UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
Commission File Number 0-12944
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 incorporation or organization) (I.R.S. Employer 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.
[X] YES [ ] NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[X] YES [ ] NO
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.
17,927,932 shares of Common Stock, $.10 Par Value, at November 2, 2004
1
FORWARD LOOKING STATEMENTS
All statements other than statements of historical fact included in this Form
10-Q Quarterly Report regarding our financial position, business strategy,
plans, anticipated growth rates, 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
meaning in connection with a discussion 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 to our major customer, manufacturing and
supplier risks, dependence on new product development, rapid technological and
market change, international operations, dependence on proprietary technology
and key personnel, length of the sales cycle, environmental regulations, and
changes in expected costs of discontinued operations. Further information on
potential factors that could affect our business is described in our reports on
file with the Securities and Exchange Commission, including our Form 10-K for
the fiscal year ended June 30, 2004.
2
PART I - Financial Information
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Thousands, except per share amounts)
Three Months Ended
-----------------------------
September 30, September 26,
2004 2003
------------- -------------
Net sales
Products $25,883 $19,812
Development services 1,695 4,435
------- -------
27,578 24,247
------- -------
Cost of goods sold
Products 15,168 12,813
Development services 1,297 3,657
------- -------
16,465 16,470
------- -------
Gross profit 11,113 7,777
Selling, general, and administrative expenses 5,659 5,838
Research, development, and engineering expenses 3,208 3,309
------- -------
Operating profit (loss) 2,246 (1,370)
------- -------
Other income (expense):
Interest income 179 204
Miscellaneous income (expense), net (29) 45
------- -------
Total other income 150 249
------- -------
Earnings (loss) from continuing operations before
income taxes and minority interest 2,396 (1,121)
Income tax benefit (expense) (862) 448
Minority interest (122) 10
------- -------
Earnings (loss) from continuing operations 1,412 (663)
------- -------
Discontinued TeraOptix operations, net of tax (61) (162)
Charges and adjustments on the disposal of
TeraOptix, net of tax (4) --
------- -------
Loss from discontinued operations (65) (162)
------- -------
Net earnings (loss) $ 1,347 $ (825)
======= =======
Basic - Earnings (loss) per share:
Continuing operations $ 0.08 $ (0.04)
Discontinued operations $ -- $ (0.01)
------- -------
Net earnings (loss) $ 0.08 $ (0.05)
======= =======
Diluted - Earnings (loss) per share:
Continuing operations $ 0.08 $ (0.04)
Discontinued operations $ (0.01) $ (0.01)
------- -------
Net earnings (loss) $ 0.07 $ (0.05)
======= =======
Weighted average shares outstanding:
Basic shares 17,923 17,678
======= =======
Diluted shares 18,115 17,678
======= =======
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Thousands of dollars, except share amounts)
September 30, 2004 June 30, 2004
------------------ -------------
Assets
Current assets:
Cash and cash equivalents $ 15,796 $ 17,462
Marketable securities 9,173 8,428
Receivables, net 20,401 26,338
Inventories 26,713 21,547
Prepaid expenses 1,909 1,915
Deferred income taxes 3,471 3,999
Assets of discontinued unit held for sale 2,012 2,012
-------- --------
Total current assets 79,475 81,701
Marketable securities 9,495 8,503
Property, plant, and equipment, net 28,626 27,433
Deferred income taxes 31,086 31,738
Intangible assets, net 5,090 4,999
Other assets 1,075 1,078
-------- --------
Total assets $154,847 $155,452
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Payables $ 10,424 $ 10,384
Progress payments received from customers 1,129 615
Accrued salaries and wages 4,275 5,794
Other accrued liabilities 3,198 4,389
Income taxes payable 2,059 2,038
-------- --------
Total current liabilities 21,085 23,220
Other long-term liabilities 244 350
Minority interest 1,360 1,238
-------- --------
Total liabilities 22,689 24,808
-------- --------
Stockholders' equity:
Common Stock, $.10 par value per share:
40,000,000 shares authorized;
18,373,312 shares issued (18,332,933 at June 30, 2004);
17,926,107 shares outstanding (17,885,728 at June 30, 2004) 1,837 1,833
Additional paid-in capital 141,528 141,151
Retained earnings (accumulated deficit) (4,649) (5,996)
Accumulated other comprehensive income (loss):
Currency translation effects (1,321) (1,119)
Net unrealized gain on marketable securities 50 62
-------- --------
137,445 135,931
Less treasury stock, at cost (447,205 shares) 5,287 5,287
-------- --------
Total stockholders' equity 132,158 130,644
-------- --------
Total liabilities and stockholders' equity $154,847 $155,452
