The following is a reconciliation of the accrued warranty liability, which is included in the other accrued liabilities in the Condensed Consolidated Balance Sheets:
Separate financial information by segment for total assets, capital expenditures, and depreciation and amortization is not evaluated by our chief operating decision-maker. Substantially all of our operating expenses, assets, and depreciation and amortization are U.S. based.
Sales by geographic area were as follows:
| | Three Months Ended September 30, | |
| | 2007 | | 2006 | |
| | | | | | | | |
| Americas | | $ | 15,538 | | $ | 15,164 |
| Europe | | | 4,117 | | | 3,795 |
| Japan | | | 9,892 | | | 15,351 |
| Pacific Rim | | | 2,167 | | | 6,797 |
| Total | | $ | 31,714 | | $ | 41,107 |
Note 11: Transactions with Stockholder
Sales to Canon Inc., a stockholder, and Canon Sales Co., Inc., a distributor of certain of our products in Japan and a subsidiary of Canon Inc. (collectively referred to as “Canon”), amounted to $5,564 (18% of net sales) for the three months ended September 30, 2007 as compared with $12,617 (31% of net sales) for the comparable prior year period. Selling prices of products sold to Canon are based, generally, on the terms customarily given to distributors. At September 30, 2007 and June 30, 2007, there were, in the aggregate, $2,172 and $4,515, respectively, of trade accounts receivable from Canon.
Note 12: Hedging Activities
We enter into foreign currency forward contracts to reduce the impact of adverse fluctuations on earnings associated with foreign currency exchange rate changes. We do not enter into any derivative transactions for speculative purposes. These contracts are not designated as cash flow, fair value, or net investment hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, and therefore, are marked-to-market with changes in fair value recorded in the Condensed Consolidated Statement of Operations. These contracts are entered into for periods consistent with the expected currency transaction exposures, generally three to six months. Any gains and losses on the fair value of these contracts should largely offset corresponding losses and gains on the underlying transactions.
As of September 30, 2007, we had six currency contracts outstanding involving our Japanese operations with notional amounts aggregating $8,100. For the three months ended September 30, 2007 and 2006, we recognized net unrealized losses of $583 and net unrealized gains of $159, respectively, from foreign currency forward contracts. These gains and losses are substantially offset by foreign exchange losses and gains on intercompany balances recorded by our subsidiaries. These net gains and losses are included in other income in the Condensed Consolidated Statements of Operations.
| Note 13: Income Tax Benefit (Expense) | | Fiscal 2008 | | | Fiscal 2007 |
| | | | | | Tax Rate | | | | | Tax Rate |
| | Amount | | % | | Amount | | % |
|
| Quarter ended September 30 | | $ | 361 | | | 36 | % | | $ | (2,069 | ) | 35 | % |
The income tax rate for the three months ended September 30, 2007 was 36% as compared with 35% for the three months ended September 30, 2006. This increase in the tax rate is primarily impacted by the loss of the deduction attributable to the Extraterritorial Income Exclusion (“EIE”), which was repealed effective January 1, 2007, partially offset by an increase in earnings in foreign jurisdictions that have a lower tax rate.
We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” on July 1, 2007. As a result of this adoption, we recognized a liability for unrecognized income tax benefits of $1,535, an increase in income tax receivables of $616, and a charge of approximately $919 to the July 1, 2007 retained earnings balance. As of the adoption date, we had gross tax-affected unrecognized tax benefits of $1,784, of which $1,168, if recognized, would affect the effective tax rate. Due to our net operating loss carryforwards, we have accrued no interest and penalties for the unrecognized tax benefits; however, our accounting policy is to recognize interest related to unrecognized tax benefits in interest expense. Penalties, if incurred, would be recognized as a component of income tax expense. In the normal course of business, we provide for uncertain tax positions and adjust our unrecognized tax benefits accordingly. We are not aware of any tax positions that would create a significant adjustment to the unrecognized tax benefits during the next 12 months.
We are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. We are no longer subject to U.S. federal income tax audit or tax adjustments for years prior to June 30, 1997. We are no longer subject to state and foreign income tax audit or tax adjustments for years prior to June 30, 2000 and June 30, 2003, respectively. We are currently not under income tax audit in any jurisdictions.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Zygo Corporation is a worldwide supplier of optical metrology instruments, precision optics, and electro-optical design and manufacturing services, serving customers in the semiconductor capital equipment and industrial markets. We conduct the majority of our manufacturing in our 153,500 square foot facility in Middlefield, Connecticut and our 39,780 square foot facility in Tucson, Arizona.
