brks_Current_Folio_10Q

Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


 

FORM 10-Q

 


(Mark One)

 

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

For the quarterly period ended: June 30, 2017

 

 

 

OR

 

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from __________ to _________

 

Commission File Number 000-25434


 

BROOKS AUTOMATION, INC.

(Exact name of registrant as specified in its charter)

 


 

 

 

Delaware

04-3040660

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

15 Elizabeth Drive

Chelmsford, Massachusetts

(Address of principal executive offices)


01824

(Zip Code)


Registrant’s telephone number, including area code: (978) 262-2400


 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes      No  

 

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:

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

 (Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

 

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 Rule 12b-2 of the Exchange Act).    Yes      No  

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date, July 27, 2017: common stock, $0.01 par value and 69,759,300 shares outstanding.

 

 

 


 

Table of Contents

BROOKS AUTOMATION, INC.

Table of Contents

 

PAGE NUMBER

 

 

PART I. FINANCIAL INFORMATION 

3

Item 1. Consolidated Financial Statements 

3

Consolidated Balance Sheets as of June 30, 2017 and September 30, 2016 (unaudited) 

3

Consolidated Statements of Operations for the three and nine months ended June 30, 2017 and 2016 (unaudited) 

4

Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended June 30, 2017 and 2016 (unaudited) 

5

Consolidated Statements of Cash Flows for the nine months ended June 30, 2017 and 2016 (unaudited) 

6

Notes to Consolidated Financial Statements (unaudited) 

7

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

35

Item 3. Quantitative and Qualitative Disclosures about Market Risk 

50

Item 4. Controls and Procedures 

50

PART II. OTHER INFORMATION 

51

Item 1. Legal Proceedings 

51

Item 1A. Risk Factors 

51

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

51

Item 5. Other Information 

51

Item 6. Exhibits 

52

Signatures 

53

 

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PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

BROOKS AUTOMATION, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

    

June 30, 

    

September 30, 

 

 

2017

 

2016

Assets

 

 

  

 

 

  

Current assets

 

 

  

 

 

  

Cash and cash equivalents

 

$

117,081

 

$

85,086

Marketable securities

 

 

12

 

 

39

Accounts receivable, net

 

 

120,752

 

 

106,372

Inventories

 

 

105,304

 

 

92,572

Prepaid expenses and other current assets

 

 

22,215

 

 

15,265

Total current assets

 

 

365,364

 

 

299,334

Property, plant and equipment, net

 

 

52,949

 

 

54,885

Long-term marketable securities

 

 

2,565

 

 

6,096

Long-term deferred tax assets

 

 

1,460

 

 

1,982

Goodwill

 

 

210,609

 

 

202,138

Intangible assets, net

 

 

75,458

 

 

81,843

Equity method investments

 

 

32,628

 

 

27,273

Other assets

 

 

5,738

 

 

12,354

Total assets

 

$

746,771

 

$

685,905

Liabilities and Stockholders' Equity

 

 

  

 

 

  

Current liabilities

 

 

  

 

 

  

Accounts payable

 

$

49,991

 

$

41,128

Deferred revenue

 

 

33,062

 

 

14,966

Accrued warranty and retrofit costs

 

 

7,646

 

 

6,324

Accrued compensation and benefits

 

 

21,718

 

 

21,254

Accrued restructuring costs

 

 

1,690

 

 

5,939

Accrued income taxes payable

 

 

10,466

 

 

7,554

Accrued expenses and other current liabilities

 

 

20,686

 

 

22,628

Total current liabilities

 

 

145,259

 

 

119,793

Long-term tax reserves

 

 

1,782

 

 

2,681

Long-term deferred tax liabilities

 

 

2,950

 

 

2,913

Long-term pension liabilities

 

 

2,469

 

 

2,557

Other long-term liabilities

 

 

4,539

 

 

4,271

Total liabilities

 

 

156,999

 

 

132,215

Commitments and contingencies (Note 18)

 

 

  

 

 

  

Stockholders' Equity

 

 

  

 

 

  

Preferred stock, $0.01 par value- 1,000,000 shares authorized, no shares issued or outstanding

 

 

 —

 

 

 —

Common stock, $0.01 par value- 125,000,000 shares authorized, 83,216,169 shares issued and 69,754,300 shares outstanding at June 30, 2017, 82,220,270 shares issued and 68,758,401 shares outstanding at  September 30, 2016

 

 

832

 

 

821

Additional paid-in capital

 

 

1,867,645

 

 

1,855,703

Accumulated other comprehensive income

 

 

15,000

 

 

15,166

Treasury stock, at cost- 13,461,869 shares

 

 

(200,956)

 

 

(200,956)

Accumulated deficit

 

 

(1,092,749)

 

 

(1,117,044)

Total stockholders' equity

 

 

589,772

 

 

553,690

Total liabilities and stockholders' equity

 

$

746,771

 

$

685,905

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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BROOKS AUTOMATION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

    

Revenue

 

 

  

 

 

  

 

 

  

 

 

  

 

Products

 

$

141,957

 

$

111,596

 

$

396,684

 

$

302,238

 

Services

 

 

39,760

 

 

35,938

 

 

114,321

 

 

100,532

 

Total revenue

 

 

181,717

 

 

147,534

 

 

511,005

 

 

402,770

 

Cost of revenue

 

 

  

 

 

  

 

 

  

 

 

  

 

Products

 

 

85,658

 

 

69,557

 

 

243,360

 

 

192,816

 

Services

 

 

24,487

 

 

23,814

 

 

74,606

 

 

68,437

 

Total cost of revenue

 

 

110,145

 

 

93,371

 

 

317,966

 

 

261,253

 

Gross profit

 

 

71,572

 

 

54,163

 

 

193,039

 

 

141,517

 

Operating expenses

 

 

  

 

 

  

 

 

  

 

 

  

 

Research and development

 

 

11,958

 

 

12,819

 

 

34,148

 

 

39,208

 

Selling, general and administrative

 

 

40,016

 

 

31,854

 

 

109,496

 

 

98,667

 

Restructuring charges

 

 

828

 

 

996

 

 

2,663

 

 

9,807

 

Total operating expenses

 

 

52,802

 

 

45,669

 

 

146,307

 

 

147,682

 

Operating income (loss)

 

 

18,770

 

 

8,494

 

 

46,732

 

 

(6,165)

 

Interest income

 

 

137

 

 

55

 

 

432

 

 

310

 

Interest expense

 

 

(93)

 

 

(37)

 

 

(286)

 

 

(56)

 

Gain on settlement of equity method investment

 

 

 —

 

 

 —

 

 

1,847

 

 

 —

 

Other loss, net

 

 

(314)

 

 

(107)

 

 

(848)

 

 

(289)

 

Income (loss) before income taxes and earnings of equity method investments

 

 

18,500

 

 

8,405

 

 

47,877

 

 

(6,200)

 

