Attached files
file | filename |
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EX-31.2 - ZYGO CORP | c64264_ex31-2.htm |
EX-10.1 - ZYGO CORP | c64264_ex10-1.htm |
EX-32.2 - ZYGO CORP | c64264_ex32-2.htm |
EX-32.1 - ZYGO CORP | c64264_ex32-1.htm |
EX-31.1 - ZYGO CORP | c64264_ex31-1.htm |
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
(Mark One)
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x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2010
or
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o |
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
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ZYGO CORPORATION |
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(Exact name of registrant as specified in its charter) |
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Delaware |
06-0864500 |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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Laurel Brook Road, Middlefield, Connecticut |
06455 |
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(Address of principal executive offices) |
(Zip Code) |
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(860) 347-8506 |
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Registrants telephone number, including area code |
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N/A |
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(Former name, former address, and former fiscal year, if changed from last report) |
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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 o NO |
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). (1) |
o YES o NO |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o |
Accelerated filer x |
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Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
17,646,841 shares of Common Stock, $.10 Par Value, at February 1, 2011
(1) The registrant is not currently required to submit Interactive Data Files pursuant to Rule 405 of Regulation S-T.
FORWARD LOOKING STATEMENTS
All statements other than statements of historical fact included in this Form 10-Q Quarterly Report regarding financial performance, condition and operations, and the business strategy, plans, anticipated revenues, bookings, market acceptance, growth rates, market opportunities, and objectives of management of the Company for future operations are forward-looking statements. Forward-looking statements are intended to provide managements current expectations or plans for the future operating and financial performance of the Company 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 revenues to our major customer; manufacturing and supplier risks; risks of booking cancellations, push-outs and de-bookings; dependence on timing and market acceptance of new product development; rapid technological and market change; risks in international operations; risks related to the reorganization of our business; dependence on proprietary technology and key personnel; length of the revenue cycle; environmental regulations; investment portfolio returns; fluctuations in our stock price; the risk that anticipated growth opportunities may be smaller than anticipated or may not be realized; risks related to recent and announced business acquisitions, including the acquisition of the assets of ASML US, Incs Richmond, California facility and integration of the businesses and employees; and the risk related to the Companys recent and announced changes to senior management.
Any forward-looking statements included in this Quarterly Report speak only as of the date of this document. We undertake no obligation to publicly update or revise forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-Q. Further information on potential factors that could affect our business is described in this Form 10-Q and in our reports on file with the Securities and Exchange Commission, including our Form 10-K for the fiscal year ended June 30, 2010.
2
PART I - Financial Information
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Thousands, except per share amounts)
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Three
Months Ended |
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Six
Months Ended |
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2010 |
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2009 |
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2010 |
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2009 |
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Net revenues |
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$ |
36,086 |
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$ |
26,081 |
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$ |
67,205 |
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$ |
47,406 |
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Cost of goods sold |
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19,192 |
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15,128 |
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36,108 |
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29,279 |
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Gross margin |
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16,894 |
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10,953 |
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31,097 |
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18,127 |
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Selling, general, and administrative expenses |
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8,257 |
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8,365 |
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15,468 |
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15,141 |
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Research, development, and engineering expenses |
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3,768 |
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3,896 |
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7,133 |
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7,543 |
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Operating profit (loss) |
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4,869 |
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(1,308 |
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8,496 |
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(4,557 |
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Other income |
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Gain on acquisition |
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1,289 |
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1,289 |
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Miscellaneous income, net |
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43 |
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47 |
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224 |
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158 |
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Total other income |
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1,332 |
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47 |
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1,513 |
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158 |
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Earnings (loss) from continuing operations before income taxes, including noncontrolling interest |
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6,201 |
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(1,261 |
) |
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10,009 |
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(4,399 |
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Income tax benefit (expense) |
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(111 |
) |
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308 |
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(754 |
) |
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(374 |
) |
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Net earnings (loss) from continuing operations |
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6,090 |
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(953 |
) |
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9,255 |
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(4,773 |
) |
Net earnings (loss) from discontinued operations, net of tax |
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(639 |
) |
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91 |
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(2,474 |
) |
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Net earnings (loss) including noncontrolling interest |
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6,090 |
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(1,592 |
) |
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9,346 |
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(7,247 |
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Less: Net earnings attributable to noncontrolling interest |
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316 |
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313 |
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844 |
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445 |
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Net earnings (loss) attributable to Zygo Corporation |
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$ |
5,774 |
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$ |
(1,905 |
) |
$ |
8,502 |
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$ |
(7,692 |
) |
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Basic - Earnings (loss) per share attributable to Zygo Corporation |
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Continuing operations |
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$ |
0.33 |
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$ |
(0.07 |
) |
$ |
0.47 |
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$ |
(0.31 |
) |
Discontinued operations |
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(0.04 |
) |
$ |
0.01 |
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(0.14 |
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Net earnings (loss) per share |
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$ |
0.33 |
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$ |
(0.11 |
) |
$ |
0.48 |
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$ |
(0.45 |
) |
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Diluted - Earnings (loss) per share attributable to Zygo Corporation |
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Continuing operations |
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$ |
0.32 |
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$ |
(0.07 |
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$ |
0.47 |
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$ |
(0.31 |
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Discontinued operations |
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(0.04 |
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0.01 |
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(0.14 |
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Net earnings (loss) per share |
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$ |
0.32 |
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$ |
(0.11 |
) |
$ |
0.48 |
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$ |
(0.45 |
) |
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Weighted average shares outstanding |
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Basic shares |
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17,596 |
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16,993 |
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17,554 |
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16,968 |
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Diluted shares |
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17,993 |
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16,993 |
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17,862 |
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16,968 |
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Amounts Attributable to Zygo Corporation |
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Net earnings (loss) from continuing operations attributable to Zygo Corporation |
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$ |
5,774 |
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$ |
(1,266 |
) |
$ |
8,411 |
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$ |
(5,218 |
) |
Discontinued operations, net of tax |
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(639 |
) |
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91 |
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(2,474 |
) |
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Net earnings (loss) attributable to Zygo Corporation |
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$ |
5,774 |
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$ |
(1,905 |
) |
$ |
8,502 |
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$ |
(7,692 |
) |
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See accompanying notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Thousands, except share amounts)
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December 31, 2010 |
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June 30, 2010 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
45,105 |
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$ |
46,536 |
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Marketable securities |
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1,000 |
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1,000 |
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Receivables, net of allowance for doubtful accounts of $1,439 and $1,975, respectively |
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28,806 |
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19,948 |
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Inventories |
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27,221 |
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25,220 |
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Prepaid expenses and other |
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1,815 |
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1,643 |
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Income tax receivable |
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1,050 |
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Current assets of discontinued operations |
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17 |
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17 |
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Total current assets |
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103,964 |
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95,414 |
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Marketable securities |
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1,045 |
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922 |
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Property, plant, and equipment, net |
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32,483 |
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23,029 |
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Intangible assets, net |
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5,781 |
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5,387 |
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Other assets |
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413 |
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Total assets |
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$ |
143,273 |
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$ |
125,165 |
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Liabilities and Equity |
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Current liabilities: |
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Accounts payable |
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$ |
7,851 |
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$ |
8,426 |
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Accrued progress payments and deferred revenue |
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4,572 |
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5,700 |
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Accrued salaries and wages |
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4,858 |
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3,173 |
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Other accrued liabilities |
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6,305 |
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5,191 |
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Income tax payable |
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1,008 |
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152 |
