Ladies and gentlemen, thank you for standing by. Welcome to the Brooks Automation Business Update conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Tuesday, August 28th, 2018. I would now like to turn the conference over to Lindy Robinson, Executive Vice President and Chief Financial Officer. Please go ahead, sir.
Thank you, Melody. Good morning, everyone. Welcome to the Brooks Automation conference call to update you on our business transaction we announced yesterday. We scheduled this call specifically to share additional color on the agreement we entered yesterday to sell the cryogenic vacuum business. If you've not seen it, the press release is posted on the investor relations page of our website, www.brooks.com. We have also posted some illustrated PowerPoint slides that will be used to support our prepared comments during this call. I would like to remind everyone that during the course of the call, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. There are many factors that may cause actual financial results or other events to differ from those identified in such forward-looking statements.
I would refer you to the section of our earnings release titled Safe Harbor Statement, the Safe Harbor slide on the aforementioned PowerPoint presentation on our website, our various filings with the SEC, including our annual reports on Form 10-K and our quarterly reports on 10-Q. We make no obligation to update these statements should future financial data events occur that differ from the forward-looking statements presented today. In the course of discussion, we may make reference to non-GAAP financial measures, which are sometimes used in addition to and in conjunction with results presented in accordance with GAAP. We believe that these non-GAAP measures provide an additional way of viewing aspects of our operations and performance. When considered with GAAP financial results and the reconciliation of GAAP measures, they provide an even more complete understanding of the Brooks business.
Non-GAAP measures should not be relied upon for the exclusion of the GAAP measures themselves. On the call with me today, of course, is our Chief Executive Officer, Stephen Schwartz. We will open with his remarks on the signed agreement and the rationale for the transaction. I will then provide additional color on the agreement and our steps moving forward. Following our prepared remarks, as Melody indicated, we will take questions from the phone line. During our prepared remarks, again, we will make reference to the slides I mentioned, available to everyone on our investor relations page of our Brooks website. With that, I now turn the call over to our CEO, Stephen Schwartz.
Thank you, Lindy. Good morning, everyone. Thanks for joining us today. For those of you who have followed Brooks over the years, you are aware that our strategic thrust has been to invest in two high-growth areas, the development of a life sciences business supporting the explosion in the number of biological samples that are being used for research and drug discovery, and the capture of more semiconductor automation applications, which are being led by new and increasing numbers of manufacturing process steps. More than 80% of our R&D spending and all of the acquisitions we've made during the past 7 years have been in support of these two high-growth areas. We believe that this has been the right strategy for the company, as from fiscal 2013 through 2017, we've increased top-line revenue by 65%, and 90% of that growth came from our life sciences and semi-automation initiatives.
The divestiture of our cryo vacuum and cryo chiller business is a critical strategic decision for Brooks. We've been in the business since our merger with Helix Technology Corp. in 2005. Over the years, we benefited from strong financial performance and excellent customer relationship. For a few years, beginning in 2011, technical contributions from our cryo scientists were instrumental in the foundation of our life sciences business. Except for the adaptation of some of the cold technologies to life sciences, most of the cryo business is focused on vacuum creation applications, and the vast majority of those to the manufacture of semiconductor and semiconductor-related devices.
We've always believed that there are additional high-value applications for these capabilities in adjacent markets, we've also been cognizant that the capture of these opportunities would take additional investment and would require broader presence in these new markets, investments which we've been reluctant to make without impacting our life sciences and semi-automation initiatives. Without additional investment in the cryogenic vacuum business, our growth opportunities in that segment are somewhat limited due to the high market share positions that we hold and the existence of competition that's capable enough to compete for substantial market share. We are pleased that Atlas Copco shares our vision for growth opportunities in this business. They have both the ability to invest in growth of these market opportunities and the global commercial presence to support products in these adjacent segments.