======== ========
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Thousands of dollars)
Three Months Ended
-----------------------------
September 30, September 26,
2004 2003
------------- -------------
Cash provided by (used for) operating activities:
Net earnings (loss) $ 1,347 $ (825)
Adjustments to reconcile net earnings (loss) to cash
provided by (used for) operating activities:
Loss from discontinued operations 65 162
Depreciation and amortization 1,506 1,489
Deferred income taxes 1,216 (453)
Other, net 53 52
Changes in operating accounts:
Receivables 5,941 (1,406)
Inventories (5,129) (242)
Prepaid expenses 62 228
Accounts payable, accrued expenses, and taxes payable (2,443) (1,172)
Minority interest 122 (10)
------- -------
Net cash provided by (used for) continuing operations 2,740 (2,177)
Net cash used for discontinued operations (157) (317)
------- -------
Net cash provided by (used for) operating activities 2,583 (2,494)
------- -------
Cash provided by (used for) investing activities:
Additions to property, plant, and equipment (2,599) (1,898)
Purchase of marketable securities (3,515) (870)
Additions to intangibles and other assets (247) (264)
Proceeds from the sale or maturity of marketable securities 1,750 2,230
------- -------
Net cash used for investing activities (4,611) (802)
------- -------
Cash provided by (used for) financing activities:
Employee stock purchase 328 249
Exercise of employee stock options 34 315
------- -------
Net cash provided by continuing operations 362 564
Net cash used for discontinued operations -- (210)
------- -------
Net cash provided by financing activities 362 354
------- -------
Net decrease in cash and cash equivalents (1,666) (2,942)
Cash and cash equivalents, beginning of period 17,462 31,209
------- -------
Cash and cash equivalents, end of period $15,796 $28,267
======= =======
See accompanying notes to consolidated financial statements
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except for per share amounts)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation
Zygo Corporation is a worldwide developer and supplier of high performance
metrology instruments, high precision optics, optical assemblies, and automation
for the semiconductor and industrial markets. The accompanying consolidated
financial statements include the accounts of Zygo Corporation and its
subsidiaries ("ZYGO," "we," "us," "our" or "Company"). All material transactions
and accounts with the subsidiaries have been eliminated from the consolidated
financial statements. The results of operations for the three month period ended
September 30, 2004 are not necessarily indicative of the results to be expected
for the full fiscal year.
The Consolidated Balance Sheet at September 30, 2004, the Consolidated
Statements of Operations for the three months ended September 30, 2004 and
September 26, 2003, and the Consolidated Statements of Cash Flows for the three
months ended September 30, 2004 and September 26, 2003 are unaudited but, in
management's opinion, include all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the results of the
interim periods. The accompanying consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
included in our June 30, 2004 Annual Report on Form 10-K, including items
incorporated by reference therein.
Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share are calculated in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share."
The following table sets forth the reconciliation of basic weighted average
shares outstanding and diluted weighted average shares outstanding:
Three Months Ended
-----------------------------
September 30, September 26,
2004 2003
------------- -------------
Basic weighted average shares outstanding 17,923,000 17,678,000
Dilutive effect of stock options 192,000 --
---------- ----------
Diluted weighted average shares outstanding 18,115,000 17,678,000
========== ==========
For the three months ended September 26, 2003, we recorded net losses. Due to
these net losses, stock options to acquire 248,000 shares of common stock for
the three months ended September 26, 2003, were excluded from the computation of
diluted earnings per share because of the anti-dilutive effect on loss per
share.
Stock Compensation Plans
As of September 30, 2004, we have two stock-based compensation plans, which are
described below. A third stock-based compensation plan expired in September
2002. We apply Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
our plans. Since all options were granted with an exercise price equal to the
market value of the stock on the date of grant, no compensation cost has been
recognized for our fixed option plans. Pro forma information regarding net
income and earnings per share is required by SFAS No. 123 "Accounting for
Stock-Based Compensation," which requires that the information be determined as
if we have accounted for our stock options granted in fiscal years beginning
after December 15, 1994 under the fair value method of the Statement.
