operating expenses incurred that (1) are clearly

identifiable as costs being disposed of upon completion of the sale and (2) will not be continued by the Company on an ongoing basis.  Indirect expenses which supported the Cryogenics business, and which will remain as part of the continuing operations, are not reflected in income from discontinued operations.

Fiscal Year Ended September 30, 2017 Compared to Fiscal Year Ended September 30, 2016

Revenue

We reported revenue of $527.5 million for fiscal year 2017 compared to $434.0 million for fiscal year 2016, an increase of $93.5 million, or 22%.

Our Brooks Semiconductor Solutions Group segment reported revenue of $378.8 million for fiscal year 2017 compared to $325.9 million for fiscal year 2016. The increase of $52.9 million, or 16%, reflects increases in revenues from contamination control systems and robotic automation products and systems, partially offset by a decline in revenues from services.

The robotic automation products revenue has historically included revenue from patent royalties and sales of third party atmospheric robots under a distribution agreement in North America.  During fiscal year 2016, these revenue streams stopped, driving a decline of $8.7 million attributable to the expiration of certain patents and $13.0 million from exiting the atmospheric robot distribution arrangement. Royalty income generated from the expired patents was $8.7 million in fiscal years 2016. Product revenue from the atmospheric robot distribution arrangement was $13.0 million in fiscal years 2016. There was no royalty income and no revenue from the atmospheric robot distribution arrangement generated during fiscal year 2017.

Our Brooks Life Sciences segment reported revenue of $148.7 million for fiscal year 2017 compared to $108.1 million for fiscal year 2016. The increase of $40.6 million, or 38%, was primarily driven by organic growth of $25.3 million, or 23%. The organic growth was primarily attributable to sample storage services, automated storage systems, including the BioStore III Cryo, and consumables and instruments. Acquisitions accounted for $15.3 million of the increase compared to fiscal year 2016, which consisted of $8.2 million from two additional months of revenue from BioStorage acquired on November 30, 2015, $3.7 million from the acquisition of Cool Labs, and $3.4 million from the acquisition of PBMMI. 

Revenue generated outside the United States amounted to $354.6 million, or 67% of total revenue, for fiscal year 2017 compared to $277.1 million, or 64% of total revenue, for fiscal year 2016.

Gross Margin

We reported gross margins of 37.7% for fiscal year 2017 compared to 36.1% for fiscal year 2016. Gross margin increased in the Brooks Semiconductor Solutions Group segment and Brooks Life Sciences segment by 1.9 percentage points and 0.7 percentage points, respectively. Cost of revenue for fiscal year 2017 included $3.9 million of charges for amortization related to completed technology as compared to $4.2 million incurred during fiscal year 2016. Additionally, cost of revenue for fiscal year 2017 also included $0.5 million of inventory step-up charges, compared to $0.6 million for fiscal year 2016.

Our Brooks Semiconductor Solutions Group segment reported gross margins of 38.0% for fiscal year 2017 compared to 36.1% for fiscal year 2016. Product margins increase was driven by improved operating leverage from higher revenue and the outcome of product cost optimization efforts. Service margins increase was driven by lower material costs for robot repair, and cost savings from the restructuring actions that resulted in reduced repair operations costs and increased field service productivity. Please refer to the "Restructuring Charges" section below for further information on the restructuring actions. Cost of revenue during fiscal year 2017 included $2.5 million of amortization related to completed technology compared to $2.7 million during fiscal year 2016. During fiscal years 2017 and 2016, cost of revenue included $0.1 million and $0.6 million, respectively, of inventory step-up charges.

Our Brooks Life Sciences segment reported gross margins of 36.8% for fiscal year 2017 compared to 36.1% for fiscal year 2016. The increase was driven by improved cost management on large stores projects, volume leverage driven by organic revenue growth, favorable contributions from recent acquisitions and savings from the recent

restructuring actions, partially offset by increased expenses supporting the transition to in-sourcing of manufacturing from a contract provider to our Manchester location and expenses related to the consolidation of our Cool Labs operations. Please refer to the "Restructuring Charges" section below for further information on these restructuring actions. Cost of revenue during fiscal year 2017 included $1.4 million of amortization related to completed technology as compared to $1.5 million during fiscal year 2016. Additionally, cost of revenue for fiscal year 2017 included $0.4 million of inventory step-up charges. There were no such charges during fiscal year 2016.