Furthermore, Atlas Copco will provide an excellent home for our employees who will remain with the business, they will be exceptional stewards of the products, which will continue to receive their investment and dependable partners to our customers, most of whom are already served by Atlas Copco through their other market-leading vacuum product lines. We would imagine that a move of this significance will bring some questions, I'll try to anticipate 2 of them right now. First, isn't the cryo capability necessary for the life sciences business? Well, in our earliest days of life sciences product and market development, we did utilize scientific and engineering expertise from our semiconductor business unit to help in the development of next-generation automated cold store and handling systems. As we've grown the life sciences business, we've built an exceptional engineering and development team that includes dedicated automation and cryogenic experts.
We now have more than 750 employees in our life sciences business unit, and we're confident that we have all of the capabilities needed to develop, manufacture, market, sell, and support the next generations of life sciences cold chain products. A second question relates to what we'll do with the proceeds from the sale. As we demonstrated to you, we've built our business through focused investment in new product development and through acquisition of companies and capabilities that accelerate our roadmaps. Over the past seven years, we've completed 15 acquisitions, 11 in life sciences and four in semiconductor automation. We intend to continue our strategy to look for acquisitions to grow these two segments, and with the proceeds of this transaction, we expect that we have sufficient capital to consider one or more transformative acquisitions.
We have a robust pipeline of opportunities that include expansion of core life sciences areas where we already have offerings, and adjacent service offerings that can add more value to samples under management. We also plan to remain opportunistic in the semiconductor automation space. We believe that this change to our product portfolio provides an injection of capital that will allow us to accelerate our pursuit of more profitable growth, gives management the ability to more clearly focus on these opportunities, and transfers the strong cryo business to Atlas Copco, who we believe will continue to support our customers, employees, and further the development of applications that are natural extensions of the capability already existing in the cryo vacuum business unit. We're energized by the opportunities enabled by this strategic move, and we look forward to the continued transformation of Brooks.
I'll now turn the call back over to Lindy, who will give you more specifics about the deal and an outline of next steps.
Thank you, Stephen. I will now turn over to the slide presentation I referenced on our website. Looking at page three, I just highlight some of the remarks that Stephen made. That is, the transaction was for $675 million, of course, subject to final working capital amount. We feel strongly we now have our business positioned on two strong platforms with high growth potential. This transaction, of course, is putting a significant amount of capital in front of us for use for future growth opportunities. Let's go on to page four, and I'll give you more details of the transaction. The products and operations affected are those which pertain to the cryogenic vacuum business inside our semiconductor solutions segment. These include the CTI vacuum pump, the Polycold chillers, and the services related to these products.
These product lines have been running at approximately $195 million in revenue over the past year, and we typically see gross margins in this area running approximately one to three points less than the average semiconductor segment margin. In the sale, we are also transferring our share of the UCI joint venture, which operates in Japan in partnership with Ulvac, and which primarily services the OLED and LED market. I should highlight that you find the income from the joint venture below our operating profit line in P&L. In accordance with GAAP, we will place the operations of the business into discontinued operations as we close this quarter.
For now, we're happy to say we will leave our recent guidance in place for the total of the business, meaning that the sum of continued operations and discontinued operations remain on track to achieve that range of results on a non-GAAP basis. At the end of the September quarter, we will demonstrate the results in this context as well as report to you the results of the continuing operations. In regards to timing, we anticipate a closing inside the March quarter, our second quarter of fiscal 2019. The transaction will be subject to traditional regulatory reviews, including the HSR review. In this case, we will submit the transaction for CFIUS review. While regulatory approvals always present some risk to transactions, we see these regulatory processes primarily as a variable of time.
We estimate the proceeds will net approximately $560 million in cash to the company after consideration of taxes. As most of the asset value is in the U.S., the majority of cash will come into the U.S., while a smaller amount will remain overseas for future investment. We anticipate making full use of available U.S. net operating losses carried forward on our balance sheet, as well as other deferred tax assets as appropriate. Our leverage equation with our current debt level will move up modestly, but remains low within the range of our target levels. Of course, the available capital significantly increases our capacity for future acquisitions. Let's move on to slide five, which chronicles the M&A transactions since we stepped into the life science business.