Income tax provision

 

 

3,680

 

 

220

 

 

9,900

 

 

75,070

 

Income (loss) before equity in earnings of equity method investments

 

 

14,820

 

 

8,185

 

 

37,977

 

 

(81,270)

 

Equity in earnings of equity method investments

 

 

2,530

 

 

379

 

 

7,249

 

 

1,248

 

Net income (loss)

 

$

17,350

 

$

8,564

 

$

45,226

 

$

(80,022)

 

Basic net income (loss) per share

 

$

0.25

 

$

0.12

 

$

0.65

 

$

(1.17)

 

Diluted net income (loss) per share

 

 

0.25

 

 

0.12

 

 

0.64

 

 

(1.17)

 

Dividend declared per share

 

 

0.10

 

 

0.10

 

 

0.30

 

 

0.30

 

Weighted average shares used in computing net income (loss) per share:

 

 

  

 

 

  

 

 

  

 

 

  

 

Basic

 

 

69,711

 

 

68,628

 

 

69,496

 

 

68,437

 

Diluted

 

 

70,405

 

 

69,166

 

 

70,198

 

 

68,437

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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BROOKS AUTOMATION, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

    

Net income (loss)

 

$

17,350

 

$

8,564

 

$

45,226

 

$

(80,022)

 

Other comprehensive income (loss), net of tax:

 

 

  

 

 

  

 

 

  

 

 

  

 

Cumulative foreign currency translation adjustments

 

 

4,592

 

 

1,766

 

 

(164)

 

 

6,793

 

Unrealized gains (losses) on marketable securities, net of tax effects of $0 during each of the three and nine months ended June 30, 2017, and $0 and ($58) during the three and nine months ended  June 30, 2016

 

 

 4

 

 

11

 

 

 2

 

 

(92)

 

Actuarial gains (losses), net of tax effects of $0 and $5 during the three and nine months ended June 30, 2017, $1 and $0 during the three and nine months ended  June 30, 2016

 

 

 2

 

 

(1)

 

 

(4)

 

 

 2

 

Total other comprehensive income (loss), net of tax

 

 

4,598

 

 

1,776

 

 

(166)

 

 

6,703

 

Comprehensive income (loss)

 

$

21,948

 

$

10,340

 

$

45,060

 

$

(73,319)

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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BROOKS AUTOMATION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

June 30, 

 

 

 

    

2017

    

2016

    

 

Cash flows from operating activities

 

 

  

 

 

  

 

 

Net income (loss)

 

$

45,226

 

$

(80,022)

 

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

  

 

 

  

 

 

Depreciation and amortization

 

 

20,649

 

 

21,320

 

 

Gain on settlement of equity method investment

 

 

(1,847)

 

 

 —

 

 

Stock-based compensation

 

 

11,081

 

 

8,206

 

 

Amortization of premium on marketable securities and deferred financing costs

 

 

24

 

 

368

 

 

Undistributed earnings of equity method investments

 

 

(7,249)

 

 

(1,248)

 

 

Deferred income tax provision

 

 

498

 

 

71,875

 

 

Gain on disposal of long-lived assets

 

 

(106)

 

 

 —

 

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

  

 

 

  

 

 

Accounts receivable

 

 

(14,644)

 

 

2,862

 

 

Inventories

 

 

(12,851)

 

 

2,110

 

 

Prepaid expenses and other current assets

 

 

(6,076)

 

 

(3,909)

 

 

Accounts payable

 

 

9,470

 

 

(4,689)

 

 

Deferred revenue

 

 

17,875

 

 

7,171

 

 

Accrued warranty and retrofit costs

 

 

1,299

 

 

(87)

 

 

Accrued compensation and tax withholdings

 

 

279

 

 

(6,558)

 

 

Accrued restructuring costs

 

 

(4,201)

 

 

3,720

 

 

Accrued expenses and other current liabilities

 

 

1,954

 

 

(5,010)

 

 

Net cash provided by operating activities

 

 

61,381

 

 

16,109

 

 

Cash flows from investing activities

 

 

  

 

 

  

 

 

Purchases of property, plant and equipment

 

 

(6,827)

 

 

(9,414)

 

 

Purchases of technology intangibles

 

 

(240)

 

 

 —

 

 

Purchases of marketable securities

 

 

 —

 

 

(12,901)

 

 

Sales and maturities of marketable securities

 

 

3,590

 

 

139,388

 

 

Disbursement for a loan receivable

 

 

 —

 

 

(1,491)

 

 

Acquisitions, net of cash acquired

 

 

(5,346)

 

 

(125,498)

 

 

Purchases of other investments

 

 

(170)

 

 

(500)

 

 

Net cash used in investing activities

 

 

(8,993)

 

 

(10,416)

 

 

Cash flows from financing activities

 

 

  

 

 

  

 

 

Proceeds from issuance of common stock

 

 

960

 

 

948

 

 

Payment of deferred financing costs

 

 

(27)

 

 

(508)

 

 

Common stock dividends paid

 

 

(20,932)

 

 

(20,613)

 

 

Net cash used in financing activities

 

 

(19,999)

 

 

(20,173)

 

 

Effects of exchange rate changes on cash and cash equivalents

 

 

(394)

 

 

(126)

 

 

Net increase (decrease) in cash and cash equivalents

 

 

31,995

 

 

(14,606)

 

 

Cash and cash equivalents, beginning of period

    

 

85,086

  

 

80,722

    

  

Cash and cash equivalents, end of period

 

$

117,081

  

$

66,116

 

  

Supplemental disclosure of non-cash investing and financing activities:

 

 

  

 

 

  

 

 

Purchases of property, plant and equipment included in accounts payable

 

$

1,009

 

$

1,245

 

 

Fair value of non-cash consideration for the acquisition of Cool Lab, LLC

 

 

10,348

 

 

 —

 

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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BROOKS AUTOMATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. Basis of Presentation

The unaudited consolidated financial statements of Brooks Automation, Inc. and its subsidiaries (“Brooks”, or the “Company”) included herein have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). All intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all material adjustments, which are of a normal and recurring nature and necessary for a fair statement of the financial position and results of operations and cash flows for the periods presented, have been reflected in the accompanying unaudited consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full fiscal year.

Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements have been condensed or omitted and, accordingly, the accompanying financial information should be read in conjunction with the audited consolidated financial statements and notes thereto contained on the Company’s Annual Report on Form 10‑K filed with the United States Securities and Exchange Commission (the “SEC”) for the fiscal year ended September 30, 2016 (the "2016 Annual Report on Form 10‑K"). The accompanying Consolidated Balance Sheet as of September 30, 2016 was derived from the audited annual consolidated financial statements as of the period then ended.

 

2. Summary of Significant Accounting Policies

Foreign Currency Translation

Certain transactions of the Company and its subsidiaries are denominated in currencies other than their functional currency.

