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Zygo Corporation (NASDAQ:ZIGO)

F2Q09 Earnings Call

January 29, 2009 6:00 pm ET

Executives

J. Bruce Robinson – Chairman, Chief Executive Officer

Walter A. Shepard – Chief Financial Officer

Analysts

Robert Goth - MAK Capital

Kelly Anderson - Sidoti & Company

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Zygo Corporation second quarter fiscal ’09 results conference call. (Operator Instructions) I would now like to turn the conference over to Walter Shepard, Chief Financial Officer. Please go ahead, sir.

Walter A. Shepard

Thank you, Tim. Good evening, everyone. I want to thank you for joining us tonight for our second quarter fiscal 2009 conference call. Before I turn the call over to Bruce Robinson, Zygo’s Chairman and CEO, I would like to read the following forward-looking statement.

All statements other than statements of historical fact that are made during this call are regarding our financial position, business strategy, plans, anticipated growth rates, market acceptance, and objectives of management for future operations are forward-looking statements. Forward-looking statements are intended to provide management’s current expectations and plans for the future operating and financial performance based upon information currently available and assumptions currently believed to be valid. Forward-looking statements can be identified by the use of words such as “anticipates,” “believe,” “estimate,” “expects,” “intend,” “plans,” “strategy,” “project,” and other words of similar meaning in connection with a discussion of the future operating or financial performance. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors. Among the important factors that could cause actual events to differ materially from those in the forward-looking statements are fluctuations in capital spending of our customers, fluctuation in net sales to our major customers, manufacturer and supplier rifts, dependence on timing and market acceptance of new product development, rapid technological market change, risk in international operations, dependence on proprietary technology and key personnel, length of the sales cycle, environmental regulations, investment portfolio returns, fluctuations in our stock price and risks associated with the merger of ESI and the transactions contemplated by the agreement.

Further information on potential factors that could affect Zygo Corporation’s business is described in our reports on file with the Securities and Exchange Commission including our Form 10-K as amended for the fiscal year ended June 30, 2008.

Now I would like to turn the call over to Bruce.

J. Bruce Robinson

Thank you, Walter. Ladies and gentlemen, thank you for attending Zygo’s second quarter fiscal 2009 earnings call.

I believe it is obvious to everyone that we are experiencing an economic tsunami that is global in nature. Despite our diversity both in products and markets, we are not immune to the severe reductions in capital spending by our major customers. In particular, the steep decline of the semiconductor and display sectors has significantly impacted our bookings.

Total orders year-on-year are down 36% however our core instrument business is down less than 4%. Defense, aerospace and scientific markets have not been as adversely affected as other sectors of the economy and we continue to see significant customer interest in our base instruments.

We have completed extensive work on integrating our high volume manufacturing tools in the semiconductor fab and are relatively confident that shortly through the selection process we will see multiple tool orders. The optical division has seen reductions in orders of 52% year-on-year, primarily related to delays in initiating the CEA laser fusion contract, the significant reduction in elective surgery, medical product sales and the virtual shutdown of orders for optical components related to the semiconductor market.

Offsetting this, we recently received a $1 million pre-production order for a medical product that is disease-related and therefore more immune to the economic conditions. We will be shipping it in 2009, however, we anticipate that this will begin to ramp significantly as we move into calendar 2010.

We’re also experiencing increased unit activity into security surveillance both in aerial reconnaissance windows and laser-based surveillance assemblies. Finally, the unit ramp in dental metrology products has been significant and very encouraging. Given this, we’re estimating a stronger second half in our optical division with their orders up more than 150% over the first half of fiscal 2009.

Although it is not possible to judge the bottom of the market in this economy, we believe that by concentrating on our core business, by optimizing inventory, capital spending and expenses, and by implementing accelerated cost controls, we can sustain the business through the recession and emerge as a profitable, stronger optical metrology company.

