Zygo F4Q09 (Qtr End 6/30/09) Earnings Call Transcript

Aug.20.09 | About: Zygo Corporation (ZIGO)

Zygo Corporation (NASDAQ:ZIGO)

F4Q09 (Qtr End 6/30/09) Earnings Call

August 20, 2009 6:00 pm ET


Walter A. Shephard - Chief Financial Officer, Vice President - Finance, Treasurer

J. Bruce Robinson - Chairman of the Board, Chief Executive Officer


Kelly Anderson - Sidoti & Company



Ladies and gentlemen, welcome to the Zygo Corporation fourth quarter and full year results conference call. (Operator's Instructions) As a reminder this call is being recorded today, Thursday, August 20th of 2009. It is now my pleasure to turn the conference over to Mr. Walter Shephard, Chief Financial Officer. Please go ahead, sir.

Walter A. Shephard

Thank you. Good evening, everyone. I want to thank you for joining us tonight for our fourth quarter fiscal 2009 conference call. Before I turn the conference call over to Bruce Robinson, Zygo's 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 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 meanings, in conjunction with the discussions 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 the forward-looking statements are fluctuations in capital spending of our customers, fluctuations in net sales from our major customer, manufacturing and supplier risk, risk of order cancellations, push outs and de-bookings, dependence on timing and market acceptance of new product development, rapid technological and market change, risk and international operations, dependence on proprietary technology and key personnel, length of sales cycle, environmental regulations, investment portfolio returns, fluctuations on stock price, and the risk that anticipated growth opportunities may be smaller than anticipated or not realized.

Future information or potential factors that could affect Zygo Corporation's business described in our reports on file with the Securities and Exchange Commission, including our Form 10-K as amended for the fiscal year June 30th, 2008. Now I would like to turn the call over to Bruce.

J. Bruce Robinson

Thank you, Walter. Good evening, ladies and gentlemen. I am very happy to have put 2009 behind us and look forward to an improved economy and improved operating results as we concentrate on fiscal 2010.

We have taken a number of cost reduction actions amounting to $17 million of annualized savings, and these actions will positively influence operating results through fiscal 2010. We did see revenue and order momentum in the metrology division in our fourth quarter, as did many of our peers. Whether this reflects increased CapEx spending by our customers or a temporary correction in inventory remains to be seen. There certainly is increased quotation activity over the last few months.

Absent the merger termination fee and severance costs, the company was cash positive for the quarter. Our balance sheet remains strong, and with the cost reductions in full effect for 2010, will remain so.

It was encouraging to see the book-to-bill ratio for July published by SEMI recently. July was the first time in 30 months that the book-to-bill ratio was over one in the semiconductor space. Traditionally, Zygo's revenue has been 40% related to the semiconductor market, and any improvement in this market segment is welcome news.

If this booking trends continue, we should begin to experience increased demand for our OEM optical component and metrology products.

Our strategy shift from a direct in-line production metrology tool to a Zygo inside approach to the market was reflected in our recent contract signing with Nanometrics. We continue to look for companies in other markets that can benefit from Zygo technology, in combination with their own complimentary in-line production metrology.

This strategy, although affecting revenue, provides increased margins with minimal expense, and therefore improved profitability. It also allows us to concentrate on our core strength related to metrology and optics.

One part of the world where it would see that the recession has not adversely affected our business is China. On the contrary, I have been pleasantly pleased to see increased momentum in metrology sales through our joint-venture manufacturing entity. The success of our manufacturing joint venture in China, and the excellent quality of the product, is encouraging us to consider further development of locally adaptable products.

We have had considerable success in attracting medical equipment companies to our FDA certified optical mechanical assembly facility. A total of five new medical companies were added in fiscal 2009 and are presently in various phases from prototype to pre-manufacturing. We anticipate that as these customers move into volume manufacturing they will have a beneficial impact on the revenue and (inaudible).

So I can say that for the first time in a number of quarters, I am cautiously optimistic. The combination of a leaner organization and a gradual recovery would say that the worst is behind us.

Thank you, and I'll turn it back to Walter for the financial information.

Walter A. Shephard

Thank you, Bruce. As reported in our press release, orders for the fourth quarter were $15.3 million. The fourth quarter orders from our Metrology Solutions Division bounced back from $6.9 million in Q3 to $10.9 million, an increase of 58%.

On the optics side, orders were down from last quarter to $4.4 million. This division tends to be cyclical as their main customers tend to place large orders often covering production from six to 12 months. In these difficult economic times, slippage or push out of these types of orders are more pronounced. For example, the group was expecting one multimillion dollar order to be booked in Q4, and it was pushed into Q3.

Backlog at the end of the fiscal year stood at $38.3 million. Sales for the quarter were $24.2 million with the Metrology Solution Division accounting for 74% of the revenues. Within this division, the Instrument Group had a majority of the sales at $11.1 million. This was an increase of 7% from Q3 and is due to the increased bookings in the quarter.

Our Display Systems Group also had a good quarter with $4.1 million of revenues being recorded as we received customer signoff on a number of systems in the field.

The Optical Systems Division revenue in the quarter were $6.2 million, a slight increase from Q3. The group's defense and laser fusion customers led the way.

Gross loss for the quarter was 3% as the company took charges in the quarter for asset impairments, restructuring and severance charges, and inventory reserves. Without these charges, gross profit would have been 33%. On a comparable basis, Q3's gross profit would have been 34%. Our gross profit is still being impacted by the lower sales volume. We are taking steps to reduce our overhead costs wherever possible.

