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FORM 10-Q.
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1998
or
[ ] Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
(Amended by Exch Act Rel No. 312905. Eff 4/26/93)
Commission File Number 0-12944
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ZYGO CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 06-0864500
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Laurel Brook Road, Middlefield, Connecticut 06455
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(Address of principal executive offices) (Zip Code)
(860) 347-8506
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Registrant's telephone number, including area code
N/A
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(Former name, former address, and former fiscal year,
if changed from last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES NO
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
10,978,047 Shares of Common Stock, $.10 Par Value at May 1, 1998
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS
(Thousands, except per share amounts)
For the Three Months For the Nine Months
Ended March 31,(1) Ended March 31,(1)
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1998 1997 1998 1997
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Net sales ............................................. $26,901 $22,476 $78,494 $61,729
Cost of goods sold .................................... 14,345 11,381 42,897 32,338
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Gross profit ....................................... 12,556 11,095 35,597 29,391
Selling, general and administrative expenses .......... 4,776 3,489 12,324 9,563
Research, development and engineering expenses ........ 2,596 1,815 7,507 5,054
Nonrecurring acquisition-related charges .............. -- -- 1,585 11,083
Failed merger costs ................................... -- -- 335 --
Amortization of goodwill and other intangibles ........ 197 140 535 371
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Operating profit ................................... 4,987 5,651 13,311 3,320
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Other income (expense):
Interest income .................................... 272 157 797 700
Miscellaneous (expense), net ....................... (144) (37) (300) (114)
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128 120 497 586
Earnings before income taxes .......................... 5,115 5,771 13,808 3,906
Income tax expense .................................... 1,579 2,078 4,886 5,058
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Net earnings (loss) ................................... $ 3,536 $ 3,693 $ 8,922 $(1,152)
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Earnings per common share (4):
Basic (2) .......................................... $ .32 $ .35 $ .82 $ (.11)
======= ======= ======= =======
Diluted (2) ........................................ $ .29 $ .31 $ .73 $ (.11)(3)
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Weighted average number of shares:
Basic .............................................. 10,939 10,444 10,857 10,369(3)
======= ======= ======= =======
Diluted ............................................ 12,192 12,105 12,248 10,369(3)
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(1) The results of Sight Systems, Inc., which is being accounted for as an immaterial
pooling-of-interests, are included from July 1, 1997; the results of Syncotec Neue Technologien und
Instrumente GmbH are included from September 1, 1997 when the acquisition of the remaining 50% of
Syncotec was completed; and the results of Technical Instrument Co. are included in the consolidated
results of the Company from August 8, 1996 when that acquisition was effective, since both of
Syncotec and TIC were accounted for as purchases.
(2) The difference between basic shares outstanding and diluted shares outstanding is the assumed
conversion of common stock equivalents (stock options) in the amounts of 1,253,000 and 1,661,000 in
the three months ended March 31, 1998 and 1997, respectively, and 1,391,000 in the nine months ended
March 31, 1998.
(3) As per generally accepted accounting principles, the computation of the net loss per share is based
on the weighted average basic shares outstanding.
(4) The net earnings per common share have been restated as a result of the adoption of Statement of
Financial Accounting Standards No 128, Earnings per Share.
