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UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the quarterly period ended March 31, 2013
   
or
   
£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the transition period from _________________________ to _________________________
   
Commission File Number 0-12944

 

Zygo Corporation
(Exact name of registrant as specified in its charter)

 

Delaware   06-0864500  
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)  
       
Laurel Brook Road, Middlefield, Connecticut   06455  
(Address of principal executive offices)   (Zip Code)  

 

(860) 347-8506
Registrant’s telephone number, including area code
 
N/A
(Former name, former address, and former fiscal year, if changed from last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    S YES £ NO

 

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).    S YES £ 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.

 

  Large accelerated filer £   Accelerated filer S
  Non-accelerated filer £ (Do not check if a smaller reporting company)   Smaller reporting company £

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

£ YES S NO

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

18,519,813 shares of Common Stock, $.10 Par Value, at May 1, 2013

1

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 revenue, bookings, market acceptance, growth rates, market opportunities and objectives of management of the Company for future operations are forward-looking statements. Forward-looking statements provide management’s 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,” “plan(s),” “strategy,” “project,” “should” and other words of similar meaning in connection with a discussion of current or 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 revenues to our major customers; manufacturing and supply chain risks; risks of order 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 integration of manufacturing facilities; risks related to any reorganization of our business; risks related to changes in management personnel; 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; and risks related to business acquisitions.

 

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 after the date of this Form 10-Q except as required by law. 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, 2012, filed with the Securities and Exchange Commission on September 13, 2012.

2

PART I - Financial Information

 

Item 1. Financial Statements

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED) (Amounts in thousands, except per share amounts)

 

   Three Months Ended
March 31,
   Nine Months Ended
March 31,
 
    2013    2012    2013    2012 
                     
Net revenue  $34,533   $38,472   $109,374   $122,504 
Cost of goods sold   19,273    19,032    61,338    61,805 
Gross profit   15,260    19,440    48,036    60,699 
                     
Selling, general and administrative expenses   9,362    8,702    26,451    26,272 
Research, development and engineering expenses   4,990    4,017    14,073    12,166 
Operating profit   908    6,721    7,512    22,261 
                     
Other income (expense)                    
Miscellaneous income (expense), net   (266)   (23)   (438)   (221)
Total other income (expense)   (266)   (23)   (438)   (221)
Income before income taxes, including noncontrolling interests   642    6,698    7,074    22,040 
Income tax benefit (expense)   890    (772)   (866)   (2,381)
Net income including noncontrolling interests   1,532    5,926    6,208    19,659 
Less: Net income attributable to noncontrolling interests   166    519    875    1,605 
Net income attributable to Zygo Corporation  $1,366   $5,407   $5,333   $18,054 
                     
Earnings per share attributable to Zygo Corporation                    
Basic earnings per share  $0.07   $0.30   $0.29   $1.01 
Diluted earnings per share  $0.07   $0.29   $0.28   $0.97 
                     
Weighted average shares outstanding                    
Basic shares   18,506    18,116    18,434    17,948 
Diluted shares   19,126    18,883    19,080    18,640 
3

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED) (Amounts in thousands)

 

   Three Months Ended
March 31,
   Nine Months Ended
March 31,
 
   2013   2012   2013   2012 
                     
Net income attributable to Zygo Corporation  $1,366   $5,407   $5,333   $18,054 
Other comprehensive income (loss)                    
Foreign currency translation adjustment   (623)   236    (258)   (1,007)
Comprehensive income   743    5,643    5,075    17,047 
Less: Comprehensive income (loss) attributable to noncontrolling interests   (25)   102    79    (159)
Comprehensive income attributable to Zygo Corporation  $768   $5,541   $4,996   $17,206 

 

See accompanying notes to condensed consolidated financial statements.