Foreign currency exchange losses generated from the settlement and remeasurement of these transactions are recognized in earnings and presented within “Other loss, net” in the Company’s unaudited Consolidated Statements of Operations. Net foreign currency transaction and remeasurement losses totaled $0.7 million and $0.5 million, respectively, during the three months ended June 30, 2017 and 2016 and $1.6 million and $1.5 million, respectively, during the nine months ended June 30, 2017 and 2016.

Use of Estimates

The preparation of unaudited consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates are associated with accounts receivable, inventories, goodwill, intangible assets other than goodwill, long-lived assets, derivative financial instruments, deferred income taxes, warranty obligations, revenue recognized using the percentage of completion method, pension obligations and stock-based compensation expense. The Company bases its estimates on historical experience and various other assumptions, including in certain circumstances, future projections that management believes to be reasonable under the circumstances. Although the Company regularly assesses these estimates, actual results could differ from those estimates. Changes in estimates are recorded in the period in which they occur and become known.

Recently Issued Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (the "FASB") issued an amendment to the accounting guidance related to goodwill impairment testing which eliminates the requirement to calculate the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. In accordance with the provisions of the newly issued guidance, an entity should perform its goodwill impairment test by comparing the fair value of the reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount

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exceeds the reporting unit’s fair value, up to the amount of goodwill allocated to that reporting unit. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019 and should be adopted prospectively. Early adoption of the newly issued guidance is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company performs its annual goodwill impairment assessment on April 1st of each fiscal year. The Company adopted the guidance during the third quarter of fiscal year 2017. The adoption of the guidance did not have an impact on the Company’s financial position or results of operations. No triggering events indicating goodwill impairment occurred during the three and nine months ended June 30, 2017. Please refer to Note 5, “Goodwill and Intangible Assets” for further discussion.

In January 2017, the FASB issued an amendment to the accounting guidance on business combinations to clarify the definition of a business when assessing whether a set of transferred assets and activities represents a business. Such set of transferred assets and activities does not represent a business if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If the threshold is not met, entities need to evaluate whether the set of assets and activities meets the requirement that a business includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and should be adopted prospectively. Early adoption of the newly issued guidance is permitted. The Company is currently evaluating the impact of this guidance on its financial position and results of operations.

In February 2016, the FASB issued new accounting guidance for reporting lease transactions. In accordance with the provisions of the newly issued guidance, a lessee should recognize at the inception of the arrangement a right-of-use asset and a corresponding lease liability initially measured at the present value of lease payments over the lease term. For finance leases, interest on a lease liability should be recognized separately from the amortization of the right-of-use asset, while for operating leases, total lease costs are recorded on a straight-line basis over the lease term. For leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying assets to forgo a recognition of right-of-use assets and corresponding lease liabilities and record a lease expense on a straight-line basis. Entities should determine at the inception of the arrangement whether a contract represents a lease or contains a lease which is defined as a right to control the use of identified property for a period of time in exchange for consideration. Additionally, entities should separate the lease components from the non-lease components and allocate the contract consideration on a relative standalone price basis in accordance with provisions of ASC Topic 606, Revenue from Contracts with Customers. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 and should be adopted via a modified retrospective approach with certain optional practical expedients that entities may elect to apply. The Company expects to adopt the guidance during the first quarter of fiscal year 2020 and is currently evaluating the impact of this guidance on its financial position and results of operations.

In June 2016, the FASB issued new accounting guidance for reporting credit losses. The new guidance introduces a new "expected loss" impairment model that applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities and other financial assets. Entities are required to estimate expected credit losses over the life of financial assets and record an allowance against the assets’ amortized cost basis to present them at the amount expected to be collected. Additionally, the guidance amends the impairment model for available for sale debt securities and requires entities to determine whether all or a portion of the unrealized loss on such debt security is a credit loss. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption of the newly issued guidance is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. The standard should be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company expects to adopt the guidance during the first quarter of fiscal year 2021 and is currently evaluating the impact of this guidance on its financial position and results of operations.

In February 2015, the FASB issued an amendment to the accounting guidance for consolidations of financial statements by changing the analysis that a reporting entity must perform to determine whether it should consolidate certain types of variable interest entities. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The guidance can be adopted either via a full retrospective approach or a modified retrospective approach by recording a cumulative-effect adjustment to beginning equity in the period of

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adoption. The Company adopted the guidance during the first quarter of fiscal year 2017. The adoption of the guidance did not have an impact on the Company’s financial position or results of operations. Please refer to Note 9, "Other Balance Sheet Information" for further discussion.

In August 2014, the FASB issued new accounting guidance related to evaluation of relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements issuance date. The guidance is effective for fiscal years ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company expects to adopt the guidance during the fourth quarter of fiscal year 2017. Early adoption of the newly issued guidance is permitted. The adoption of the guidance is not expected to have an impact on the Company’s financial position or results of operations.

In May 2014, the FASB issued new accounting guidance for reporting revenue recognition. The guidance provides for the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. A five-step process set forth in the guidance may require more judgment and estimation within the revenue recognition process than the current GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The guidance was initially effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. In August 2015, the FASB issued an amendment deferring the effective date of the guidance by one year. The guidance should be adopted retrospectively either for each reporting period presented or via recognizing the cumulative effect at the date of the initial application. Early adoption is permitted only as of annual reporting periods, including the interim periods, beginning after December 15, 2016. The Company expects to adopt the guidance during the first quarter of fiscal year 2019. The Company has initiated the evaluation of the potential impact of adopting the new guidance on its financial position and results of operations, but has not yet completed such assessment or determined the transition method that will be used to adopt the new guidance.

Other

For further information with regard to the Company’s Significant Accounting Policies, please refer to Note 2 "Summary of Significant Accounting Policies" to the Company’s consolidated financial statements included in the 2016 Annual Report on Form 10‑K.

 

 

3. Marketable Securities

The Company invests in marketable securities that are classified as available-for-sale and records them at fair value in the Company’s unaudited Consolidated Balance Sheets. Marketable securities reported as current assets represent investments that mature within one year from the balance sheet date. Long-term marketable securities represent investments with maturity dates greater than one year from the balance sheet date.