I believe you can see how this divestiture is indeed consistent with past actions where we have made divestitures and reapplied the capital to new opportunities in life sciences and semiconductor automation. I want to highlight on this page also that the Granville-Phillips instruments business, which we divested in 2014 for $87 million, was also a subset of the Helix business, which was where we acquired the cryogenics business originally in 2005. You can also observe that the total of our past seven years of acquisition activity approximates a three-to-one ratio of transactions and dollar value expended for expanding life sciences compared to the opportunities we find to strengthen the semiconductor portfolio. All transactions have been purposeful in moving the portfolio to higher value. We'll continue to be thoughtful and disciplined in our steps going forward. The proceeds from this divestiture is expected to enable ever more transformative targets.
If you move with me to slide six, I think you'll further see the rationale for this divestment. I show you the traction of the life science business and that of the semiconductor automation business, both showing significant double-digit growth over the recent five-year period. Cryogenic vacuum business has certainly enjoyed growth, but it's just not justified the investment aligned with our priorities. The proceeds from the divestiture will allow us to accelerate the investments in these higher growth spaces. Turning now over to slide seven, we'll provide a snapshot to remind you of our portfolio going forward. Based on our 2018 revenue forecast, we estimate more than 30% will be from the life sciences side of the business, where we've built the broadest offerings in the market for end-to-end sample management.
Semiconductor, which is now primarily automation, is estimated to represent 69% of the revenue and will now have the high majority of revenue in the high growth spaces, driven by those growth drivers of deposition and etch, advanced packaging, and contamination control. Let's look at the next steps more carefully on page eight. We'll focus first on executing the deal. It is important to note we already have much preparation work completed, and I believe this, indeed, was an important element in finding the optimal home for the business among potential buyers. As we look toward the closure of the deal by the March quarter, we are focusing resources on the transition services agreement to support the buyer. We do not foresee a long transition period, nor do we have exposure to penalties if timelines extend.
As we move past this point, we'll begin steps to realign our infrastructure for the businesses we will serve going forward. Of course, in the categories of growth, we also have resources dedicated today to driving both organic and acquisitive growth initiatives, which we work on daily. This transformation map shows a high-level view of our intermediate steps, but I would emphasize this is not a new roadmap for our team. M&A is a key element of how we define our business model nowadays, and we know how to do this. The sale and the transition are always hard work, while the end state of the growth, the new markets, and improved results are the motivating factors for the Brooks team. If you turn now to slide nine, I show you that there's a similar message of consistency.
We're on the same strategic roadmap we've outlined for you for the past five years, extending our leadership in our markets, accelerating growth of life sciences, driving margin expansion, and responsible deployment of capital. Finally, on slide 10, I want to be sure that you've heard our primary direction. Both Steve and I have highlighted we will use this opportunity to accelerate the transformation of Brooks, still perfectly aligned with the strategic priorities. The capital proceeds are a significant enabling factor for us. We're strengthening our two segments by driving focus further into high growth areas to extend our market leadership. As is the purpose of the call, we highlight the transaction and that the closing is expected to occur by the March quarter.
This concludes our prepared remarks. I'll now turn the call back over to Melody, the operator, to take questions from the line.
Thank you. Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-toned prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you are using a speakerphone, please lift your handset before entering your request. Again, to register for a question, that is the one followed by the four on your telephone. One moment, please, for the first question. Our first question comes from the line of Craig Ellis with B. Riley FBR. Your line is open. Please proceed with your question.
Thanks for taking the question. Stephen and Lindy, congratulations on the announced transaction and the valuation you're getting for what's been a good business for Brooks and looks like a good fit elsewhere. The first question is really a clarification. You mentioned that you'll submit for CFIUS approval. Is there other country approval that will be needed for this deal?