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Current liabilities of discontinued operations |
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167 |
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287 |
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Total current liabilities |
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24,761 |
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22,929 |
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Other long-term liabilities |
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5,544 |
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1,359 |
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Long-term liabilities of discontinued operations |
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198 |
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281 |
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Commitments and contingencies |
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Equity: |
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Common stock, $0.10 par value per share: |
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40,000,000 shares authorized; |
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19,864,134 shares issued (19,663,414 at June 30, 2010); |
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17,644,991 shares outstanding (17,480,219 at June 30, 2010) |
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1,986 |
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1,966 |
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Additional paid-in capital |
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165,654 |
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163,052 |
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Accumulated deficit |
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(31,342 |
) |
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(39,844 |
) |
Accumulated other comprehensive income (loss): |
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Currency translation effects |
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384 |
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(728 |
) |
Treasury stock, at cost, 2,219,143 shares (2,183,195 at June 30, 2010) |
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(26,326 |
) |
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(26,043 |
) |
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Total stockholders equity - Zygo Corporation |
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110,356 |
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98,403 |
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Noncontrolling interest |
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2,414 |
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2,193 |
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Total equity |
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112,770 |
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|
100,596 |
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Total liabilities and equity |
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$ |
143,273 |
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$ |
125,165 |
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See accompanying notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Thousands)
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Six Months Ended December 31, |
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2010 |
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2009 |
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Cash provided by (used for) operating activities: |
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Net earnings (loss) including noncontrolling interest |
|
$ |
9,346 |
|
$ |
(7,247 |
) |
Adjustments to reconcile net earnings (loss) to cash provided by (used for) operating activities from continuing operations: |
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(Earnings) loss from discontinued operations |
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(91 |
) |
|
2,474 |
|
Depreciation and amortization |
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|
3,102 |
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|
3,121 |
|
Gain on acquisition, net of tax |
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(1,289 |
) |
|
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Deferred income taxes |
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(725 |
) |
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(61 |
) |
Provision for doubtful accounts |
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(257 |
) |
|
227 |
|
Compensation cost related to share-based payment arrangements |
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|
1,882 |
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|
1,117 |
|
Excess tax benefits from share-based payment arrangements |
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(21 |
) |
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Other |
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(437 |
) |
|
(124 |
) |
Changes in operating accounts: |
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Receivables |
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(7,993 |
) |
|
(127 |
) |
Inventories |
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|
665 |
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|
6,364 |
|
Prepaid expenses and other current assets |
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1,348 |
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|
(504 |
) |
Accounts payable, accrued expenses, and taxes payable |
|
|
587 |
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|
(1,142 |
) |
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Net cash provided by operating activities from continuing operations |
|
|
6,117 |
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|
4,098 |
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Net cash used for operating activities from discontinued operations |
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(197 |
) |
|
(1,309 |
) |
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Cash provided by (used for) investing activities: |
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Additions to property, plant, and equipment |
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(556 |
) |
|
(625 |
) |
Purchase of marketable securities |
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(999 |
) |
|
(999 |
) |
Additions to intangibles |
|
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(264 |
) |
|
(312 |
) |
Acquisitions |
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(7,142 |
) |
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|
Proceeds from the sale and maturity of marketable securities |
|
|
1,043 |
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|
4,000 |
|
Proceeds from the sale of other assets |
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|
35 |
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|
291 |
|
|
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Net cash (used for) provided by investing activities |
|
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(7,883 |
) |
|
2,355 |
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|
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Cash used for financing activities: |
|
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Dividend payment to noncontrolling interest |
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(721 |
) |
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Excess tax benefits from share-based payment arrangements |
|
|
21 |
|
|
|
|
Restricted stock vesting and related tax benefits |
|
|
(282 |
) |
|
(238 |
) |
Exercise of employee stock options |
|
|
739 |
|
|
13 |
|
|
|
|
|
|
|
|
|
Net cash used for financing activities |
|
|
(243 |
) |
|
(225 |
) |
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
775 |
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|
103 |
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(1,431 |
) |
|
5,022 |
|
Cash and cash equivalents, beginning of year |
|
|
46,536 |
|
|
32,723 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
45,105 |
|
$ |
37,745 |
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
Net cash received for income tax refunds of $261 for the six months ended December 31, 2010. Net cash paid for income taxes of $418 for the six months ended December 31, 2009.
Dividend declared to noncontrolling interest but not paid was $101 for the six months ended December 31, 2010.
See accompanying notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(Thousands, except for share and per
share amounts)
Note 1: Accounting Policies
Basis
of Presentation and Principles of Consolidation
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. The accompanying
condensed consolidated financial statements include the accounts of Zygo
Corporation and its subsidiaries (Zygo, we, us, our or the Company).
The Company follows accounting principles generally accepted in the United
States of America (US GAAP). Zygos reporting currency is the U.S. dollar.
The functional currency of the majority of our foreign subsidiaries is their
local currency and, as such, amounts included in the consolidated statements of
operations are translated at the weighted-average exchange rates for the
period. Assets and liabilities are translated at period-end exchange rates and
resulting foreign exchange translation adjustments are recorded in the
consolidated balance sheets as a component of accumulated other comprehensive
income (loss). All transactions and accounts with the subsidiaries have been
eliminated from the condensed consolidated financial statements. The results of
operations for the three and six months ended December 31, 2010 are not
necessarily indicative of the results to be expected for the full fiscal year.
The condensed consolidated balance sheet at December 31, 2010, the condensed consolidated statements of operations for the three and six months ended December 31, 2010 and 2009, and the condensed consolidated statements of cash flows for the six months ended December 31, 2010 and 2009 are unaudited but, in managements opinion, include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results of the interim periods. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended June 30, 2010, including items incorporated by reference therein.
Discontinued
Operations
The Company classifies
operations as discontinued when the operations have either ceased, or are
expected to be disposed of in a sale transaction in the near term, and the
operations and cash flows of all discontinued operations have been eliminated
or will be eliminated upon consummation of the expected sale transaction, and
the Company will not have any significant continuing involvement in the
discontinued operations. Authoritative guidance related to the impairment or
disposal of long-lived assets requires the calculation of estimated fair value
less cost to sell long-lived assets for assets held for sale. The calculation
of estimated fair value less cost to sell includes significant estimates and
assumptions, including, but not limited to: operating projections; discount
rate; excess working capital levels; property values; and the anticipated costs
involved in the selling process. As more fully described in Note 2,
Discontinued Operations, we have discontinued the Singapore IC packaging
operations of our Vision Systems product line, which is included in our
Metrology Solutions segment.
Recent
Accounting Guidance Not Yet Adopted
In January 2010, the
Financial Accounting Standards Board (FASB) issued amended standards that
require additional fair value disclosures. These disclosure requirements are
effective in two phases. On January 1, 2010, we adopted the requirements for
disclosures about inputs and valuation techniques used to measure fair value as
well as disclosures about significant transfers. The adoption of this portion
of the guidance did not have a material impact on our financial statements.
Beginning in fiscal 2012, the balance of these amended standards will require
presentation of disaggregated activity within the reconciliation for fair value
measurements using significant unobservable inputs (Level 3). We believe the
adoption of the balance of these amended standards will not have a material
impact on our financial statements.
Adoption
of New Accounting Pronouncements
In October 2009, the
FASB issued authoritative guidance on revenue recognition that became effective
for us on July 1, 2010. Under the new guidance on arrangements that include
software elements, tangible products that have software components that are
essential to the functionality of the tangible product will no longer be within
the scope of the software revenue recognition guidance, and software-enabled
products will now be subject to other relevant revenue recognition guidance.
Additionally, the FASB issued authoritative guidance on revenue arrangements
with multiple deliverables that are outside the scope of the software revenue
recognition guidance. Under the new guidance, when vendor specific objective
evidence or third party evidence for deliverables in an arrangement cannot be
determined, a best estimate of the selling price is required to separate
deliverables and allocate arrangement consideration using the relative selling
price method. The new guidance includes new disclosure requirements on how the
application of the relative selling price method affects the timing and amount
of revenue recognition. The adoption of this new guidance did not have a
material impact on our financial statements.
In June 2009, the FASB issued
authoritative guidance on the consolidation of variable interest entities which
became effective for us on July 1, 2010. The new guidance requires revised
evaluations of whether entities represent variable interest entities, ongoing
assessments of power over such entities, and additional disclosures for variable
interests. The adoption of this new guidance did not have a material impact on
our financial statements.
6
Reclassifications
Certain amounts have
been reclassified to conform to current-year presentations related to other
income.
Note 2: Discontinued Operations
We discontinued the Singapore IC packaging operations of our Vision Systems product line in fiscal 2010. In accordance with authoritative guidance, the results of operations for the aforementioned operations are presented in the Companys condensed consolidated financial statements as discontinued operations. In addition, adjustments were made to the carrying value of assets held for sale if the carrying value exceeded their estimated fair value less cost to sell.
The following table summarizes the operating results of our discontinued operations for the three and six months ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
December 31, |
|
December 31, |
|
||||||||
|
|
|
|
|
|
||||||||
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net revenues |
|
$ |
|
|
$ |
344 |
|
$ |
|
|
$ |
665 |
|
Non-cash charge |
|
|
|
|
|
|
|
|
|
|
|
(678 |
) |
(Operating expenses) and other income |
|
|
|
|
|
(983 |
) |
|
91 |
|
|
(2,461 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations, net of tax |
|
$ |
|
|
$ |
(639 |
) |
$ |
91 |
|
$ |
(2,474 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the assets and liabilities of our discontinued operations included in the condensed consolidated balance sheets of the Company as of December 31, 2010 and June 30, 2010:
|
|
|
|
|
|
|
|
|
|
December
31, |
|
June
30, |
|
||
|
|
|
|
|
|
||
Other assets |
|
$ |
17 |
|
$ |
17 |
|
|
|
|
|
|
|
|
|
Current assets of discontinued operations |
|
$ |
17 |
|
$ |
17 |
|
|
|
|
|
|
|
|
|
|
|||||||
Accrued expenses and other current liabilities |
|
$ |
167 |
|
$ |
287 |
|
|
|
|
|
|
|
|
|
Current liabilities of discontinued operations |
|
$ |
167 |
|
$ |
287 |
|
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
$ |
198 |
|
$ |
281 |
|
|
|
|
|
|
|
|
|
Long-term liabilites of discontinued operations |
|
$ |
198 |
|
$ |
281 |
|
|
|
|
|
|
|
|
|
7
Note 3: Acquisitions
Richmond, California
On November 12, 2010, we completed a transaction with ASML US,
Inc. (ASML) to purchase substantially all the assets of ASMLs Richmond, California operation, including a
55,300 square-foot manufacturing facility. With this acquisition, we will expand our optical manufacturing capabilities. The
assets were acquired for $12,475 of which $7,142 was in cash and the balance was for a future consideration, net present
valued at $5,333 using a discount factor of 14%, based on the level of shipments to ASML over the next three years beginning
January 1, 2011. On the acquisition date, the consideration was recorded as a liability as shown on our consolidated balance
sheet at December 31, 2010, with $1,127 recorded as a current liability and $4,206 recorded as a long-term liability. The
future consideration represented a supply agreement that was entered in with ASML that provided for a volume discount. In
addition, we hired key management and employees working at the Richmond facility to be integrated into Zygos Optical
Systems Division - Extreme Precision Optics Group.