The Zygo Corporation Amended and Restated Non-Employee Director Stock Option
Plan permits the granting of non-qualified options to purchase a total of
620,000 shares (adjusted for splits) of common stock at prices not less than the
market value of the stock on the date of grant. Under the terms of the Plan, as
amended on September 24, 1999, each new non-employee director (other than a
person who was previously an employee of ZYGO or any of our subsidiaries) was
granted an option to purchase 8,000 shares of common stock, generally, on his or
her first day of service as a non-employee director; and each other non-employee
director was granted an option to purchase 3,000 shares of common stock on an
annual basis. All options were fully exercisable on the date of grant and have a
10-year term. The Plan, as amended, will
6
expire on November 17, 2009. The Company does not intend to grant further
options under the Non-Employee Director Stock Option Plan.
The Zygo Corporation 2002 Equity Incentive Plan permits the granting of
restricted stock and stock options to purchase shares of common stock up to a
total of 1,500,000 shares. The exercise price per share of common stock covered
by an option may not be less than the par value per share on the date of grant,
and in the case of an incentive stock option, the exercise price may not be less
than the market value per share on the date of grant. These options generally
vest over a four year period in quarterly increments. The Plan will expire on
August 27, 2012. Pursuant to the terms of the Plan, the Board of Directors may
also amend the Plan to authorize the grant of other types of equity-based
awards, without further action by our stockholders. Non-employee directors are
now granted fully exercisable options to purchase 6,000 shares of common stock
on an annual basis and each new non-employee director is granted fully
exercisable options to purchase 12,000 shares of common stock, generally, on
their first day of service, in all instances at the market value per share on
the date of grant.
The Zygo Corporation Amended and Restated Non-Qualified Stock Option Plan
permitted the granting of non-qualified options to purchase a total of 4,850,000
shares (adjusted for splits) of common stock at prices not less than the market
value of the stock on the date of grant. Options generally became exercisable at
the rate of 25% of the shares each year commencing one year after the date of
grant. The Plan, as amended, expired on September 3, 2002.
The fair value of options at date of grant was estimated using the Black-Scholes
model. Our pro forma information is as follows:
Three Months Ended
-----------------------------
September 30, September 26,
2004 2003
------------- -------------
Net earnings (loss), as reported $ 1,347 $ (825)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (1,252) (1,165)
------- -------
Pro forma net earnings (loss) $ 95 $(1,990)
======= =======
Net earnings (loss) per share
Basic - as reported $ 0.08 $ (0.05)
======= =======
Basic - pro forma $ 0.01 $ (0.11)
======= =======
Diluted - as reported $ 0.07 $ (0.05)
======= =======
Diluted - pro forma $ 0.01 $ (0.11)
======= =======
7
Comprehensive Income (Loss)
Our total comprehensive income (loss) was as follows:
Three Months Ended
-----------------------------
September 30, September 26,
2004 2003
------------- -------------
Net earnings (loss) $1,347 $(825)
Unrealized gain (loss) on marketable
securities, net of tax (12) (31)
Unrealized gain (loss) on swap agreement,
net of tax -- 193
Foreign currency translation effect (202) 606
------ -----
Comprehensive income (loss) $1,133 $ (57)
====== =====
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market. At September 30, 2004 and June 30, 2004, inventories were as
follows:
September 30, June 30,
2004 2004
------------- --------
Raw materials and manufactured parts $13,252 $11,155
Work in process 12,711 9,794
Finished goods 750 598
------- -------
$26,713 $21,547
======= =======
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Maintenance and repairs are
charged to expense as incurred. Management evaluates, on an ongoing basis, the
carrying value of our property, plant, and equipment and makes adjustments when
impairments are identified. Depreciation is based on the estimated useful lives
of the various classes of assets and is computed using the straight-line method.
At September 30, 2004 and June 30, 2004, property, plant, and equipment were as
follows:
Estimated
September 30, June 30, Useful Life
2004 2004 (Years)
------------- -------- -----------
Land $ 615 $ 615 --
Building and improvements 11,973 11,941 15-40
Machinery, equipment, and office furniture 41,691 40,602 3-8
Leasehold improvements 657 657 1-5
Construction in progress 5,218 3,917 --
-------- --------
60,154 57,732
Accumulated depreciation (31,528) (30,299)
-------- --------
$ 28,626 $ 27,433
======== ========
Depreciation expense for the three months ended September 30, 2004 and September
26, 2003 was $1,377 and $1,366, respectively.
8
Intangible Assets
Intangible assets include patents, trademarks, and license agreements. The cost
of intangible assets is amortized on a straight-line basis over estimated useful
lives ranging from 4-20 years. Intangible assets, at cost, at September 30, 2004
and June 30, 2004 were as follows:
September 30, June 30,
2004 2004
------------- --------
Intangible assets $ 6,960 $ 6,759
Accumulated amortization (1,870) (1,760)
------- -------
$ 5,090 $ 4,999
======= =======
Intangible amortization expense was $113 and $101 for the three months ended
September 30, 2004 and September 26, 2003, respectively. Amortization expense
related to certain intangible assets is included in cost of goods sold in the
Consolidated Statements of Operations.
