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Zygo Corporation (NASDAQ:ZIGO)

F3Q10 (Qtr End 03/31/10) Earnings Call Transcript

May 4, 2010 5:00 pm ET

Executives

Walter Shephard – VP, Finance, CFO and Treasurer

Chris Koliopoulos – Chairman, President & CEO

Analysts

Kelly Anderson – Sidoti & Company

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Zygo third quarter results conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. (Operator Instructions) As a reminder this conference is being recorded Tuesday, May 4th, 2010. I would now like to turn the conference over to Walter Shephard, Chief Financial Officer. Please go ahead, sir.

Walter Shephard

Thank you, Sara. Good afternoon, everyone. I want to thank you for joining us for our third quarter fiscal 2010 conference call. Before I turn the conference call over to Dr. Chris Koliopoulos, Zygo's President and CEO, I would like to remind you that today's call will contain forward-looking statements, including 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 historical facts.

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 the discussion of future operating or financial performance.

These forward statements represent our predictions and expectations as to future events which we believe are reasonable, are based on reasonable assumptions. However numerous risks and uncertainties could 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 report on file with the Securities and Exchange Commission including our Form 10-K as amended for the fiscal year ended June 30, 2009.

We assume no obligation to revise or update any forward-looking statements. Now I would like to turn the call over to Chris.

Chris Koliopoulos

Thank you, Walter. It's been a hectic quarter at Zygo to say the least. With the organization adjusting to a new CEO, Zygo has completed the acquisition of Zemetrics, an optical metrology systems manufacturer based in Tucson, Arizona.

Through the synergies created with this merger, we are moving on opportunities in surface metrology to expand our product lines to address markets in data storage substrates and high brightness LED wafers.

I am also pleased that a strong working relationship has developed between the groups and the level of interaction is high on a daily basis.

Much of my time during the quarter has been spent to position Zygo for success going forward. We have been holding sessions to strengthen our core product lines, addressing market needs and increasing our market share with our metrology business.

I am excited about our new product developments as we worked to introduce a range of products to expand our offerings in advanced three dimensional surface metrology and interferometric testing of optical components and optical systems.

Zygo is the standard around the world in optical metrology and we intend to continue to support our customers by providing them with confidence in the measurements they depend on.

Not only do our customers rely on the capability provided by Zygo metrology tools, but we do as well. Our optical components and Electro-Optics Groups utilize these state of the art technologies to fabricate and assemble optics and optical sub-systems to high degrees of precision. This is an enabling aspect of Zygo's optics business, one that leverages our understanding of precision metrology along with our proprietary technologies to provide value to the customer when they purchase these high-precision, unique products and services from Zygo.

So with the given core metrology and optics business of Zygo, we have been working hard to develop an operating business model that is sustainable going forward. We believe that there is a number of factors that assist Zygo in this model.

Zygo will celebrate its 40th anniversary next month, celebrating these many years of an established customer base with over 10,000 systems delivered and the strong market position in its core business.

Zygo also celebrates its strong patent portfolio with over 300 patents issued. And of course, we celebrate all the people at Zygo that have worked to create a powerhouse in optics and optical metrology.

We are pleased with our debt free balance sheet and a growing cash position, which gives us the confidence to drive our opportunities forward. With the cost reductions implemented over the past year, along with improving revenue sources, Zygo's gross margins are increasing to levels not seen for many years, helping to establish an operating model that would drive profitability.

As we continue to drive our operating model going forward, we see improvements in our revenue and profitability for the next quarter, assuming global economic conditions are maintained.

Now I will turn the call over to Walter to fill you in with the details of the quarter, Walter?

Walter Shephard

Thank you, Chris. Bookings for the quarter were $27.3 million, which is an increase of 75% from Q3 of fiscal 2009. Although the bookings in the third quarter were down slightly from the second quarter we continue to see very good activities throughout our various business units.

Our Metrology Solutions division accounted for the majority of the bookings recorded at $16.1 million. The Instrument Group accounted for the greatest share of the bookings with just under $10 million in the quarter, while our PPS group had its best bookings quarter of the year, as its two primary customers in lithography market segment finally ordered in quantity.

The Optical System division continues its strong bookings from the second quarter with additional bookings in the laser fusion and life sciences markets. In addition, this division also won a significant clear trend window order.

Year-to-date bookings for the first nine month of the year are running at 17% above the same period in the last fiscal year.

At the end of the quarter, the company's backlog stood at just under $44 million the highest it has been in a year.

Revenues for the quarter were $25.4 million, so much of the bookings, the quarter represents a significant increase over Q3 of a year-ago, 27%, while showing a small decline in our Q2 revenues.

The Metrology Solutions division accounted for 60% of the revenues in the quarter, the divisions revenues were driven primarily by the instrument group in PPS which had its best quarterly revenue of the fiscal year.

Within the Optical Systems division, the laser fusion and Electro-Optics groups had their best revenue performance of the year as well.