There's no other country approvals. I would reiterate that we've been careful on this, and we did seek advice outside that specializes in this area, and it's assessed to be less risk than typical and that we expect it to go through. We think this is a variable of timing, but in these days with administration and variables of approval, you always have to highlight that risk.
Thanks, Lindy. The first question is something that I've been getting both last night and this morning, that is related to potential redeployment of proceeds. Is there a list of potential targets that you have now? If so, can you speak to capabilities that you would be looking to add on either side of the business at this juncture?
Sure, Craig. Hi, it's Steve.
Thanks, Steve.
In my script, I tried to outline, we have opportunities both to bolster businesses that we're already in. You can imagine more samples under management is one key target, and in additional services to add to those capabilities. The pipeline, when we say it's robust, it's quite robust. There are numerous potential opportunities that exist, as there have been for the past five years, it's no different. One thing that I will tell you is during the last two years, both the number and the size of the opportunities of things that are in our pipeline have grown. That's been encouraging for us. Without question, we're active, and I reiterate, the pipeline is robust.
That's helpful.
On the semi side.
Go ahead.
On the semi side, the opportunities, they remain fewer for us, but we still are always on the lookout, and we're aware of some opportunities. To use the word and the proofs that we have behind us, we'll be opportunistic in and around the semi space.
Got it. Thank you. Then, turning to a couple financial issues, I'll try and wrap it into one question. Lindy, helpful to get the roadmap for how you'll proceed with the transaction. Can you provide more detail around the magnitude of stranded costs and the timing with which you might work those down? As we look out into the future beyond 2019 and beyond, what's the impact to the company's previously stated target financial model, where I believe midpoint earnings per share is in the $2.50 level?
First, I'll hit to the blunt point. We're not prepared to give a longer-term model update. We're going to get to the end of this year. Let me back up a little bit. You asked the question on stranded costs. As we highlighted, there is obviously stranded costs. We share G&A. In the cryo business, it fit our OEM sales equation very nicely. We allocate a significant amount of our back office, our G&A, on an allocation of revenue, in particular across semi. Some of our life sciences businesses are fully integrated and share that allocation, some of them remain a little more direct still inside the business. It's not a complete allocation. That'll give you a flavor that if we divested 20, 24% of our revenue, that it'll be something less than that, but close to that on the allocation of G&A.
We know it's a sizable challenge for us. Our first and foremost agenda item is to be successful in the transition of the business to do things right, to deliver the profit while we own the business, to prepare the team and the buyer for accepting the business successfully. Meanwhile, we are working on a roadmap to then reduce the corporate structure. As we do that, we'll lean down the business. We believe that we'll reduce that stranded cost, I'll estimate, by half or a little more. Meanwhile, as we build our business on the roadmap of targets, we will then reassess again in terms of how we need that corporate structure, how we don't need that corporate structure to run the businesses that we acquire. Craig, that's my roadmap and description. I know it'd be more useful for models if I gave numbers.
We're not prepared to do that. I think as we get to the end of this quarter, two things will happen. One, we will make it really clear how we did against the guidance for the quarter in aggregate. Secondly, we'll give you a more full update on what our plans are as we head into our fiscal 2019.
That's very helpful, guys. Good luck with the transaction.
Thank you, Craig.
Thanks, Craig. We appreciate it.
Thank you. Our next question comes from the line of Amanda Scarnati with Citi. Please proceed. Your line is open.
Thanks. Just following up on how you expect to use this new cash that you have. Sitting on a lot more cash now with this transaction, plus the debt that was added earlier in the year, do you see yourself looking towards more acquisitions that could be transformative, or is it still sort of smaller transactions that kind of enhance the portfolio as you go along?
Yeah. Hi, Amanda. The number of smaller transactions, that population is pretty much the same. Again, because we have a well-established business right now, we're pretty selective, so we don't have to go after everything. That pipeline remains about the same. There are more deals that are more substantive in size, we would anticipate we'll continue to pursue those. Again, we've got ROIC objectives and reasons to continue to be disciplined. I think the expectation is that the company's out looking at both smaller and larger deals in the life sciences space.