4

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(Amounts in thousands, except share and per share amounts)

 

   March 31, 2013   June 30, 2012 
Assets          
Current assets:          
Cash and cash equivalents  $79,901   $84,053 
Receivables, net of allowance for doubtful accounts of $694 and $760, respectively   31,574    31,601 
Inventories   30,680    27,760 
Prepaid expenses, prepaid taxes and other current assets   5,875    2,851 
Revenue recognized in excess of billings on uncompleted contracts   5,265    2,371 
Deferred income taxes   11,874    8,004 
Total current assets   165,169    156,640 
Marketable securities   688    729 
Property, plant and equipment, net   33,926    33,694 
Deferred income taxes   13,760    13,760 
Intangible assets, net   4,783    5,198 
Total assets  $218,326   $210,021 
           
Liabilities and Equity          
Current liabilities:          
Accounts payable  $6,931   $9,613 
Progress payments and deferred revenue   4,989    5,482 
Billings in excess of costs and estimated earnings on uncompleted contracts   7,807     
Accrued salaries and wages   3,351    6,198 
Other accrued expenses   5,263    7,234 
Income taxes payable       416 
Total current liabilities   28,341    28,943 
           
Deferred income taxes   2,580    2,580 
Other long-term liabilities   5,181    2,518 
Total liabilities   36,102    34,041 
           
Commitments and contingencies          
Equity:          
Common stock, $0.10 par value per share:           
40,000,000 shares authorized;
20,832,269 shares issued (20,499,861 at June 30, 2012);
18,509,482 shares outstanding (18,239,941 at June 30, 2012)
   2,083    2,050 
Additional paid-in capital   179,221    176,305 
Retained earnings   27,586    22,253 
Accumulated other comprehensive loss:          
Currency translation effects   (523)   (186)
Treasury stock, at cost, 2,322,787 shares (2,259,920 at June 30, 2012)   (27,973)   (26,797)
Total shareholders’ equity - Zygo Corporation   180,394    173,625 
Noncontrolling interests   1,830    2,355 
Total equity   182,224    175,980 
Total liabilities and equity  $218,326   $210,021 

 

See accompanying notes to condensed consolidated financial statements.

5

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(Amounts in thousands)

 

   Nine Months Ended March 31, 
   2013   2012 
Cash provided by operating activities:          
Net income including noncontrolling interests  $6,208   $19,659 
Adjustments to reconcile net income to cash provided by operating activities from continuing operations:          
Depreciation and amortization   4,187    4,292 
Deferred income taxes   (3,494)    
Provision for doubtful accounts   (67)   (360)
Compensation cost related to share-based payment arrangements   4,235    3,332 
Excess tax benefits from share-based payment arrangements       (445)
Other   569    314 
Changes in operating accounts:          
Receivables   (768)   8,031 
Inventories   (2,813)   742 
Prepaid expenses, prepaid taxes and other current assets   (2,800)   (425)
Net billings in excess of revenue recognized on uncompleted contracts   4,914    562 
Accounts payable, accrued expenses and taxes payable   (4,788)   (4,601)
Net cash provided by operating activities from continuing operations   5,383    31,101 
Net cash used for operating activities from discontinued operations       (281)
Cash used for investing activities:          
Additions to property, plant and equipment   (4,288)   (2,515)
Purchase of marketable securities       (999)
Additions to intangibles   (236)   (209)
Investments and acquisitions   (3,155)    
Proceeds from the sale and maturity of marketable securities   134    2,127 
Net cash used for investing activities   (7,545)   (1,596)
Cash provided by (used for) financing activities:          
Dividend payments to noncontrolling interest   (1,742)   (2,192)
Employee stock purchase   40     
Excess tax benefits from share-based payment arrangements       445 
Repurchase of restricted stock   (1,176)   (401)
Exercise of employee stock options   1,066    2,882 
Net cash provided by (used for) financing activities   (1,812)   734 
Effect of exchange rate changes on cash and cash equivalents   (178)   (697)
Net increase (decrease) in cash and cash equivalents   (4,152)   29,261 
Cash and cash equivalents, beginning of period   84,053    60,039 
Cash and cash equivalents, end of period  $79,901   $89,300 

 

Supplemental Cash Flow Information

 

Net cash paid for income taxes was $4,819 and $2,860 for the nine months ended March 31, 2013 and 2012, respectively. Purchases of property, plant and equipment included in accounts payable was $187 and $281 for the nine months ended March 31, 2013 and 2012, respectively.

 

See accompanying notes to condensed consolidated financial statements.

6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except 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, research, defense, life sciences 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”). Zygo’s reporting currency is the U.S. dollar. The functional currencies of our foreign subsidiaries are their local currencies; and, as such, amounts included in the condensed 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. All transactions and accounts with the subsidiaries are eliminated from the condensed consolidated financial statements. The results of operations for the three and nine months ended March 31, 2013 are not necessarily indicative of the results to be expected for the full fiscal year.