Warranty
A limited warranty is provided on our products for periods ranging from 3 to 12
months and allowances for estimated warranty costs are recorded during the
period of sale. The determination of such allowances requires management to make
estimates of product return rates and expected costs to repair or replace
products under warranty. If actual return rates or repair and replacement costs,
or both, differ significantly from management's estimates, adjustments to the
expense may be required.
The following is a reconciliation of the beginning and ending balances of our
accrued warranty liability, which is included in the "Other accrued liabilities"
line item in the Consolidated Balance Sheets:
Three Months Ended
-----------------------------
September 30, September 26,
2004 2003
------------- -------------
Beginning balance $1,486 $1,215
Reductions for payments made (525) (519)
Changes in accruals related to warranties issued in
the current period 194 211
Changes in accruals related to pre-existing
warranties 7 225
------ ------
Ending balance $1,162 $1,132
====== ======
Supplemental Cash Flow Information
Interest payments on debt were $243 for the first three months ended September
26, 2003. Income tax payments amounted to $199 for the three months ended
September 30, 2004. There were no income tax refunds or payments for the first
three months ended September 26, 2003.
Reclassifications
Certain amounts included in the consolidated financial statements for the prior
year have been reclassified to conform with current year presentation.
9
NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") Issued Financial
Interpretation No. ("FIN") 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" and a related revision, FIN 46R. FIN 46 requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the equity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. FIN
46 is effective for all variable interest entities created or acquired prior to
February 1, 2003 for the first reporting period ended after March 15, 2004. The
adoption of FIN 46 did not have an impact on our consolidated results of
operations or financial position.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which expands
financial statement disclosures for defined benefit plans. The change replaces
existing FASB disclosure requirements for pensions. The adoption of SFAS No. 132
(revised) did not have a material affect on our results of operations or
financial position.
NOTE 3: DIVESTITURES AND DISCONTINUED OPERATIONS
In September 2002, we committed to a planned disposition of our TeraOptix
business unit ("TeraOptix"). We discontinued all operations by January 2003. We
have marketed the facility previously used by the TeraOptix unit for sale and
have recorded impairment charges since then related to the decline in the fair
market value of the facility. We announced in August 2004 that we have entered
into an agreement to sell our TeraOptix facility. The sales transaction,
anticipated to be completed in the second quarter of fiscal 2005, is expected to
generate approximately $2,000 in cash, net of selling expenses. In the first
quarter of fiscal 2005 and 2004, discontinued operations reflected the carrying
costs, net of tax, of the facility.
The results and loss on disposal of the TeraOptix business unit have been
presented as separate line items in the accompanying Consolidated Statements of
Operations as "Discontinued TeraOptix operations, net of tax", for all periods
presented. The components of cash flow from discontinued operations are as
follows:
Three Months Ended
-----------------------------
September 30, September 26,
2004 2003
------------- -------------
Cash flow from operating activities from discontinued operations:
Loss from discontinued operations $ (65) $(162)
Deferred income taxes (36) (132)
Other, net (56) (23)
----- -----
Net cash used for operating activities from discontinued operations (157) (317)
----- -----
Cash flow from financing activities from discontinued operations:
Payment of long-term debt -- (210)
----- -----
Net cash used for financing activities from discontinued operations -- (210)
----- -----
Net cash used by discontinued operations $(157) $(527)
===== =====
10
NOTE 4: SEGMENT INFORMATION
We operate in two principal business segments globally: Semiconductor and
Industrial. The segment data is presented below in a manner consistent with
management's internal measurement of the business.