What is the ideal split between the semi business and the non-semi business? I know you're not quite ready to update the target model, if there's just kind of an ideal split in your mind, where would that fall?
Amanda, it's interesting, we don't spend much time on the split of the business. We go after the semi business and all the opportunity that it brings. As that market expands, we seem to be expanding at a greater rate. We go after that with vigor and a lot of focus. In life sciences, we think the market opportunity is larger. We manage two businesses Relatively independently from that standpoint, of course, we would anticipate that the growth rates and the size of the market opportunities that exist, that in a five-year period, we could imagine life sciences going beyond the size of semi, just because of the size of the opportunity and the market opportunities that are presented.
We really go after driving profitable growth, and the mix will be what it is as a result, as opposed to us managing or targeting any particular mix.
Great. Thank you.
Thank you. Our next question comes from the line of Patrick Ho with Stifel. Please proceed. Your line is open.
Thank you very much, and congrats, guys, on the deal. Steve, maybe first off, in terms of your customers, some of the cryogenic customers are the same ones on the vacuum automation side of things. I guess the bigger picture question is, given that you've been through a lot of these type of semi deals, how do you placate them to make sure that you're not abandoning everything longer term, with a greater focus on life sciences? Basically, how do you ensure that they feel comfortable with the rest of the businesses being a core Brooks story?
Sure. It's a consideration always, Patrick, and a really good question. I think that as we're really close to the customers in all parts of the business, you can imagine from a cryo and automation side, I think the customers have really seen our investment in R&D and next product development in the pursuit of leading their needs at 7 nanometer and 5 nanometer in the automation space. The fact that we continue to make acquisitions in the space to stay whole, to stay healthy, and stay in front of them. I think it'd be tough to be able to give them more confidence about that. At the same time, we've been very supportive in the cryo vacuum space, but without additional breakthrough opportunities, the capabilities that we've developed have been largely unchanged, but certainly from reliability and an economic standpoint, have vastly improved over the years.
I think the customers, and of course, we've reached out already, I think the customers are comforted to know that the intentions of Atlas Copco are to leave the engineering and the manufacturing operations in place to utilize Chelmsford as the headquarters to continue to rely on the same people doing the same kinds of things for them. I think that gives them some comfort. Again, I think our track record of the investments that we've made and the amount of resource and technology we've applied against the customer problems hopefully gives them great comfort. Again, in the conversations that we've had, the customers just wanted to reiterate that, but I think they've witnessed our commitment. Patrick, over the next months and years, we're going to have to continue to demonstrate it to them.
It's a really good question, but one I think that we'll continue to work closely with our customers to make sure that they still receive our full commitment.
Fair enough. Maybe as my follow-up question on the financial side of the ledger, the one thing I believe that you guys have done extremely good job on the semiconductor business in terms of the margins and delivering profit. For the longest time, I believe the cryogenics has been a part of that, generating profits for the overall company, which helps support the investments on the life sciences side. Timing is always everything, and obviously, you said the deal closed in the March quarter, but how do you potentially, I guess, make up some of the gap on the profit side that'll help keep funding the investments needed on the life sciences side if there's a gap between a potential deal on that end?
Patrick, this has been very specific to our strategy, is you've read it right, that the semiconductor business has been interestingly described in the last 3 years as a stable, growing, and cash-producing part of the business. If you went back 5 years ago, people questioned it in terms of the cyclicality, whether it's a rocky road. It has been built into a much stronger business. A lot of that is on the automation and contamination control being added to the portfolio. You're right, that the cryo business has also produced profit and cash for us. We still have the largest portion of the semi elements there, but letting go of the cryo and the cryo repair, it's a very healthy business that we're passing to the buyer.