Operating expenses in Q4 were $18.4 million. This included a number of charges for asset impairment, severance charges, and bad debt provisions, totaling $4.3 million. Excluding these charges, our operating expenses would have been $14.1 million.

With the additional reduction in workforce at the end of the fourth quarter, and with the reduction of operating expenses as a result of the transaction with Nanometrics, we're expecting our operating expenses to continue to show sizable decreases in the coming quarters.

Since the beginning of the calendar year we have reduced overall headcount by 18% and have taken steps to reduce overall operating costs and manufacturing costs by over $17 million on an annualized basis.

On the balance sheet, we continue to focus on maintaining a strong cash balance. The reduction of cash in market research for the third quarter was primarily a result of the merger termination fee and severance costs. Excluding these two items, our cash position increased by approximately $200,000.

Our DSOs improved dramatically from Q3 with our accounts receivable at 63 days. As I mentioned in the last quarterly conference call, we have been working diligently with our display customers and those efforts have begun to pay off as improved cash collections started in the last month of the fourth quarter and has continued into the first quarter of fiscal 2010.

Our inventory levels dropped $8 million from Q3. In addition to the inventory reserves, inventory decrease was driven by the performance of our instrument and our display groups.

During the fourth quarter we had virtually no fixed-asset additions and for fiscal 2009 we spent $4.3 million capital expenditures, down 35% year over year. We did take a valuation allowance against our deferred tax assets according to the accounting standards. All the assets have been removed from the balance sheet and we'll be able to call them back when we return a profitability on our US operations.

So despite all that has happened in fiscal 2009 with the economy, we still enter fiscal 2010 with a strong balance sheet.

I'd like to now turn the call over to questions.

Question-and-Answer Session


(Operator's Instructions) And our first question comes from the line of Kelly Anderson with Sidoti & Company. Please go ahead.

Kelly Anderson - Sidoti & Company

Hi, guys. Thanks for taking my questions — just a couple of quick housekeeping ones for Walter to start off. Could you possibly give us the cash flow from operations in the D&A for the quarter?

Walter A. Shephard

The D&A in the quarter are $2 million. Our operating cash flow — and again we're still finalizing our cash flow statement so these are estimates, is about $5.2-$5.3 million and it was the same for the net free cash flows, a loss of -5.3 in both cases.

Kelly Anderson - Sidoti & Company

Okay. And then in terms of the one-time charges that you incurred for the quarter, I'm wondering if any of those are related to the decline we saw in your intangible assets balance and whether that’s going to result in any P&L savings, for example as low amortization charges or something like that?

Walter A. Shephard

The answer to that is yes. We took both some fixed asset impairments and we took some impairment on some intangibles so that the D&A would be going decreased going forward in FY10.

Kelly Anderson - Sidoti & Company

Okay, great. And just in terms of the FPD Outsourcing, I mean how close are we to announcing a partner for that segment?

J. Bruce Robinson

As you know, Kelly, we had signed an agreement with Nanometrics for the semiconductor side and we're very happy with that deal because it allows us to remain in the market and continue to supply our technology to the semiconductor customers, as well as serving them better by having someone who has complimentary metrology and a larger force in the field.

To the extent that we can do the same thing in display and we can find the partner, then that is what we will do. And I would say that it is in the interest both of us and the customer to see what we can do in that area.

Kelly Anderson - Sidoti & Company

Okay. But those specific guidance on say —

J. Bruce Robinson

I can't give you any guidance right at the moment, Kelly.

Kelly Anderson - Sidoti & Company

Okay. That is fine. And then obviously we have heard a lot of people talk about the near-term improvements that they've seen in the semiconductor equipment market, I’m just wondering how that specifically is impacting your Metrology Group? Is it mostly tied to the instruments business so far, or have we seen a pickup on the litho side yet?

J. Bruce Robinson

We normally lag a downturn by 4-6 months and we lag an upturn by a similar amount. So I would suspect if semi is coming back now that we would start to see, in 4-6 months, increasing orders and shipments. It's based on our OEM, sort of the business that we have there. So it's traditional for us to lag by about four months. But instrument metrology itself in other areas is doing very well. We saw a significant uptick in orders in the fourth quarter from the third quarter and we continue to see some strength as we go into this quarter. So in other areas than semiconductor at the moment we are seeing a strong recovery in the instrument market.

Kelly Anderson - Sidoti & Company

Excellent. And then just touching on the medical devices opportunities, I think you said that you announced five customers for fiscal 2009, were any of those new from the fourth quarter and we are working with any new customers at this time?

J. Bruce Robinson

We had one new one in the fourth quarter, we had a couple in the third quarter, and we had some in the earlier part of fiscal 2009. So there are five in total and we are starting to ramp up some of those that came earlier in the year. The ones that came in the fourth quarter, we are sort of in the engineering phase so we're doing anything from engineering through prototyping and we're now starting to move some of them into manufacturing.

Kelly Anderson - Sidoti & Company

Okay, great. Thanks so much. I'm glad to hear things are improving.

J. Bruce Robinson

Thank you, Kelly.


(Operator's Instructions) And there are no further questions at this time.

Walter A. Shephard

Okay. Thank you very much. Thank you very much, ladies and gentlemen, for joining the call. We appreciate it very much and we look forward to talking to you next quarter. Thank you.


Ladies and gentlemen, that does conclude today's conference call. We thank you very much for your participation and we ask that you please disconnect your lines. Have a wonderful evening, everyone.

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