When we recognized that the semiconductor market was soft in fiscal 2008, we reduced headcount by 8%. This January, we took further actions that reduced our workforce by a further 7% as well as instituting furloughs and salary reductions. Although this latest action provided further annualized relief of $9 million, we can consider it a start and not in itself sufficient. We are preparing for a downturn that extended beyond calendar 2009. Our primary objective going forward will be to focus on liquidity and maintaining a strong balance sheet while strategically investing in customer-related projects associated with our core business.

Thank you. Now I will return you to Walter for a review of the financials.

Walter A. Shepard

Thank you, Bruce. As we noted in our press release, orders for the second quarter were $22.3 million with the majority of the orders booked, 77%, from our metrology division. Within this division, our instruments group continues to book the largest volume of orders and their bookings were $13 million in the quarter. The rest of the division units were severely impacted by the economic downturn, especially as it relates to the semiconductor and display markets.

The optical division also experienced a slowdown of orders as part of its business that has exposure to the semiconductor and consumer markets that has been negatively affected. The optics group did receive an order from a new customer in the medical market but it was not sufficient to overcome the slowdown in other areas.

Although our backlog declined from the previous quarter, it still stands at a healthy $51.6 million at the end of December.

Sales for the quarter were $33.5 million of which 73% was from the metrology solutions division and the balance of 27% from the optical systems division. Canon sales in the quarter represented 15% of the total sales, with 9% being Canon-consumed sales and sales to other end-use customers accounting for 6%. For year-to-date, Canon sales represented 17% of the company’s total revenues, the same amount for the first six months of fiscal 2008.

As was the case with orders, the metrology division sales were led by the instruments group which had revenues of almost $14 million in the quarter. The display systems unit reported revenues of $5 million as this group continued to get acceptance of their systems in the field in a very difficult market environment.

The optical division had revenues of $9 million in the quarter with the component group accounting for the majority of the revenue as their customers tend to be related to defense and the laser-fusion markets.

Gross profit for the quarter was 36.6%. Margins were negatively impacted by product mix, under-absorption due to lower sales volumes, and a higher level of reserves that we took against certain inventory items.

Operating expenses were $18.8 million in Q2. As mentioned in the press release, we had charges to operating expenses of $3.9 million that are outside the normal course of our operations. On a comparative basis, our second quarter fiscal 2009 operating expenses also include $1.5 million of expenses related to the Solvision acquisition and we took none in the second quarter last fiscal year.

As we have mentioned, the company has undertaken additional cost reduction programs in this current quarter to reduce our cost structure further. We expect to see normalized operating expenses decline in the coming quarters.

Our balance sheet remains strong. Our cash, cash equivalents and marketable securities were $40.1 million at the end of the quarter. There was a decrease in the prior quarter, $4.2 million, with most of the decrease attributable to paying merger-related expenses.

We reported accounts receivable of $26.7 million, a decline of almost $2 million from last quarter which was a result of the lower sales volume. Our DSO spiked up to 69 days, again due to lower volume of sales. Inventory rose slightly from last quarter by $500,000.

While we did receive acceptance on a number of display systems thereby relieving inventory, the inventory pipeline was refilled by the manufacturer of the next set of display systems in the backlog. Our purchasing department is working closely with our business units to make sure that the incoming inventory purchases match current and future demand.

Year-to-date, we have spent $3 million on capital equipment, most of it related to demo equipment. This amount is 35% below our budget amount and this will be watched closely for the remainder of the year.

I will now turn the call over to Tim for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Gentlemen, we appear to have no questions at this time. I will turn the call back over to you. Oh, we do have someone who has just queued up. Robert Goth with MAK Capital. Please go ahead.

Robert Goth - MAK Capital

First, I was just wondering if you could tell me what the operating cash flow was for the quarter as well as how much of the unusual expenses were actually cashed out the door for the quarter.

Walter A. Shepard

Of the unusual expenses, approximately $2 million were cash-related and the balances were reserves.