 

In management’s opinion, the accompanying balance sheets and related interim statements of income, comprehensive income, and cash flows 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, 2012, including items incorporated by reference therein.

 

Recent Accounting Guidance Not Yet Adopted

In February 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The objective of ASU No. 2013-02 is to improve the reporting of reclassifications out of accumulated other comprehensive income (“AOCI”). Entities are required to disclose changes in AOCI balances by component and significant items reclassified out of AOCI. The effective date for ASU No. 2013-02 for Zygo is the first quarter of fiscal year 2014.

 

Reclassifications

Certain amounts included in the condensed consolidated statements of cash flows for the prior year have been reclassified to conform with the current year presentation of “Net billings in excess of revenue recognized on uncompleted contracts.” In fiscal 2012, net billings in excess of revenue recognized on uncompleted contracts of $562 was reported as part of “Accounts payable, accrued expenses and taxes payable” and is now broken out into its own caption.

 

Note 2: Earnings Per Share

 

For the three and nine months ended March 31, 2013, outstanding stock options and restricted stock awards for 361,938 shares and 230,791 shares, respectively, (for the three and nine months ended March 31, 2012, outstanding stock options and restricted stock awards for 32,378 shares and 270,143 shares, respectively) of the Company’s common stock 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 March 31,   Nine Months Ended March 31, 
   2013   2012   2013   2012 
Basic weighted average shares outstanding   18,505,621    18,116,470    18,433,765    17,947,928 
Dilutive effect of stock options and and restricted shares   620,577    766,681    645,740    692,166 
Diluted weighted average shares outstanding   19,126,198    18,883,151    19,079,505    18,640,094 
7

Note 3: Shareholders’ Equity

 

The following table sets forth shareholders’ equity and noncontrolling interest for the nine months ended March 31, 2013 and 2012:

 

   Nine Months Ended March 31, 
   2013   2012 
    Shareholders’
Equity
Zygo Corp.
    Non-Controlling
Interest
    Total
Equity
    Shareholders’
Equity
Zygo Corp.
    Non-Controlling
Interests
    Total
Equity
 
Equity, beginning of period  $173,625   $2,355   $175,980   $124,720   $3,367   $128,087 
Net income   5,333    875    6,208    18,054    1,605    19,659 
Foreign currency translation effect   (337)   79    (258)   (848)   (159)   (1,007)
Total   4,996    954    5,950    17,206    1,446    18,652 
Share-based compensation   4,620        4,620    3,332        3,332 
Repurchase of restricted stock   (1,176)       (1,176)   (401)       (401)
Employee stock purchase   40        40             
Exercise of employee stock options and related tax effect   1,066        1,066    2,882        2,882 
Dividends attributable to noncontrolling interests       (1,101)   (1,101)       (2,192)   (2,192)
Purchase of subsidiary shares from noncontrolling interest   (2,777)   (378)   (3,155)            
Equity, end of period  $180,394   $1,830   $182,224   $147,739   $2,621   $150,360 

 

Note 4: Changes in Zygo Corporation Ownership Interest in Subsidiary

 

Zygo Corporation purchased the outstanding noncontrolling interest in our German subsidiary, ZygoLOT, for $3,155 in the first quarter of fiscal 2013. The following table sets forth the effects on equity of changes in our ownership interest of ZygoLOT.

 

   Nine Months Ended
March 31,
 
   2013   2012 
         
Net income attributable to Zygo Corporation  $5,333   $18,054 
           
Transfers to the noncontrolling interest          
Decrease in Zygo Corporation paid in-capital for purchase of noncontrolling interest   2,749     
Net transfers to noncontrolling interest   2,749     
           
Change from net income attributable to Zygo Corporation shareholders and transfers to noncontrolling interest  $2,584   $18,054 
8

Note 5: Marketable Securities

 

Marketable securities as of March 31, 2013 consisted of a mutual fund investment comprised primarily of corporate securities classified as a trading security. 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 net income and are derived using the specific identification method for determining the cost of securities sold.

