Nov 11, 2008
Executives
Michael W. McCarthy – Director, Investor Relations Robert J.
Lepofsky - President, Chief Executive Officer & Director Martin S. Headley - Chief Financial Officer & Executive Vice President
Analysts
CJ Muse – Barclays Capital James Covello – Goldman Sachs Satya Kumar – Credit Suisse First Boston Brett Pera – Caris & Co. Jenny Uhn – JP Morgan Securities Patrick Ho – Stifel Nicolaus Hari Chandra – Deutsche Bank Tim Arcuri - Citigroup
Operator
Welcome to the Brooks Automation earnings conference. Please be aware that today’s conference is being recorded.
At this time I would like to turn the conference over to your speaker today, Mr. Michael McCarthy, Director of Investor Relations at Brooks Automation.
Michael W. McCarthy
My name is Mike McCarthy, Director of Investor Relations and Corporate Communications for Brooks. I’d like to welcome each of you for joining us to discuss our fiscal 2008 fourth quarter and full year results.
Our press release was issued at about 4:00 pm Eastern time this afternoon and is available to you on our website as are copies of the slides used as background for the call this afternoon. The URL is www.Brooks.com.
Before we begin I'd like to remind all participants that during the course of this call we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of ‘95. There are a number of factors that could cause actual results or events to differ materially from those indicated by such forward-looking statements.
I refer to the section of our earnings release titled Safe Harbor Statement in the Company's most recent filings with the SEC. This call will remain archived for instant replay on our website until we report our fiscal 2009 first quarter results in mid-February.
Bob Lepofsky, our CEO, will open the call with some brief comments about the Company's performance and strategic positioning. He will then be followed by Martin Headley, our CFO, who will provide a more detailed overview of our fourth quarter results after which we will turn the call back to Bob for a brief summary.
Bob will then moderate the Q&A session. I’ll now turn the call over to Bob.
Robert F. Lepofsky
I can summarize the September ending quarter as both frustrating and disappointing not because of what the people at Brooks accomplished in the quarter but because we saw any hope for top line growth come to a precipitous halt and we’ve seen our bottom line improvement plans stymied. We were expecting the new initiatives that we had developed with customers through the earlier pat of the year to turn into a growing revenue base beginning in August.
We worked hard getting our business model in shape to deliver over $0.40 of every incremental dollar to the PBT line and we anticipated seeing the early returns on the investments we made in retooling some of our operations particularly in our automation group being poised for performance. In summary as we entered last quarter we thought we had it right.
We had driven our break even to the targeted $125 million quarterly run rate level and internally we expected to exit the quarter printing black ink. Late in the quarter business deteriorated at a pace that accelerated as the quarter ended.
As Martin will discuss shortly our automated systems group recorded a 15% sequential decline in revenues and on a sequential basis our global customer operations fell even more due to a lack of legacy product shipments and a significant pull back in spares and services supporting preventive maintenance activities. While one might expect more stability in that end of the business the reality has been that as plant utilization has decreased customers are actually cannibalizing unused tools for parts rather than buying replacements from suppliers like us.
Our one bright spot was critical components activity which has a much more diversified customer base. With over 50% of their sales in the quarter coming from non-semi customers they recorded a slight uptick in business albeit total revenues were still down year-over-year.
All in sales were $107 million in the quarter just below our $110 million guidance with a $0.16 GAAP loss before special charges and non-cash goodwill a $0.01 short of guidance. You have already heard from most of our major OEM accounts so I will not repeat the details underlying the challenges that our customers are facing.
We are a critical and strategic business partner to all of the leading industry participants. We are working closely with our OEM accounts to now be sure that our plans are in sync with theirs particularly in our extended factory business.
Unlike many companies that lack conviction and capital our customers know that we are well positioned, we will manage Brooks through this downturn and we will be ready to support their requirements entering the next upturn. As a result of this position we’re actually spending much of our time with these customers today discussing new and expanding opportunities and looking forward to the future of our collaborative relationships.
But before talking more about how we plan to move forward both in the face of immediate uncertain market conditions and in the longer term allow me to pause here and have Martin fill in the details of the quarter and fiscal year just ended. Then will return with some additional remarks before we take your questions.
Martin S. Headley
As Mike mentioned earlier we’ve again posted slides to the Brooks’ website that we believe will be useful in getting a clearer understanding of our results. During my prepared comments I will make reference to the appropriate slide.
