Zygo Corp. F3Q09 (Qtr End 31/03/09) Earnings Call Transcript

Apr.30.09 | About: Zygo Corporation (ZIGO)

Zygo Corp. (NASDAQ:ZIGO)

F3Q09 (Qtr End 31/03/09) Earnings Call

April 30, 2009 6:00 pm ET

Executives

Walter Shephard - CFO

Bruce Robinson - Chairma and CEO

Analysts

Kelly Anderson - Sidoti & Company

Operator

Welcome to the Zygo corporations third quarter results conference call. During the presentation all participants will be in a listen only mode. (Operator Instructions). This conference is being recorded for transcription Thursday, April 30, 2009. I would now like to turn the conference over to Mr. Walter Shephard, Chief Financial Officer for Zygo. Please go ahead, sir.

Walter Shephard

Good evening everyone. I want to thank you for joining us tonight for our third quarter fiscal 2009 conference call. Before I turn the call over to Bruce Robinson's Zygo's Chairman and CEO, I'd like to read the forward-looking statement. All statements other than statements of historical fact that are made during this call, 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 or 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 anticipate, believe, estimate, expect, intend, plans, strategy, project and other words of similar meaning in connection with a discussion of 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 forward-looking statements are fluctuation in capital spending of our customers, fluctuations in net sales to our major customer, manufacturer and supplier risks, risks of order cancellations, push outs and de-bookings, dependence on timing and market acceptance of new product development, rapid technological and market change, risking 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 the risks that anticipated growth opportunities maybe smaller than anticipated and not realized.

Future information and 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'd like to turn the call over to Bruce.

Bruce Robinson

Thank you, Walter. As anticipated the third quarter was very challenging for Zygo, given the economic climate across virtually all of our market segments. With revenues down 48% year-on-year, the resultant loss minus extraordinary items was $0.34. Our balance sheet remains healthy with $43.1 million of cash. We are executing on the cost reduction plans we outlined last quarter and are moving aggressively towards a cash positive operation.

Our bookings were 15.6 million, affected by push outs of 2.1 million and severe market conditions. Clearly this does not support the present level of expenses and we are aggressively implementing further cost reductions across the Company. Visibility is poor; however, we have seen stronger quote activity in this quarter which may indicate quarter three as the trough quarter in this downturn.

We have been receiving some orders directly related to the stimulus money being distributed across various areas of the world. We also received a new manufacturing development order in the life science market that has the potential to provide solid revenue and earnings growth for our optical division. This market with the exception of products related to the elective surgery area has continued strong in a down economy.

Follow-on orders for high volume manufacturing process control and semiconductor and data storage markets continued to validate our technology. We have begun partnership discussions that will accelerate our technology adoption, by leveraging the partner strength and systems sales and service to high volume manufacturers in these industries.

This is a significant step forward, since it enables Zygo to achieve solid margins while reducing significantly the operational costs associated with worldwide distribution and service of the customers in the semiconductor and data storage markets. We expect to see a $4 million to $5 million annualized expense reduction as a result of this effort.

Our strategy to increase Zygo revenue over our traditional laboratory instruments by developing form fit and function products for in line production in specific high volume markets has reached the level of maturity that will benefit customers, Zygo, and our partners, while improving our margins and reducing our expenses.

We continue to invest in our core technology to develop exciting new products, to further the market share gains we were achieving prior to the global recession. This activity combined with our in line partnerships will provide solid growth drivers as the economy recovers. Zygo is concentrating on developing leading edge metrology, expanding our defense and life sciences businesses, maintaining a strong balance sheet and preparing for the recovery with a more cost effective leaner organization. I'll now turn the call back to Walter.

Walter Shephard

Thank you, Bruce. As reported in our press release orders for the third quarter were 15.6 million. This is the first quarter we experienced significant de-bookings primarily in display unit with a customer push out of 1.8 million. As a result our metrology division had orders of $6.9 million or 40% of the companies orders in the quarter.

Significant order wins for the dividend came from the semiconductor unit which received two orders from both the semiconductor and data storage customer. Our PPS group which serves primarily the lithography market continues to suffer from the severe downturn that has impacted this segment of the marketplace. Although there have been public comments made that this market maybe turning around later this year, visibility continues to be poor.

The Instrument Group also suffered in our Third Quarter as the diversity of the market it serves has not been immune to the current downturn. As Bruce mentioned, we're beginning to see increased quotation activity but it's still too early to determine how much of this will turn into orders.

The Optical division saw a puck up in orders from the first half run rate as the group booked orders of almost 9 million. A significant order was recorded for the Fusion optics as this division also received a design order from another new customer of life science market, its third new customer so far this year in this growing market space.

Our backlog at the end of March stood at 47.2 million.

Sales for the quarter were 20 million, with the metrology division accounting for 70% of the revenues. Within this division, the instrument group had the majority of sales at 10.3 million. This reduced sales volume from the prior quarter was negatively impacted by the lower order run rate. The optical divisions revenues were 6.1 million in the quarter with a majority of the revenue derived from the defense and laser fusion customers.