Three Months Ended
-----------------------------
September 30, September 26,
2004 2003
------------- -------------
Semiconductor
Sales $16,002 $12,251
Gross profit 6,563 3,174
Gross profit as a % of sales 41% 26%
Industrial
Sales $11,576 $11,996
Gross profit 4,550 4,603
Gross profit as a % of sales 39% 38%
Total
Sales $27,578 $24,247
Gross profit 11,113 7,777
Gross profit as a % of sales 40% 32%
Separate financial information by segment for total assets, capital
expenditures, and depreciation and amortization is not available and is not
evaluated by the 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, September 26,
2004 2003
------------- -------------
Domestic $ 8,044 $ 6,302
------- -------
Far East:
Japan 14,057 13,810
Pacific Rim 2,829 3,228
------- -------
Total Far East 16,886 17,038
Europe and Other (primarily Europe) 2,648 907
------- -------
Total $27,578 $24,247
======= =======
NOTE 5: RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMER
Sales to Canon Inc., one of our significant stockholders, and Canon Sales Co.,
Inc., a distributor of certain of our products in Japan and a subsidiary of
Canon Inc., amounted to $12,592 (46% of net sales) for the three months ended
September 30, 2004, as compared with $12,296 (51% of net sales) for the
comparable prior year period. These sales include revenues generated from the
development agreements referenced below. Selling prices of products sold to
Canon Inc. and Canon Sales Co., Inc. are based, generally, on the terms
customarily given to distributors. Revenues generated from the development
agreements are recorded on a cost-plus basis. At September 30, 2004 and June 30,
2004, there were, in the aggregate, $7,770 and $10,913, respectively, of trade
accounts receivable from Canon Inc. and Canon Sales Co., Inc.
In September 2002, we entered into a contract with Canon Inc. related to the
development of certain interferometers. In March 2004, we signed a preliminary
agreement to begin further add-on work, with a definitive agreement expected to
be signed in the second quarter of fiscal 2005. During the three months ended
September 30, 2004 and September 26, 2003, we recognized revenue in the
semiconductor segment of $1,695 and $4,435, respectively, for the original
contract and subsequent add-on work.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Introduction
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. Optical
instruments products encompass non-contact optical measurement instruments.
Optics products consist of high performance macro-optics components, optical
coatings, and optical system assemblies. We conduct the majority of our
manufacturing in our 135,500 square foot facility in Middlefield, Connecticut.
We are currently constructing an 18,000 square foot addition to our Middlefield,
Connecticut, facility to increase our overall manufacturing space.
We also perform several development services, which have produced a significant
amount of our revenue over the past two years. In September 2002, we entered
into a development services agreement with Canon Inc. In March 2004, we signed a
preliminary agreement to begin further add-on work, with a definitive agreement
anticipated to be signed in the second quarter of fiscal 2005. In the first
quarter of fiscal 2005, we recognized $1.7 million of revenue from these
developmental services contracts as compared with $4.4 million in the prior year
comparable quarter. We anticipate significant revenues from this expected
follow-on contract. Our period over period comparable sales would be
significantly adversely affected if we do not continue to provide these
development services.
We achieved an order level for the first quarter of fiscal 2005 of $34.1 million
as compared with $24.1 million for the first quarter of fiscal 2004 and $42.1
million for the fourth quarter of fiscal 2004. This order flow boosted backlog
at September 30, 2004 to $61.4 million. Orders for the first quarter of our
fiscal year are normally lower than the remaining quarters in our fiscal year.
Orders in the semiconductor segment decreased $13.1 million, or 54%, as compared
with the fourth quarter of fiscal 2004, and $5.6 million, or 34%, as compared
with the first quarter of fiscal 2004, primarily due to an overall slowdown in
the semiconductor market. A continued slowdown in the semiconductor segment
could impact our orders in the remaining quarters of our fiscal year. In the
first quarter of fiscal 2005, strong orders in the industrial segment partially
offset the decrease in semiconductor orders. Orders in the industrial segment
increased $5.1 million, or 28%, as compared with the fourth quarter of fiscal
2004 and $15.6 million, or 208%, as compared with the first quarter of fiscal
2004, due to strong demand across most of our regions. We continue to receive
orders from the flat panel market of the semiconductor segment. We expect flat
panel orders to continue for the immediate future, which could help offset the
expected overall semiconductor slowdown.
We discontinued our telecommunications TeraOptix business unit during fiscal
2003. Accordingly, the results of TeraOptix have been presented as a separate
line item on the Consolidated Statements of Operations as "Discontinued
TeraOptix operations, net of tax", for all periods presented. In addition, the
charges on the disposal of TeraOptix, net of tax, have been recorded as a
separate line item for all periods presented. All continuing operations line
items presented exclude TeraOptix results. During fiscal 2003 and 2004, we
marketed for sale our former telecommunications facility located in Westborough,
Massachusetts. In August 2004, we entered into an agreement to sell the
facility. The sales transaction is expected to be completed in the second
quarter of fiscal year 2005 and is to generate approximately $2.0 million of
cash, net of selling expenses. At September 30, 2004, the carrying value of the
facility, net of estimated selling expenses, is $2.0 million.