Turning to Slide 3 I will comment on how our results compared with our guidance provided for the September quarter at our last conference call. As you may recall we provided guidance for the top line of $110 million to $125 million and indicated that the resulting diluted loss from continuing operations excluding special charges should be between $0.15 per share at the low end of the revenue range through to $0.05 per share at the $125 million revenue level.
As Bob referred to in his comments the declining industry activity levels through the quarter resulted in a top line of $106.9 million on which we reported a GAAP loss excluding special charges from continuing operations of $10 million or $0.16. Although revenues were approximately short of the midpoint of our guidance and 3% short of the bottom of our range our cost structure initiatives enabled us to come within $0.01 of the bottom of our range of guidance.
For those analysts and investors modeling on a cash EPS basis the impact of intangibles amortization was $4.1 million or $0.07 in the fourth quarter and $16.4 million or $0.25 per share for the full fiscal year. Non-cash assets impairment charges impacted special charges and were $206.2 million in the quarter and $214.8 million for the full year resulting in GAAP losses from continuing operations of $216.2 million or $3.45 for the quarter and $236.6 million or $3.67 for the full fiscal year.
There was $300,000 of income recognized from discontinued operations in the quarter as the final contingencies from the software division sale were resolved. Slide number four sets our the components of special charges booked during the quarter.
Declining valuations in the sector and the marked deterioration of the semi-conductor capital equipment market outlook resulted in our identifying significant impairments of goodwill and other long-lived assets under the applicable FASB statements. The largest component was a $198 million impairment of goodwill that wrote off all goodwill for our automated systems segment and approximately half of the goodwill in the other segments.
Since goodwill is not depreciated there is no forward impact on our non-cash expense levels. Additionally by virtue of that goodwill impairment process we performed a detailed analysis of other asset balances that should be considered impaired by virtue of market valuations for the segments.
In doing so we identified impairments to the book values of other intangibles of $2.2 million and buildings and leasehold improvements of $3.5 million. We will incur approximately $500,000 less per annum in depreciation and amortization as a result of taking these impairment charges in the quarter.
Declines in market valuations across the globe also impacted our investment in a Swiss public company whose significant operations are in the semi-conductor capital equipment market. We took an additional $1 million charge.
This investment is now written down to roughly $2 million. Finally within special charges there were the charges associated with our restructuring and resizing program that brought the company down to $125 million revenue per quarter breakeven.
The total charges associated with this program during the quarter of the year was $7.3 million and represent the only cash costs within the special charges. Slide 5 shows the summary third quarter and fourth quarter income statements through the operating loss line.
The cost reductions executed during the quarter and the full year impacts of third quarter actions offset the loss variable contribution from the reduction in revenues from $124 million to $106.9 million. To better understand these dynamics we’ve included Slide 6 where we bridge from the operating performance in the third quarter a loss of $7 million to the operating performance in the fourth quarter a loss of $11.5 million.
You can see we experienced declines in revenues everywhere except in our critical components segment where growth and revenues to industrial analytical instrumentation and other markets offset the declines experienced in the semi-conductor capital equipment market. Looking at specific areas of revenue and profit performance we recognized license income on receipt of statements from relevant licensees and this results in quarterly volatility.
In the quarter licensing income declined $1.2 million with dollar-for-dollar impact on operating profits. The favorable impact of our restructuring and cost containment actions in the automated systems business was the key factor behind modest sequential declines in gross profit of $300,000 on significant sequential declines in revenues of $7.9 million for our systems and components.
Within the critical components segments though similar cost containment and productivity actions resulted in a margin improvement of $1.3 million on a $500,000 revenue increase. Within the global customer organization it is worth looking at the business in two slices.
Firstly the legacy products and secondly our spares, repairs and onsite service businesses. The legacy products had significant impact in the quarter-over-quarter trends by virtue of some larger legacy system sales in the third quarter made at higher gross margins.
Additionally we took a $900,000 additional excess inventory provision at the end of the fiscal year reflecting the weakening market conditions. We experienced declines in spares, repair and service revenues of approximately 14% as the end user customers exhibited the behaviors Bob outlined earlier and which are typical in a cyclical trough this behavior being to cannibalize idle equipment rather than purchase spare parts to maintain active tools.