Research and Development

Research and development expenses were $39.9 million in fiscal year 2017 compared to $44.2 million in fiscal year 2016. The decrease of $4.3 million reflects expense reductions of $2.6 million within the Brooks Semiconductor Solutions Group segment and $1.7 million within the Brooks Life Sciences System segment. Lower research and development expenses during fiscal year 2017 as compared to fiscal year 2016 were primarily attributable to the full year realization of savings from restructuring actions initiated prior to fiscal year 2017 and the progression of certain projects from the development stage to market which resulted in lower project spending.

Selling, General and Administrative

Selling, general and administrative expenses were $141.5 million in fiscal year 2017 compared to $119.3 million in fiscal year 2016. The increase of $22.2 million was primarily attributable to: (i) higher compensation costs primarily driven by increased headcounts, and increased incentive bonuses and commissions, (ii) higher stock-based compensation expense related primarily to performance above targets, (iii) higher merger-related costs during fiscal years 2017, (iv) higher amortization expense during fiscal years 2017, (v) higher outside service costs and (vi) higher operating expenses as a result of the PBMMI acquisition. These increases were partially offset by lower depreciation expense in information technology systems.

Amortization expense related primarily to customer relationships was $13.2 million and $10.8 million, respectively, during fiscal years 2017 and 2016.

Restructuring Charges

We recorded restructuring charges of $3.1 million during fiscal year 2017 as compared to $10.2 million during fiscal year 2016.

Restructuring Charges Incurred During Fiscal Year Ended September 30, 2017

Restructuring charges of $3.1 million incurred during fiscal year 2017 were related to severance costs and consisted of $1.7 million related to restructuring actions initiated during fiscal year 2017 and $1.4 million related to restructuring actions initiated in prior periods.

The charges from restructuring actions initiated during fiscal year 2017 was primarily related to streamlined field service operations in our Brooks Semiconductor Solutions Group segment. This action had been completed as of September 30, 2017 and resulted in approximately $1.9 million in annualized cost of revenue reductions. We realized approximately $1.9 million and $0.8 million, respectively, of cost savings during fiscal year 2018 and 2017.

The charges from actions initiated prior to fiscal year 2017 were primarily related to the consolidation of the Jena, Germany repair facility into the Chelmsford, Massachusetts repair operation. This restructuring action was initiated to streamline the service repair operations and reduce the overhead cost structure within our Brooks Semiconductor Solutions Group segment. This restructuring action was substantially completed as of September 30, 2018. We recognized $0.8 million cost savings related to this action during the fiscal year 2017 and $1.5 million during fiscal year 2018. Total annualized cost savings from this action consisted of $1.0 million of cost of revenue reductions and $0.6 million of selling, general and administrative expense reductions.

The charges from actions initiated prior to fiscal year 2017 also include a small portion of charges from the company-wide restructuring action initiated in fiscal year 2016 to streamline business operations and improve competitiveness and overall profitability. This action had been completed as of September 30, 2017. Cost savings from

this action were $13.1 million and $5.8 million, respectively, during fiscal year 2017 and 2016. Savings realized during fiscal year 2017 consisted of $4.3 million of cost of revenue reductions, $2.6 million of research and development expense reductions, and $6.1 million of selling, general and administrative expense reductions.

Restructuring Charges Incurred During Fiscal Year Ended September 30, 2016

Restructuring charges of $10.2 million incurred during fiscal year 2016 were related to severance costs which consisted of $8.9 million related to restructuring actions initiated during fiscal year 2016 and $1.3 million related to restructuring actions initiated in prior periods.

Charges from restructuring actions initiated during fiscal year 2016 consisted of: (i) $3.1 million attributable to the Brooks Life Sciences segment to streamline the segment’s management structure, integrate acquisitions, consolidate facility and improve profitability, (ii) $1.2 million attributable to the Brooks Semiconductor Solutions Group segment to consolidate our Jena, Germany repair facility into our Chelmsford, Massachusetts repair operation, and (iii) $4.5 million of costs related to the company-wide restructuring action to streamline business operations, improve competitiveness and overall profitability.