Unrealized gains and losses are excluded from earnings and reported as a separate component of accumulated other comprehensive income until the security is sold or matures. Gains or losses realized from sales of marketable securities are computed based on the specific identification method and recognized as a component of "Other loss, net" in the accompanying unaudited Consolidated Statements of Operations. During the three and nine months ended June 30, 2017, the Company sold marketable securities with a fair value and amortized cost of $3.6 million each and recognized net losses of less than $0.1 million. The Company collected cash proceeds of $3.5 million from the sale of marketable securities and reclassified net unrealized holding losses of less than $0.1 million from accumulated other comprehensive income into "Other loss, net" in the accompanying unaudited Consolidated Statements of Operations as a result of these transactions. There were no sales of marketable securities during the three months ended June 30, 2016. During the nine months ended June 30, 2016, the Company sold marketable securities with a fair value of $127.6 million and amortized cost of $127.7 million and recognized net losses of $0.2 million. Gross gains reported as a component of net losses recognized on the sale of marketable securities were insignificant during the nine months ended June 30, 2016. The Company collected cash proceeds of $127.0 million from the sale of marketable securities and reclassified net unrealized holding losses of $0.2 million from accumulated other comprehensive income into "Other loss, net" in the

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accompanying unaudited Consolidated Statements of Operations as a result of these transactions. There were no unrealized losses on available for sale securities presented as a component of accumulated other comprehensive income at June 30, 2017. Unrealized losses on available for sale securities presented as a component of accumulated other comprehensive income were insignificant at September 30, 2016.

The following is a summary of the amortized cost and the fair value, including accrued interest receivable, as well as unrealized holding gains (losses) on the short-term and long-term marketable securities as of June 30, 2017 and September 30, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Gross

    

Gross

    

 

 

 

Amortized

 

Unrealized 

 

Unrealized 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

June 30, 2017 :

 

 

  

 

 

  

 

 

  

 

 

  

Corporate securities

 

$

2,565

 

$

 —

 

$

 —

 

$

2,565

Other debt securities

 

 

12

 

 

 —

 

 

 —

 

 

12

 

 

$

2,577

 

$

 —

 

$

 —

 

$

2,577

September 30, 2016 :

 

 

  

 

 

  

 

 

  

 

 

  

Corporate securities

 

$

2,394

 

$

 —

 

$

 —

 

$

2,394

Other debt securities

 

 

39

 

 

 —

 

 

 —

 

 

39

Municipal securities

 

 

3,704

 

 

 1

 

 

(3)

 

 

3,702

 

 

$

6,137

 

$

 1

 

$

(3)

 

$

6,135

 

The fair values of the marketable securities by contractual maturities at June 30, 2017 are presented below (in thousands):

 

 

 

 

 

    

Fair Value

Due in one year or less

 

$

12

Due after ten years

 

 

2,565

Total marketable securities

 

$

2,577

 

Expected maturities could differ from contractual maturities because the security issuers may have the right to prepay obligations without prepayment penalties.

The Company reviews the marketable securities for impairment at each reporting period to determine if any of the securities have experienced an other-than-temporary decline in fair value. The Company considers factors, such as the length of time and extent to which the market value has been less than the cost, the financial condition and near-term prospects of the issuer, the Company’s intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of its amortized cost basis. If the Company believes that an other-than-temporary decline in fair value has occurred, it writes down the investment to fair value and recognizes the credit loss in earnings and the non-credit loss in accumulated other comprehensive income. There were no marketable securities in unrealized loss position as of June 30, 2017. As of September 30, 2016, aggregate fair value of the marketable securities in an unrealized loss position was $2.5 million and was comprised entirely of municipal securities. Aggregate unrealized losses for these securities were insignificant as of September 30, 2016 and are presented in the table above. These securities were not considered other-than-temporarily impaired and, as such, the Company did not recognize impairment losses during the period then ended. The unrealized losses were attributable to changes in interest rates that impacted the value of the investments.

 

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4. Acquisitions

Acquisitions Completed in Fiscal Year 2017

Acquisition of Cool Lab, LLC

On November 28, 2016, the Company acquired 100% of the equity of Cool Lab, LLC ("Cool Lab") from BioCision, LLC ("BioCision"). The Company held a 20% equity ownership interest in BioCision prior to the acquisition. Cool Lab was established as a subsidiary of BioCision on November 28, 2016 upon a transfer of certain assets related to cell cryopreservation solutions with net carrying values of $0.9 million. Cool Lab provides a range of patented and/or patent-pending offerings for sample cooling and freezing, controlled rate freezing, portable cryogenic transport and archival storage solutions for customers with temperature-sensitive workflow process. Cool Lab’s offerings assist in managing the temperature stability of therapeutics, biological samples, and related biomaterials in ultra-cold and cryogenic environments. The acquisition of Cool Lab is expected to allow the Company to extend its comprehensive sample management solutions across the cold chain of custody, which is consistent with the other offerings it brings to its life sciences customers. Please refer to Note 6, "Equity Method Investments" for further information on the equity interest in BioCision held by the Company immediately before the acquisition date.

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 the settlement of certain preexisting relationships with Cool Lab and BioCision, disclosed as non-cash consideration of $10.3 million, which has been measured at fair value on the acquisition date.

The non-cash consideration of $10.3 million consisted of financial instruments of BioCision held by the Company prior to the acquisition of Cool Lab that were subsequently measured at fair value on the acquisition date and delineated as non-cash consideration paid for Cool Lab. Such non-cash consideration was comprised of: (i) the redeemable fair value of the Company’s existing 20% equity ownership interest in BioCision of $3.1 million, (ii) convertible debt securities of BioCision and warrants of $5.6 million to purchase BioCision’s preferred units, and (iii) term notes of BioCision of $1.6 million including accrued interest. Such pre-acquisition financial instruments had an aggregate carrying value of $8.6 million and were measured at an aggregated fair value of $10.3 million on the acquisition date. As a result of such measurement, the Company recognized a net gain of $1.6 million in its unaudited Consolidated Statements of Operations during the nine months ended June 30, 2017. Please refer to Note 6, "Equity Method Investments" and Note 17, "Fair Value Measurements" for further information on the financial instruments included in the non-cash consideration and the valuation techniques and inputs used in fair value measurements.

The Company used a market participant approach to record the assets acquired and liabilities assumed in the Cool Lab acquisition. The purchase price allocation is based on a preliminary valuation and subject to further adjustments within the measurement period as additional information becomes available related to the fair value of such assets acquired and liabilities assumed. The fair values of intangible assets acquired and residual goodwill were preliminary as of June 30, 2017. The Company will refine such fair value estimates as new information becomes available during the measurement period. Any adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the acquisition date.

The preliminary amounts recorded were as follows (in thousands):

 

 

 

 

 

    

Fair Value of Assets
and
 Liabilities

Inventory

 

$

1,283

Intangible assets

 

 

6,100

Goodwill

 

 

8,527

Accrued liabilities

 

 

(30)

Other liabilities

 

 

(686)

Total purchase price

 

$

15,194

 

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Fair values of intangible assets acquired consisted of: (i) a customer relationship intangible asset of $3.6 million attributable to a certain customer, (ii) completed technology of $1.2 million and (iii) other customer relationship intangible assets of $1.3 million. The Company used the income approach in accordance with the excess-earnings method to estimate the fair value of customer relationship intangible assets which is equal to the present value of the after-tax cash flows attributable to the intangible asset only. The Company used the income approach in accordance with the relief-from-royalty method to estimate the fair value of the completed technology which is equal to the present value of the after-tax royalty savings attributable to owning that intangible asset. The weighted average amortization periods for intangible assets acquired are 3 years for the customer relationship intangible asset attributable to a certain customer, 8 years for completed technology and 10 years for other customer relationship intangible assets. The intangible assets acquired are amortized over the total weighted average period of 5.5 years using methods that approximate the pattern in which the economic benefits are expected to be realized, including percentage of revenue expected to be generated from sales to a certain customer over the contract term.