This transaction met the conditions of a business combination as defined by Accounting Standards Codification (ASC) 805 and, as such, is accounted for under ASC 805 using the purchase method of accounting. The results of the Richmond operations were included in our condensed consolidated statements of operations from the acquisition date. Zygo performed a preliminary fair value exercise to allocate the purchase price to the acquired assets and liabilities at November 12, 2010, which is complete with the exception of a final review of the market analysis of certain equipment acquired in the transaction. Due to the specialized nature of certain equipment purchased, that many of the equipment components are custom built specialty parts and the timing of the transaction the Company is still in the process of completing its review of this information. Zygo expects to finalize the purchase price allocation prior to the end of fiscal 2011. The following table summarizes the consideration paid for the business and the preliminary fair values of the assets acquired and liabilities assumed at the date of acquisition (dollars in thousands):
|
|
|
|
|
|
|
Fair
Value On |
|
|
|
|
|
|
|
Consideration: |
||||
Cash |
|
$ |
7,142 |
|
Future consideration |
|
|
5,333 |
|
|
|
|
|
|
Purchase Price |
|
$ |
12,475 |
|
|
|
|
|
|
|
|
|
|
|
Assets Acquired: |
|
|
|
|
Inventories |
|
$ |
2,399 |
|
Property and equipment |
|
|
11,467 |
|
Technology and customer relationships |
|
|
623 |
|
|
|
|
|
|
Total assets |
|
|
14,489 |
|
|
|
|
|
|
Less gain on acquisition |
|
|
2,014 |
|
|
|
|
|
|
Purchase Price |
|
$ |
12,475 |
|
|
|
|
|
|
In recording the fair values of the assets acquired and the volume discount liability, we also recorded a gain on acquisition of $2,014 in accordance with ASC 805 using the purchase method of accounting which was recorded in the unaudited consolidated condensed statement of operations. In addition, a deferred tax liability of $725 was recorded in the opening balance sheet, which had the effect of reducing the gain on acquisition to $1,289. We maintain a full valuation allowance on our net deferred tax assets. Therefore, we recorded a tax benefit to reduce the valuation allowance to the net deferred tax asset balance. Prior to recording the gain, we reassessed whether we had correctly identified all of the assets acquired and all of the liabilities assumed. Additionally, we also reviewed the procedures used to measure the amounts of the identifiable assets acquired, liabilities assumed and consideration transferred.
The purchased inventory was comprised of raw materials and work in process. The fair value for work in process was $1,833 and was determined by considering the sales price of finished units to represent fair value. The fair value for the building and land was $6,080 and was determined by a valuation specialist using the sales comparison approach to value the land and a combination of the sales and cost approach for the building and improvements. The fair value of the equipment was $5,387 and was determined by the market approach. Management is still evaluating certain pieces of equipment and the value assigned to those pieces may change from the preliminary valuation included in the financial statements. Any change in the valuation of the assets would increase or decrease the amount of the gain recorded in the statements of operations. Fair value of customer relationships was determined to be $23 by using the multi-period excess earnings method. The fair value of technology was $600 and was determined using the relief from royalty method.
During the three and six months ended December 31, 2010, Richmond operations contributed revenue and net earnings of $2,496 and $539, respectively. Acquisition related expenses of $126 and $406 were recognized in administration expense for the three and six months ended December 31, 2010, respectively.
8
Proforma financial information of revenues and net earnings are impractical to provide. Prior to the acquisition, the Richmond operation was accounted for as a cost center within ASML. Therefore, sales were not recorded at the Richmond level within ASML and separate financial statements for the Richmond operation were not prepared. While ASML provided financial information sufficient for Zygo to conclude that the acquisition was not significant under Regulation S-X rule 3-05, ASML did not provide and Zygo does not have access to financial information for the appropriate periods to present pro forma financial information.
The following disclosure presents certain information regarding the Companys acquired intangible assets as of December 31, 2010. All acquired intangible assets were valued by the income approach and are being amortized over their initial estimated useful lives of five years for both customer relationships and technology, in both instances with no estimated residual values. We review our intangible assets for impairment annually.
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer |
|
Technology |
|
Total |
|
|||
|
|
|
|
|
|
|
|
|||
|
||||||||||
Balance at November 12, 2010 |
|
$ |
23 |
|
$ |
600 |
|
$ |
623 |
|
|
||||||||||
Amortization expense |
|
|
(8 |
) |
|
(16 |
) |
|
(24 |
) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
$ |
15 |
|
$ |
584 |
|
$ |
599 |
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Chris L. Koliopoulos, Zygos President and CEO, was a major shareholder of Zemetrics as well as the major holder of Zemetrics outstanding shareholder notes. Dr. Koliopoulos received a total of 195,790 shares of Company common stock, consisting of 106,233 shares of Company common stock as consideration for the purchase of his shares of Zemetrics stock and 89,557 shares of Company common stock in payment of $680 principal amount of Zemetrics outstanding shareholder notes (plus accrued interest thereon) held by Dr. Koliopoulos.
Acquisition costs for the twelve months ended June 30, 2010 were $457, and are included in selling, general & administrative expenses. An escrow account with 38,743 shares (including 16,421 shares issued to Dr. Koliopoulos) of Company common stock was established to secure potential indemnification claims until the date that is fifteen days after completion of the audit of the Companys financial statements for the first fiscal year ending after the closing. The escrow requirements have been met and the shares have since been distributed.
9
The following is the final purchase price allocation based on the estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition on January 22, 2010:
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
11 |
|
Inventories |
|
|
403 |
|
Prepaid expenses |
|
|
18 |
|
Property and equipment |
|
|
15 |
|
Customer relationships |
|
|
112 |
|
Technology |
|
|
1,428 |
|
Goodwill |
|
|
2,003 |
|
|
|
|
|
|
Total assets |
|
|
3,990 |
|
Less: Liabilities assumed |
|
|
89 |
|
|
|
|
|
|
Total |
|
$ |
3,901 |
|
|
|
|
|
|
In addition, net deferred tax assets of $360 were recorded in the opening balance sheet at zero value, net of a full valuation allowance. Based on the Companys expectations of future U.S. taxable income, the Company believes it is more likely than not that such net deferred tax assets will not be realized.
The purchase price was allocated to the underlying assets acquired and liabilities assumed based on their fair values. Analyses supporting the purchase price allocation include a valuation of assets and liabilities as of the closing date, an analysis of intangible assets and a detailed review of the opening balance sheet to determine other significant adjustments required to recognize assets and liabilities at fair value. Intangible assets of technology and customer relationships were valued on an income approach based on future earnings projections.
The following disclosure presents certain information regarding the Companys acquired intangible assets as of June 30, 2010. All acquired intangible assets were valued by the income approach and are being amortized over their initial estimated useful lives of three years for customer relationships and seven years for technology, in both instances with no estimated residual values. We review our intangible assets for impairment annually.
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer |
|
Technology |
|
Total |
|
|||
|
|
|
|
|
|
|
|
|||
|
||||||||||
Balance at January 22, 2010 |
|
$ |
112 |
|
$ |
1,428 |
|
$ |
1,540 |
|
|
||||||||||
Amortization expense |
|
|
(16 |
) |
|
(85 |
) |
|
(101 |
) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010 |
|
$ |
96 |
|
$ |
1,343 |
|
$ |
1,439 |
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded an impairment charge of $2,003 relating to acquired goodwill in the quarter ended March 31, 2010 subsequent to the acquisition date. The Zemetrics reporting unit had minimal sales history and cumulative losses since inception. In addition, the fair value of common stock issued as consideration on the closing date was $10.80 per share, which was significantly in excess of the implied value per share in the formula used in the purchase agreement to determine the number of common shares issued as consideration (which was based on the market price per share during the 40-day period prior to closing). In consideration of these factors, management determined the carrying value of the reporting unit exceeded its fair value, and that the implied fair value of goodwill was zero at March 31, 2010.