These actions in the Brooks Life Sciences segment resulted in approximately $3.8 million in annual pre-tax cost savings, including $1.0 million of cost of revenue reductions and $2.9 million of selling, general and administrative expense reductions. Total cost savings realized as a result of these restructuring initiatives amounted to $5.1 million, of which $1.3 million were realized prior to fiscal year 2017 and $3.8 million were realized during fiscal year 2017.

Our restructuring actions initiated in prior periods was primarily related to the Brooks Semiconductor Solutions segment to integrate Contact, and to close and transfer the Mistelgau, Germany manufacturing operations to a contract manufacturer.

Non-Operating Income (Expenses)

Gain on Settlement of Equity Method Investment – During fiscal year 2017, we recognized a gain of $1.8 million on the settlement of the equity method investment in BioCision which was included as a part of the non-cash consideration for an acquisition of Cool Lab.

Interest income – During both fiscal years 2017 and 2016, we recorded interest income of $0.5 million, which represented interest earned on our marketable securities. 

Interest expense – During fiscal years 2017 and 2016, we recorded interest expense of 0.4 million and $0.2 million, respectively.

Other expenses, net – During fiscal years 2017 and 2016 we recorded other expenses, net of $1.7 million and $1.4 million, respectively. The $0.3 million increase in expense was primarily attributable to higher foreign currency exchange losses of $0.4 million recognized during fiscal year 2017 and higher losses of $0.2 million during fiscal year 2017 as compared to fiscal year 2016 related to fair value measurement of convertible debt securities in BioCision.  These increases were partially offset by a gain on pension settlement of $0.3 million recognized during fiscal year 2017.   

Income Tax Provision

We recorded an income tax provision on continuing operations of $3.4 million in fiscal year 2017 compared to an income tax provision of $66.3 million in fiscal year 2016. The continuing operations income tax provision for fiscal year 2017 was primarily comprised of the provision on our earnings during that fiscal year. The continuing operations income tax provision for fiscal year 2016 was primarily driven by the establishment of a full valuation allowance against our U.S. net deferred tax assets during that year.

Equity in Earnings of Equity Method Investments

We incurred losses of $0.5 million from our investment in BioCision during fiscal year 2017 compared to losses of $1.1 million during fiscal year 2016. Our investment in BioCision was settled during the first quarter of fiscal year 2017

as a part of the non-cash consideration for the acquisition of Cool Lab on November 28, 2016. Prior to closing the equity investment, we traditionally recorded the income and losses related to the equity method investment in BioCision one quarter in arrears. During fiscal year 2017, we recorded two additional months of activity in the carrying value of the investment as a result of its settlement. We deemed the amount of $0.2 million related to two additional months of activity to be insignificant.

Discontinued Operations

We incurred revenue and net income from discontinued operations of $165.4 million and $51.9 million, respectively for fiscal year 2017 related to our semiconductor cryogenics business as compared to $126.3 million and $16.0 million, respectively for fiscal year 2016. The net income is inclusive of income from the UCI joint venture in 2017 and 2016.   The income from discontinued operations only includes direct operating expenses incurred that (1) are clearly identifiable as costs being disposed of upon completion of the sale and (2) will not be continued by the Company on an ongoing basis.  Indirect expenses which supported the cryogenics business, and which will remain as part of the continuing operations, are not reflected in income from discontinued operations.

LIQUIDITY AND CAPITAL RESOURCES

A considerable portion of our revenue is dependent on the demand for semiconductor capital equipment which historically has experienced periodic downturns. We believe that we have adequate resources to satisfy our working capital, financing activities, debt service and capital expenditure requirements for the next twelve months. The cyclical nature of our served markets and uncertainty in the current global economic environment make it difficult for us to predict longer-term liquidity requirements with sufficient 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 to us on acceptable terms or otherwise, we may be unable to successfully develop or enhance products and services, respond to competitive pressure or take advantage of acquisition opportunities, any of which could have a material adverse effect on our business, financial condition and operating results.

