Q2 2013 Earnings Call
February 07, 2013 5:00 pm ET
John P. Jordan - Chief Financial Officer, Vice President and Treasurer
Chris L. Koliopoulos - Chairman, Chief Executive Officer and President
Ladies and gentlemen, thank you for standing by, and welcome to the Zygo Corporation Fiscal 2013 Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded, February 7, 2013. I will now turn the conference call over to Mr. John P. Jordan, Vice President, Chief Financial Officer and Treasurer of Zygo Corporation. Mr. Jordan, please go ahead.
John P. Jordan
Good afternoon. I'm John Jordan, Vice President, Chief Financial Officer and Treasurer of Zygo Corporation. Thank you for joining us for the Zygo Corporation's Second Quarter Fiscal 2013 Earnings Conference Call. On the call with us today is Dr. Chris Koliopoulos, President and Chief Executive Officer of Zygo Corporation.
The press release containing Zygo Corporation’s second quarter results was published today at 4 p.m. It is also available on our website at www.zygo.com.
I will turn the call over to Dr. Koliopoulos to discuss the results of the quarter, but before doing so, I'd like to remind you that today's call may contain forward-looking statements, which may include statements about our financial position, business strategy, plans, anticipated growth rates, market acceptance, objectives of management for future operations and other statements that are not historic facts.
Forward-looking statements can be identified by the use of words such as anticipate, believe, estimate, expect, intend, plans, strategy, project, should and other words of similar meaning in connection with the discussion of future operating or financial performance. These forward-looking statements represent our predictions and expectations as to future events, which we believe are reasonable, and are based on reasonable assumptions. However, numerous risks and uncertainties can cause actual results to differ materially from those expressed or implied in the forward-looking statements. Information about some of these risks and uncertainties can be found in our earnings release and in our reports filed with the Securities and Exchange Commission, including our report on Form 10-K for the fiscal year ended June 30, 2012, filed September 13, 2012. We assume no obligation to revise or update any forward-looking statements.
Now I would like to turn the call over to our President and Chief Executive Officer, Dr. Chris Koliopoulos. Chris?
Chris L. Koliopoulos
Thank you, John. Good afternoon, everyone, and thank you for joining our second quarter 2013 earnings conference call. We are here to report our second quarter and first 6 months of fiscal year 2013 results and discuss our business activities and some of our highlights of the quarter during the call today.
Although quote activity has been reasonably robust and bookings improved considerably during the second quarter, the lower bookings from the previous 2 quarters combined with a seasonally short quarter caused shipments and revenue in the quarter to be lower than we had targeted. As a result, second quarter revenue of $34.6 million was 14% lower than revenues for the second quarter of fiscal 2012 and the first quarter of fiscal 2013.
The Optical Systems division revenue decreased 9% and Metrology Solutions division revenue was 16% less than the prior year quarter, primarily due to a few shipments from our special projects group, a result of a shorter quarter and customer timing.
Bookings for the quarter rose to $42.8 million, sequentially improving 15% over fourth -- first quarter bookings and 20% over Q4 fiscal 2012, resulting from improved sales representation in our markets, increased interest in our new products and the diversification of our customer base. Although the weakness in the semiconductor capital equipment sector has continued to impact our bookings and revenue through the second quarter, sales in other sectors have filled in the semiconductor sector shortfall. Notwithstanding the contraction in the semiconductor industry, our product development efforts in our system -- in our Vision Systems group began yielding results as vision began installations of new products, developed for back end, bumped device, 3D metrology and inspection during the quarter. We are anticipating additional contribution from these new products in the second half of the year as capacity requirements drive further orders.
The semiconductor contraction has also depressed bookings activity in our precision positioning systems group. But our product development initiatives in that area also began to produce results, as our bookings and new PPS products ramped up since the end of last quarter. We anticipate that PPS will also continue to gain traction during the rest of the fiscal year into next year as new technology begins to be evaluated and adopted.
Our order backlog increased to $73.2 million, the second highest level in nearly 5 years from $68 million at June 30, 2012; $65.1 million at September 30, 2012 and $69.7 million at December 31, 2011. As we enter the second half of the year, we anticipate that the healthy backlog and the strong quotation activity and order rate will help drive a stronger second half of 2013.
Our headcount has increased from 609 at June 30 of last year to 620 at December 31. We are continuing to selectively hire engineering, design and manufacturing resources to address requirements in specific markets and to support our research and development initiatives.
Over the last few years, Zygo has improved its operations using lean methodologies to produce stronger gross margins, has invested in its infrastructure to increase capacity and capabilities in fabrication and the precision instruments, optical components and coatings and has continued to develop advanced technology and products to support our customers roadmaps.
We are well-positioned to capitalize on improving economic conditions, which will support growth and increase shareholder value. The latter part of fiscal 2012 and the early part of fiscal 2013 was challenging due to the uncertainty produced by the political and economic climate, severely slowing down bookings as customers solve planned purchases. It is our belief that we have experienced the trough of the cycle. With the trend in bookings improving and a healthy backlog, we are well-positioned for a stronger second half of the fiscal year.
Zygo is weathering well the weak semiconductor cycle, maintaining profitability while continuing to position the company for growth as economic conditions strengthen, especially in the semiconductor sector.
Now I will turn the call over to John to discuss the financial results in more detail. John?