10
From the date of acquisition, the Zemetrics reporting unit had revenues of $103 and an operating loss of $2,658 (including the aforementioned $2,003 goodwill impairment charge), which are included in the consolidated financial statements for the period ended June 30, 2010. The following unaudited proforma condensed financial information shows the results of operations for the year ended June 30, 2010 as though the acquisition of Zemetrics had occurred at the beginning of such fiscal year. The proforma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time:
|
|
|
|
|
|
|
Year
ended |
|
|
|
|
|
|
|
|
||||
Net revenues |
|
$ |
101,330 |
|
Net loss attributable to Zygo Corporation |
|
$ |
(3,565 |
) |
|
|
|
|
|
Loss per share amounts: |
|
|
|
|
Basic and Diluted - Loss per share |
|
$ |
(0.21 |
) |
Note 4: Restructuring and related costs
During fiscal 2009, we initiated restructuring actions related to ongoing cost reduction efforts comprised of workforce reductions and the consolidation of manufacturing operations in Tucson, Arizona.
The following table summarizes the accrual balances and utilization by cost type for the fiscal 2011 and fiscal 2010 restructuring actions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
Facility |
|
Total |
|
|||
|
|
|
|
|
|
|
|
|||
Balance at June 30, 2010 |
|
$ |
290 |
|
$ |
227 |
|
$ |
517 |
|
Payments |
|
|
(241 |
) |
|
(96 |
) |
|
(337 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
$ |
49 |
|
$ |
131 |
|
$ |
180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
Facility |
|
Total |
|
|||
|
|
|
|
|
|
|
|
|||
Balance at June 30, 2009 |
|
$ |
262 |
|
$ |
452 |
|
$ |
714 |
|
Restructuring charges |
|
|
602 |
|
|
|
|
|
602 |
|
Payments |
|
|
(310 |
) |
|
(111 |
) |
|
(421 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
554 |
|
$ |
341 |
|
$ |
895 |
|
|
|
|
|
|
|
|
|
|
|
|
11
Note 5: Earnings Per Share
Basic and diluted earnings per share are calculated in accordance with US GAAP. For the three and six months ended December 31, 2010, 1,316,888 and 1,711,206 (for the three and six months ended December 31, 2009, 1,810,846 and 1,978,312 ) of the Companys outstanding stock options and restricted stock awards (Stock Grants) were excluded from the calculation of diluted earnings per share because they were antidilutive.
The following table sets forth the reconciliation of basic weighted average shares outstanding and diluted weighted average shares outstanding for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, |
|
Six Months Ended December 31, |
|
||||||||
|
|
|
|
|
|
||||||||
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Basic weighted average shares outstanding |
|
|
17,596,321 |
|
|
16,993,467 |
|
|
17,554,229 |
|
|
16,967,988 |
|
Dilutive effect of stock options and restricted shares |
|
|
396,348 |
|
|
|
|
|
307,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
17,992,669 |
|
|
16,993,467 |
|
|
17,862,195 |
|
|
16,967,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6: Comprehensive Income (Loss)
Our Stockholders Equity and Noncontrolling Interest for the six months ended December 31, 2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31, |
|
||||||||||||||||
|
|
|
|
||||||||||||||||
|
|
2010 |
|
2009 |
|
||||||||||||||
|
|
|
|
|
|
||||||||||||||
|
|
Stockholders |
|
Non- |
|
Total |
|
Stockholders |
|
Non- |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Equity, beginning of period |
|
$ |
98,403 |
|
$ |
2,193 |
|
$ |
100,596 |
|
$ |
98,583 |
|
$ |
1,444 |
|
$ |
100,027 |
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
|
8,502 |
|
|
844 |
|
|
9,346 |
|
|
(7,692 |
) |
|
445 |
|
|
(7,247 |
) |
Foreign currency translation effect |
|
|
1,112 |
|
|
199 |
|
|
1,311 |
|
|
612 |
|
|
(239 |
) |
|
373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
9,614 |
|
|
1,043 |
|
|
10,657 |
|
|
(7,080 |
) |
|
206 |
|
|
(6,874 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation charges related to stock awards |
|
|
1,882 |
|
|
|
|
|
1,882 |
|
|
1,171 |
|
|
|
|
|
1,171 |
|
Restricted stock vesting and related tax effect |
|
|
(282 |
) |
|
|
|
|
(282 |
) |
|
(238 |
) |
|
|
|
|
(238 |
) |
Exercise of employee stock options and related tax effect |
|
|
739 |
|
|
|
|
|
739 |
|
|
13 |
|
|
|
|
|
13 |
|
Dividends attributable to noncontrolling interests |
|
|
|
|
|
(822 |
) |
|
(822 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity, end of period |
|
$ |
110,356 |
|
$ |
2,414 |
|
$ |
112,770 |
|
$ |
92,449 |
|
$ |
1,650 |
|
$ |
94,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Note 7: Marketable Securities
Marketable securities consisted primarily of corporate and government agency securities for fiscal 2011 and 2010. The Company classifies these securities as held-to-maturity and trading. Dividend and interest income is recognized when earned. Straight-line amortization related to discounts and premiums on the purchase of marketable securities is recorded in interest income. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold.
At December 31, 2010 and June 30, 2010, the held-to maturity securities consisted of a government treasury bill. We have both the intent and the ability to hold the government treasury bill to maturity. The amortized cost, gross unrealized gains and losses, and fair value of held-to-maturity securities at December 31, 2010 and June 30, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
At December 31, 2010 |
|
$ |
1,000 |
|
$ |
|
|
$ |
|
|
$ |
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30,
2010 |
|
$ |
1,000 |
|
$ |
|
|
$ |
|
|
$ |
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The government treasury bill is being held in an account designated as loan collateral to cover our outstanding letters of credit.
Trading securities consist of a mutual fund investment corresponding to elections made in our deferred compensation program. In December 2010, we began quarterly distributions in accordance with the deferred compensation program agreement. The cost, gross unrealized gains and losses, redemptions, and fair value of trading securities at December 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
Gross |
|
Gross |
|
Redemp- |
|
Ending |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
At December 31, 2010 |
|
$ |
922 |
|
$ |
166 |
|
$ |
|
|
$ |
(43 |
) |
$ |
1,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December
31, 2009 |
|
$ |
499 |
|
$ |
128 |
|
$ |
|
|
$ |
|
|
$ |
627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities of investment securities classified as held-to-maturity at December 31, 2010 and June 30, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
June 30, 2010 |
|
||||||||
|
|
|
|
|
|
||||||||
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Due within one year |
|
$ |
1,000 |
|
$ |
1,000 |
|
$ |
1,000 |
|
$ |
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no securities in a continuous unrealized loss position at December 31, 2010 and June 30, 2010.
In determining whether investment holdings are other than temporarily impaired, we consider the nature, cause, severity, and duration of the impairment. We and our investment advisors use analyst reports, credit ratings and other items as part of our review.
13
Note 8. Fair Value Measurements
Authoritative guidance related to fair value measurements and disclosures establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the managements assumptions used to measure assets and liabilities at fair value. The classification of financial assets and liabilities within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2010 and June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and Liabilities Measured at Fair Value: |
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at December 31, 2010 |
|
||||||||
|
|
|
|
|
|
||||||||
|
|
Total
carrying |
|
Quoted
prices |
|
Significant
|
|
Significant |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
11,930 |
|
$ |
11,930 |
|
$ |
|
|
$ |
|
|
Trading securities |
|
|
1,045 |
|
|
1,045 |
|
|
|
|
|
|
|
Foreign currency hedge |
|
|
(97 |
) |
|
|
|
|
(97 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,878 |
|
$ |
12,975 |
|
$ |
(97 |
) |
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and Liabilities Measured at Fair Value: |
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements at June 30, 2010 |
|
||||||||
|
|
|
|
|
|
||||||||
|
|
Total
carrying |
|
Quoted
prices |
|
Significant
|
|
Significant
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
22,141 |
|
$ |
22,141 |
|
$ |
|
|
$ |
|
|
Trading securities |
|
|
922 |
|
|
922 |
|
|
|
|
|
|
|
Foreign currency hedge |
|
|
(70 |
) |
|
|
|
|
(70 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
22,993 |
|
$ |
23,063 |
|
$ |
(70 |
) |
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
When available, the Company uses quoted market prices to determine the fair value of its assets and liabilities included in Level 1. When quoted market prices are unobservable, the Company uses quotes from independent pricing vendors based on recent trading activity and other relevant information. The carrying value of other financial instruments, including cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to their short maturities.
14
Note 9: Share-Based Payments
We recorded share-based compensation expense for the three months ended December 31, 2010 and 2009 of $935 and $496, respectively, with a related tax benefit of $336 and $179, respectively. We recorded share-based compensation expense for the six months ended December 31, 2010 and 2009 of $1,882 and $1,170, respectively, with a related tax benefit of $677 and $421, respectively. For the three months ended December 31, 2009, $46 was recorded as part of discontinued operations. For the six months ended December 31, 2009, $54 was recorded as part of discontinued operations.
