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Zygo (NASDAQ:ZIGO)

Q2 2014 Earnings Call

February 06, 2014 5:00 pm ET

Executives

John P. Jordan - Chief Financial Officer, Vice President and Treasurer

Gary K. Willis - Interim Chief Executive Officer and Director

John M. Stack - President of Optical Systems Division

Anthony Allan - Chief Operating Officer

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Zygo Corporation's Fiscal 2014 Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, the call is being recorded, February 6, 2014. I will now turn the conference over to Mr. John P. Jordan, Vice President, Chief Financial Officer and Treasurer. Mr. Jordan, please proceed.

John P. Jordan

Thank you, Shawnda. 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 2014 Earnings Conference Call. On the call with us today are Gary K. Willis, Interim Chief Executive Officer; Tony Allan, Chief Operating Officer; and John Stack, President, Optical Systems Division.

We wish to apologize for the delay in publishing the earnings press release and postponing the conference call. We had some real technical and transmission difficulties with both the conference call provider and the newswire service that added to the delay.

The press release containing Zygo Corporation's second quarter results was published today after the market closed. It is also available on our website at www.zygo.com.

I will turn the call over to Gary Willis to begin the call. But before doing so, I would 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.

Please refer to the press release and our annual report on Form 10-K and other reports filed with the Securities and Exchange Commission for a discussion of forward-looking statements and a discussion of the risks and uncertainties that can cause actual results to differ materially from those expressed or implied in the forward-looking statements. We assume no obligation to revise or update any forward-looking statements.

Now, I'd like to turn the call over to our Chief Executive Officer, Gary Willis. Gary?

Gary K. Willis

Thanks, John. And thanks to all you for joining our Second Quarter Performance Update Conference Call. The second quarter saw positive momentum building in revenue, gross margin gains and bookings. As you are aware, we introduced a new profiler product in August. And as result of that introduction, we saw a record number of units booked in the October through December quarter confronting the robust market traction for that new product. In addition, total dollar bookings across all divisions significantly increased in the latter part of the second quarter, and those order rates continued through January. The delivery times on those bookings spanned both short- and longer-term deliveries. And combined with our existing backlog, positions the company for increased revenue and profits for the remainder of the fiscal year.

Let me turn it back John for the financial review. And then John Stack will update you on our Optics operations, and Tony Allan will do likewise for our Metrology business. John?

John P. Jordan

Thank you, Gary. And again good evening, everyone. Bookings of $38.4 million for the second quarter of fiscal 2014 increased 4% from prior quarter bookings of $37 million, $42 million -- $42.8 million booked in the prior-year quarter. At the end of the quarter, backlog was $76.9 million compared to $73.2 million at December 31, 2012, and $86.7 million at September 30, 2013.

As we discussed in our earnings press release, the company has historically reported the value of non-cancelable orders received and orders in backlog that have delivery dates within the following 12 months. Effective with this quarter report, the company will be reporting the value of all orders received in bookings and backlog and we'll separately report the value of orders with delivery dates beyond 12 months. The company believes this policy more accurately reflects the business activity.

The value of orders included in backlog with delivery dates beyond 12 months from December 31, 2013, is $900,000. The value of orders excluded from backlog at September 30, 2013, with delivery dates beyond 12 months, was $1.2 million and for December 31, 2012 was $2 million. If those orders had been included in backlog on the respective dates, the reported backlog at September 30, 2013 would have been $87.9 million and at December 31, 2012, the backlog would have been $75.2 million.

Revenue of $48.2 million for the second quarter increased by 39% over $34.6 million reported in the prior-year quarter, and 20% over the $40.1 million reported in the prior quarter. Metrology Solutions division revenue increased 58% and Optics revenue increased 8% over revenue reported in the prior-year quarter. Metrology revenue was 70% of total revenue in the quarter and Optics revenue was 30%. In the prior year's second quarter, Metrology was 62% of the total revenue and Optics was 38%. Revenue for the first 6 months of fiscal 2014 was $88.3 million versus $74.8 million in the first 6 months of fiscal 2013, an 18% increase. Metrology revenues were 68% of total revenue in the first half of fiscal 2014 and Optics revenue was 32% compared to Metrology at 63% and Optics at 37% in the first half of fiscal 2013.