Continuing Operations
We recorded earnings from continuing operations for the first quarter of fiscal
2005 of $1.4 million, or $0.08 per diluted share, as compared with a loss of
$0.7 million, or $0.04 per diluted share, for the first quarter of fiscal 2004.
Net sales of $27.6 million for the first quarter of fiscal 2005 increased by
$3.4 million, or 14%, compared with the prior year period. For the first quarter
of fiscal 2005, net sales in the semiconductor segment were $16.0 million, or
58% of total net sales, as compared with $12.2 million, or 50% of total net
sales, in the comparable prior year period, primarily due to an increase in
sales to our lithography customers. This offset a decrease in revenues of $2.7
million from the development services agreements with Canon, Inc. compared with
the comparable prior year period revenues of $4.4 million. The year over year
decline in developmental service agreement revenue is primarily attributable to
the winding down of the initial development agreement and a slower than
anticipated start on the further add-on work under the expected follow-up
agreement. Net sales in the industrial segment were $11.6 million, or 42% of
total net sales, as compared with $12.0 million, or 50% of total net sales, in
the prior year period. Industrial sales in the first quarter of fiscal
12
2005 were slightly down as compared with the first quarter of fiscal 2004,
primarily due to large aperture systems that shipped in the prior year.
Domestic region sales amounted to $8.0 million in the first quarter of fiscal
2005, an increase of $1.7 million, or 27%, from the first quarter of fiscal
2004. International region sales amounted to $19.6 million in the first quarter
of fiscal 2005, an increase of $1.7 million, or 9%, from the first quarter of
fiscal 2004. Sales in Japan during the first quarter of fiscal 2005 amounted to
$14.1 million, an increase of $0.3 million, or 2%, from the first quarter of
fiscal 2004. Europe/Other sales, primarily Europe sales, amounted to $2.7
million in the first quarter of fiscal 2005, an increase of $1.8 million, or
200%, from the first quarter of fiscal 2004 primarily due to strong optics and
automotive sales. Sales in the Pacific Rim during the first quarter of fiscal
2005, excluding Japan, amounted to $2.8 million, a decrease of $0.4 million, or
13%, from the first quarter of fiscal 2004 sales levels.
Sales in U.S. dollars for the first quarter of fiscal 2005 were $23.3 million,
or 85%, of total net sales for the period. 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. Management believes the
percentage of sales in foreign currencies may increase in the coming year due to
an increase in sales denominated in yen to Japanese customers. The majority of
our foreign currency transactions and foreign operations are in the euro and
Japanese yen. In the absence of a substantial increase in sales orders in
currency 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 consolidated financial position and results of operations.
Gross profit for the first quarter of fiscal 2005 totaled $11.1 million, an
increase of $3.3 million, or 42%, from $7.8 million in the first quarter of
fiscal 2004. Gross profit as a percentage of sales for the first quarters of
fiscal 2005 and 2004 were 40% and 32%, respectively. Gross profit as a
percentage of sales in the first quarter of fiscal 2005 was favorably impacted
by continued success with factory cost reduction programs as well as changes in
product mix. In the first quarter of fiscal 2004, we experienced several
manufacturing issues which reduced the gross profit as a percentage of sales
below expected levels.
Selling, general, and administrative expenses ("SG&A") in the first quarter of
fiscal 2005 amounted to $5.7 million, a decrease of $0.1 million, or 2%, from
$5.8 million in the first quarter of fiscal 2004. As a percentage of net sales,
SG&A for the first quarter of fiscal 2005 and fiscal 2004 was 21% and 24%,
respectively. The decrease in SG&A as a percentage of sales was due to the costs
remaining stable on a higher sales volume.
Research, development, and engineering expenses ("R&D") for the first quarter of
fiscal 2005 totaled $3.2 million, a decrease of $0.1 million, or 3%, from $3.3
million in the first quarter of fiscal 2004. This decrease was primarily due to
costs associated with flat panel display projects nearing completion partially
offset by increases due to various optics initiatives.
The income tax expense from continuing operations in the first quarter of fiscal
2005 totaled $0.9 million, or 36% of pre-tax earnings, which compares with an
income tax benefit of $0.4 million, or 40% of pre-tax loss, in the first quarter
of fiscal 2004. Our overall effective tax rate, including discontinued
operations, was 36% for the first quarter of fiscal 2005 as compared with 41% in
the comparable prior year period. The decrease in the overall effective tax rate
is primarily due to an increase in the percentage of pre-tax income from
domestic operations, which has a lower effective tax rate than income from
foreign operations. Research and development credits, which have historically
been included in our effective tax rate calculation, were excluded in the first
quarter of fiscal 2005 due to the expiration of the credit under United States
tax law. The credit has been renewed during our second fiscal quarter of 2005
and will be reflected in our effective tax rate in future quarters.