Our gross profit for the quarter was 16%. The reason for the slower rate was due principally to significant inventory write-offs of $3.3 million related to our display, semiconductor, and vision business units as well as severance costs of $400,000. Without these charges, the Company's gross profit would have been 34.4%. In addition, the absorption issues in the factories had a negative impact of eight percentage points.

Operating expenses in Q3 were $23 million highlighted by a number of charges including severance costs of $500,000, merger related costs of $6.1 million which include the accrued termination fee of $5.4 million, and a write-down of intangibles of 2.1 million. Without these charges, our normalized run rate would have been $14.3 million.

As we mentioned in our press release and Bruce commented earlier, we are aggressively pursuing additional cost cutting measures and our operating costs will continue to drop in the coming quarters as we implement these measures to bring our expenses in line with our expected revenues.

Maintaining a strong cash position is one of the highest priorities and is receiving focus throughout the company. Cash, cash equivalents and marketable securities were $43 million at the end of March.

Although this is a decline of $5 million from our second quarter we are actively focusing on the following activities: With regard to accounts receivable, we have had a number of discussions with our display customers who have been severely impacted by this downturn and there for have been slow to pay. We have been able to arrange payment terms with a number of them and are working on the remaining few to come up with similar programs.

Concerning inventory, we have slashed the amount of open PL since the beginning of the calendar year based on the order run-rate. We're actively managing our purchasing on a day-to-day basis to avoid future excess inventory build up until we have more visibility on future orders.

Our fixed asset additions are also being closely monitored. Capital additions are running 25% through the first nine months of this year as compared with the prior year. Over half of the third quarters' 1.2 million additions were for loan and demo equipment. I'll now turn the call over to the operator for questions. Patrick?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Kelly Anderson with Sidoti & Company.

Kelly Anderson - Sidoti & Company

In the PPS segment, a lot of equipment companies have been talking lately about reaching a cyclical bottom in the equipment market. I'm just wondering how closely you track the inventory levels they have of your products and if it is true that we have reached a bottom in the equipment market, what kind of lag there might be for when you start to see an uptick in your orders?

Walter Shephard

I think in listening to the ASML Conference Call and the discussions that they made to their investors and to their analysts, basically they were talking about some technology buys more towards the 45 and 32-nanometer nodes over the next six to nine months. So that showed a little more activity for them and since they're on the leading edge of the metrology buys, one would anticipate that we would see a little more activity going forward, but there was no indication by them that in this particular year, there was going to be significant return to previous levels in that particular business.

From a standpoint of inventory, I don't think there was a tremendous amount of inventory out there. I don't think that's where the log jam is in terms of our particular products. I think it's just a matter that the semiconductor manufacturers are not buying steppers or spending a lot of capital at this particular point in time.

Kelly Anderson - Sidoti & Company

Okay, and turning to the SPD business, just as a clarification, those were just push outs, there weren't any cancellations and I would assume we're working through a fair amount of 08' backlog at this point?

Bruce Robinson

Yes, we still are, and this particular customer just cancelled the delivery date and since they did not give us a new delivery date within a 12 month basis we have de-booked it. Officially they did not cancel it but they did not give us a delivery date, therefore we took it out of our backlog.

Kelly Anderson - Sidoti & Company

Okay and turning to the instruments business, that's been an area of relative strength for you guys for quite some time. I think it's fair to say that's been hit with the general weakness that we've been seeing. Is there anything you can point to sort of qualitatively as to where this might be coming from?

Bruce Robinson

This particular quarter, it seemed to come across almost all markets that we're in that affected us in the instrument business. Although in the fourth quarter where we are today we're seeing a fair amount of more activity than we had seen in the third quarter. So we're holding out some hope that that was a bit of an anomaly.

Kelly Anderson - Sidoti & Company

Finally on the in line metrology segment; I know you've referenced in the past working with as many as two different front end customers and a handful of guys in the back end of the line. I'm just wondering if the conversations there are still progressing or whether given the difficult business environment those have sort of slowed to a halt?

Bruce Robinson

No. We're still progressing with discussions with semiconductor manufacturers, but one of the things that we pointed out in our press release and we also pointing out in my comments earlier is that we are talking to semiconductor equipment manufacturers, and by forming partnerships with them will accelerate our technology into that space.

Kelly Anderson - Sidoti & Company

I think you said on the last earnings call that you had expected optics contracts to be up as much as 150% in the second half. Are you still comfortable with that estimate?

Bruce Robinson

Well, through the first half of the year they did about 9 million and in the third quarter alone we booked 9 million. So their business is definitely coming up. I am just hesitant to say what I see out there because visibility is poor but they have a lot of activity going on, it’s a question of when we can pull our customers release orders.

Operator

Ladies and Gentlemen, (Operator Instructions). Sir, there appear to be no further questions at this time. I'll now turn the conference back over to you.

Walter Shephard

Okay, well thank you very much for attending our third quarter conference call and we look forward to the results in our fourth quarter. Thank you. Bye-bye.

Operator

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation and ask that you now please disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!