 

Trading securities consisted of a mutual fund investment corresponding to elections made in our deferred compensation program. We make quarterly distributions in accordance with the deferred compensation program agreement. The following table sets forth the beginning balance at July 1, 2012 and 2011, gross unrealized gains and losses, contributions, redemptions and fair value of trading securities at March 31, 2013 and 2012:

 

   Balance   Gross   Gross             
   Beginning of   Unrealized   Unrealized         Ending 
   Fiscal Year   Gains   Losses   Contributions   Redemptions   Balance 
March 31, 2013                        
Marketable Securities  $729    $93    $    $    $(134)   $688 
                               
March 31, 2012                              
Marketable Securities  $980   $99   $(134)  $   $(127)  $818 

 

Note 6. Fair Value Measurements

 

Fair value measurement disclosures utilize a valuation hierarchy for determining the grouping of the inputs used. 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 management’s assumptions used to measure assets and liabilities at fair value. A financial asset or liability classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

 

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 for similar products. The carrying value of other financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities, approximates fair value due to their short maturities.

 

The following tables provide the assets and liabilities carried at fair value measured on a recurring basis as of March 31, 2013 and June 30, 2012:

 

Assets Measured at Fair Value:

 

       Fair value measurements at March 31, 2013 
   Total carrying
value at
March 31,
   Quoted prices
in active
markets
   Significant
other
observable
inputs
   Significant
unobservable
inputs
 
   2013   (Level 1)   (Level 2)   (Level 3) 
Money market funds  $23,734   $23,734   $   $ 
Trading securities   688    688         
Foreign currency hedge  $246        246     
Total  $24,668   $24,422   $246   $ 

9

Assets and Liabilities Measured at Fair Value:

 

       Fair value measurements at June 30, 2012 
   Total carrying
value at
   Quoted prices
in active
markets
   Significant
other
observable
inputs
   Significant
unobservable
inputs
 
   June 30, 2012   (Level 1)   (Level 2)   (Level 3) 
Money market funds  $19,931   $19,931   $   $ 
Trading securities   729    729         
Foreign currency hedge   (3)       (3)    
Total  $20,657   $20,660   $(3)  $ 

 

Note 7: Share-Based Payments

 

We recorded share-based compensation expense for the three months ended March 31, 2013 and 2012 of $1,479 and $1,014, respectively, with related tax benefits of $532 and $365, respectively. We also recorded share-based compensation expense for the nine months ended March 31, 2013 and 2012 of $4,235 and $3,332, respectively, with related tax benefits of $1,524 and $1,200, respectively.

 

Stock Options

We use the Black-Scholes option-pricing model to calculate the fair value of stock option awards. The key assumptions for this valuation method include the expected term of the option, stock price volatility, risk-free interest rate, dividend yield and exercise price. 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 three months ended March 31, 2013 and 2012 was $9.45 and $10.50, respectively. The weighted-average fair value of stock option grants for the nine months ended March 31, 2013 and 2012 was $12.64 and $7.21, respectively. During the three months ended March 31, 2013 and 2012, we granted stock options for an aggregate of 50,000 and 6,500 shares of common stock. During the nine months ended March 31, 2013 and 2012, we granted stock options for an aggregate of 172,934 and 229,562 shares of common stock, respectively.

 

The table below indicates the key assumptions used in the option valuation calculations for options granted in the periods presented:

 

   Three Months Ended March 31,   Nine Months Ended March 31, 
   2013   2012   2013   2012 
Term   7.3 Years    6.6 Years    7.3 Years    6.6 Years 
Volatility   59.2%   59.5%   59.2%   59.5%
Dividend yield                
Risk-free interest rate   1.4%   1.5%   1.2-1.4%   1.5%

 

Restricted Stock

Our share-based compensation expense also includes the effects of the issuance of 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. There were no shares of restricted stock issued during the three months ended March 31, 2013 and 2012. During the nine months ended March 31, 2013 and 2012, an aggregate of 162,901 and 146,412 shares, respectively, of restricted stock units were issued at a weighted average stock price at date of grant of $18.49 and $13.24, respectively. Generally, the restrictions on the restricted stock units granted to employees prior to January 1, 2011 lapse at a rate of 50% on the three year anniversary and the remaining 50% on the fourth year anniversary. Restrictions on restricted stock units granted to employees after January 1, 2011 lapse at a rate of 25% each year.