Spares and services revenues declined $4.3 million with a $2.5 million drop through to operating profit. The completion of certain research and development projects together with lower levels of engineering support in the market downturn enabled us to reduce R&D spending levels by $1.6 million.
We should emphasize that all our critical programs to drive future growth remain resourced. Although all actions against the company related to equity incentive matters have been resolved we had sequentially increased costs as the third quarter included a $1.4 million credit for reimbursements of previously expensed professional fees.
We continue to incur costs associated with contractual indemnification of a former officer and those cost levels have increased with trial dates approaching. Excluding these matters we further reduced SG&A expenses by $1.9 million in the quarter.
Slide 7 summarizes what happened below the operating profit line where there were no significant fluctuations in interest income, other expense or earnings from joint ventures net of minority interests. I’ve already talked about the permanent impairment charge of our Swiss public company investment leaving me to talk to taxes.
The third quarter saw the routine run rate level of tax provision that reflects alternative minimum tax, certain foreign tax provisions and interest on outstanding tax contingencies. As we foresaw and talked about briefly on the last call the fourth quarter saw the expiry of statutory audit periods from certain foreign tax exposures and the release of the associated tax provisions resulting a $1.2 million benefit being recognized for taxes during the quarter.
We would not anticipate any significant repeat of this event during fiscal 2009. On the next three slides I will briefly cover our sequential segment performance.
On Slide 8 we set out the sequential performance of our critical component segment where revenues improved by 1.8% over the third quarter. Gross margins improved from 36.1% to 39.8%.
For the full year gross margins were 37.7%. Sequentially operating expenses increased from $8.8 million to $9.1 million a result of the higher shared service cost allocations resulting from declined activity levels in the other segment.
On Slide 9 we see the sequential performance of the automated systems segment. Revenues declined sequentially by 15.4% with declines in both license income and product sales.
Margins held steady at 16.5% with cost containment offsetting the loss contributions from license and product revenues. Operating expenses were reduced by $1.2 million sequentially from both research and development savings as new programs released into volume production and the impact of the broader based restructuring activities across the whole company and the reduction in shared service cost allocations.
On Slide 10 you can see how the strong contributions from legacy hardware products in the third quarter resulted in a higher sequential revenue decline of 23.4% without such revenues in the fourth quarter. This variable contribution decline together with the additional inventory reserves I made reference to earlier resulted in the low 12% gross margin.
Operating expenses were approximately flat. Turning to Slide 11 we see that cash flows from continuing operations were $6 million in the quarter with adjusted EBITDA dipping slightly below break even on the low activity level.
Asset management generated cash in the quarter as I will discuss in conjunction with the next slide. Capital expenditures were $6.2 million with $3.6 million invested in IT projects expected to significantly benefit the company’s operations when completed.
Overall our cash reduced $1.1 million in the quarter slowly from the impact of the translation of operating cash held by some of our subsidiaries in foreign currencies. In Slide 12 you can observe that we reduced our net working capital by $12.4 million over the course of the quarter and brought it back below the levels of the prior fiscal year end.
Accounts receivable decreased by $7.8 million and only increased as a percentage of annualized quarter sales because of the differing profile of sales within the quarter. The aging of our receivables actually improved in the quarter.
Inventories were reduced by $6.3 million as we pulled back on spare parts holding levels. Accounts payable reduced as a result of lower activity levels.
With that overview of our past performance I will now turn the call back to Bob for comments about the future.
Robert F. Lepofsky
September 30th marked the end of our fiscal year and the end of a year of restructuring and refocusing at Brooks. As you know we set out on a three-step plan that called for a major reduction in our cost of operations and a significant improvement in customer responsiveness followed by initiatives to leverage a number of earlier strategic investments.
We also had the expectation that by this point in time we would be expanding the base of our business. Clearly the sharp falling off of our core business and the strong probability that the global economic crisis will constrain our business for some time means we must adjust our thinking and reset near term expectations accordingly.
The headline of one analyst report issued as recently as yesterday read “Layoffs and shutdowns point to a long deep downturn”. Most people in our business are cautious about the near term outlook.
Given all the uncertainties surrounding our customer’s plant shutdowns in the closing weeks of this year we are not providing guidance specific for this quarter. We would remind you that the loss of one week in the quarter is the loss of 7% to 8% of our revenues for that quarter.