Stock Options
We utilized the Black-Scholes valuation method to determine the weighted average fair value of the stock option grants for both fiscal 2011 and 2010 stock option valuations. The key assumptions for this valuation method include the expected term of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price, and forfeiture rate. Many of these assumptions are judgmental and highly sensitive in the determination of compensation expense. Under the assumptions indicated below, the weighted-average fair value of stock option grants for the six months ended December 31, 2010 and 2009 were $2.99 and $3.67, respectively. During the six months ended December 31, 2010 and 2009, we issued stock options for an aggregate of 50,000 and 140,000 shares of common stock, respectively. During the three months ended December 31, 2010 and 2009, there were no stock grants issued.
The table below indicates the key assumptions used in the option valuation calculations for options granted in the periods presented:
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31, |
|
||
|
|
|
|
|
||
|
|
|
2010 |
|
2009 |
|
|
|
|
|
|
|
|
|
Term |
|
4.1 Years |
|
5.1 Years |
|
|
Volatility |
|
45.7% |
|
59.8% |
|
|
Dividend yield |
|
0.0% |
|
0.0% |
|
|
Risk-free interest rate |
|
1.1% |
|
2.5% |
|
|
Forfeiture rate |
|
0.0% |
|
10.8% |
|
Restricted Stock
Our share-based compensation expense also includes the effects of the issuance of restricted stock and restricted stock units. The compensation expense related to restricted stock awards is determined based on the market price of our stock at the date of grant applied to the total number of shares that are anticipated to fully vest, which is then amortized over the expected term. During the three months ended December 31, 2010 and 2009, an aggregate of 258,000 and 1,000 shares, respectively, of restricted stock units were issued at a weighted average grant price of $10.67 and $7.18, respectively. During the six months ended December 31, 2010 and 2009, an aggregate of 289,000 and 269,000 shares, respectively, of restricted stock units were issued at a weighted average grant price of $10.38 and $5.39, respectively. Generally, the restrictions on the restricted stock and restricted stock units granted to employees lapse at a rate of 50% after three years and the remaining 50% after the fourth year.
Note 10: Receivables
At December 31, 2010 and June 30, 2010, receivables were as follows:
|
|
|
|
|
|
|
|
|
|
December
31, |
|
June 30, 2010 |
|
||
|
|
|
|
|
|
||
Trade |
|
$ |
29,857 |
|
$ |
21,314 |
|
Other |
|
|
388 |
|
|
609 |
|
|
|
|
|
|
|
|
|
|
|
|
30,245 |
|
|
21,923 |
|
Allowance for doubtful accounts |
|
|
(1,439 |
) |
|
(1,975 |
) |
|
|
|
|
|
|
|
|
|
|
$ |
28,806 |
|
$ |
19,948 |
|
|
|
|
|
|
|
|
|
15
Note 11: Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. At December 31, 2010 and June 30, 2010, inventories were as follows:
|
|
|
|
|
|
|
|
|
|
December
31, |
|
June
30, |
|
||
|
|
|
|
|
|
||
Raw materials and manufactured parts |
|
$ |
13,486 |
|
$ |
12,682 |
|
Work in process |
|
|
10,250 |
|
|
9,322 |
|
Finished goods |
|
|
3,485 |
|
|
3,216 |
|
|
|
|
|
|
|
|
|
|
|
$ |
27,221 |
|
$ |
25,220 |
|
|
|
|
|
|
|
|
|
Note 12: 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 December 31, 2010 and June 30, 2010, property, plant, and equipment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December
31, |
|
June
30, |
|
Estimated
Useful Life |
|
||
|
|
|
|
|
|
|
|
||
Land |
|
$ |
1,696 |
|
$ |
615 |
|
|
|
Building and improvements |
|
|
22,494 |
|
|
17,390 |
|
15-40 |
|
Machinery, equipment, and office furniture |
|
|
61,594 |
|
|
56,136 |
|
3-8 |
|
Leasehold improvements |
|
|
1,028 |
|
|
1,002 |
|
1-5 |
|
Construction in progress |
|
|
82 |
|
|
332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,894 |
|
|
75,475 |
|
|
|
Accumulated depreciation |
|
|
(54,411 |
) |
|
(52,446 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
32,483 |
|
$ |
23,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense was $1,352 and $1,328 for the three months ended December 31, 2010 and
2009, respectively.
Depreciation
expense was $2,609 and $2,757 for the six months ended December 31, 2010 and
2009, respectively.
Note 13: Warranty
A limited warranty is provided on our products for periods ranging from 3 to 24 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 managements estimates, adjustments to the expense will be required.
As part of a strategic business partnership with Nanometrics entered into in June 2009, all related semiconductor systems that were purchased by Nanometrics are being warranted by us through June 2011. Nanometrics will provide warranty service and invoice us for incurred expenses. As of December 31, 2010 and 2009, $9 and $182, respectively, of our warranty liability relates to these semiconductor systems.
16
The following is a reconciliation of the accrued warranty liability, which is included in the other accrued liabilities in the condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31, |
|
||||
|
|
|
|
||||
|
|
2010 |
|
2009 |
|
||
|
|
|
|
|
|
||
Beginning balance |
|
$ |
1,360 |
|
$ |
1,614 |
|
Reductions for payments made |
|
|
(565 |
) |
|
(453 |
) |
Changes in accruals related to pre-existing warranties |
|
|
216 |
|
|
(195 |
) |
Changes in accruals related to warranties made in the current period |
|
|
250 |
|
|
418 |
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
1,261 |
|
$ |
1,384 |
|
|
|
|
|
|
|
|
|
Note 14: Intangible Assets
Intangible assets include patents, trademarks, customer relationships and technology, and a covenant not-to-compete. The cost of patents, trademarks, and customer relationships and technology is amortized on a straight-line basis over estimated useful lives ranging from 3-17 years. We entered into a non-compete agreement with a former officer and director of the Company effective February 28, 2009. The agreement calls for payments over a four year period of declining amounts totaling $878, which includes $27 of imputed interest. As of December 31, 2010, current liabilities include $119 and long-term liabilities include $67 related to the payments under this agreement. We are amortizing the value of the non-compete over four years on a declining balance method.
Intangible assets, at cost, at December 31, 2010 and June 30, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
December
31, |
|
June
30, |
|
||
|
|
|
|
|
|
||
Patents and trademarks |
|
$ |
6,146 |
|
$ |
5,882 |
|
Covenant not-to-compete |
|
|
851 |
|
|
851 |
|
Customer relationships and technology |
|
|
2,163 |
|
|
1,540 |
|
|
|
|
|
|
|
|
|
|
|
|
9,160 |
|
|
8,273 |
|
Accumulated amortization |
|
|
(3,379 |
) |
|
(2,886 |
) |
|
|
|
|
|
|
|
|
Total |
|
$ |
5,781 |
|
$ |
5,387 |
|
|
|
|
|
|
|
|
|
Intangible amortization expense was $493 and $350 for the six months ended December 31, 2010 and 2009, respectively. This amortization expense related to certain intangible assets is included in cost of goods sold in the condensed consolidated statements of operations.
Based on the carrying amount of the intangible assets as of December 31, 2010, the estimated future amortization expense is as follows:
|
|
|
|
|
|
|
|
|
Estimated
Future Amortization |
|
|||
|
|
|
|
|||
Six months ending June 30, 2011 |
|
|
$ |
494 |
|
|
Fiscal year ending June 30, 2012 |
|
|
|
942 |
|
|
Fiscal year ending June 30, 2013 |
|
|
|
927 |
|
|
Fiscal year ending June 30, 2014 |
|
|
|
933 |
|
|
Fiscal year ending June 30, 2015 |
|
|
|
1,107 |
|
|
Thereafter |
|
|
|
1,378 |
|
|
|
|
|
|
|
|
|
Total |
|
|
$ |
5,781 |
|
|
|
|
|
|
|
|
|
17
Note 15: Segment Information
Zygos Metrology Solutions division (segment) consists of OEM and in-line products primarily for the semiconductor and industrial markets. The Optical Systems division (segment) consists of components and opto-mechanical assemblies primarily for the medical, defense, and aerospace industries, which are included in the industrial market. For the three and six months ended December 31, 2010 and 2009, segment revenues and gross margin are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, |
|
Six Months Ended December 31, |
|
||||||||
|
|
|
|
|
|
||||||||
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Metrology Solutions |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
23,568 |
|
$ |
17,157 |
|
$ |
44,417 |
|
$ |
33,134 |
|
Gross margin |
|
$ |
13,681 |
|
$ |
8,865 |
|
$ |
24,791 |
|
$ |
16,342 |
|
Gross margin as a % of net revenues |
|
|
58 |
% |
|
52 |
% |
|
56 |
% |
|
49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical Systems |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
12,518 |
|
$ |
8,924 |
|
$ |
22,788 |
|
$ |
14,272 |
|
Gross margin |
|
$ |
3,213 |
|
$ |
2,088 |
|
$ |
6,306 |
|
$ |
1,785 |
|
Gross margin as a % of net revenues |
|
|
26 |
% |
|
23 |
% |
|
28 |
% |
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
36,086 |
|
$ |
26,081 |
|
$ |
67,205 |
|
$ |
47,406 |
|
Gross margin |
|
$ |
16,894 |
|
$ |
10,953 |
|
$ |
31,097 |
|
$ |
18,127 |
|
Gross margin as a % of net revenues |
|
|
47 |
% |
|
42 |
% |
|
46 |
% |
|
38 |
% |
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.