10

Note 8: Receivables

 

The following table sets forth the components of accounts receivable at March 31, 2013 and June 30, 2012:

 

   March 31,
2013
   June 30,
2012
 
Trade  $32,268   $32,361 
Allowance for doubtful accounts   (694)   (760)
   $31,574   $31,601 

 

Note 9: Inventories

 

Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. The following table sets forth the components of inventories at March 31, 2013 and June 30, 2012:

 

   March 31,
2013
   June 30,
2012
 
Raw materials and manufactured parts  $14,170   $12,753 
Work in process   12,940    12,031 
Finished goods   3,570    2,976 
   $30,680   $27,760 

 

Note 10: Property, Plant and Equipment

 

Property, plant and equipment are stated at cost less impairments. Maintenance and repairs are charged to expense as incurred. Management evaluates, on an ongoing basis, the carrying value of 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. The following table sets forth the components of property, plant and equipment at March 31, 2013 and June 30, 2012:

 

   March 31,   June 30,   Estimated Useful Life 
   2013   2012   (Years) 
Land and improvements  $4,030   $4,030     
Building and improvements   24,740    24,228    15-40 
Machinery, equipment and office furniture   61,728    58,259    3-8 
Leasehold improvements   1,097    964    1-5 
Construction in progress   980    1,625     
    92,575    89,106      
Accumulated depreciation   (58,649)   (55,412)     
   $33,926   $33,694      

 

Depreciation expense was $1,193 and $1,168 for the three months ended March 31, 2013 and 2012, respectively, and $3,537 and $3,670 for the nine months ended March 31, 2013 and 2012, respectively.

11

Note 11: Warranty

 

A limited warranty is provided on our products for periods ranging from 3 to 12 months, and allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires management to make estimates of product return rates and expected costs to repair or replace products under warranty. If actual return rates or repair and replacement costs, or both, differ significantly from management estimates, adjustments to the expense will be required.

 

The following table is a reconciliation of the beginning and ending balances of the accrued warranty liability, which is included in “Other accrued expenses” in the condensed consolidated balance sheets:

 

   Nine Months Ended March 31, 
   2013   2012 
Beginning balance  $1,188   $1,333 
Reductions for payments made   (665)   (938)
Changes in accruals related to pre-existing warranties   (292)   202 
Changes in accruals related to warranties made in the current period   385    661 
Ending balance  $616   $1,258 

 

Note 12: Intangible Assets

 

Intangible assets includes patents, customer relationships and technology and a covenant not-to-compete. The cost of patents 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. As of March 31, 2013, all payments required by this agreement have been made. We amortized the value of the non-compete over four years on a declining-balance method.

 

The following table sets forth the components of intangible assets, as of March 31, 2013 and June 30, 2012:

 

   March 31,   June 30, 
   2013   2012 
Patents  $7,169   $6,934 
Customer relationships and technology   2,163    2,163 
Covenant not-to-compete       851 
    9,332    9,948 
Accumulated amortization   (4,549)   (4,750)
Total  $4,783   $5,198 

 

Amortization expense related to intangibles was $211 and $203 for the three months ended March 31, 2013 and 2012, respectively, compared with $650 and $623 for the nine months ended March 31, 2013 and 2012, respectively. This amortization expense related to intangible assets is included in “Cost of goods sold” and “Selling, general and administrative expenses” in the condensed consolidated statements of operations.

 

Based on the carrying amount of the intangible assets as of March 31, 2013, the estimated future amortization expense is as follows:

 

   Estimated Future Amortization
   Expense 
Three months ending June 30, 2013  $271 
Fiscal year ending June 30, 2014   826 
Fiscal year ending June 30, 2015   815 
Fiscal year ending June 30, 2016   638 
Fiscal year ending June 30, 2017   499 
Fiscal year ending June 30, 2018   377 
Thereafter   1,357 
Total  $4,783 
12

Note 13: Segment and Major Customer Information

 

Our business is organized into two operating divisions – Metrology Solutions (Metrology Solutions segment) and Optical Systems (Optical Systems segment). Consistent with our business structure, we report segments as Metrology Solutions and Optical Systems. The Metrology Solutions segment includes 3-Dimensional surface metrology products, precision positioning systems and custom-engineered solutions used in the semiconductor capital equipment, research, defense and industrial markets. The Optical Systems segment designs, develops and manufactures high precision optical components and electro-optical systems used in the semiconductor capital equipment, defense, life sciences and research markets. The chief operating decision-maker uses this information to allocate resources.