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CONSOLIDATED BALANCE SHEETS
(Thousands, except share amounts)
March 31, June 30,
1998 1997
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ASSETS
Current Assets:
Cash and cash equivalents ............................ $ 20,545 $ 10,981
Marketable securities ................................ 8,277 12,766
Receivables .......................................... 21,688 20,730
Inventories:
Raw materials and manufactured parts ............. 10,607 7,435
Work in process .................................. 3,257 3,248
Finished goods ................................... 950 973
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Total inventories ........................... 14,814 11,656
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Costs in excess of billings .......................... 1,737 2,082
Prepaid expenses and taxes ........................... 202 590
Deferred income taxes ................................ 2,312 2,205
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Total current assets ........................ 69,575 61,010
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Property, plant and equipment, at cost .................. 29,333 21,865
Less accumulated depreciation ........................... 14,445 12,691
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Net property, plant and equipment .................... 14,888 9,174
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Goodwill and other intangible assets, net ............... 8,706 7,818
Other assets ............................................ 436 797
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Total assets ................................ $ 93,605 $ 78,799
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ..................................... $ 7,393 $ 4,659
Accrued expenses and customer progress payments ...... 7,752 8,246
Federal and state income taxes ....................... 1,332 472
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Total current liabilities ................... 16,477 13,377
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Deferred income taxes ................................... 3,448 3,014
Stockholders' Equity:
Common stock, $.10 par value per share:
15,000,000 shares authorized; 11,163,147
shares issued (10,765,940 at June 30, 1997) ........ 1,116 1,077
Additional paid-in capital ........................... 41,988 40,210
Retained earnings .................................... 30,871 21,405
Currency translation effects ......................... (12) 0
Net unrealized gain on marketable securities ......... 18 17
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73,981 62,709
Less treasury stock, at cost; 207,600 shares ....... 301 301
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Total stockholders' equity .................. 73,680 62,408
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Total liabilities and stockholders' equity .. $ 93,605 $ 78,799
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 1998 and 1997
(Thousands of dollars)
1998 1997
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Cash provided by (used for)
operating activities:
Net earnings (loss) ................................. $ 8,922 $ (1,152)
Adjustments to reconcile net earnings (loss) to cash
provided by (used for) operating activities:
Depreciation and amortization .................... 2,536 1,831
Deferred income taxes ............................ 0 832
Loss on disposal of assets ....................... 206 191
Nonrecurring in-process R&D ...................... 879 10,084
Gain on sale of marketable securities ............ (70) (49)
Intangible and other assets ...................... -- 406
Changes in operating accounts:
Receivables .................................... (133) (6,783)
Costs in excess of billings .................... 345 (1,241)
Inventories .................................... (2,680) (2,825)
Prepaid expenses ............................... 393 47
Accounts payable and accrued expenses .......... 1,522 (3,585)
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Net cash provided by (used for)
operating activities............................ 11,920 (2,244)
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Cash provided by (used for)
investing activities:
Additions to property, plant and equipment .......... (7,678) (2,956)
Investment in marketable securities ................. (3,480) (2,104)
Investment in other assets .......................... (512) (157)
Acquisition of business ............................. (1,268) (11,786)
Proceeds from sale of marketable securities ......... 2,208 4,849
Proceeds from maturity of marketable securities ..... 5,765 4,345
Proceeds from sale of assets ........................ 0 18
Cash acquired from acquisitions ..................... 2,059 --
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Net cash provided by (used for)
investing activities............................ (2,906) (7,791)
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Cash provided by (used for)
financing activities:
Repayment of long-term debt ......................... -- (2,662)
Exercise of employee stock options .................. 550 234
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Net cash provided by (used for)
financing activities............................ 550 (2,428)
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Net increase (decrease) in cash and cash equivalents .... 9,564 (12,463)
Cash and cash equivalents, beginning of year ............ 10,981 18,449
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Cash and cash equivalents, end of quarter ............... $20,545 $ 5,986
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The interim financial statements furnished herein reflect all adjustments which
are, in the opinion of management, necessary for a fair statement of the results
for the interim periods presented. All such adjustments are of a normal and
recurring nature. The results for the quarter ended March 31, 1998 are not
necessarily indicative of the results to be expected for the entire fiscal year.
These interim financial statements should be read in conjunction with the
financial statements and notes included in the Company's June 30, 1997 Annual
Report on Form 10-K including items incorporated by reference therein.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Zygo Corporation, through its divisions and wholly owned subsidiaries,
Middlefield, Technical Instrument Company ("TIC"), Syncotec Neue Technologien
und Instrumente GmbH ("Syncotec"), Sight Systems, Inc. ("SSI"), and NexStar
Automation, Inc. ("NexStar"), designs, develops, manufactures, and markets high
performance noncontact electro-optical measuring instruments and systems,
automation systems, and components. These business units were renamed during the
quarter ended March 31, 1998 to reflect the completed integration of the core
business and several recent acquisitions as follows:
Formerly New
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Middlefield Zygo Advanced Metrology Systems
TIC and Syncotec Zygo Advanced Imaging Systems
SSI Zygo Vision Systems
NexStar Zygo Automation Systems
Zygo, in addition to its instruments and systems products, also manufactures
optical components to precise tolerances both for sale and for use as key
elements in its own products. Utilizing proprietary laser and white light
optical technology combined with advanced software and electronics, Zygo's
precision noncontact measuring instruments and systems enable manufacturers in a
variety of high technology industries, including data storage, semiconductor,
and precision optics, to increase operating efficiencies and production yields
by identifying and collecting quantitative data on product defects, both during
and after the manufacturing process. Zygo's interferometric and confocal
components are sold directly to OEMs for incorporation into their products.