Historically, it had an impact of 2-4% on our effective tax rate. In future
quarters, the effect may be less to the extent there is increased pre-tax
income.
RELATED PARTY TRANSACTIONS
In September 2002, we entered into a contract with Canon Inc. related to the
development of certain interferometers (refer to Note 5 of our unaudited
consolidated financial statements for additional information). In March 2004, we
signed a preliminary agreement to begin further add-on work, with a definitive
agreement expected to be signed in the second quarter of fiscal 2005. During the
three months ended September 30, 2004 and September 26, 2003, we recognized
revenue in the semiconductor segment of $1.7 million and $4.4 million,
respectively, from these development services for Canon, Inc.
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LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004, working capital was $58.4 million, a decrease of $0.1
million from $58.5 million at June 30, 2004. We maintained cash, cash
equivalents, and marketable securities at September 30, 2004 totaling $34.5
million, which remained consistent with the $34.4 million at June 30, 2004.
Major fluctuations in working capital included a reduction in accounts
receivable of $5.9 million due to collections of receivables from the high sales
experienced in the fourth quarter of fiscal 2004 and an increase in inventories
of $5.1 million due to an increase in anticipated shipments in the second and
third quarters of fiscal 2005. There were no borrowings outstanding under our
$3.0 million bank line of credit at September 30, 2004. The line of credit
expires in November 2004.
We recently announced that we entered into an agreement to sell our vacant
Westborough, Massachusetts, facility. The sale transaction, anticipated to be
completed in the second quarter of fiscal 2005, is expected to generate
approximately $2.0 million in cash, net of selling expenses.
Acquisitions of property, plant, and equipment were $2.6 million the first
quarter ended September 30, 2004, which includes $0.6 million for the
construction of an addition to our existing Middlefield, Connecticut, facility.
The building addition is expected to be completed during fiscal 2005 for an
additional $2.0-$2.5 million, and will be funded from existing cash balances.
The additional space is expected to be used primarily for manufacturing.
Management believes that cash generated from operations, together with the
liquidity provided by existing cash balances, will be sufficient to satisfy our
liquidity requirements for the next 12 months.
CRITICAL ACCOUNTING POLICIES, SIGNIFICANT JUDGMENTS, AND ESTIMATES
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these 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
consolidated financial statements. On an on-going basis, management evaluates
its estimates and judgments, including those related to bad debts, inventories,
warranty obligations, income taxes, and long-lived assets. 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. We consider certain accounting policies related to
revenue recognition and allowance for doubtful accounts, inventory valuation,
warranty costs, accounting for income taxes, and valuation of long-lived assets
to be critical policies due to the estimates and judgments involved in each.
Revenue Recognition and Allowance for Doubtful Accounts
We recognize revenue based on guidance provided in Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 104, "Revenue
Recognition" and in accordance with EITF Issue No. 00-21, "Revenue Arrangements
with Multiple Deliverables." We recognize revenue when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, our
price is fixed or determinable, and collectibility is reasonably assured.
We maintain an allowance for doubtful accounts based on a continuous review of
customer accounts, payment patterns, and specific collection issues. We perform
on-going credit evaluations of our customers and do not require collateral from
our customers. For many of our international customers, we require an
irrevocable letter of credit to be issued by the customer before a shipment is
made. If the financial condition of our customers were to deteriorate, resulting
in an impairment of their ability to make payments, additional allowances would
be required.
Inventory Valuation
Inventories are valued at the lower of cost or market, cost being determined on
a first-in, first-out basis. Management evaluates the need to record adjustments
for impairment of inventory on a monthly basis. Our policy is to assess the
valuation of all inventories, including raw materials, work-in-process, and
finished goods. Obsolete inventory or inventory in excess of management's
estimated future usage is written down to estimated market value, if less than
its cost. Contracts with fixed prices are evaluated to determine if estimated
total costs will exceed revenues. A loss provision is recorded when the judgment
is made that actual costs incurred plus estimated costs remaining to be incurred
will exceed total revenues from the contract. Inherent in the estimates of
market value are management's estimates related to current economic trends,
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future demand for our products, and technological obsolescence. Significant
management judgments must be made when providing for obsolete and excess
inventory and losses on contracts. If actual market conditions are different
than those projected by management, additional inventory write-downs and loss
accruals may be required.