The discussion of our cash flows and liquidity that follows does not include the impact of the disposition of our cryogenics business and is stated on a total company consolidated basis. 

Overview of Cash Flows and Liquidity

Our cash, cash equivalents and marketable securities as of September 30, 2018 and 2017 consist of the following (in thousands):

 

Our cash, cash equivalents and marketable securities were $251.2 million as of September 30, 2018. Our cash balances are held in numerous locations throughout the world, with the substantial majority of those amounts located outside of the United States. As of September 30, 2018, we had cash and cash equivalents of $197.7 million, of which $84.7 million was held outside of the United States. If these funds are needed for the U.S. operations, we would need to repatriate these funds. As a result of recent changes in U.S. tax legislation, any repatriation in the future would not result in U.S. federal income tax. Our intent is to permanently reinvest these funds outside of the U.S. and our current operating plans do not demonstrate a need to repatriate these funds for our U.S. operations. We had marketable securities of $53.5 million and $2.7 million, respectively, as of September 30, 2018 and 2017. Our marketable securities are generally readily convertible to cash without an adverse impact. 

Fiscal Year Ended September 30, 2018 Compared to Fiscal Year Ended September 30, 2017

Overview

Cash and cash equivalents and marketable securities were $251.2 million at September 30, 2018 as compared to $104.3 million at September 30, 2017. The increase in cash and cash equivalents and marketable securities of $146.9 million was primarily attributable to cash inflows of $197.6 million related to proceeds from the term loan and cash inflows of $74.0 million generated from our operating activities, partially offset by cash payments of $85.8 million related to acquisitions, cash outflows of $28.3 million related to dividend payments made to our shareholders, as well as capital expenditure payments of $12.8 million.

Operating Activities

Cash flows from operating activities can fluctuate significantly from period to period as earnings, working capital needs and the timing of payments for income taxes, restructuring activities and other charges impact reported cash flows.

Cash flows provided by operating activities were $74.0 million during fiscal year 2018 comprised primarily of earnings of $120.6 million, including net income of $116.5 million and the impact of non-cash related charges of $4.1 million. Partially offsetting these items were the uses of cash of $46.6 million related to the changes in our operating assets and liabilities. The changes in operating assets and liabilities that resulted in a use of cash consisted primarily of an increase in accounts receivable as a result of higher revenue and an increase in inventory levels to support the growth of our business. These uses of cash were partially offset by sources of cash related primarily to increases in accounts payable as well as increased accrued compensation and tax withholdings. Cash flows provided by operating activities were $96.2 million during fiscal year 2017 and were comprised primarily of earnings of $96.9 million, including net income of $62.6 million and the impact of non-cash related earnings of $34.3 million. Partially offsetting these items were uses of cash of $0.7 million related to the changes in our operating assets and liabilities. 

Net income from discontinued operations contributed $48.7 million and $51.9 million for fiscal years ended 2018 and 2017, respectively, in the net income referenced for the respective periods above.  Cash flows from operations will be negatively impacted in future periods by the completion of sale of our cryogenic business. 

Investing Activities

Cash flows from investing activities consist primarily of cash used for acquisitions, capital expenditures and purchases of marketable securities as well as cash proceeds generated from sales and maturities of marketable securities. Cash used in investing activities was $148.5 million during fiscal year 2018 as compared to $54.2 million during the fiscal year 2017. Cash used in investing activities of $148.5 million during fiscal year 2018 included cash payments of $85.8 million for acquisitions, $69.7 million for the purchases of marketable securities and $12.8 million of capital expenditures, partially offset by cash inflows from sales and maturities of marketable securities of $19.1 million and $0.7 million in proceeds from other investments and sales of property, plant and equipment. Cash used in investing activities of $54.2 million during fiscal year 2017 included $44.8 million for acquisitions and $12.7 million of capital expenditures, offset by $3.6 million of proceeds from sales and maturities of marketable securities.