Gross margin for the quarter achieved a record for the company at 51.5%, 7.4 percentage points higher than the prior-year quarter, and 5.8 percentage points better than the gross margin in the first quarter fiscal year 2014, due to the higher revenue base, better mix of products with Metrology representing 70% of total revenue in the quarter and the better margins on both Metrology, and to a lesser degree, Optics products. Gross margin for the first 6 months of fiscal 2014 was 48.9%, 5.1 percentage points higher than gross margin in the prior-year period. Operating expenses in the quarter were $18.3 million, 38% of revenue compared with $13.1 million and 37.7% of revenue in Q2 of last year, and $14.9 million, 37.2% of revenue in the previous quarter. Operating expenses were higher than the prior quarter and prior-year quarter due primarily to $2 million -- $2.1 million of separation costs in the quarter for separation of the former CEO and incentive compensation expenses recorded in the quarter. RD&E cost increase from the prior year and prior-year quarter due to increased development costs on large projects that are nearing completion and completion of the recently introduced Nexview profiler and the Mini interferometer.

As set forth in the reconciliation of reported results to non-GAAP results included in our earnings press release, if the 1x CEO separation expenses were removed, operating expenses on a non-GAAP basis would have been $16.2 million, or 33.6% of revenue. Operating expenses in the first 6 months of fiscal 2014 were $33.2 million, 37.6% of revenue compared, with $26.2 million and 35% of revenue in the prior-year period. Operating expenses were higher than the prior-year period due primarily to the CEO separation costs, reversal of the bad debt reserve in the previous year quarter in sales and marketing, $628,000 of costs incurred for a terminated acquisition effort in Q1 and increased personnel costs primarily related to Group Insurance. If the acquisition costs and CEO separation costs are removed, operating expenses for the first half on a non-GAAP basis would be $30.5 million, or 34.6% of revenue.

As set forth in the reconciliation of reported results to non-GAAP results, operating income in the quarter on a non-GAAP basis after removing the CEO separation cost was $8.6 million, an operating margin of 17.8%. On a GAAP basis, operating income was $6.5 million and operating margin of 13.5%, versus $2.2 million or 6.4% of revenue in last year's Q2, and $3.4 million or 8.5% of revenue in the prior quarter. Operating income for the first 6 months of fiscal 2014 on a non-GAAP basis was $12.6 million, an operating margin of 14.3%. On a GAAP basis, operating income was $9.9 million, an operating margin of 11.3% versus $6.6 million, or 8.8%, of revenues from last year's first 6 months. The increased revenue and gross margin were the drivers of the operating margin increase from the prior year's 6 months.

As reflected in the reconciliation of reported results to non-GAAP results in the earnings press release, on a non-GAAP basis after removing the after-tax effect of the CEO's severance, net income and EPS for the second quarter were $5.3 million and $0.27 per diluted share in the fiscal 2014 quarter compared with $800,000 and $0.04 per diluted share in the second quarter of fiscal 2013. Net income for the second quarter on a GAAP basis was $4 million, or $0.21 per diluted share, compared to $800,000, or $0.04 per diluted share, for the second quarter of fiscal 2013.

For the first 6 months of fiscal 2014, after removing the after-tax effect of the acquisition costs and CEO severance costs and the tax adjustment in Q1, net income and EPS on a non-GAAP basis were $7.7 million and $0.40 per diluted share, compared with $2.6 million and $0.14 per diluted share in the prior year period. Net income for the first half of fiscal 2014 on a GAAP basis was $6 million or $0.31 per diluted share, compared to net income of $2.6 million, or $0.14 per diluted share, in the first 6 months of fiscal 2013.

Cash on hand at December 31, 2013 increased $6 million from September 30, 2013 to $90.4 million. Cash generated from operations during the quarter was $9 million. Significant uses of cash during the quarter included $2.1 million for capital expenditures, primarily for production facility infrastructure improvements and for equipment to improve optics manufacturing and coating capabilities.

Accounts receivable at December 31, 2013 increased $800,000 in the quarter due to the revenue increase. But due to better collections of offshore receivables, days sales outstanding improved to 59 days compared to 69 days at September 30, and 73 days at June 30, 2013. Inventories increased $700,000 from September 30 to $31.3 million, directly attributable to increased work in process inventories of components for shipment during the third quarter on the large PPS contract received in March 2013 and for Optics components scheduled for shipment in the third and fourth quarters.

As discussed in the press release, we have made significant progress on the resolution of issues in our deferred tax accounts and improving the controls of our accounting for income taxes. We have installed robust controls and are using third-party experts to ensure that all historical accounts are properly stated. During the review of the accounts, we have uncovered adjustments reported over the past several quarters, none of which have an effect on operations, reported operating results, cash position or cash flow. The aggregate of those adjustments has been determined to be immaterial to the financial statements of the 2012 and 2013 fiscal periods and more appropriately reflected in the financial statements of the periods to which they relate. As a result, the tax expense and deferred tax asset and liabilities accounts have been restated from amounts previously reported for the years ended June 30, 2012 and 2013 and the quarter ended September 30, 2013. The amounts reported for those periods in this press release reflect the adjustments as though they had been recorded in the proper period. These adjustments in the amounts referred to in previously reported periods are the company's calculations of the related amounts and are subject to completion of a review of those amounts by the company's registered public accounting firm. The company will file its quarterly report on form 10-Q as soon as practical.