During the second quarter of fiscal 2007, we reorganized our business into two operating divisions – Metrology and Optics. Consistent with this reorganization, beginning with the second quarter of fiscal 2007, we are reporting our operating segments as Metrology and Optics. Prior year segment information has been restated in a manner consistent with our new reporting segments. The Metrology division (segment) consists of OEM and in-line products. The Optics division (segment) consists of components and opto-mechanical assemblies primarily for the medical, defense, and aerospace markets. These two business segments continue to serve two global markets: semiconductor and industrial.
Orders for the three months ended September 30, 2007 were $36.5 million. Orders from our Metrology division accounted for 60% of the orders received, with the Optics division accounting for the remaining 40%. We continue to experience a decreased level of orders for our lithography OEM products and anticipate this trend to continue through the second quarter of fiscal 2008. We also have experienced push-outs of orders in the semiconductor capital equipment sector.
Sales for the three months ended September 30, 2007 were adversely affected by delays in customers' acceptance of several large systems (approximately $4.0 million) and delays in shipments of certain products due to late deliveries of key parts from suppliers (approximately $1.5 million). Earnings were further affected by unabsorbed factory costs due to low sales volume. Optics sales represent an increasing percentage of our sales. These sales generally have a lower gross profit as a percentage of sales than our Metrology sales.
We are now expecting fiscal 2008 revenues to be approximately 5%-10% below the $181 million of sales achieved in fiscal 2007. This reflects growth in certain areas, partially offsetting the downturn in the lithography and semiconductor markets. We continue to anticipate fiscal 2008 sales and earnings to be skewed toward the second half of the year when we expect to see a strengthening in orders and shipments.
CRITICAL ACCOUNTING POLICIES, SIGNIFICANT JUDGMENTS, AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures at the date of our condensed consolidated financial statements. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, marketable securities, warranty obligations, income taxes, long-lived assets, and share-based payments. Management bases its estimates and judgments on historical experience and current market conditions and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. As discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007, management considers the Company’s policies on revenue recognition and Allowance for Doubtful Accounts; Inventory Valuation; Other than Temporary Impairment of Marketable Securities; share-based compensation; warranty costs; accounting for income taxes; valuation of long-lived assets; and accruals for health insurance to be critical accounting policies due to the estimates, assumptions, and application of judgment involved in each.
As discussed below and in Note 13 to the Condensed Consolidated Financial Statements, we have adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” on July 1, 2007. Other than these changes, there have been no significant changes in our critical accounting estimates during the first three months of fiscal 2008. In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be
11
sustained, no tax benefit has been recognized in the financial statements. Where applicable, associated interest has also been recognized.
RESULTS OF OPERATIONS
| Net Sales | | | | | | | | | | | | |
| | Fiscal 2008 | | Fiscal 2007 |
| | | | | Net Sales | | | | | Net Sales |
| (Dollars in millions) | | Amount | | % | | Amount | | % |
| Quarter ended September 30 | | | | | | | | | | | | |
| Metrology | | $ | 19.9 | | 63 | % | | $ | 31.8 | | 77 | % |
| Optics | | | 11.8 | | 37 | % | | | 9.3 | | 23 | % |
| | Total | | $ | 31.7 | | 100 | % | | $ | 41.1 | | 100 | % |
Overall, net sales decreased 23% in the three months ended September 30, 2007 from the comparable prior year period, reflecting a decrease in metrology segment sales of 37% and an increase in optics segment sales of 27%, as compared to the first quarter of fiscal 2007. The decrease in metrology sales was primarily due to volume decreases in lithography, semiconductor systems, and display systems of $13.3 million, partially offset by a sales increase in our core instruments sales of $1.5 million. Lithography sales decreased by $6.6 million, primarilydue to a decrease of $7.1 million in Canon sales. Lithography sales to Canon represented 10% of total sales in the three months ended September 30, 2007, as compared with 21% in the comparable prior year period. There were no semiconductor system sales in the three months ended September 30, 2007, and for the same period, display systems were adversely affected by the delay in anticipated acceptances of three systems. The increase in optics segment sales was attributable to an increase in optical assemblies of $1.7 million, which includes deliveries of optical assemblies for the National Ignition Facility and medical device equipment, and laser fusion optics of $0.7 million.