Warranty Costs
We provide for the estimated cost of product warranties at the time revenue is
recognized. We consider historical warranty costs actually incurred and
specifically identified circumstances to establish the warranty liability. The
warranty liability is reviewed on a quarterly basis. Should actual costs or
revised estimated costs differ from management's prior estimates, revisions to
the estimated warranty liability would be required.
Accounting for Income Taxes
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective income tax bases, and operating loss and tax credit carryforwards.
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes," requires the establishment of a valuation allowance to reflect
the likelihood of the realization of deferred tax assets. We record a valuation
allowance to reduce our deferred tax assets to an estimated realizable amount
based on historical and forecasted results. While management has considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event management were
to determine that Zygo would be able to realize its deferred tax assets in the
future in excess of its net recorded amount, an adjustment to the valuation
allowance would increase income in the period such determination was made.
Likewise, should management determine that Zygo would not be able to realize all
or part of its net deferred tax asset in the future, an adjustment to the
valuation allowance would be charged to income in the period such determination
was made. Our effective tax rate may vary from period to period, generally based
on changes in estimated taxable income or loss, changes to the valuation
allowance, changes to federal, state or foreign tax laws, and deductibility of
certain costs and expenses by jurisdiction.
Valuation of Long-Lived Assets
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the carrying value of intangible assets and other long-lived
assets is reviewed on a regular basis for the existence of facts or
circumstances, both internally and externally, that may suggest impairment. Some
factors we consider important, which could trigger the impairment review,
include a significant decrease in the market value of an asset, a significant
change in the extent or manner in which an asset is used, a significant adverse
change in the business climate that could affect the value of an asset, an
accumulation of costs for an asset in excess of the amount originally expected,
a current period operating or cash flow loss combined with a history of
operating or cash flow losses or a projection that demonstrates continuing
losses, and a current expectation that, more likely than not, a long-lived asset
will be disposed of significantly before the end of its estimated useful life.
If such circumstances exist, we evaluate the carrying value of long-lived assets
to determine if impairment exists based upon estimated undiscounted future cash
flows over the remaining useful life of the assets and comparing that value with
the carrying value of the assets. If the carrying value of the assets is greater
than the estimated future cash flows, the assets are written down to the
estimated fair value. We determine the estimated fair value of the assets based
on a current market value of the assets. If a current market value is not
readily available, a projected discounted cash flow method is applied using a
discount rate determined by management to be commensurate with the risk inherent
in the current business model. Our cash flow estimates are based upon
management's best estimates, using appropriate and customary assumptions and
projections at the time.
Health Insurance
Beginning in January 2004, we became self-insured for the majority of our group
health insurance. We rely on claims experience in determining an adequate
liability for claims incurred, but not reported. To the extent actual claims
exceed estimates, we may be required to record additional expense. A one percent
change in actual claims would have an annual impact of approximately $25,000 on
our financial condition and results of operations.
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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.
RISK FACTORS THAT MAY IMPACT FUTURE RESULTS
Risk factors that may impact future results include those disclosed in our Form
10-K for the year ended June 30, 2004.
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 first three months of fiscal
2005.
For discussion of our exposure to market risk, refer to Item 7a. Quantitative
and Qualitative Disclosures about Market Risk, presented in our Annual Report
filed with the Securities and Exchange Commission on Form 10-K for the year
ended June 30, 2004.
Item 4. Controls and Procedures
ZYGO maintains "disclosure controls and procedures," as such term is defined
under Securities Exchange Act Rule 13a-15(e), that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized, and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosures. In designing 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. We have carried out an evaluation, as of the end of the period
covered by this report, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon their evaluation and subject to the foregoing, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective in ensuring that material information
relating to ZYGO is made known to the Chief Executive Officer and Chief
Financial Officer by others within our company during the period in which this
report was being prepared.
There were no changes in our internal controls over financial reporting that
occurred during our most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
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PART II - Other Information
Item 6. Exhibits
(a) Exhibits:
31.1 Certification of Chief Executive Officer under Rule 13a-14(a)
31.2 Certification of Chief Financial Officer under Rule 13a-14(a)
32.1 Certification of Chief Executive Officer and Chief Financial Officer
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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/ J. Bruce Robinson
-----------------------------------------------------
J. Bruce Robinson
President, Chairman, and Chief Executive Officer
/s/ Walter A. Shephard
-----------------------------------------------------
Walter A. Shephard
Vice President, Finance, Chief Financial Officer, and
Treasurer
Date: November 5, 2004
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