Why we feel comfortable doing it at this juncture is, one, life sciences traction on the growth and the profit roadmap that we've given you, we feel strongly about, and we have a lot of conviction that it's on path. As I inferred in our guidance, we have a roadmap to get to the 10% operating margin in life sciences this quarter. I need to be at the high end of that quarter revenue, but it's going to be profitable and improving in profitability. As we go into 2019, we'll see another step of profitability as our roadmaps have shown you. As we add to that, as Steve highlighted, we do focus on ROIC metrics. We focus on the value that the businesses we bring in will bring in additional profit.
We're keenly looking at this equation, and we feel very comfortable that this was a good timeline and capability, that we're not putting the business at risk. We're actually capitalizing On really 3 vectors: an improved business model where we've achieved significant value from it. Secondly, the growth of the semi market has heightened the valuations, I believe, as it should be for the future. It's much better to do this today than it would have been earlier. Finally, our life sciences business and our semi-automation business is ready to stand on its own, and we feel really good where it's headed. I do look forward to putting an updated model, which will put numbers to this and clarity in front of our investors. We're going to let this be absorbed.
We'll go through the discontinued operation separation, we'll get more clarity on it, we'll provide more details to this in the future.
Great. Good luck, guys. Thank you again.
Thanks. Bye, Patrick.
Thank you. Our final question comes from the line of Paul Knight with Janney Montgomery Scott. Your line is open. Please proceed.
Hi, Steve. With this additional capital that you will receive, is there also going to be a pickup in CapEx? I know you have facilities worldwide that customers probably want more of. Should we expect a CapEx build as well with more facilities, more services?
Yeah. Paul, I think as you're aware, the CapEx model we have, Lindy refers to it often as a variable CapEx. As there's capacity needed for sample storage, we'd add there, but it's been modest. We would continue the same kind of trend from that standpoint on a CapEx spend. I wouldn't anticipate any big bump in CapEx.
What do you worry about the most on this transaction that we should be aware of with this deal?
In terms of the capital or when you ask about the awareness of this deal?
The moving part. I guess, one thing you had mentioned was achieving profitability at the full asset. Anything else?
No. Well, I'll share with you that we have about a round number of 450 employees affected by this, and we're spending a lot of time with those employees. Last night, we were on the phone with Asia, and this morning, we'll be having meetings with our employee base in total, as well as our employee base that's affected. The buyer is visiting with us today and starting to meet with the portions of the management team that they haven't met with as an introduction. They're in no way stepping in to manage the business, as we're not closing the business for another few months. I think those are important points, though. The transition's underway. We've had many meetings with the buyer, so we feel like the transaction is in good hands right now to proceed going forward.
In terms of the business impact, there is a high consideration for us, as the previous questions have highlighted, that the profit there has been good, and that's what brings a good price on what we've sold. I think, Paul, our primary focus is make the transition successful, focus on those stranded costs to reduce them, and have our structure tuned ready to take in the future acquisitions. I'd emphasize this last point. The only reason we do something like this is to move forward. It's not to slow down. Moving forward is our focus on taking in new investment and new acquisitions. We don't put a target on that in terms of a model because we don't get backed into a corner. We only do things that make sense. That's our focus going forward.
Lastly, the cryo business, Steve, it was, I think, slower growth. Was it a lumpier business?
Paul, during the last five years, it's been pretty steady, but again, the market share positions are high. A vast majority of the business is dedicated to semi and semi-related devices. Because semiconductor's been relatively strong, it's also been a strong market. It hasn't grown like the other segments. However, that said, if and as semi slows down, if it goes through cycles, this particular business would be subject to those cycles.
Okay. Thank you.
Thanks, Paul.
I will turn it back to you for final remarks.
Everyone, we really appreciate the attention that you give us on our regular calls and on this special call. It's a big day for us in terms of a transition, but it's another day for us in that this is something we've done several times. As we said, this is part of the definition of Brooks, the transformation portion of our model, and we really appreciate the attention you give us. Look forward to seeing you as we're out on the street in conferences. Thank you very much.
Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.