Zygo's optical components are used in many applications, including laser fusion
research, semiconductor manufacturing equipment, and aerospace optical systems,
as well as being an integral part of precision optical components.
Predominantly all of Zygo's instruments and systems employ either a laser or
white light source to make noncontact measurements. Zygo is a leader in
interferometric and confocal metrology. Interferometric metrology, utilizing a
process called interferometry, whereby a pattern of bright and dark lines
(called fringes) results from an optical path difference between a reference and
a measurement beam. Zygo's products then analyze these patterns through a series
of steps and generate quantitative three-dimensional surface profiles, which are
used to determine conformity to dimensional specification and, increasingly, to
analyze and enhance manufacturing processes. Interferometric measurement
instruments and systems are used by a variety of industries, including by the
data storage industry to inspect and analyze the surface of computer hard disks
and read/write heads, and by the semiconductor industry for high precision
distance measurement and motion control. Confocal Scanning Optical Microscopy
("CSOM") is a key base technology employed in Zygo's confocal metrology Systems.
The majority of Zygo's mask metrology microscope systems and subsystems employ
white light CSOM technology. In a microscope utilizing white light CSOM imaging,
a high-intensity white light illuminates a section of a spinning disk containing
pinholes arranged in multiple spiral patterns. Acting as point illumination
sources, the pinholes direct light to points on the sample. The reflected light
from the sample returns through the same section of the disk. Only light from
points on the sample near the focal plane will pass through the pinholes for
imaging.
The Company, via its wholly owned subsidiary, Technical Instrument Company,
completed the acquisition of Syncotec, a German-based company, effective
September 1, 1997. Zygo, prior to this acquisition completed all necessary legal
requirements allowing for appropriate transfer and registration of its original
50 percent ownership on June 30, 1997. Syncotec, located in Asslar, Germany,
which is part of the Advanced Imaging Systems business, designs, develops,
manufactures, and markets high precision metrology systems and components which
incorporate confocal scanning optical microscopy technology for European
customers to improve their production efficiency and manufacturing yields.
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The Company completed its acquisition of SSI, effective August 19, 1997, a
privately held business located in Newbury Park, California. SSI, now Zygo
Vision Systems, designs, develops, and manufactures application-specific machine
vision systems. Zygo serves the data storage industry and the semiconductor
industry with application-specific vision systems which are primarily used in
production by its customers. These vision systems are unique in that they are
configured from a vast collection of software and hardware components into a
system which meets specific customer requirements. Examples of such applications
in the data storage industry where Zygo has sold the majority of its systems to
date include: pole geometry measurements and gap width on various types of
read/write heads, straightness, and measurements of read/write heads mounted on
row bars in the manufacturing process.
Zygo Automation Systems designs, develops, manufactures, and markets
comprehensive automated system solutions to enable manufacturers in a variety of
high technology industries, including the data storage, semiconductor, and
electronics industries, to enhance operational efficiencies and product yields.
Zygo's high speed production solutions reduce downtimes, especially in
manufacturing processes adaptable to the manufacture of multiple products
differing in size, features, and functionality.
Also effective in the third quarter of 1998, Zygo reorganized its worldwide
sales, service, and applications support infrastructure into a single
organization handling all of the Zygo products and services from several
sales/service offices around the United States and in Singapore.
RESULTS OF OPERATIONS
Net sales of $26,901,000 for the three months and $78,494,000 for the nine
months ended March 31, 1998, increased by $4,425,000 or 20% and $16,765,000 or
27%, respectively, from the net sales in the comparable prior year periods. Net
sales of the Company's instruments and systems increased by 6% to $18,106,000
and net sales of modules and components increased by 61% to $8,795,000 in the
third quarter of fiscal 1998, each from the comparable quarter in fiscal 1997.
Net sales of the Company's instruments and systems and net sales of modules and
components increased by $7,447,000 or 17% and $9,318,000 or 56%, respectively,
for the nine months ended March 31, 1998 as compared to the nine-month period
ended March 31, 1997. The increase in net sales in the third quarter ended March
31, 1998 was largely attributable to the Company's modules and components which
includes revenues recorded on the NIF optics facility contract with Lawrence
Livermore National Laboratory. The Company's instruments and systems sales gains
compared to the prior year were principally from its interferometric microscopes
and large aperture systems. Also impacting the sales growth in the third quarter
of fiscal 1998 as compared to the third quarter of fiscal 1997, were the
acquisitions of Sight Systems, Inc. ("SSI") and Syncotec Neue Technologien und
Instrumente GmbH ("Syncotec") completed in the first quarter of fiscal 1998,
which collectively added approximately $1.8 million in net sales.