Goodwill represents the excess of the consideration transferred over the fair value of the net assets acquired and has been assigned to the Brooks Life Science Systems segment. Goodwill is primarily the result of expected synergies from combining the operations of Cool Lab with the Company’s operations and is deductible for tax purposes.

The Company recorded a liability of $0.7 million in the purchase price allocation that represented a preacquisition contingency incurred on the acquisition date. The obligation is related to a rebate that is due to a particular customer if the annual product sales volume metrics exceed threshold amounts under the provisions of the contract assumed by the Company. Fair value of such liability was determined based on a probability weighted discounted cash flow model. The carrying amount of the liability was $0.7 million at June 30, 2017. Additionally, the Company recognized a customer relationship intangible asset of $3.6 million related to this arrangement, as discussed above.

The operating results of Cool Lab have been reflected in the results of operations for the Brooks Life Science Systems segment from the date of the acquisition, which included approximately one month of activity during the first quarter of fiscal year 2017. During the three months ended June 30, 2017, revenue and net loss from Cool Lab recognized in the Company’s results of operations were $1.1 million and less than $0.1 million, respectively. During the nine months ended June 30, 2017, revenue and net loss from Cool Lab recognized in the Company’s results of operations were $2.5 million and $0.3 million, respectively. During the three and nine months ended June 30, 2017, the net loss included charges of $0.1 million and $0.4 million, respectively, related to the step-up in value of the acquired inventories and amortization expense $0.4 million and $0.8 million, respectively, related to acquired intangible assets.

During the three and nine months ended June 30, 2017, the Company incurred $0.1 million and $0.4 million, respectively, in non-recurring transaction costs with respect to the Cool Lab acquisition which were recorded in "Selling, general and administrative" expenses within the accompanying unaudited Consolidated Statements of Operations.

The Company did not present a pro forma information summary for its consolidated results of operations for the three and nine months ended June 30, 2017 and 2016 as if the acquisition of Cool Lab occurred on October 1, 2015 because such results were immaterial.

Acquisitions Completed in Fiscal Year 2016

Acquisition of BioStorage Technologies, Inc.

On November 30, 2015, the Company completed its acquisition of BioStorage Technologies, Inc., or BioStorage, an Indiana-based global provider of comprehensive sample management and integrated cold chain solutions for the biosciences industry. These solutions include collection, transportation, processing, storage, protection, retrieval and disposal of biological samples. These solutions combined with the Company’s existing offerings, particularly automation for sample storage and formatting, provide customers with fully integrated sample management cold chain solutions which will help them increase productivity, efficiencies and speed to market. This acquisition will allow the Company to access a broader customer base that is storing samples at ultra cold temperatures and simultaneously provide opportunities for BioStorage to use the Company’s capabilities to expand into new markets. Please refer to Note 4,

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"Acquisitions" to the Company’s consolidated financial statements included in the 2016 Annual Report on Form 10‑K for further information on this transaction.

At the closing of the acquisition of BioStorage, a cash payment of $5.4 million was placed into escrow which consisted of $2.9 million ascribed to the purchase price and $2.5 million related to retention arrangements with certain employees. The escrow balance was reduced by its full amount subsequent to the acquisition date, and there was no escrow balance outstanding as of June 30, 2017.

The operating results of BioStorage have been reflected in the results of operations for the Brooks Life Science Systems segment from the date of the acquisition, which included one month of activity during the first quarter of fiscal year 2016. During the three months ended June 30, 2017, revenue and net income from BioStorage recognized in the Company’s results of operations were $15.3 million and $2.4 million, respectively. During the three months ended June 30, 2016, revenue and net income from BioStorage recognized in the Company’s results of operations were $12.4 million and $1.1 million, respectively. During the nine months ended June 30, 2017, revenue and net income from BioStorage recognized in the Company’s results of operations were $46.0 million and $6.0 million, respectively. During the nine months ended June 30, 2016, revenue and net income from BioStorage recognized in the Company’s results of operations were $30.3 million and $0.3 million, respectively. During the three and nine months ended June 30, 2017, the net income included amortization expense of $1.1 million and $3.4 million, respectively, related to acquired intangible assets. During the three and nine months ended June 30, 2016, the net income included amortization expense of $0.9 million and $2.0 million, respectively, related to acquired intangible assets.

During each of the three months ended June 30, 2017 and 2016, the Company incurred $0.1 million in non-recurring transaction costs with respect to the BioStorage acquisition which were recorded in "Selling, general and administrative" expenses within the unaudited Consolidated Statements of Operations. The Company incurred $0.2 million and $3.2 million, respectively, of such costs during the nine months ended June 30, 2017 and 2016. The retention payment of $2.5 million was recorded within prepaid expenses and other current assets at the acquisition date and is recognized as compensation expense over the service period or upon a triggering event in the underlying change in control agreements. The Company recorded $0.1 million of compensation expense related to this arrangement during the nine months ended June 30, 2017 and $0.3 million and $0.7 million, respectively, during the three and nine months ended June 30, 2016. There were no such charges recorded during the three months ended June 30, 2017. The retention payment balance was $0.1 million at September 30, 2016. There was no balance related to the retention payment at June 30, 2017.

The following unaudited pro forma financial information represents a summary of the consolidated results of operations for the Company and BioStorage for the three and nine months ended June 30, 2016 as if the acquisition of BioStorage occurred on October 1, 2014 (in thousands):

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

    

June 30, 2016

    

June 30, 2016

    

Revenue

 

$

147,534

 

$

413,816

 

Net income (loss)

 

 

9,163

 

 

(74,024)

 

Basic income (loss) per share

 

$

0.13

 

$

(1.08)

 

Diluted income (loss) per share

 

$

0.13

 

$

(1.08)

 

Weighted average shares outstanding used in computing net income (loss) per share:

 

 

 

 

 

 

 

Basic

 

 

68,628

 

 

68,437

 

Diluted

 

 

69,166

 

 

68,437

 

 

The unaudited pro forma information presented above reflects historical operating results of the Company and BioStorage and includes the impact of certain adjustments directly attributable to the business combination. The unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition of BioStorage had taken place on October 1, 2014. During the nine months ended June 30, 2016, the adjustments reflected in the unaudited proforma information included aggregate amortization and depreciation expense of $0.6 million and tax effects of $0.5 million. The impact of the restructuring charges and transaction costs was excluded from the pro forma net income (loss) during the three and

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nine months ended June 30, 2016. The Company did not present unaudited pro forma financial information for the three and nine months ended June 30, 2017 since the results of BioStorage were included in the Company’s consolidated results of operations during the periods then ended.