Capital expenditures are made primarily for increasing capacity, replacing equipment, supporting new product development and improving information technology infrastructure. Capital expenditures were $12.8 million during fiscal year 2018 as compared to $12.7 million during the fiscal year 2017.

Financing Activities

Cash provided by financing activities was $170.3 million during fiscal year 2018 as compared to $25.9 million used in financing activities during fiscal year 2017. Cash provided by financing activities during fiscal year 2018 included cash inflows of $197.6 million related to proceeds from the term loan originated in October 2017, partially offset by cash dividend payments to our shareholders of $28.3 million and principal payments on the term loan of $1.5 million. Cash used in financing activities was $25.9 million during fiscal year 2017 and related primarily to cash dividend payments to our shareholders.

Fiscal Year Ended September 30, 2017 Compared to Fiscal Year Ended September 30, 2016

Overview

Cash and cash equivalents and marketable securities were $104.3 million at September 30, 2017 as compared to $91.2 million at September 30, 2016. The increase in cash and cash equivalents and marketable securities of $13.1 million was primarily attributable to cash inflows of $96.2 million generated from our operating activities, partially offset by cash outflows related to acquisitions of $44.8 million, dividends payments to our shareholders of $27.9 million, and capital expenditure payments of $12.7 million during fiscal year 2017.

Operating Activities

Cash flows provided by operating activities were $96.2 million during fiscal year 2017 and were comprised primarily of earnings of $96.9 million, including net income of $62.6 million and the impact of non-cash related earnings of $34.3 million. Partially offsetting these items were uses of cash of $0.7 million related to the changes in our operating assets and liabilities. The changes in operating assets and liabilities that resulted in a use of cash consisted primarily of an increase in accounts receivable as a result of higher revenue and an increase in inventory levels to support the growth of our business. These uses of cash were partially offset by sources of cash related primarily to increases in accounts payable as well as increased accrued compensation and tax withholdings and restructuring costs. Cash flows provided by operating activities were $39.5 million during fiscal year 2016 and were comprised primarily of earnings of $39.3 million, including the impact of non-cash related earnings of $108.8 million and a net loss of $69.5 million. Partially offsetting these items were sources of cash of $0.2 million related to the changes in our operating assets and liabilities.

Net income from discontinued operations contributed $51.9 million and $16.0 million for fiscal years ended 2017 and 2016, respectively, in the net income referenced for the respective periods above. 

Investing Activities

Cash used in investing activities was $54.2 million during fiscal year 2017 as compared to $10.9 million during fiscal year 2017. Cash used in investing activities of $54.2 million during fiscal year 2017 included $44.8 million for acquisitions and $12.7 million of capital expenditures, offset by $3.6 million of proceeds from sales and maturities of marketable securities.  Cash used in investing activities of $10.9 million during fiscal year 2016 included $125.2 million for the acquisition of BioStorage, $12.8 million of capital expenditures and the disbursement of $1.8 million for a loan provided to BioCision, partially offset by $139.4 million proceeds from sales and maturities of marketable securities.

Capital expenditures are made primarily for increasing capacity, replacing equipment, supporting new product development and improving information technology infrastructure. Capital expenditures were $12.7 million during fiscal year 2017 as compared to $12.8 million during fiscal year 2016.

Financing Activities

Cash used in financing activities was $25.9 million during fiscal year 2017 as compared to $26.0 million during fiscal year 2016. Cash used in financing activities in both fiscal years 2017 and 2016 related primarily to cash dividend payments to our shareholders of $27.9 million and $27.5 million, respectively, partially offset by proceeds from issuance of common stock.

Capital Resources

Senior Secured Term Loan Facility

On October 4, 2017, we entered into a $200.0 million term loan with Morgan Stanley Senior Funding, Inc., JPMorgan Chase Bank, N.A. and Wells Fargo Securities, LLC. The term loan was issued at $197.6 million, or 98.8% of its par value, resulting in a discount of $2.4 million, or 1.2%, which represented loan origination fees paid at the closing. The loan proceeds are used for acquisition and general corporate purposes.