Net sales increases for the nine months ended March 31, 1998 were primarily the
result of incremental revenues of custom optical components, including the
contribution from the NIF program, the acquisitions of SSI and Syncotec
completed earlier in fiscal 1998, and growth in the Company's interferometric
systems sales. Sales of automation systems and confocal mask metrology systems
have been negatively impacted by the slowdown in the data storage and
semiconductor industries, respectively, and, accordingly, declined slightly in
the nine months ended March 31, 1998 from the comparable prior year period.
Gross profit for the three months and nine months ended March 31, 1998, amounted
to $12,556,000 and $35,597,000, respectively, an increase of $1,461,000 or 13%
and $6,206,000 or 21%, respectively, from the comparable prior year periods.
Gross profit, as a percentage of sales, for the quarter and nine months ended
March 31, 1998, amounted to 46.7% and 45.3%, respectively, compared to 49.4% and
47.6% for the three months and nine months ended March 31, 1997. While gross
profit dollars increased due to sales volume increases, gross profit as a
percentage of sales decreased principally due to the impact of the NIF facility
project with its generally lower margins,
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the effects of product mix, and the underutilization of certain fixed
manufacturing costs, primarily in the Company's Longmont, Colorado, Automation
Systems facility.
Selling, general and administrative expenses in the three months and nine months
ended March 31, 1998 amounted to $4,776,000 and $12,324,000 respectively, an
increase of $1,287,000 or 37% and $2,761,000 or 29%, respectively, from the same
periods the year earlier. The Company also added to its infrastructure in Sales,
Service and Marketing with a number of initiatives, including manpower additions
to its direct sales and service group, the addition of an office in Singapore,
and the introduction of several new products, most notably, the MESA
interferometer. Quarter and year-to-date costs were also impacted by
volume-related expenses, such as commissions paid to the Company's direct sales
personnel and external sales agents. As a percentage of sales, selling, general
and administrative expenses in the three months and nine months ended March 31,
1998 amounted to 17.8% and 15.7%, respectively, as compared to 15.5% and 15.5%,
respectively, in the comparable prior year periods.
Research, development and engineering expenses ("R&D") in the three months and
nine months ended March 31, 1998, amounted to $2,596,000 and $7,507,000,
respectively, an increase of $781,000 or 43% and $2,453,000 or 49% from the
comparable three- and nine-month periods in the prior fiscal year. During the
quarter, the Company incurred expenses relating to the consolidation of its
Flying Height Test Division and Vision Systems operations into a new facility in
Newbury Park, California. The Company also continued to add research and
development resources at all locations in order to support new product
development. These efforts, combined with the inclusion of Syncotec from
September 1997 and SSI from July 1997, accounted for the increases. Research and
development expenses as a percentage of sales in the three- and nine-month
periods were 9.7% and 9.6%, as compared to 8.1% and 8.2%, respectively, in the
comparable prior year periods.
Results of operations for the nine-month period ended March 31, 1998 includes
$1,920,000 of nonrecurring acquisition-related charges recorded in the three
months ended September 30, 1997. These nonrecurring charges consisted of
$707,000 of expenses incurred to complete the Company's acquisition of SSI, the
write-off of $878,000 of in-process research and development costs in
conjunction with the Company's acquisition of Syncotec, and $335,000 of expenses
relating to the Company's failed merger discussions with Digital Instruments,
Inc. which were terminated in October 1997. In the three months ended September
30, 1996 the Company recorded acquisition-related charges amounting to
$11,083,000 relating to its acquisitions of TIC and NexStar.
Operating profit in the three months ended March 31, 1998 amounted to
$4,987,000, a decrease of $664,000 or 12% from the $5,651,000 of operating
profit in the comparable prior year period. Excluding the nonrecurring charges
for both periods, the Company's operating profit in the nine months ended March
31, 1998 was $15,231,000, an increase of $828,000 or 6% from the $14,403,000 of
operating profit in the nine months ended March 31, 1997. Including the
nonrecurring charges for both periods, the Company reported an operating profit
of $13,311,000 for the nine months ended March 31, 1998 as compared with an
operating profit of $3,320,000 in the comparable prior year period.