 

5. Goodwill and Intangible Assets

Goodwill represents the excess of net book value over the estimated fair value of net tangible and identifiable intangible assets of a reporting unit. Goodwill is tested for impairment annually or more often if impairment indicators are present at the reporting unit level. If the existence of events or circumstances indicates that it is more likely than not that fair values of the reporting units are below their carrying values, the Company performs additional impairment tests during interim periods to evaluate goodwill for impairment. No triggering events indicating goodwill impairment occurred during the three and nine months ended June 30, 2017.

The Company performs its annual goodwill impairment assessment on April 1st of each fiscal year. During the three months ended June 30, 2017, the Company adopted on a prospective basis the Accounting Standard Update 2017-04, Intangibles- Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment issued by the FASB as a part of simplification initiative. The adoption of the guidance is expected to reduce the cost and complexity of evaluating goodwill for impairment and did not have an impact on the Company’s financial position or results of operations during the three and nine months ended June 30, 2017. In accordance with provisions of the guidance, the Company initially assesses 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 the Company determines, 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, it performs 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

 

As of June 30, 2017, the Company completed the annual goodwill impairment test for its five reporting units and determined that no adjustment to goodwill was necessary. The Company 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, the Company did not perform the quantitative assessment for these reporting units and did not recognize impairment losses. The Company also performed the quantitative goodwill impairment test for the fourth reporting unit within the Brooks Semiconductor Solutions Group segment and for the Brooks Life Science Systems reporting unit. The Company determined that no adjustment to goodwill was necessary for these two reporting units since their fair values substantially exceeded their respective carrying values. If events occur or circumstances change that would more likely than not reduce the fair value of any reporting unit below its carrying value, the Company will evaluate such reporting unit’s goodwill for impairment between annual tests.

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The components of the Company’s goodwill by an operating segment at June 30, 2017 and September 30, 2016 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Brooks

    

 

 

    

 

 

    

 

 

 

 

Semiconductor

 

Brooks

 

 

 

 

 

 

 

 

Solutions

 

Life Science

 

 

 

 

 

 

 

 

Group

 

Systems

 

Other

 

Total

Gross goodwill, at September 30, 2016

 

$

655,781

 

$

135,301

 

$

26,014

 

$

817,096

Accumulated goodwill impairments

 

 

(588,944)

 

 

 —

 

 

(26,014)

 

 

(614,958)

Goodwill, net of accumulated impairments, at September 30, 2016

 

 

66,837

 

 

135,301

 

 

 —

 

 

202,138

Acquisitions and adjustments

 

 

(56)

 

 

8,527

 

 

 —

 

 

8,471

Gross goodwill, at June 30, 2017

 

 

655,725

 

 

143,828

 

 

26,014

 

 

825,567

Accumulated goodwill impairments

 

 

(588,944)

 

 

 —

 

 

(26,014)

 

 

(614,958)

Goodwill, net of accumulated impairments, at June 30, 2017

 

$

66,781

 

$

143,828

 

$

 —

 

$

210,609

 

During the nine months ended June 30, 2017, the Company recorded a goodwill increase of $8.5 million primarily related to the acquisition of Cool Lab which represented the excess of the consideration transferred over the fair value of the net assets acquired. Please refer to the Note 4 "Acquisitions" for further information on this transaction.

The components of the Company’s identifiable intangible assets as of June 30, 2017 and September 30, 2016 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

September 30, 2016

 

 

 

 

Accumulated

 

Net Book

 

 

 

Accumulated

 

Net Book

 

    

Cost

    

Amortization

    

Value

    

Cost

    

Amortization

    

Value

Patents

 

$

9,028

 

$

7,724

 

$

1,304

 

$

7,808

 

$

7,486

 

$

322

Completed technology

 

 

60,745

 

 

53,931

 

 

6,814

 

 

60,485

 

 

51,018

 

 

9,467

Trademarks and trade names

 

 

9,142

 

 

4,776

 

 

4,366

 

 

9,142

 

 

4,204

 

 

4,938

Customer relationships

 

 

119,260

 

 

56,286

 

 

62,974

 

 

114,263

 

 

47,147

 

 

67,116

 

 

$

198,175

 

$

122,717

 

$

75,458

 

$

191,698

 

$

109,855

 

$

81,843

 

Amortization expense for intangible assets was $4.3 million and $3.8 million, respectively, during the three months ended June 30, 2017 and 2016 and $12.7 million and $11.1 million, respectively, during the nine months ended June 30, 2017 and 2016.

Estimated future amortization expense for the intangible assets for the remainder of fiscal year 2017 and the subsequent four fiscal years is as follows (in thousands):

 

 

 

 

Fiscal year ended September 30, 

    

 

  

2017

 

$

3,970

2018

 

 

15,693

2019

 

 

15,468

2020

 

 

14,156

2021

 

 

8,253

Thereafter

 

 

17,918

 

 

$

75,458

 

6. Equity Method Investments

The Company accounts for certain of its investments using the equity method of accounting and records its proportionate share of the investee’s earnings (losses) in its results of operations with a corresponding increase (decrease) in the carrying value of the investment.

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BioCision, LLC

At September 30, 2016, the Company held a 20% equity interest in BioCision, a privately-held company based in Larkspur, California, which was accounted for as an equity method investment. The carrying value of the investment in BioCision was $1.7 million at September 30, 2016. During the three and nine months ended June 30, 2016, the Company recorded a loss associated with BioCision of $0.3 million and $0.7 million, respectively.

At September 30, 2016, the Company held a term loan receivable from BioCision and five-year convertible debt securities with a warrant agreement to purchase BioCision’s preferred units. The convertible debt securities and the warrant were recorded at fair value during each reporting period, and the remeasurement gains and losses were recognized as a component of "Other loss, net" in the Company’s unaudited Consolidated Statements of Operations. The fair value of the convertible debt securities and the warrant was $5.8 million and less than $0.1 million, respectively, at September 30, 2016. During the nine months ended June 30, 2016, the Company recognized remeasurement gains of $0.5 million related to these financial instruments. Please refer to Note 17, “Fair Value Measurements” for further information on the valuation techniques and inputs used in fair value measurements of the convertible debt securities and the warrant. The term loan with an aggregate principal amount of $1.5 million bore an annual interest rate of 10% and was provided to BioCision to support its working capital requirements. At September 30, 2016, the term loan was recorded at its carrying value of $1.5 million and included in "Other assets" in the Company’s unaudited Consolidated Balance Sheets. Please refer to Note 8, "Equity Method and Other Investments" to the Company’s consolidated financial statements included in the 2016 Annual Report on Form 10‑K for further information on these financial instruments.