Sales in U.S. dollars for the three months ended September 30, 2007 were approximately 73% of total net sales, with the remaining 27% being in Euro or Yen. For our sales which are based in foreign currency, we are exposed to foreign exchange fluctuations from the time customers are invoiced in foreign currency until collection occurs. Significant changes in the values of foreign currencies relative to the value of the U.S. dollar can impact the sales of our products in export markets, as would changes in the general economic conditions in those markets. In the absence of a substantial increase in sales orders in currencies other than U.S. dollars, we believe a 10% appreciation or depreciation of the U.S. dollar against the Euro and Yen would have an immaterial impact on our condensed consolidated financial position and results of operations.
| Gross Profit by Segment | | | | | | | | | | | | |
| | Fiscal 2008 | | Fiscal 2007 |
| | | | | Gross | | | | | Gross |
| (Dollars in millions) | | Amount | | Margin % | | Amount | | Margin % |
| Quarter ended September 30 | | | | | | | | | | | | |
| Metrology | | $ | 8.2 | | 41 | % | | $ | 14.7 | | 47 | % |
| Optics | | | 2.9 | | 24 | % | | | 3.1 | | 33 | % |
| | Total | | $ | 11.1 | | 35 | % | | $ | 17.8 | | 43 | % |
Gross profit as a percentage of net sales for the three months ended September 30, 2007 was 35%, a decrease of eight percentage points from the comparable prior year period. Within the Metrology division, the decrease in gross profit as a percentage of net sales is primarily due to unabsorbed costs due to lower lithography sales volume. Within the Optics division, the decrease in gross profit as a percentage of net sales is primarily due to unabsorbed costs due to lower than expected sales volume as we experienced delayed parts shipments from suppliers that decreased our manufacturing capacity in the period. In addition, shipments for the initial production run of the helmet mounted display units carry no margin due to cost over-runs on the initial units. Final units of the initial production run are expected to be completed in the second quarter of fiscal 2008. Our overall gross profit as a percentage of net sales was also adversely affected by the shift in product mix. Sales in the Metrology division, which carry an overall higher gross margin as compared with the Optics division, accounted for 63% of total net sales in the three months ended September 30, 2007 as compared with 77% of our total net sales in the comparable prior year period.
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| Selling, General, and Administrative Expenses ("SG&A") | | | | | | | |
| | | Fiscal 2008 | | Fiscal 2007 |
| (Dollars in millions) | | | Amount | | % of Sales | | Amount | | % of Sales |
| | | | | | | | | | | | | | | |
| Quarter ended September 30 | | | $ | 7.4 | | | 23 | % | | $ | 7.5 | | 18 | % |
| |
| SG&A expenses decreased by $0.1 million in the three months ended September 30, 2007 from the comparable prior yearperiod. The decrease in SG&A primarily was attributable to lower administration expense related to decreased bonus andprofit sharing expenses based on the first quarter results, partially offset by increased salaries and marketing activity in theMetrology segment within the semiconductor and display solutions units. |
| | | | | | | | | | | | | | | | |
| Research, Development, and Engineering Expenses ("RD&E") | | | | | | |
| | | Fiscal 2008 | | Fiscal 2007 |
| (Dollars in millions) | | | Amount | | % of Sales | | Amount | | % of Sales |
| | | | | | | | | | | | | | | |
| Quarter ended September 30 | | | $ | 5.6 | | | 18 | % | | $ | 5.1 | | 12 | % |
| | | | | | | | | | | | | | | |
| The increase in RD&E for the three months ended September 30, 2007 as compared with the comparable prior year periodprimarily was attributable to continued development efforts within our Metrology segment, including our semiconductorinitiatives and, to a lesser extent, in display, and optical assemblies. We continue to focus and build on our semiconductorinitiatives as one of our core areas of expected future growth. |
| | | | | | | | | | | | | | | | |
| Other Income | | | | | | | | | | | | | | |
| | | Fiscal 2008 | | Fiscal 2007 |
| | | | | | | | | | | | | | |
| (Dollars in millions) | | | Amount | | % of Sales | | Amount | | % of Sales |
| | | | | | | | | | | | | | | |
| Quarter ended September 30 | | | $ | 1.0 | | | 3 | % | | $ | 0.8 | | 2 | % |
| | | | | | | | | | | | | | | | |
| Other income for the three months ended September 30, 2007 increased by $0.2 million from the comparable prior yearperiod. This increase primarily was attributable to foreign currency net unrealized and realized gains. |
| | | | | | | | | | | | | | | | |
| Income Tax Benefit (Expense) | | | | | | | | | | | | | | | |
| | | Fiscal 2008 | | Fiscal 2007 |
| | | | | | | Tax Rate | | | | | Tax Rate |
| (Dollars in millions) | | | Amount | | % | | Amount | | % |
| | | | | | | | | | | | | | | |
| Quarter ended September 30 | | | $ | 0.4 | | | 36 | % | | $ | (2.1 | ) | 35 | % |
The income tax rate for the three months ended September 30, 2007 was 36% as compared with 35% in the comparable prior year period. This increase in the tax rate is primarily due to the loss of the deduction attributable to the Extraterritorial Income Exclusion (“EIE”), which was repealed effective January 1, 2007, partially offset by an increase in earnings in foreign jurisdictions that have a comparatively lower tax rate.