As of September 30, 2018, the outstanding term loan principal balance was $198.5 million, excluding unamortized deferred financing costs of $2.4 million. The term loan matures and becomes fully payable on October 4, 2024. Installment principal payments equal to 0.25% of the initial principal amount of the term loan are payable on the last day of each quarter, with any remaining principal amount becoming due and payable on the maturity date. During fiscal year 2018, we made principal payments of $1.5 million under the term loan. Subject to certain conditions stated in the term loan agreement, we may redeem the term loan at any time at our option without a significant premium or penalty, except for a repricing transaction, as defined in the term loan agreement. We would also be required to redeem the term loan at the principal amount then outstanding upon the occurrence of certain events, as set forth in the term loan agreement.

Borrowings under the term loan bear variable interest rates, at our option, based on either LIBOR, the federal funds effective rate or the prime rate plus an applicable percentage. As a result, we may experience exposure to interest rate risk due to the potential volatility associated with the variable interest rates on the term loan. If rates increase, we may be subject to higher costs of servicing the loan which could reduce our profitability and cash flows. During fiscal year 2018, the weighted average stated interest rate on the term loan was 4.4%. During fiscal year 2018, we incurred cash interest expense of $8.7 million on the term loan. Our debt service requirements are expected to be funded through our existing sources of liquidity and operating cash flows.

The term loan agreement contains certain customary representations and warranties, covenants and events of default. As of September 30, 2018, we were in compliance with all covenants and conditions under the term loan agreement.

On November 15, 2018, entered into a new $350.0 million senior secured incremental term loan, under our Credit Agreement, dated October 4, 2017 to finance a portion of the cash purchase price of our acquisition of GENEWIZ which was completed on that same date.

Line of Credit Facility

We maintain a revolving line of credit with Wells Fargo Bank, N.A. and JPMorgan Chase Bank, N.A that provides for revolving credit financing of up to $75.0 million, subject to borrowing base availability, as defined in the credit agreement. The line of credit matures on October 4, 2022. The proceeds from the line of credit are available for permitted acquisitions and general corporate purposes.

As of September 30, 2018, we had approximately $47.5 million available for borrowing under the line of credit. We anticipate that our available borrowings under the line of credit will reduce upon the closure of the sale of our semiconductor cryogenics business. There were no amounts outstanding pursuant to the line of credit as of September 30, 2018. The amount of funds available for borrowing under the line of credit arrangement may fluctuate each period based on our borrowing base availability. The line of credit contains certain customary representations and warranties, a financial covenant, affirmative and negative covenants, as well as events of default. We were in compliance with the line of credit covenants as of September 30, 2018. Although we believe we will be able to generate sufficient cash in the United States and foreign jurisdictions to fund future operating costs, we secured the revolving line of credit as an additional assurance for maintaining liquidity in the United States during potentially severe downturns of the cyclical semiconductor market, as well as for strategic investments and acquisitions.

Shelf Registration Statement

On July 27, 2016, we filed a registration statement on Form S‑3 with the SEC to sell securities, including common stock, preferred stock, warrants, debt securities, depository shares, purchase contracts and purchase units in amounts to be determined at the time of an offering. Any such offering, if it does occur, may happen in one or more transactions. The specific terms of any securities to be sold will be described in supplemental filings with the SEC. This registration statement will expire on July 27, 2019.

 

Dividends

Our Board of Directors declared the following dividends during the fiscal years 2018 and 2017 (in thousands, except per share data):

 

On November 6, 2018, our Board of Directors approved a cash dividend of $0.10 per share of our common stock. The total dividend of approximately $7.2 million will be paid on December 20, 2018 to shareholders of record at the close of business on December 7, 2018. Dividends are declared at the discretion of our Board of Directors and depend on actual cash flow from operations, our financial condition, 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 we serve. We may reduce, delay or cancel a quarterly cash dividend based on the severity of a cyclical downturn.

Share Repurchase Program

On September 29, 2015, our Board of Directors approved a share repurchase program for up to $50.0 million worth of our common stock. The timing and amount of any shares repurchased are based on market and business conditions, legal requirements and other factors and may be commenced or suspended at any time at our discretion. There were no shares repurchased under this program during fiscal year 2018.