On November 28, 2016, BioCision established Cool Lab as its subsidiary upon transferring certain assets related to cell cryopreservation solutions with net carrying values of $0.9 million, in which the Company acquired a 100% equity interest on that date for an aggregate purchase price of $15.2 million. The purchase price consisted of a cash payment of $4.8 million, a liability to the seller of $0.1 million, which has been satisfied, and non-cash consideration of $10.3 million measured at fair value on the acquisition date which was comprised of: (i) the redeemable fair value of the existing 20% equity ownership interest in BioCision of $3.1 million, (ii) the convertible debt securities of BioCision and warrants of $5.6 million to purchase BioCision’s preferred units, and (iii) the term notes of BioCision of $1.6 million including accrued interest.

Carrying value of the equity method investment in BioCision was $1.2 million on November 28, 2016 and reflected BioCision’s losses of $0.5 million recorded from October 1, 2016 through the acquisition date. The Company has traditionally recorded the income and losses related to the equity method investment in BioCision one quarter in arrears. During the first quarter of fiscal year 2017, the Company recorded two additional months of activity in the carrying value of the investment as a result of its settlement. The Company deemed the amount of $0.2 million related to two additional months of activity to be insignificant. The equity method investment in BioCision was measured at fair value of $3.1 million at the acquisition date, and as a result the Company recognized a gain of $1.8 million upon the redemption of the equity method investment in its unaudited Consolidated Statements of Operations during the nine months ended June 30, 2017. On November 28, 2016, convertible debt, warrant and the term loan with carrying values of $5.8 million, less than $0.1 million and $1.6 million, respectively, were measured at their fair values of $5.6 million, less than $0.1 million and $1.6 million, respectively. As a result of such measurement, the Company recognized an aggregate loss of $0.2 million upon the settlement of these financial instruments in "Other loss, net" in its unaudited Consolidated Statements of Operations during the nine months ended June 30, 2017. Please refer to Note 4, "Acquisitions" and Note 17, "Fair Value Measurements" for further information on the acquisition transaction and the valuation techniques and inputs used in fair value measurements.

ULVAC Cryogenics, Inc.

The Company and ULVAC Corporation of Chigasaki, Japan each own a 50% stake in the joint venture, ULVAC Cryogenics, Inc (“UCI”). UCI manufactures and sells cryogenic vacuum pumps, principally to ULVAC Corporation.

The carrying value of the investment in UCI was $32.6 million and $25.6 million, respectively, at June 30, 2017 and September 30, 2016. During the three months ended June 30, 2017 and 2016, the Company recorded income of $2.5 million and $0.7 million, respectively, representing its proportionate share of UCI’s earnings. During the nine months

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ended June 30, 2017 and 2016, the Company recorded income of $7.7 million and $2.0 million, respectively, representing its proportionate share of UCI’s earnings. Management fee payments received by the Company from UCI were $0.3 million and $0.2 million, respectively, during the three months ended June 30, 2017 and 2016. Management fee payments received by the Company from UCI were $0.8 million and $0.6 million, respectively, during the nine months ended June 30, 2017 and 2016. During the nine months ended June 30, 2017 and 2016, the Company incurred charges from UCI’s for products or services of $0.2 million each. Such charges were insignificant during the three months ended June 30, 2017 and 2016. At June 30, 2017 and September 30, 2016, the Company owed UCI $0.1 million in connection with accounts payable for unpaid products and services.

 

7. Line of Credit

The Company maintains a five-year senior secured revolving line of credit (the "line of credit"), with Wells Fargo Bank, N.A. ("Wells Fargo"), that provides for up to $75 million of borrowing capacity, subject to borrowing base availability, as defined in the agreement governing the line of credit. There were no amounts outstanding under the line of credit as of June 30, 2017 and September 30, 2016. During the three and nine months ended June 30, 2017, the Company incurred less than $0.1 million and $0.1 million, respectively, in fees related to the unused portion of the line of credit commitment amount. Such fees were insignificant during the three and nine months ended June 30, 2016. The line of credit contains certain customary representations and warranties, a financial covenant, affirmative and negative covenants, as well as events of default. The Company was in compliance with the line of credit covenants as of June 30, 2017 and September 30, 2016. Please refer to Note 11, "Line of Credit" to the Company’s consolidated financial statements included in the 2016 Annual Report on Form 10‑K for further information on the line of credit arrangement.

 

8. Income Taxes

During the three and nine months ended June 30, 2017, the Company recorded an income tax provision of $3.7 million and $9.9 million, respectively, which was driven primarily by foreign income. Tax provision recorded during the nine months ended June 30, 2017 was partially offset by $0.9 million of tax benefits related to the reduction of reserves for unrecognized tax benefits resulting from the expiration of statutes of limitations.

During the three and nine months ended June 30, 2016, the Company recorded an income tax provision of $0.2 million and $75.1 million, respectively. The income tax provision of $0.2 million recorded during the third quarter of fiscal year 2016 was driven primarily by global income generated during the period, partially offset by $0.3 million of tax benefits related to the reduction of reserves for unrecognized tax benefits resulting from the expiration of statues of limitations. The tax provision of $75.1 million recorded during the nine months ended June 30, 2016 was driven primarily by the change in the valuation allowance against U.S. net deferred tax assets recognized during the second quarter of fiscal year 2016. Partially offsetting the valuation allowance provision were benefits related to pre-tax losses in the U.S., the reinstatement of the U.S. research and development tax credit retroactive to January 1, 2015, and reductions of reserves for unrecognized tax benefits resulting from the expiration of the statute of limitations.

The Company evaluates the realizability of its deferred tax assets by tax-paying component and assesses the need for a valuation allowance on an annual and quarterly basis. The Company evaluates the profitability of each tax-paying component on a historic cumulative basis and on a forward looking basis in the course of performing this analysis. The Company evaluated all positive and negative evidence in concluding it was appropriate to establish a full valuation allowance against U.S. net deferred tax assets during the second quarter of fiscal year 2016. The Company maintained such allowance at June 30, 2017 and will continue to maintain it until there is sufficient positive evidence to support the reversal of all or some portion of these allowances. Please refer to Note 12, "Income Taxes" to the Company’s consolidated financial statements included in the 2016 Annual Report on Form 10‑K for further information on the valuation allowance.

The Company is subject to U.S. federal income tax and various state, local and international income taxes in various jurisdictions. The amount of income taxes paid is subject to the Company’s interpretation of applicable tax laws in the jurisdictions in which it files tax returns. In the normal course of business, the Company is subject to income tax audits in various global jurisdictions in which it operates. The years subject to examination vary for the U.S. and international

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jurisdictions, with the earliest tax year being 2010. Based on the outcome of these examinations or the expiration of statutes of limitations for specific jurisdictions, it is reasonably possible that the related unrecognized tax benefits could change from those recorded in the Company’s unaudited Consolidated Balance Sheets. The Company currently anticipates that it is reasonably possible that the unrecognized tax benefits will be reduced by approximately $0.5 million within the next twelve months.