As we mentioned in our press release, we are extremely pleased with our gross margin results of 45%. This clearly has been our best performing quarter in years in this area and is a result of the pickup in our business activity, improved factory efficiencies and a continued focus on our cost efforts. While pleased with these results, we continue to work on initiatives that we believe can push the gross margins higher.

Operating expense in the quarter were $13.5 million, as been previously mentioned this quarter contained a number of charges $3.3 million which were associated with the unsolicited offer from II-VI, the conclusion of charges laid to the CEO search and the purchase accounting cost related to the Zemetrics acquisition. Adjusting for these charges, expenses were $10.3 million a 25% reduction from Q3 of a year-ago. We will continue to look ways to reduce our expenses, while at the same time making sure that we continue to make the critical investments that will further our revenue growth.

Excluding the charges outlined above, the company had an operating profit of $1.2 million, an improvement over the second quarter's profit when adjusted for similar charges.

Our balance sheet continues to get stronger; cash, cash equivalents and marketable securities totaled just under $43 million at the end of March, an improvement since the beginning of the fiscal year of almost of $6 million.

Our DSO's in the quarter were 60 days, a slight improvement from the 61 days from the start of the fiscal year. And our inventory levels picked up slightly from the last quarter by 800,000 to $25.2 million in anticipation of fourth quarter shipments. The current inventory levels are well below where we begin the fiscal year with $30.5 million of inventory.

This concludes the prepared portion of our remarks; we will now take your questions. Sara?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions)And our first question comes from the line of Kelly Anderson with Sidoti & Company. Please proceed with your questions.

Kelly Anderson – Sidoti & Company

Thanks for taking my questions.First off, just wanted to touch on quickly the sequential decline in revenue and orders, is that primarily being lead by the instruments group and if so, is there any specific cause of that decline?

Walter Shephard

The instrument groups did have a slight decline in both orders and revenues, but as I mentioned Kelly, we're still seeing a lot of activities, more of timing, we had some push out of some large orders that we've been trying to pull in now into the fourth quarter. On the revenue side it's a little bit on the, a little bit on the instrument side, I think we are down in total by about $0.5 million. So we don't see that as an overall indication of the business falling off, it's just more of timing issues.

Kelly Anderson – Sidoti & Company

Was there any specific reason for those push outs?

Walter Shephard

No. Just getting customers to commit, that’s all.

Kelly Anderson – Sidoti & Company

Okay. And then in terms of the Electro-Optics Group, what do you perceive to be the biggest opportunities for that business as we move through the end of F10 and into fiscal 2011.

Chris Koliopoulos

Well, Kelly, this is Chris. I think what we are looking at are expansion in some of our previous large customers giving us increased orders in their deliveries. And we see potential there for expansion of that business. And then, we're bringing in other opportunities where the Zygo technology and expertise and its ability to fabricate and assemble optical sub-systems can improve our margins in those areas.

Kelly Anderson – Sidoti & Company

Okay. And then just turning to the strength in the gross margin line that you saw during this quarter, is there any way to sort of strip out what impact the outsource businesses have on the gross margin. And do you see those levels as being sustainable as we move forward?

Walter Shephard

I think as we've been indicating last couple of calls, Kelly, we want to push the margins up higher. As you know, the metrology division does, the nature of their business have higher margin. Both divisions performed very well in the quarter. So I think as I mentioned in my remarks, we want to see the number of initiatives going on to push these margins up higher. So we like to be sustainable yes, I think, of course, it could always be mix issue between the optics and metrology group. Of course, we'd love to have a straight line going up, but overall I think you'll see continued margin improvement, that's going to be our goal.

Chris Koliopoulos

Kelly we are looking at putting out product that has more value to the customers and therefore we should be able to benefit from the gross margins of that.

Kelly Anderson – Sidoti & Company

Okay. And then just quick one for you Walter for housekeeping purposes, can you give us the cash flow from operations and the capital spending during the quarter?

Walter Shephard

Sure. The CapEx in the quarter was about $400,000 we've been keeping kind of a tight rein although with some of the new opportunities that Chris is seeing, we’ll be probably starting to expand on the CapEx spending. Our free cash flow, overall for the year, which is the operating cash flow minus capital is about positive about $5.4 million, in the quarter it was about 3.2.

Kelly Anderson – Sidoti & Company

Okay. Thanks very much for help.

Chris Koliopoulos

Okay.

Operator

(Operator Instructions) And Mr. Shephard, there are no further questions at this time. So I will now turn the conference back over to you.

Walter Shephard

All right. Thank you everyone for joining us tonight in the conference call. We appreciate that, and as Chris was pointing out, there is a lot of activity going on here at Zygo, with the latest acquisition of Zemetrics and the attention that we're putting on to get out some new products. We hope to continue to report some good news to you in the future. Thank you very much.

Chris Koliopoulos

Thank you all.

Operator

Thank you. And ladies and gentleman, that does conclude the conference call for today. We thank you for your participation and we ask that you please disconnect your lines.

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