Revenues by geographic area were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, |
|
Six Months Ended December 31, |
|
||||||||
|
|
|
|
|
|
||||||||
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Americas |
|
$ |
19,571 |
|
$ |
12,932 |
|
$ |
36,480 |
|
$ |
26,216 |
|
Europe |
|
|
4,766 |
|
|
3,780 |
|
|
8,376 |
|
|
6,097 |
|
Japan |
|
|
7,911 |
|
|
3,421 |
|
|
13,793 |
|
|
7,249 |
|
Pacific Rim |
|
|
3,838 |
|
|
5,948 |
|
|
8,556 |
|
|
7,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
36,086 |
|
$ |
26,081 |
|
$ |
67,205 |
|
$ |
47,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 16: Transactions with Stockholder
Revenues from 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 $3,482 and $2,031 (10% and 8% of net revenues, respectively) for the three months ended December 31, 2010 and 2009, respectively. For the six months ended December 31, 2010 and 2009, sales to Canon amounted to $6,953 and $3,020 (10% and 6% of net revenues, respectively). Selling prices of products sold to Canon are based, generally, on the terms customarily given to distributors. At December 31, 2010 and June 30, 2010, there were, in the aggregate, $900 and $667, respectively, of trade accounts receivable from Canon.
18
Note 17: Derivatives and 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 authoritative guidance on accounting for derivative instruments and hedging activities and, therefore, are marked-to-market with changes in fair value recorded in the condensed consolidated statement of operations in miscellaneous income. 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 are expected to substantially offset corresponding losses and gains on the underlying transactions.
As of December 31, 2010, we had seven currency contracts outstanding involving our Japanese operations with notional amounts aggregating $3,200. These foreign currency hedges are not considered designated hedging instruments. For the three months ended December 31, 2010 and 2009, we recognized net unrealized losses of $29 and unrealized gains of $160, respectively, from foreign currency forward contracts. For the six months ended December 31, 2010 and 2009, we recognized net unrealized losses of $26 and unrealized gains of $13, respectively, from foreign currency forward contracts. These unrealized gains and losses are substantially offset by foreign exchange losses and gains on intercompany balances recorded by our subsidiary and are recorded in miscellaneous income on our condensed consolidated statements of operations.
The following table summarizes the fair value of derivative instruments as of December 31, 2010:
|
|
|
Derivatives not designated as hedging instruments |
|
Balance Sheet Location |
|
|
|
|
|
|
Number of foreign exchange contracts: 7 |
|
Other accrued liabilities $97 |
The following table summarizes the fair value of derivative instruments as of December 31, 2009:
|
|
|
Derivatives not designated as hedging instruments |
|
Balance Sheet Location |
|
|
|
|
|
|
Number of foreign exchange contracts: 6 |
|
Prepaid expenses $11 |
|
|
Other accrued liabilities $12 |
Note 18: Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended December 31, |
|
Six Months ended December 31, |
|
||||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
Amount |
|
Tax |
|
Amount |
|
Tax |
|
Amount |
|
Tax |
|
Amount |
|
Tax |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense) |
|
$ |
(111 |
) |
|
2 |
% |
$ |
308 |
|
|
24 |
% |
$ |
(754 |
) |
|
8 |
% |
$ |
(374 |
) |
|
9 |
% |
Income tax expense for the three and six months ended December 31, 2010 included income taxes in state and foreign jurisdictions. For the first three months ended December 31, 2010, we also recognized $725 of tax benefit from the adjustment of valuation allowances on our deferred assets associated with the Richmond asset purchase from ASML. The accounting guidance required that any deferred liability realized tangent to the transaction reduce the gain and be reported net of the gain; yet, the matching reduction in gross deferred assets from the adjustment to the valuation allowance is recorded in the income tax provision as a current benefit. While reported in two separate places in the financial statements, the reduction of the gain realized and associated tax benefit are equal and offsetting on a net basis. We continue to maintain a full valuation allowance on our net deferred tax assets as of December 31, 2010. In future periods, the valuation allowance could be reduced based upon sufficient evidence indicating that it is more likely than not that a portion of the deferred tax assets will be realized.
In the normal course of business, we provide for uncertain tax positions and adjust our unrecognized tax benefits or liabilities accordingly. For the three and six months ended December 31, 2010, we did not recognize an additional liability or realize any benefit for changes in our tax positions. We had no uncertain tax benefits or liabilities as of December 31, 2010 and June 30, 2010. We are not aware of any tax positions that would create a material adjustment to the unrecognized tax benefits during the next twelve months.
19
The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions and generally remains open to income tax examinations by relevant tax authorities for tax years beginning with fiscal 2007. The Company also files in foreign jurisdictions and generally remains open to income tax examinations for tax years beginning with fiscal 2005.
Note 19: Commitments and Contingencies
From time to time we are subject to certain legal proceedings and claims that arise in the normal course of our business. At December 31, 2010, we have a reserve of $1,400 for potential royalty claims. In the opinion of management, any settlement of royalty claims in excess of or below the amount recorded is not expected to have a material effect on our financial condition, results of operations, or liquidity.
We are aware of certain levels of contamination on one of our properties which is below reportable levels. In addition, we are aware of certain contamination on an adjacent property that we formerly owned. The future effect of environmental matters, including potential liabilities, is often difficult to estimate. Presently, we are unable to determine or reasonably estimate the amount of costs, if any, that we might incur or for which we may potentially be responsible. We will record an environmental reserve when it is both probable that a liability has been incurred and the amount of any liability can be reasonably estimated, whether a claim has been asserted or unasserted.
20
Item 2. Managements 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, 55,300 square foot facility in Richmond, California, and our 39,780 square foot facility in Tucson, Arizona.
On November 12, 2010, we completed a transaction with ASML US, Inc. (ASML) to purchase substantially all the assets of ASMLs Richmond, California operation, including a 55,300 square-foot manufacturing facility. The assets were acquired for $7,142 in cash and future consideration, net present valued at $5.3 million, based on the level of shipments to ASML over the next three years beginning January 1, 2011. In addition, we hired key management and employees working at the Richmond facility to be integrated into Zygos Optical Systems Division - Extreme Precision Optics Group. With this acquisition, we will considerably expand our optical manufacturing capabilities. Coupled with our existing leadership position in metrology, large flat optics production, and electro-optical design and manufacturing, the Richmond operation is expected to provide highly synergistic capabilities that can immediately address new applications in semiconductor, defense, and the life-sciences markets.
The fair value of the assets acquired was greater than the purchase price, resulting in a gain on acquisition of $2.0 million which was recorded in other income. In addition, a deferred tax liability of $0.7 million was recorded in the opening balance sheet, which had the effect of reducing the gain on acquisition to $1.3 million. The fair value of the assets was determined based on managements review of the value of the assets at the time of their acquisition. The equipment acquired is specialized in nature and, in some cases, was designed and fabricated internally at ASML, making the valuation of the equipment difficult. Management is still evaluating certain pieces of equipment and the value assigned to those pieces may change from the preliminary valuation included in the financial statements. Any change in the valuation of the assets would increase or decrease the amount of the gain recorded in the statements of operations.
Bookings for the three months ended December 31, 2010 (our second quarter of fiscal 2011) were $46.4 million, as compared with $34.0 million for the first quarter of fiscal 2011. Bookings for our Metrology Solutions segment accounted for 61% of the bookings in the second quarter of fiscal 2011, with the Optical Systems segment accounting for 39% of bookings, reflecting the inclusion of $11.3 million of bookings for the newly-acquired Richmond operation. Our Metrology Solutions segment bookings increased 23%, or $5.3 million, over the first fiscal quarter of 2011 and 72%, or $11.9 million, over the prior year quarter. Our Optical Systems segment bookings, excluding the Richmond operation, decreased 46%, or $5.5 million from the prior year quarter and 39%, or $4.2 million, from the first quarter. The reduction in bookings from the first quarter of fiscal 2011 was primarily due to the receipt in Quarter 1 of fiscal 2011 of a $3.0 million helmet display order and, to a lesser extent, a slowdown in orders from our life sciences customers. The acquisition of the Richmond assets and the subsequent bookings from this operation will help to offset any long-term effects of reduced bookings in certain of our existing life sciences customers.
21
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, share-based payments and accruals for health insurance. 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, Managements Discussion and Analysis of Financial Condition and Results of Operations of the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2010, management considers the Companys 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.