 

9. Other Balance Sheet Information

The following is a summary of accounts receivable at June 30, 2017 and September 30, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

June 30, 

 

September 30, 

 

 

    

2017

    

2016

    

Accounts receivable

 

$

122,394

 

$

108,713

 

Less allowance for doubtful accounts

 

 

(1,514)

 

 

(2,241)

 

Less allowance for sales returns

 

 

(128)

 

 

(100)

 

Accounts receivable, net

 

$

120,752

 

$

106,372

 

 

The following is a summary of inventories at June 30, 2017 and September 30, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

June 30, 

 

September 30, 

 

 

    

2017

    

2016

    

Inventories

 

 

  

 

 

  

 

Raw materials and purchased parts

 

$

72,820

 

$

60,979

 

Work-in-process

 

 

11,273

 

 

16,090

 

Finished goods

 

 

21,211

 

 

15,503

 

Total inventories

 

$

105,304

 

$

92,572

 

 

Reserves for excess and obsolete inventory were $23.9 million and $24.8 million, respectively, at June 30, 2017 and September 30, 2016.

During the nine months ended June 30, 2017 and the fiscal year ended September 30, 2016, the Company had cumulative capitalized direct costs of $4.4 million and $3.7 million, respectively, associated with development of software for its internal use which are included within "Property, plant and equipment, net" in the accompanying unaudited Consolidated Balance Sheets. During the nine months ended June 30, 2017, the Company capitalized direct costs of $0.8 million associated with development of software for its internal use.

Deferred financing costs of $0.6 million and $0.7 million, respectively, at June 30, 2017 and September 30, 2016 are associated with obtaining the line of credit financing and presented within "Other assets" in the accompanying unaudited Consolidated Balance Sheets. Amortization expense incurred during the three and nine months ended June 30, 2017 was less than $0.1 million and $0.1 million, respectively, and included in interest expense in the accompanying unaudited Consolidated Statements of Operations. Such expenses were insiginficant during the three and nine months ended June 30, 2016. Please refer to Note 7, “Line of Credit” for further information on this arrangement.

A note receivable of $0.2 million at June 30, 2017 and September 30, 2016 is recorded at carrying value and included in "Other assets" in the accompanying unaudited Consolidated Balance Sheets. The note had an initial value of $3.0 million and a stated interest rate of 9% upon its origination in fiscal year 2012 and was provided by the Company to a strategic partner (the “Borrower”) to support its future product development and other working capital requirements. Prior to fiscal year 2017, the Company amended the terms of the note due to the subordination of its security interest in the assets of the Borrower to the new lender and recognized cumulative impairment charges of $3.4 million as a result of making a determination that a recovery of all amounts due from the loan was not probable. No triggering events indicating additional impairment of the note receivable occurred during the three and nine months ended June 30, 2017. Please refer to Note 9, "Loan Receivable" to the Company’s consolidated financial statements included in the 2016 Annual Report on Form 10‑K for further information on the loan.

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The Company determined that the Borrower represented a variable interest entity since the level of equity investment at risk was not sufficient for the entity to finance its activities without additional financial support. However, the Company did not qualify as the primary beneficiary since it would not absorb the majority of the expected losses from the Borrower and did not have the power to direct the Borrower’s product research, development and marketing activities that have the most significant impact on its economic performance. The Company has no future contractual funding commitments to the Borrower and, as a result, the Company’s exposure to loss is limited to the outstanding principal and interest due on the loan. During the nine months ended June 30, 2017, the Company adopted the Accounting Standards Update 2015‑02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, and concluded that it does not qualify as the primary beneficiary since it doesn’t have the power to direct the Borrower’s activities that most significantly impact its economic performance. The adoption of the guidance did not have an impact on the Company’s financial position and the results of operations since it concluded that it does not have a controlling financial interest in Borrower .

The Company establishes reserves for estimated cost of product warranties based on historical information. Product warranty reserves are recorded at the time product revenue is recognized, and retrofit accruals are recorded at the time retrofit programs are established. The Company’s warranty obligation is affected by product failure rates, utilization levels, material usage, service delivery costs incurred in correcting a product failure and supplier warranties on parts delivered to the Company.

The following is a summary of product warranty and retrofit activity on a gross basis for the three and nine months ended June 30, 2017 and 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Activity -Three Months Ended June 30, 2017

Balance

    

 

 

    

 

 

    

Balance

March 31, 

 

 

 

 

 

 

 

June 30, 

2017

 

Accruals

 

Costs Incurred

 

2017

$

7,073

 

$

2,440

 

$

(1,867)

 

$

7,646

 

 

 

 

 

 

 

 

 

 

 

 

Activity -Three Months Ended June 30, 2016

Balance

    

 

 

    

 

 

    

Balance

March 31, 

 

 

 

 

 

 

 

June 30, 

2016

 

Accruals

 

Costs Incurred

 

2016

$

5,735

 

$

2,279

 

$

(2,059)

 

$

5,955

 

 

 

 

 

 

 

 

 

 

 

 

Activity -Nine Months Ended June 30, 2017

Balance

    

 

 

    

 

 

    

Balance

September 30, 

 

 

 

 

 

 

 

June 30, 

2016

 

Accruals

 

Costs Incurred

 

2017

$

6,324

 

$

7,656

 

$

(6,334)

 

$

7,646

 

 

 

 

 

 

 

 

 

 

 

 

Activity -Nine Months Ended June 30, 2016

Balance

    

 

 

    

 

 

    

Balance

September 30, 

 

 

 

 

 

 

 

June 30, 

2015

 

Accruals

 

Costs Incurred

 

2016

$

6,089

 

$

6,989

 

$

(7,123)

 

$

5,955

 

 

10. Derivative Instruments

The Company has 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. These transactions and balances, including short-term advances between the Company and its subsidiaries, subject the Company’s operations to exposure from exchange rate fluctuations. The impact of currency exchange rate movement can be positive or negative in any period. The Company mitigates the impact of potential currency transaction gains and losses on short-term intercompany advances through timely settlement of each transaction, generally within 30 days.

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The Company also enters into foreign exchange contracts to reduce its exposure to currency fluctuations. Under forward contract arrangements, the Company typically agrees to purchase a fixed amount of U.S. dollars in exchange for a fixed amount of a foreign currency on specified dates with maturities of three months or less. These transactions do not qualify for hedge accounting. Net gains and losses related to these contracts are recorded as a component of "Other loss, net" in the accompanying unaudited Consolidated Statements of Operations and are as follows for the three and nine months ended June 30, 2017 and 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

    

Realized gains (losses) on derivatives not designated as hedging instruments

 

$

147

 

$

233

 

$

(450)

 

$

1,230

 

 

The Company had the following notional amounts outstanding under foreign currency contracts that do not qualify for hedge accounting at June 30, 2017 and September 30, 2016 (in thousands):