Order bookings and planned shipment schedules remain quite fluid. From where we sit and what we see in here today thinking about sequential revenue declines in the 15% plus range for the December and March quarters are not unrealistic.
The senior leadership team here at Brooks has been reevaluating every aspect of our business in light of the new realities we are all facing. There is no question we must and will resize our business.
More importantly we have rethought what we do well and where we come up short. We have identified areas where we can gain leverage through tighter integration of some of our lines of business.
We see other areas where we and our customers will be better served by leveraging the capabilities of our own strategic business partners. Our reevaluation is comprehensive and it is broad reaching.
We will be announcing our plans internally over the weeks ahead. Accordingly as I’m sure you will understand we believe it is inappropriate to provide the details of any plan on the call here today.
What we will say is the changes we envision will be significant and the actions we plan will be taken quickly. There will be cynics who characterize our plans as chasing a falling knight and others who will criticize the pace of our actions to date.
We don’t see it that way at all. We see the period ahead as an opportunity to take bold steps, get it right while doing it without jeopardizing customer commitments and responsiveness.
You should know we remain committed to turning the potential of Brooks into performance for our shareholders. Finally I should also take note of the fact that unlike many we have in hand the capital resources to operate the business and implement our plans in a tough economic climate.
We continue to work closely with our Board to assess the adequacy of our cash position and to evaluate a range of alternative economic and market recovery scenarios. With a capital market still in disarray and unprecedented lack of forward visibility in our served market we retain a cautious position.
Having bought back about $90 million of stock over the course of the past year against our authorization to buy up to $200 million we chose not to buy any stock in the September quarter a position we continue to believe is both prudent and proper. In closing let me say that our destination is not changing but the path we take to get there certainly will.
We are Brooks a provider of critical automation, vacuum and instrumentation solutions and a highly valued business partner to OEMs and end users throughout the world. While challenged in the short term we believe that the semi-conductor, data storage, advanced display, analytical instrument and solar markets we serve will provide ample opportunity for growth in profits and attractive returns on invested capital over the longer term.
On that note of optimism in an otherwise gloomy world I want to thank you for your attention and now, Operator, we’ll open the line for questions.
Operator
(Operator Instructions) We will take as many questions as time allows, however we do ask that you limit yourself to one question with one follow up. We’ll pause for a moment to allow everyone a chance to signal.
We’ll take our first question from CJ Muse – Barclays Capital.
CJ Muse – Barclays Capital
First question, in terms of your December guide, I guess we are about six weeks into the quarter, can you comment on what you’ve seen so far in terms of turns business to try to help us frame where we should model the December quarter?
Martin S. Headley
At this stage, we’ve been seeing levels of business that are consistent with our customers’ announcements regarding declining levels of business going into the quarter. I think as Bob referred to the reason we find guidance so difficult at this juncture is the lack of clarity as to how much there may be further reductions in order bookings for delivery in the current quarter.
The extent to which our major customers may seek to have additional shutdowns during the course of the quarter as Bob made reference to in his previous remarks each week shutdown represents about 7% of the quarter from which we lose sales. That level of uncertainty makes it very difficult for us to project at this juncture exactly where the revenue levels may finally rest.
I think Bob gave you some indication about 15% plus being something that you could expect to see absent further actions by our customers which are and remain extremely uncertain.
Robert F. Lepofsky
Given the nature of the business, CJ, as you know product flowing out of our automation group and particularly the extended factory is directly related to activity in our OEM factories. So you can do the arithmetic real quick.
It’s a given we’ll lose two weeks in this quarter. And the issue of is it three or three plus is really about how the Thanksgiving week and the week after play out.
So I would say to you, you need to be modeling well beyond the 15% and so we’ve kind of pegged that, take it at two to three weeks and that’s where you get the 15% to 20%. I would say 15% is baked in right now and we have not seen any good news in the last couple of weeks.
CJ Muse – Barclays Capital
In your prepared remarks you also talked about possibly down another 15% in the March timeframe and I’m not trying to hold you to that number but I guess my question is have you seen in the last couple weeks a difference in your dialog with your OEM customers than what they discussed on their earnings calls?
Robert F. Lepofsky
No, the problem we’re all having is that tremendous uncertainty and lack of visibility. So again if you just play that number and say fine even if everybody came back ready to go on January 1st I think it’s the latter part of the March quarter that has people nervous.