Robert Goth - MAK Capital

What was the operating cash flow for the quarter?

Walter A. Shepard

I don’t have it at my fingertip right now Robert. I’ll have to get back to you after I review that. Our cash flow statements for our Q, we are still working on that. So it’s not finalized yet.

Robert Goth - MAK Capital

Okay, I missed, you mentioned a few initiatives or new orders, could you just mention those again please?

J. Bruce Robinson

Number one, we have completed the work on integrating our high-volume manufacturing tools for the semiconductor fab and we anticipate in the coming weeks, certainly in time probably for the next conference call that the selection process will be complete and that we should see some high-volume manufacturing orders, multiple tool orders from there. We expect probably that one of those orders, at least one of those orders will come in this quarter.

The other area was in the disease-related optical products for the medical industry where we have received a $1 million order to prepare a pre-production order and once that pre-production order is shipped to the customer for his inspection, we anticipate then that we will start shipping units each month there on out. It will start to ramp as he has success in the marketplace. These production units are used in Europe to date but are being tested in the U.S., etc, so we think this could be significant as we go forward.

The other businesses we have in the optical systems are associated with medical and with surveillance. The dental products have been, they’re getting traction and we’re seeing the units go up each month and also in the security surveillance, both in the window base and the laser-based surveillance assemblies. We have been seeing a number of increasing orders there. We anticipate the optical division will have a much better half going forward than they had in the first half of the year.

Robert Goth - MAK Capital

To be specific on the medical or dental product is it cosmetic-related on the dental side?

J. Bruce Robinson

The dental side is, you know if you need a crown or a bridge rather than putting the stuff in your mouth that would make the impression, you actually use a 3-D piece of metrology to calculate what the teeth would look like. Therefore, it is not so uncomfortable for the patient and its much better accuracy in terms of the product that’s produced.

Robert Goth - MAK Capital

And on the medical side?

J. Bruce Robinson

On the medical side, it’s related to cataracts in the eyes and that type of thing. I can’t see any more than that, surgery related to cataracts.

Operator

(Operator Instructions) We have a question from Kelly Anderson with Sidoti & Company. Please go ahead.

Kelly Anderson - Sidoti & Company

Just a quick housekeeping one in terms of the operating cost savings you were talking about. I believe your previous guidance coming into the year was $67-$69 million for the year. Does that mean that we are looking at a picture more like $58-$60 million if you exclude the solvency charges?

Walter A. Shepard

I think the way we look at it, if you take a look at the quarter we just completed and back out these merger-related and royalty claim reserve we took, our run rate is about $15 million so what I would do, it would be more like $60 million and so from the $60 million, you take it down to $9 million, so it is more like $51 million and that is all inclusive in the company. Again, we will be working to lower that number as the business conditions dictate.

Kelly Anderson - Sidoti & Company

Obviously, you guys came into the year with a significant amount of backlog in your SPD business. Have you seen any cancellations in the backlog? How secure do you feel with that number?

J. Bruce Robinson

We have not seen any cancellations but obviously we have seen fab closures. So the shipments that we have, that we have shipped to date, some of them still require collection of receivables. So I would say that there is some concern on our side. At the same time, the shipments that we’ve made are to larger customers so we anticipate collecting but it may take a little bit longer than we have anticipated.

Kelly Anderson - Sidoti & Company

Just a final question, I believe you said that you are expecting a 150% increase in your optics orders for the second half. I am just wondering what the lead times look like for those kind of tools and how you might see that ramping in terms of revenue as we move along?

J. Bruce Robinson

I think obviously it will help some of the revenue this quarter but probably more into next quarter, then into 2010.

Operator

We have no further questions at this time.

J. Bruce Robinson

Okay, well, thank you. Thank you very much for attending the conference and we look forward to seeing you in the next quarter.

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Source: Zygo Corporation F2Q09 (Qtr End 12/31/08) Earnings Call Transcript

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