In October 2009, the FASB issued authoritative guidance on revenue recognition that became effective for us on July 1, 2010. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. The adoption of this new guidance did not have a material impact on our financial statements.
In June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities which became effective for us on July 1, 2010. The new guidance requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of power over such entities, and additional disclosures for variable interests. The adoption of this new guidance did not have a material impact on our financial statements.
22
RESULTS OF OPERATIONS
Net Revenues by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2011 |
|
Fiscal 2010 |
|
||||||||
|
|
|
|
|
|
|
||||||||
(Dollars in millions) |
|
|
Amount |
|
Net |
|
Amount |
|
Net |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metrology Solutions |
|
$ |
23.6 |
|
|
65 |
% |
$ |
17.2 |
|
|
66 |
% |
|
Optical Systems |
|
|
12.5 |
|
|
35 |
% |
|
8.9 |
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
36.1 |
|
|
100 |
% |
$ |
26.1 |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metrology Solutions |
|
$ |
44.4 |
|
|
66 |
% |
$ |
33.1 |
|
|
70 |
% |
|
Optical Systems |
|
|
22.8 |
|
|
34 |
% |
|
14.3 |
|
|
30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
67.2 |
|
|
100 |
% |
$ |
47.4 |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall, net revenues for the three months ended December 31, 2010 increased 38% as compared with the prior year period, reflecting increases in Metrology Solutions segment revenues of 37% and in Optical Systems segment revenues of 40%. The increase in Metrology Solutions segment net revenues was primarily due to volume increases in lithography stage metrology of $4.0 million, instruments of $2.6 million, and OEM heads of $1.0 million, partially offset by revenue decreases of $1.2 million in the display and semiconductor product lines which we sold in fiscal 2010. Shipments to both of our major lithography stage customers accounted for the majority of the increase in lithography stage revenues. The increase in the Optical Systems segment revenues was primarily due to the addition of Extreme Precision Optics (Richmond, California) of $2.5 million, which was purchased in November 2010, and contract manufacturing of $0.8 million. The increase in contract manufacturing revenues is primarily related to volume increases in the helmet mounted display and multiple objective lenses that constitute gene sequencers, partially offset by decreases in the dental and eye surgery product lines.
Net revenues for the six months ended December 31, 2010 increased 42% as compared with the prior year period, reflecting increases in Metrology Solutions segment revenues of 34% and in Optical Systems segment revenues of 59%. The increase in Metrology Solutions segment net revenues was primarily due to volume increases in lithography stage metrology of $7.1 million, instruments of $5.6 million, and OEM heads of $2.2 million, partially offset by revenue decreases of $3.8 million in the display and semiconductor product lines which we sold in fiscal 2010. Shipments to both of our major lithography stage customers accounted for the majority of the increase in lithography stage revenues. The increase in the Optical Systems segment revenues was primarily due to increases in contract manufacturing of $4.2 million and the addition of Extreme Precision Optics (Richmond, California) of $2.5 million. The increase in contract manufacturing revenues is primarily related to volume increases in the helmet mounted display and multiple objective lenses that constitute gene sequencers, partially offset by decreases in the dental and eye surgery product lines during the second quarter.
Revenues in U.S. dollars for the three months ended December 31, 2010 and 2009 were approximately 71% and 73% of total net revenues, respectively, with the remaining 29% and 27%, respectively, being in Euro, Yen, or Yuan. Revenues in U.S. dollars for the six months ended December 31, 2010 and 2009 were approximately 72% and 70% of total net revenues, respectively, with the remaining 28% and 30%, respectively, being in Euro, Yen, or Yuan. For our revenues 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, or in the general economic conditions in our export markets, could materially impact the revenues of our products in these markets and our condensed consolidated financial position and results of operations.
23
Gross Margin by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2011 |
|
Fiscal 2010 |
|
||||||||
|
|
|
|
|
|
|
||||||||
(Dollars in millions) |
|
|
Amount |
|
Gross |
|
Amount |
|
Gross |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metrology Solutions |
|
$ |
13.7 |
|
|
58 |
% |
$ |
8.9 |
|
|
52 |
% |
|
Optical Systems |
|
|
3.2 |
|
|
26 |
% |
|
2.1 |
|
|
23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16.9 |
|
|
47 |
% |
$ |
11.0 |
|
|
42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metrology Solutions |
|
$ |
24.8 |
|
|
56 |
% |
$ |
16.3 |
|
|
49 |
% |
|
Optical Systems |
|
|
6.3 |
|
|
28 |
% |
|
1.8 |
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
31.1 |
|
|
46 |
% |
$ |
18.1 |
|
|
38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin as a percentage of net revenues for the three months ended December 31, 2010 was 47%, which represents an increase of five percentage points from the comparable prior year period. Revenues from the newly acquired Extreme Precision Optics reduced overall gross margins by 1.7%, in part due to the valuation of work-in-process inventory acquired in the acquisition and shipped in the quarter. Within the Metrology Solutions segment, the increase in gross margin as a percentage of net revenues for the three months ended December 31, 2010 as compared with the prior year period was primarily due to a change in product mix towards higher margin products. Within the Optical Systems segment, the increase in gross margin as a percentage of net revenues for the three months ended December 31, 2010 as compared with the prior year period was primarily due to overall increased volume which led to improved absorption of factory costs, a favorable change in product mix towards higher margin products and the resolution of production issues related to certain optics that resulted in increased manufacturing costs in the prior year.
Gross margin as a percentage of net revenues for the six months ended December 31, 2010 was 46%, which represents an increase of eight percentage points from the comparable prior year period. Within the Metrology Solutions segment, the increase in gross margin as a percentage of net revenues for the six months ended December 31, 2010 as compared with the prior year period was primarily due to a change in product mix towards higher margin products and, to a lesser extent, improved absorption of factory costs. Within the Optical Systems segment, the increase in gross margin as a percentage of net revenues for the six months ended December 31, 2010 as compared with the prior year period was primarily due to overall increased volume which led to improved absorption of factory costs, a favorable change in product mix towards higher margin products and the resolution of production issues related to certain optics that resulted in increased manufacturing costs in the prior year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2011 |
|
Fiscal 2010 |
|
||||||||
|
|
|
|
|
|
|
||||||||
(Dollars in millions) |
|
|
Amount |
|
% of Revenues |
|
Amount |
|
% of Revenues |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended December 31 |
|
$ |
8.3 |
|
|
23 |
% |
$ |
8.4 |
|
|
32 |
% |
|
Six months ended December 31 |
|
$ |
15.5 |
|
|
23 |
% |
$ |
15.1 |
|
|
32 |
% |
SG&A expenses decreased in the three months ended December 31, 2010 by $0.1 million from the comparable prior year period, primarily due to a decrease in sales-related expenses related to the divested display product line. The decrease was partially offset by an increase in employee compensation expenses, which included restoration of the temporary pay-cuts and performance based programs and Richmond acquisition costs.
SG&A expenses increased in the six months ended December 31, 2010 by $0.4 million from the comparable prior year period, primarily due to employee compensation expenses, which included restoration of the temporary pay-cuts and performance-based programs and Richmond acquisition costs. The increase was partially offset by a decrease in sales-related expenses of the divested display product line. The decrease in the SG&A as a percentage of revenue in all periods is due to managements efforts to control expenses over a significant increase in revenue base.
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research, Development, and Engineering Expenses (RD&E) |
||||||||||||||
|
|
|
Fiscal 2011 |
|
Fiscal 2010 |
|
||||||||
|
|
|
|
|
|
|
||||||||
(Dollars in millions) |
|
|
Amount |
|
% of Revenues |
|
Amount |
|
% of Revenues |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended December 31 |
|
$ |
3.8 |
|
|
10 |
% |
$ |
3.9 |
|
|
15 |
% |
|
Six months ended December 31 |
|
$ |
7.1 |
|
|
11 |
% |
$ |
7.5 |
|
|
16 |
% |
RD&E for the three and six months ended December 31, 2010 decreased by $0.1 million and $0.4 million, respectively, as compared with the prior year period. The decrease in RD&E occurred primarily in the Metrology Solutions segment related to Display R&D cost savings. This decrease was partially offset by RD&E expense for the three and six months ended December 31, 2010 related to Zemetrics products which we acquired in the third quarter of fiscal 2010. Therefore, there are no corresponding expenses in the comparable prior year periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income |
||||||||||||||
|
|
|
Fiscal 2011 |
|
Fiscal 2010 |
|
||||||||
|
|
|
|
|
|
|
||||||||
(Dollars in millions) |
|
|
Amount |
|
% of |
|
Amount |
|
% of |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended December 31 |
|
$ |
1.3 |
|
|
4 |
% |
$ |
|
|
|
0 |
% |
|
Six months ended December 31 |
|
$ |
1.5 |
|
|
2 |
% |
$ |
0.2 |
|
|
1 |
% |
Other income for the three and six months ended December 31, 2010 increased by $1.3 million as compared with the prior year periods, primarily due to the purchase gain on the acquisition of the Richmond, California assets of ASML.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Benefit (Expense) |
||||||||||||||
|
|
|
Fiscal 2011 |
|
Fiscal 2010 |
|
||||||||
|
|
|
|
|
|
|
||||||||
(Dollars in millions) |
|
|
Amount |
|
Tax
Rate |
|
Amount |
|
Tax Rate |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended December 31 |
|
$ |
(0.1 |
) |
|
2 |
% |
$ |
0.3 |
|
|
24 |
% |
|
Six months ended December 31 |
|
$ |
(0.8 |
) |
|
8 |
% |
$ |
(0.4 |
) |
|
9 |
% |
Income tax benefit (expense) for the three and six months ended December 31, 2010 and 2009 included income taxes in state and foreign jurisdictions. Other than the adjustment associated with the valuation allowances on assets purchased in the ASML Richmond transaction as described above, there was no additional United States federal income tax expenses for the three and six months ended December 31, 2010 or income tax benefit in fiscal 2010 due to valuation allowances on deferred tax assets, including net operating loss carry-forwards in the United States. We continue to maintain a valuation allowance on all of our net deferred tax assets at December 31, 2010. In future periods, the valuation allowance could be reduced based upon sufficient evidence indicating that it is more likely than not that a portion of the deferred tax assets will be realized.