CJ Muse – Barclays Capital
Last question for me, you took the write down on the investment in the Swiss public company, are you holding securities in long-term securities?
Martin S. Headley
No, that’s held in other assets. This is not a marketable security investment, it’s something that arose by virtue of an investment we’d had in a small business which we had previously actually written off as worthless and which we had to reinstate under accounting standards and gave rise to a $5.1 million gain in the third quarter of fiscal 2007 and which under those applicable standards has to be mark-to-market even though it’s a very thinly traded company.
Operator
Our next question comes from James Covello – Goldman Sachs.
James Covello – Goldman Sachs
Just to clarify one more time, I don’t want to beat these issue to a dead horse, if each week 7% to 8% and there’s going to be at least two weeks’ worth of shutdowns, it seems like the starting point has to be down 15% quarter-over-quarter and the to only model in down 15% would imply that otherwise business would be flat during the quarter which doesn’t seem to be right. It seems to be definitely more than that and could be substantially more than that.
Am I thinking about that okay?
Robert F. Lepofsky
Yes, I think we’re trying to be quite clear, 7% to 8% a week and at least two weeks. That’s down at least 15%.
The question is, does it go down 20% to 21% given the nature of the calendar.
James Covello – Goldman Sachs
Then relative to some of the issues about customers reusing parts as opposed to buying new replacement parts from Brooks, how does that dynamic evolve as we start to come out of the downturn? Is it a situation where in the past customers have said I can continue to reuse this stuff for longer now that I realize I’ve reused it at least once, or is it a situation where there becomes a more immediate pent up need for replacement?
Robert F. Lepofsky
It’s the latter, it’s the pent up need. You cannibalize and that’s why we use the term cannibalize because that’s exactly what is happening not only to us, but to others.
You’ve got an idle machine and you’re not spending the dollars for even an extra spare part so you take it off of that machine that’s down well recognizing that when you need that machine, you need to get that part back in and that’ll actually be a leading indicator when that starts to pick up, that the machines are getting ready to go back into production.
Operator
We’ll take our next question from Satya Kumar – Credit Suisse First Boston.
Satya Kumar – Credit Suisse First Boston
Actually in your CCG group you had some key personnel revenues outside of [inaudible]. Can you just give some thoughts on how you see that growing?
Martin S. Headley
The CCG revenues grew because clearly in other sectors the industrial analytical instrumentation and some other sectors in which we participate there was not the immediate decline that we were seeing in September in the semi-conductor capital market. But I will say that we would say that since then the broader contagion which had started in semi-conductor capital equipment is broadly applying outside those markets as well.
Whilst it might not be as severe I would equally say it’s probably not as buoyant.
Satya Kumar – Credit Suisse First Boston
One quick question with regards for service revenues they were down [inaudible] quarter-over-quarter, other semi-cap companies have indicated that all the system sales could be down plus/minus cap ex, they expect services to remain strong. How do you see service revenues for the next fiscal year?
Martin S. Headley
I think I would say that we’ve probably seen some immediate declines. There’s probably a chance for some further erosion particularly in some of the legacy products but I wouldn’t see to anywhere as pronounced level as we saw during the course of the fourth quarter.
Robert F. Lepofsky
I think to follow up and to up and to pick up on Jim Covello’s previous comment, I think I heard your question as how will they look over the year and for the full year things may look a little bit better but more back end loaded than balanced through the year.
Operator
We’ll take our next question from Brett Pera – Caris & Co.
Brett Pera – Caris & Co.
Could you just give me a quick rundown of what your breakeven was and how low do you think it can go from here?
Martin S. Headley
As we were exiting the quarter, we were exiting the quarter at about our goal of $125 million quarterly revenue rate and this is where we are now. We had previously said that we thought that that was an appropriate point whilst retaining all our resources in tact to respond to our customer requirements.
Clearly in the current environment where it would appear that the upturn and requirements of our customers are somewhat deferred, we are investigating as Bob said in his prepared remarks a significantly lower break-even point. I think until we’re prepared to discuss and disclose the whole plan, it would be inappropriate to say much more than that, but it would represent another step level from where we are today.
Robert F. Lepofsky
And we should note that the $125 million break even is break even at the pre-tax level. Our cash break even is even lower and we’ll take both of those numbers down going forward.