Net earnings totaled $3,536,000 in the three-month period ended March 31, 1998,
a decrease of $157,000 or 4% from the $3,693,000 reported in the three-month
period ended March 31, 1997. The Company reported diluted per share earnings of
$.29 in the quarter ended March 31, 1998, a decrease of 6% from diluted per
share earnings of $.31 in the comparable quarter in the prior year. Excluding
nonrecurring charges, net income for the nine-month period of fiscal 1998
totaled $10,842,000, an increase of $911,000 or 9% from fiscal 1997. Diluted
earnings per share for the nine months of fiscal 1998, excluding the
nonrecurring charges, were $.89, up 7% from the $.83 in fiscal 1997. Including
the nonrecurring charges, the Company reported net earnings of $8,922,000 or
$.73 per share for fiscal 1998, as compared to a net loss in the comparable
prior year of $(1,152,000) or $(.11) per share.
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The Company has adopted the requirements of Statement of Financial Accounting
Standards 128 (SFAS 128) "Earnings per Share." The statement replaces the
presentation of primary earnings per share with basic earnings per common share
and fully diluted earnings per share, with diluted earnings per common share.
The difference between basic shares outstanding and diluted shares outstanding
is the assumed conversion of common stock equivalents (stock options) in the
amounts of 1,253,000 and 1,661,000 in the three months ended March 31, 1998 and
1997, respectively, and 1,391,000 in the nine months ended March 31, 1998. As
per generally accepted accounting principles, the computation of the net loss
per common share for the nine months ended March 31, 1997 is based on the
weighted average basic shares outstanding.
FINANCIAL CONDITION
At March 31, 1998, the Company had cash and cash equivalents of $20,545,000 and
marketable securities of $8,277,000 for a total of $28,822,000, an increase of
$3,541,000 from December 31, 1997. Working capital at March 31, 1998 was
$53,098,000, an increase of $1,432,000 or 3% from December 31, 1997 and an
increase of $5,465,000 from June 30, 1997. The increase in working capital in
the quarter was principally due to increased levels of cash and marketable
securities partially offset by accrued tax liability increases. Quarterly
increases in receivables and inventory balances were largely offset by trade
payable/accrued liability increases. When compared to June 30, 1997, the
increase in working capital was principally a result of the increases in cash
and cash equivalents and, to a lesser extent, in inventories, due to growth in
sales.
During the year, the Company has primarily utilized cash flow from operations to
fund its capital plan (and the cash portion of the purchase price of acquiring
Syncotec). Capital expenditures increased by 160% to $7,678,000 for the nine
months ended March 31, 1998, as compared to the same period in the prior year,
primarily due to the recently completed 35,000-square-foot building addition at
the Company's Middlefield, Connecticut, location. As of March 31, 1998, there
were no borrowings outstanding under the Company's $3,000,000 bank line of
credit. Unused amounts under the line of credit are available for short-term
working capital needs.
Backlog at March 31, 1998 totaled $31,024,000, an increase of $509,000 or 1.7%
from the backlog of $30,515 000 at March 31, 1997, a $7,664,000 decrease from
the backlog of $38,688,000 at June 30, 1997 which included approximately
$5,000,000 of NIF-related backlog, and a decrease of $4,982,000 from the backlog
of $36,006,000 at December 31, 1997 which included approximately $4,100,000 of
NIF-related backlog. The change in backlog was expected due to the revenues
recorded under the NIF contract, the weakness in the data storage and
semiconductor market segments, and attempts to reduce the lead times of the
Company's various instruments and systems.
This Form 10-Q may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which reflect the Company's current
judgment on certain issues. Because such statements apply to future events, they
are subject to risks and uncertainties that could cause the actual results to
differ materially. Important factors which could cause actual results to differ
materially are described in the Company's reports on Form 10-K and 10-Q and
other materials on file with the Securities and Exchange Commission.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27. Financial Data Schedule.
(b) 1. None.
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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/ GARY K. WILLIS
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Gary K. Willis
President and Chief Executive Officer
/s/ MARK J. BONNEY
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Mark J. Bonney
Vice President, Finance and
Administration, Treasurer, and
Chief Financial Officer
Date: May 8, 1998
EXHIBIT INDEX
Exhibit Description Page
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27 Financial Data Schedule for the quarterly report on
Form 10-Q for the period ended March 31, 1998.