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Earnings (Loss) from Discontinued Operations, net of tax |
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Fiscal 2011 |
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Fiscal 2010 |
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(Dollars in millions) |
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Amount |
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% of |
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Amount |
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% of |
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Quarter ended December 31 |
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$ |
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0 |
% |
$ |
(0.6 |
) |
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2 |
% |
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Six Months ended December 31 |
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$ |
0.1 |
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0 |
% |
$ |
(2.5 |
) |
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5 |
% |
The loss from discontinued operations for the three and six months ended December 31, 2009 of $0.6 and $2.5 million, respectively, was due to severance and other closure costs, primarily related to the closure of our Singapore IC packaging operations of our Vision Systems product line.
25
TRANSACTIONS WITH STOCKHOLDER
Revenues from 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 $3.5 million and $2.0 million (10% and 8% of net revenues, respectively) for the three months ended December 31, 2010 and 2009, respectively. Revenues from Canon Inc. amounted to $7.0 million and $3.0 million (10% and 6% of net revenues, respectively) for the six months ended December 31, 2010 and 2009, respectively. Selling prices of products sold to Canon are based, generally, on the terms customarily given to distributors. At December 31, 2010 and June 30, 2010, there were, in the aggregate, $0.9 million and $0.7 million, respectively, of trade accounts receivable from Canon.
LIQUIDITY AND CAPITAL RESOURCES
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. Our principal source of liquidity is operating cash flows. In addition to operating cash flows, other significant factors that affect our overall management of liquidity include: capital expenditures, customer credit requirements, investments in businesses, and the availability of bank lines of credit.
At December 31, 2010, cash and marketable securities were $46.1 million, a decrease of $1.4 million from $47.5 million at June 30, 2010. Our marketable securities consist of $1.0 million in a United States Treasury Bill as security for bank guarantees and standby letters of credit. These letters of credit are used primarily overseas to cover certain warranty periods or to cover future product shipments. As of December 31, 2010, $0.4 million of standby letters of credit were outstanding. These letters of credit are expected to expire at varying dates through January 2012. The cash equivalents balance in our money market account, which is invested primarily in U.S. government securities, was $11.9 million as of December 31, 2010. We do not believe there is any risk to liquidity in the money market account, nor are there currently any limits on redemptions.
Cash flows from operating activities from continuing operations for the six months ended December 31, 2010 of $6.1 million was primarily due to an increase in net earnings, excluding non-cash items, partially offset by an increase in receivables.
Cash flows provided by investing activities for the six months ended December 31, 2010 decreased by $10.2 million as compared with the prior year period. This decrease was primarily related to the purchase of ASMLs Richmond, California assets for $7.1 million and a decrease in proceeds from marketable securities.
Cash flows used for financing activities in the six months ended December 31, 2010 remained flat as compared with the prior year period. For the six months ended December 31, 2010, there was a dividend payment of $0.7 million to a noncontrolling interest partially offset by an increase in proceeds from stock option exercises.
We currently have no debt or lines of credit. In the future, if the need for debt or credit lines arose there is no assurance that we would be able to secure such financing. We believe we have sufficient operating flexibility and cash reserves to maintain adequate amounts of liquidity and to meet our future liquidity requirements for at least the next twelve 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.
26
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 December 31, 2010. Our exposure to market risk is presented in Item 7a., Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the year ended June 30, 2010, filed with the Securities and Exchange Commission (the 2010 Annual Report).
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.
We identified a material weakness on May 10, 2010 related to inadequate controls regarding our accounting for unusual or complex transactions and, subsequently, concluded that our internal control over financial reporting was not effective at June 30, 2010. We began the process of implementing additional controls in our financial reporting process in the fourth quarter of fiscal 2010 and first quarter of fiscal 2011, including adding control processes to aid in identifying transactions that might have unusual or complex accounting issues, a process to enhance our analysis of accounting for unusual or complex transactions as they arise in accordance with accounting principles generally accepted in the United States of America, and have added external accounting resources to review our accounting for unusual or complex transactions. However, certain controls designed and implemented to address the identified material weakness in the period-end financial reporting process have not had a sufficient period of time to operate for our management to conclude that they are operating effectively at December 31, 2010.
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.
27
PART II - Other Information
Item 1A. Risk Factors
In addition to the information set forth below and elsewhere in this report, the reader should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our 2010 Annual Report, which could materially affect our business, financial condition, or future results. The risks described in our 2010 Annual Report 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.
Acquisitions may entail certain operational and financial
risks.
Our growth strategy includes expanding our products and
services, and we may seek acquisitions or make internal investments to
strategically expand our business. We regularly review potential acquisitions
of businesses, technologies, or products complementary to our business and
periodically engage in discussions regarding such possible acquisitions.
Acquisitions involve numerous risks, including some or all of the following:
substantial cash expenditures and capital investments; potentially dilutive
issuance of equity securities; incurrence of debt and contingent liabilities;
amortization of certain intangible assets; difficulties in assimilating the
operations and products of the acquired companies; diverting our managements
attention away from other business concerns; risks of entering markets in which
we have limited or no direct experience; the inability to manage the growth
expected for various acquisitions; potential loss of key employees of the
acquired companies in the process of integrating personnel with disparate
business backgrounds; and combining different corporate cultures.
We cannot assure you that any acquisition, including the acquisition of the assets of ASMLs Richmond, California, facility will result in long-term benefits to us or that our management will be able to effectively manage the acquired businesses. We may also incorrectly judge the value or worth of an acquired company or business or of a line of business to which we devote internal resources and funding. We have in the past disposed or divested ourselves of several companies or lines of business that previously were acquired by us or in which we internally invested, at a significant net loss to us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about our purchases during the quarter ended December 31, 2010 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act.
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Period |
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Total number of |
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Average price |
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Total number of |
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Approximate dollar |
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October 1, 2010 - October 31, 2010 |
|
|
1,116 |
|
$ |
10.17 |
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|
$ |
5.0 |
|
November 1, 2010 - November 31, 2010 |
|
|
1,573 |
|
$ |
11.07 |
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|
$ |
5.0 |
|
December 1, 2010 - December 31, 2010 |
|
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1,024 |
|
$ |
12.25 |
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|
$ |
5.0 |
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(1) |
All shares were repurchased from certain of our employees in satisfaction of withholding tax obligations arising from the vesting of their restricted stock. |
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(2) |
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 December 31, 2010, there were no repurchases of common stock in the open market. The share repurchases have been effected pursuant to plans 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 allows 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. |
28
Item 6. Exhibits
|
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|
(a) |
Exhibits: |
|
|
|
|
|
10.1 |
Asset Purchase Agreement, dated as of October 27, 2010, by and among Zygo Corporation, Zygo Richmond Corporation, and ASML, US, Inc. + |
|
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|
|
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 |
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|
|
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 |
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|
|
32.1 |
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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|
|
32.2 |
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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|
|
|
+ Confidential treatment has been requested for portions of this exhibit. |
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/ Chris L. Koliopoulos |
|
|
|
Chris L. Koliopoulos |
|
Chairman, President, and Chief Executive Officer |
|
|
|
/s/ Michael M. Vehlies |
|
|
|
Michael M. Vehlies |
|
Corporate Controller, |
|
(principal financial officer) |
|
|
|
Date: February 9, 2011 |
29
EXHIBIT INDEX
|
|
10.1 |
Asset Purchase Agreement, dated as of October 27, 2010, by and among Zygo Corporation, Zygo Richmond Corporation, and ASML, US, Inc. + |
|
|
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 |
|
|
+ Confidential treatment has been requested for portions of this exhibit. |