As Gary mentioned, and John and Tony will discuss in more detail during their comments, we believe the company is well positioned with exciting new Metrology products and our targeted approach to providing the precision optics needs of our existing and identified potential customers in defense, life sciences, semiconductor, research and other applications of precision optics, and we are looking forward to delivering the results for the remainder of this year.

I will now turn the call over to John Stack, our President of the Optics Division to provide some background on the Optics business, then we will hear from Tony Allan on the Metrology business. John?

John M. Stack

Thank you, John. Optical Systems Division orders for the quarter were well balanced among 3 major market sectors: semiconductor, medical and defense. Of note, with several large recording orders for aerial reconnaissance lenses, semiconductor stage components and medical assemblies. We also received several qualifying orders, including laser fusion beam line optics and a new heads-up display program slated for production in FY '15. These programs are well positioned for future growth and utilize both existing and new capabilities. Shipments were equally well balanced by market, with continued strong production of reconnaissance optics, laser, fusion optics, medical assemblies and semiconductor stage components. We also continue to make good progress on our micro exposure tool program, which achieved several important technical milestones in the quarter.

While much of our Defense market segment continue to be impacted by uncertainty of U.S. budget cuts and the sequester, we saw orders beginning to be released late in the quarter. At present, we expect this trend to continue in Q3 as uncertainty continues to decline and budgets become more predictable. Looking forward to Q3 and the balance of the year, we see opportunity in all segments of our business with increased quoting activity, especially on new optical component programs. We believe our additional sales staff and the growth of our strategic customer base has continued to -- has contributed significantly to this increased activity.

And now, I will turn the call over to Tony Allan, our Chief Operating Officer, for comments about the Metrology business. Tony?

Anthony Allan

Thank you, John. The [indiscernible] that began in the Metrology business in Q1 continued into Q2. 3D optical profile of bookings were strong in the quarter with Nexview exceeding expectations in its first 2 quarters after its product launch. Standard 3D optical profile of bookings were the highest in the company's history across the broad geographies and markets.

This week, we also introduced our NewView 8000 series 3D optical profilers, the latest generation in the field-proven NewView product family. We anticipate that the NewView 8000 series product will further add to our profiler sales in Q3.

Overall, Metrology shipments in the quarter were ahead of expectations in both instruments and precision positioning systems. In Q2, precision positioning systems covered its highest revenue shipment quarter, delivering various precision positioning sub assemblies to a number of key semiconductor customers. We anticipate robust shipments in the third quarter of this year. Advanced packaging continued to expand our customer base with additional customer approvals in the quarter. We continue to work with our strategic partners in helping to solve the high-volume Metrology requirement and increase the production yields and product quality. We also expect to see continued interest and all those in Q3 for our Nexview systems and NewView 8000, our general purpose 3D optical profiler. Our advanced packaging Metrology products have had a slower ramp than anticipated, but we expect to see additional orders in Q3 for our advanced packaging high-volume 3D/2D Metrology products. We expect Q3 to be another strong revenue quarter for Metrology across all Metrology business units. Let me turn the call back to Gary. Gary?

Gary K. Willis

We appreciate everyone taking the time to participate in the call and your continued interest in the company. Operator, you may now solicit questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Mao Jennings [ph] who is retired.

Unknown Shareholder

So Willis, do you think in a long run it makes a lot of sense for shareholders to have literally, $90 million out of our net worth of $190 million invested in cash? I haven't heard the company address this issue, and perhaps you have some large capital expenditures in mind or acquisitions or buybacks or dutch auctions, but if you were talking with John Jordan an afternoon down by the Connecticut River about this cash on your books, what are the are constructs here? What are you thinking of in carrying this high amount of cash, and is it really in the shareholders' interest?

Gary K. Willis

Well, as you noticed from John's remarks, the company avoided an acquisition effort in the first quarter. So we are, on a continuing basis, looking to utilize the cash to lever that for continued revenue and profit growth. And you can count on that continuing going forward.

Unknown Shareholder

Good. I went back 5 years or so and I think you had around $30 million at the time and I commend you on keeping good liquidity and away from the bank. At the same time, I want to make sure funds are working as hard as they can be. And I'm glad to see you're on the lookout for expanding your business. Thank you.

Gary K. Willis

Thank you for your interest.

Operator

[Operator Instructions] And there are no further questions from the phone lines at this time.

Gary K. Willis

Okay, Shawnda, thank you very much. Since it appears that no one has further questions, we thank you all very much for participating in the call.

Operator

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

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