Contractual Obligations and Requirements

Our contractual obligations were as follows at September 30, 2018 (in thousands):

 

The letters of credit of approximately $2.2 million are related primarily to customer advances and other performance obligations at September 30, 2018. These arrangements guarantee the refund of advance payments received from our customers in the event that the product is not delivered or warranty obligations are not fulfilled in accordance with the contract terms. These obligations could be called by the beneficiaries at any time before the expiration date of the particular letter of credit if we fail to meet certain contractual requirements. None of these obligations were called during fiscal year 2018, and we currently do not anticipate any of these obligations to be called in the near future.

As of September 30, 2018, the total amount of net unrecognized tax benefits for uncertain tax positions and the accrual for the related interest was $3.5 million, all of which represents a potential future cash outlay. In comparison to September 30, 2017 where the balance was $3.9 million. The reduction largely has to do with the statute of limitations lapsing on certain positions throughout the year. We are unable to make a reasonably reliable estimate of the timing of the cash settlement for this liability since the timing of future tax examinations by various tax jurisdictions and the related resolution is uncertain.

Off-Balance Sheet Arrangements

As of September 30, 2018, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. 

 

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

We are exposed to a variety of market risks, including changes in interest rates affecting the return on our cash and cash equivalents, short-term and long-term investments and fluctuations in foreign currency exchange rates.

Interest Rate Exposure

Our $200.0 million term loan bears variable interest rates which subjects us to interest rate risk. Our primary interest rate risk exposure results from changes in the short-term LIBOR rate, the federal funds effective rate and the prime rate. As of September 30, 2018, the weighted average stated interest rate on the term loan was 4.4%. At September 30, 2018, the outstanding term loan principal balance was $198.5 million, excluding unamortized deferred financing costs of $2.4 million. During fiscal year 2018, we incurred interest expense of $8.7 million on the term loan. A hypothetical 100 basis point change in interest rates would result in a $2.0 million change in interest expense incurred during fiscal year 2018.

Our cash and cash equivalents consist principally of money market securities which are short-term in nature. At September 30, 2018 and 2017, our aggregate short-term and long-term investments were $53.5 million and $2.7 million, respectively, and consisted mostly of highly rated corporate debt securities and municipal securities. At September 30, 2018, the unrealized loss position on marketable securities was insignificant, which is included in “Accumulated other comprehensive income” in the Consolidated Balance Sheets. There were no securities in an unrealized loss position as of September 30, 2017. A hypothetical 100 basis point change in interest rates would result in an annual change of approximately $1.0 million and less than $0.1 million, respectively, in interest income earned in fiscal years 2018 and 2017.

Currency Rate Exposure

We have transactions and balances denominated in currencies other than the U.S. dollar. Most of these transactions or balances are denominated in Euros, British Pounds and a variety of Asian currencies. Sales in currencies other than the U.S. dollar were 34% and 38%, respectively, of our total sales for fiscal years ended September 30, 2018 and 2017. These sales were made primarily by our foreign subsidiaries, which have cost structures that substantially align with the currency of sale.

In the normal course of our business, we have liquid assets denominated in non-functional currencies which include cash, short-term advances between our legal entities and accounts receivable which are subject to foreign currency exposure. Such balances were approximately $84.7 million and $51.6 million, respectively, at September 30, 2018 and 2017, and related to the Euro, British Pound and a variety of Asian currencies. We mitigate the impact of potential currency translation losses on these short-term intercompany advances by the timely settlement of each transaction, generally within 30 days. We also utilize forward contracts to mitigate our exposures to currency movement. We incurred foreign currency losses of $3.3 million and $2.3 million, respectively, in fiscal years 2018 and 2017, which related to the currency fluctuation on these balances between the time the transaction occurred and the ultimate settlement of the transaction. A hypothetical 10% change in foreign exchange rates would result in a change of $4.9 million and $0.5 million, respectively, in our net income during fiscal year 2018 and 2017.

Item 8.    Financial Statements and Supplementary Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The supplementary quarterly financial information required by this Item 8 is included in Part II, Item 6, “Selected Financial Data”, and is incorporated herein by reference.