Operator
Our next question comes form Jenny Uhn – JP Morgan Securities.
Jenny Uhn – JP Morgan Securities
Just to clarify on your guidance remark, did you say March would be another 15% down from December despite everyone coming back from the shutdowns?
Robert F. Lepofsky
We are saying that we would like people to be thinking about the potential of another 15%, but it’s highly uncertain. Again we come back to what we think is a useful metric and that’s one week of plant shutdowns on the part of our customers represents 7% to 8%.
Obviously with the uncertainty of how the first quarter will play out, that could either be real or not real. It’s too soon for us to tell and we just lack the visibility to project that far out.
We did comment that we think in our discussions with customers that the highest level of uncertainty is actually later in the quarter rather than earlier in the quarter.
Jenny Uhn – JP Morgan Securities
While you don’t have visibility, you might be anticipating that there’ll be further shutdowns in the March quarter. Is that correct?
Robert F. Lepofsky
We are planning around that scenario as a realistic possibility.
Jenny Uhn – JP Morgan Securities
On your operating expenses, can you give us some help there? In the December quarter, would that be flat or given the shutdowns could that come down a little?
Martin S. Headley
That’s what we’ll be responding to and the extent to which that will move down is a function of the timing of us announcing and enacting those plans and the exact scope of those plans. They’re fairly well developed, but they are not announced at this juncture and we’re not in a position to really give guidance.
We certainly would not expect operating expenses to go up in the quarter, but the extent to which they go down is not something I can unfortunately really help you with at this time.
Jenny Uhn – JP Morgan Securities
I was thinking if you haven’t announced the restructuring plans yet, it would take some time to implement. So then just for the near term, your op ex should remain relatively flat.
Is that the right way to think about it? Or can you actually put something, take some costs down really quickly and it could take effect in the next couple months?
Martin S. Headley
I think the impacts will be fairly modest. There is the opportunity to take it down a little bit but really it’s the timing of the restructuring and it depends whether costs are going to into restructuring costs or into the ongoing operations costs.
So I don’t think it’s hugely significant is probably the best guidance I can give at the moment.
Jenny Uhn – JP Morgan Securities
My last question, I’m just curious, is the weakness at your OEMs is that evenly spread out among your OEM customers or are some doing better than others? And if so, is that because they’re leveraged to any non-semi markets?
Robert F. Lepofsky
I think as you know every one of the major and most of the second tier OEMs are all our customers and every one of our publicly held customers I believe has now released except for one. So I think you can take all of those announcements that our customers have made and they directly impact us.
You have one more to go tomorrow.
Operator
Moving on, we’ll take our next question come Patrick Ho – Stifel Nicolaus.
Patrick Ho – Stifel Nicolaus
Bob, in terms of the business historically pricing pressures usually emerge especially in downturns. Given the financial situation of many of your customers excluding some of the big ones, what type of I guess concessions are you making and what kind of help are you trying to do with a lot of your OEM customers given the current financial situation?
Robert F. Lepofsky
That’s a well-structured question because it does break the difference between the large OEMs and the smaller OEMs and I think with our large OEMs it’s actually as I tried to refer in my prepared remarks it’s a very positive and collaborative discussion we’re having there. We’re in this together.
We are an extension of our customers’ manufacturing, engineering and product support activities. There it’s about how are we coming through this together making sure that our plans are in sync and our capacities are in sync and virtually no discussion that relates to pricing per se.
This is a time for collaboration, not confrontation about pricing issues. I think with regard to the next group of OEMs, they’re looking and again leaning on us for a lot of support.
Again that’s consistent with our strategy to be an extension of our customers’, as I said earlier, engineering, manufacturing and support activities. I think at this time they are looking to us even more so as they constrain their own capability, particularly the engineering, particularly in the customer support area.
In the very small and more vulnerable accounts, there we’re working with them but we’re working with them carefully and cautiously obviously not wanting to be in an exposed position ourselves, but also trying to be supportive of their plans.
Patrick Ho – Stifel Nicolaus
Bob, perhaps another high level question for you in terms of both the macro environment and in terms of how it relates to the semi-conductor capital equipment industry, I kind of understood the strategy of how you had different business groups and how you were able to leverage each of the business groups and provide greater scale for your customers. Given the current again macro economic situation, is that business model being reevaluated?