TRANSACTIONS WITH STOCKHOLDER
Sales to Canon Inc., a stockholder, and Canon Sales Co., Inc., a distributor of certain of our products in Japan and a subsidiary of Canon Inc. (collectively referred to as “Canon”), amounted to $5.6 million (18% of net sales) for the three months ended September 30, 2007 as compared with $12.6 million (31% of net sales) for the comparable prior year period. Selling prices of products sold to Canon are based, generally, on the terms customarily given to distributors. At September 30, 2007 and June 30, 2007, there were, in the aggregate, $2.2 million and $4.5 million, respectively, of trade accounts receivable from Canon.
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LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2007, cash and marketable securities were $62.3 million, a decrease of $7.9 million from $70.2 million at June 30, 2007, primarily due to the repurchase of our common stock under our stock buyback programof $4.9 million and the payment of profit sharing and bonus amounts accrued at June 30, 2007 of $5.3 million. Cash flows used by operating activities were $1.6 million for the three months ended September 30, 2007 as compared with cash flows used by operating activities of $2.4 million for the comparable prior year period. The difference in operating cash flows for the three months of fiscal 2008 as compared with the prior year period primarily was attributable to a decrease in payments on accounts payable and accrued expenses resulting in an increase in cash flows of $5.9 million, offset by a decrease in earnings of $4.6 million.
Acquisitions of property, plant, and equipment totaled $1.8 million during the three months ended September 30, 2007.
There were no borrowings outstanding under our $3.0 million bank line of credit agreement at September 30, 2007 or June 30, 2007. The agreement contains certain financial covenants which, among others, relate to debt service and consolidated debt ratios. The agreement expires in November 2007 and is expected to be renewed. Although cash requirements will fluctuate based on the timing and extent of various factors, management believes that cash generated from operations, together with the liquidity provided by existing cash and marketable securities balances and borrowing capability, will be sufficient to satisfy our liquidity requirements for the next 12 months.
OFF-BALANCE SHEET ARRANGEMENTS
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt, or operating parts of our business that are not consolidated into our financial statements. We have not guaranteed any obligations of a third party.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes that have occurred in our quantitative and qualitative market risk disclosures during the three months ended September 30, 2007. For discussion of our exposure to market risk, refer to Item 7a., “Quantitative and Qualitative Disclosures about Market Risk”, presented in our Annual Report on Form 10-K for the year ended June 30, 2007 filed with the Securities and Exchange Commission.
Item 4. Controls and Procedures
The effectiveness of our or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing, and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate misconduct completely. In designing, implementing, and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation, as of the end of the period covered by this report, of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting on a timely basis information required to be disclosed by us in the reports that we file or submit under the Exchange Act and were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting that occurred in our most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - Other Information
Item 1A. Risk Factors
In addition to the other information set forth in this report, the reader should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended June 30, 2007, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about our purchases during the quarter ended September 30, 2007 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act.
| | | | | | Total number of | | Approximate dollar |
| | | | | | shares purchased as | | value of shares that |
| | | | | | part of publicly | | may yet be purchased |
| | Total number of | | Average price | | announced | | under the plans or |
| Period | | shares purchased | | paid per share | | plans or programs | | programs (in millions) |
| |
| July 1, 2007 - July 31, 2007 | | - | | - | | - | | $25.0 |
| August 1, 2007 - August 31, 2007 | | 92,500 | | $12.85 | | 92,500 | | $23.8 |
| September 1, 2007 - September 30, 2007 | | 283,902 | | $13.12 | | 283,902 | | $20.1 |
In August 2007, our Board of Directors authorized the repurchase of up to $25.0 million of our outstanding common stock. During the three months ended September 30, 2007, the repurchases occurred from time to time as market conditions warranted through transactions in the open market. The initial share repurchases have been effected pursuant to a plan in conformity with Rule 10b5-1 under the Securities Exchange Act of 1934. This rule allows public companies to adopt written, pre-arranged stock trading plans when they do not have material, non-public information in their possession. The adoption of this stock trading plan allowed us to repurchase our shares during periods when we otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods.
Item 6. Exhibits
| (a) | Exhibits: |
| |
| | 31.1 | Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| | 31.2 | Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| | 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
| | 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | Zygo Corporation
(Registrant)
/s/ J. Bruce Robinson
J. Bruce Robinson
Chairman and Chief Executive Officer
/s/ Walter A. Shephard
Walter A. Shephard
Vice President, Finance, Chief Financial Officer, and
Treasurer |
Date: November 9, 2007
16
EXHIBIT INDEX
| 31.1 | Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| 31.2 | Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
| 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