John P. Jordan
Thank you, Chris, and again, good afternoon, everyone. As Chris reported, revenue in the quarter was $34.6 million, about 14% less than revenue of $40 million in the same quarter last year. The weak bookings in the previous 2 quarters and timing of deliveries in the backlog caused shipments and revenue in the quarter to be lower than we had targeted.
Metrology revenue was 62% of total revenue in the quarter and Optics revenue was 38% compared to the second quarter of last fiscal year with Metrology at 64% of total revenue and Optics at 36% in that quarter. Revenue for the first 6 months of fiscal 2013 was $74.8 million versus $84 million in the first 6 months of fiscal 2012, an 11% decrease.
Metrology revenue was 63% of total revenue in the first half of fiscal 2013, and Optics revenue was 37% compared to the prior-year period when Metrology was 66% of the total revenue and optics was 34% than the first half of fiscal 2012.
Operating income in the quarter was $2.2 million, and operating margin was 6.4% versus $7.4 million or 18.6% of revenues in last year's Q2, and $4.4 million or 10.9% of revenues in the prior quarter.
Reduced gross profit from the lower revenue, reduced gross margin from a change in mix of Metrology and Optics products and poor overhead absorption from lower manufacturing volume were the primary drivers of the operating margin decrease in the prior-year quarter.
Operating income for the first 6 months of fiscal 2013 was $6.6 million and operating margin of 8.8% versus $15.5 million or 18.5% of revenue in last year's first 6 months. Decreased revenue and margin were the main drivers of the operating margin decrease from the prior year's first half.
The results in the prior-year quarters reflected the benefit each quarter from offsetting the quarterly U.S. tax provision by a reduction of the deferred tax asset valuation allowance.
Fiscal 2012 fourth quarter results, on a GAAP basis, reflected the benefit of the reversal of the remaining $18.9 million of valuation allowance into the tax provision. Since the valuation allowance has been eliminated, current year results reflected tax provision at the full effected tax rate. As we reported in Item 9A in the June 30, 2012 10-K, we determined through our valuation of internal control over accounting for income taxes during 2012 that the controls are ineffective. And there was a material weakness related to accounting for income taxes.
We began the remediation plan to address the material weakness in part by engaging an external expert to replace an internal resource to perform the tax calculations and to review the tax asset and liability accounts. The review of the tax accounts completed during the last 2 quarters gave rise to an adjustment included in the tax provision for each quarter and set forth in the reconciliation to non-GAAP results included with the earnings press release. Those adjustments recorded as a component of the quarterly tax provisions, reduced the effective tax rate in Q2 to 16%, 27% for the first half. Absent that adjustment, the tax rate would be 42.5% to 41.7% for the first half. Higher than the expected rate due to difference related to uncertain tax positions.
Net income for the second quarter was $1.6 million or $0.08 per diluted share compared to $6.2 million or $0.33 per diluted share for the second quarter of fiscal 2012. Net income for the first half of fiscal 2013 was $4 million or $0.21 per diluted share compared to net income of $12.6 million or $0.68 per diluted share in the first 6 months of 2012.
Net income on a non-GAAP basis, removing the effect of the tax adjustments I discussed, as set forth in the reconciliation of reported results to non-GAAP results in the press release, would be $1 million or $0.06 per share for the second quarter and $3 million or $0.16 per share for the first half.
Gross margin for the quarter was 44.1%, 60 basis points greater than the prior quarter on a lower revenue base. The improvement resulted from inclusions in the prior quarter of additional cost related to the ramp up of the new Optics program. Q2 also had low overhead absorption from lower revenue volume as well as unfavorable product mix.
Operating expenses in the quarter were $13.1 million versus $12.2 million in Q2 of the prior year and $13.1 million in the last quarter. The increase from the prior year quarter is primarily due to increased R&D for product development. Cash-on-hand decreased to $77.3 million at the end of December, a decrease of $6.8 million from the beginning of the fiscal year. Cash generated from operations for the quarter was $1.3 million and $1.5 million for the first 6 months.
Overall, cash used in the first 6 months was $6.7 million, including close to $5 million for the purchase of the 40% minority-owned portion of our European joint venture and payment of dividends to the joint venture partners. We also invested $3.5 million in optics manufacturing and coating equipment in Richmond and Middlefield and the beginning of the investment to build out the new facility in Tucson.
Accounts receivable at December 31 were $3.1 million less than at June 30, 2012, due to the lower revenues. Day sales outstanding at December 31 was 74 compared to 64 days at June 30. Inventories of $29.9 million increased $2.2 million from the beginning of the fiscal year due to buildup of in-process inventory required for future quarter shipments of high-value custom systems from the special projects group.
Our new products and customer diversification have helped us weather the cyclical contraction, and we look forward to the improved bookings trend and strengthening backlog to contribute to a healthy second half of the fiscal year.
That concludes the prepared portion of our remarks. Operator, you may now solicit questions.
[Operator Instructions] There are no questions at this time.
John P. Jordan
Okay, George, thanks very much. It appears as though there are no questions. Since it appears no one has any further questions, we thank you very much for participating in the call. We look forward to discussing our next quarterly earnings report. Thank you all, and goodbye. Thank you, George.
Ladies and gentlemen, that does conclude the conference call for today. And we thank you for your participation and ask that you please disconnect your lines.
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