Do you believe that it can still work post this downturn or is that something you have to evaluate on a going forward basis?
Robert F. Lepofsky
First I’ll say that we are reevaluating every aspect and all the strategies but I think the core strategies still play and I’ll take, if you will, the two extremes of our business, the critical components group at one end, that strategy is working for us and working for customers and you see the performance we have there and it’s been long term performance. That activity works during the ups and it does reasonably well during the downs.
At the other end of the spectrum is our extended factory activity. Again, in that business while it’s a lower gross margin business it’s a high return on invested capital business making it attractive.
It’s painful for us at this point in time because basically we’re carrying the under-absorption. I often joke about the comments of some of my large OEMs that they don’t have absorption problems and every time they say it, I choke up because I have those absorption problems.
Those absorption problems certainly do weigh on some of our short-term performance. We also think that model works given the fact that that under-absorption is there serving a broader range of customers.
So I think it is certainly being tested but the investments we made, and it’s the current situation we have, the investments we made to have the right capability in place, and I’ll be very specific here, in August to support the needs of our customers, when those needs disappeared, we were left with the capacity, we were left with the under-absorption but we are working very closely with our two major OEMs that use that facility, again in a collaborative way because that facility is critical to them as it is important to us. I think that we’ll see huge dividends of that strategy as we come out of the downturn.
But it is painful while we’re in it, but it is one that we believe works for the long term.
Operator
We’ll take our next question from Hari Chandra – Deutsche Bank.
Hari Chandra – Deutsche Bank
My question pertains to the service business with the legacy tools being shut down and cannibalized, does it fundamentally change your service business going forward? Also where do you see the gross margins in the quarters ahead?
Robert F. Lepofsky
I don’t think it fundamentally changes it. Again, our service business is somewhat complex in its make up.
It ranges from spare parts all the way through legacy systems. We have a level of activity that remains constant because of the service agreements, particularly on the critical components area.
So there’s stability there. It’s a real mix.
I don’t think it changes the model importantly, but it does again stress at periods like this where the customers pull back and they’re pulling back obviously not only in parts but also in some of the repair services so we have some under-absorption issues there. Again as we mentioned in two prior questions, that business is really delayed business as opposed to lost business.
We’ll get it back but we pay a price in the short term.
Hari Chandra – Deutsche Bank
Do you also expect the gross margins to come back?
Martin S. Headley
I made reference in prepared comments about an exceptional E&O charge, inventory obsolescence charge that we took. Excluding that the margins in the business, even at a very depressed level would have been over 15% and we regard that as an unacceptable level and will be addressed during our upcoming plans.
We would see that we can recover into an acceptable margin range in the future.
Hari Chandra – Deutsche Bank
Can you also give bookings and backlog data?
Martin S. Headley
For the course of the quarter the bookings were $95.2 million and our backlog on leaving the quarter was $63.8 million.
Operator
Our last question comes from Tim Arcuri – Citigroup.
Tim Arcuri – Citigroup
I had a question regarding your non-semi business, what type of environment are you seeing for your solar customers in your components group?
Robert F. Lepofsky
For us at this point, it’s more what we hear and what we read than what we have seen. Up to this point in the quarter it’s holding but certainly what we read and what we see gives us pause about the sustainability of the momentum there.
Tim Arcuri – Citigroup
Could you give an idea of what percentage of revenues you envision for next year for non-semi?
Robert F. Lepofsky
At this point it’s difficult for me to answer that question as we’re reevaluating what next year’s revenues are. I would take you back to our last conference call three months ago where we said that we were at about 18% I think was the number last quarter but headed to the mid-20s for non-semi.
Now of course as semi goes down the percentage of non-semi goes up. I know that’s a long non-answer to your question.
Tim Arcuri – Citigroup
But you also said that you probably expect the weakness to carry over now into the non-semi space too. So would you say that probably we’re looking at the same ratio?
Robert F. Lepofsky
That certainly is not a bad starting point. Again, as we look out over an entire year the question is, which businesses come back faster or slower based on the broader macro economic picture.
Operator
We have no further questions at this time. I will turn the conference back over to the company for any closing comments.
Michael W. McCarthy
We’d just like to thank everyone for their participation today and if they have any additional questions, please feel free to give us a call in our offices.
Operator
That does conclude today’s conference. We appreciate everyone’s participation and wish you all a great day.