 

The following table sets forth segment net revenue, gross profit and gross margin for the three and nine months ended March 31, 2013 and 2012:

 

   Three Months Ended March 31,   Nine Months Ended March 31, 
   2013   2012   2013   2012 
Metrology Solutions                    
Net revenue  $21,273   $24,161   $68,566   $79,482 
Gross profit  $11,796   $14,033   $37,724   $46,474 
Gross margin   55%   58%   55%   58%
                     
Optical Systems                    
Net revenue  $13,260   $14,311   $40,808   $43,022 
Gross profit  $3,464   $5,407   $10,312   $14,225 
Gross margin   26%   38%   25%   33%
                     
Total                    
Net revenue  $34,533   $38,472   $109,374   $122,504 
Gross profit  $15,260   $19,440   $48,036   $60,699 
Gross margin   44%   51%   44%   50%

 

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.

 

The following table sets forth revenue by geographic area:

 

   Three Months Ended March 31,   Nine Months Ended March 31, 
   2013   2012   2013   2012 
Americas  $18,744   $18,270   $57,361   $64,730 
Japan   6,728    7,228    18,395    19,707 
China   2,619    5,288    13,655    15,191 
Europe   4,914    5,093    14,134    15,199 
Pacific Rim   1,528    2,593    5,829    7,677 
Total  $34,533   $38,472   $109,374   $122,504 

 

Revenue from one customer accounted for 11% of net revenue for the three months ended March 31, 2013, and revenue from two customers accounted for 13% and 10% of net revenue for the three months ended March 31, 2012. Revenue from each of two customers accounted for 11% of net revenue for the nine months ended March 31, 2012. No customer accounted for over 10% of net revenue for the nine months ended March 31, 2013. Revenues from these customers were included in both reporting segments.

13

Note 14: Transactions with Shareholder

 

Revenue from Canon Inc., a shareholder, 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 $3,694 and $4,970 (11% and 13% of net revenue, respectively) for the three months ended March 31, 2013 and 2012, respectively. For the nine months ended March 31, 2013 and 2012, revenue from Canon amounted to $9,362 and $14,023 (9% and 11% of net revenue, respectively). Selling prices of products sold to Canon are based, generally, on the terms customarily given to distributors. At March 31, 2013 and June 30, 2012, there were, in the aggregate, $1,871 and $1,604, respectively, of trade accounts receivable from Canon.

 

Note 15: Derivatives and Hedging Activities

 

We enter into foreign currency forward contracts to reduce the impact of adverse fluctuations on income associated with foreign currency exchange rate changes. We do not enter into any derivative transactions for speculative purposes. The contracts are not designated as cash flow, fair value, or net investment hedges as defined under authoritative guidance on accounting for derivative instruments and hedging activities. These contracts are marked-to-market with changes in fair value recorded in the condensed consolidated statements of operations in “Miscellaneous income (expense), net.” The 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 March 31, 2013, there were nine currency contracts outstanding involving our Japanese operation with notional amounts aggregating $4,200. These foreign currency hedges are not designated as hedging instruments. For the three months ended March 31, 2013 and 2012, we recognized net unrealized gains of $47 and $90, respectively, from foreign currency forward contracts. For the nine months ended March 31, 2013 and 2012, we recognized net unrealized gains of $263 and $160, respectively, from foreign currency forward contracts. These unrealized losses and gains are essentially offset by foreign exchange gains and losses on intercompany balances recorded by our subsidiaries and are recorded in “Miscellaneous income (expense), net” in our condensed consolidated statements of operations.

 

The following table summarizes the fair value of derivative instruments as of March 31, 2013 and June 30, 2012:

 

Derivatives not designated as hedging instruments   Balance Sheet Location
           
March 31, 2013 Number of foreign exchange contracts: 9   Prepaid expenses, prepaid taxes and other current assets $246
           
June 30, 2012 Number of foreign exchange contracts: 9   Prepaid expenses, prepaid taxes and other current assets $  14
        Other accrued expenses $  17
14

Note 16: Income Taxes

 

   Three Months Ended March 31,   Nine Months Ended March 31, 
   2013   2012   2013   2012 
                 
   Amount   Tax
Rate %
   Amount   Tax
Rate %
   Amount   Tax
Rate %
   Amount   Tax
Rate %
 
                                         
Income tax (benefit) expense  $(890)      $772    12%  $866    12%  $2,381    11%

  

The income tax benefit for the three months ended March 31, 2013 resulted from the inclusion of research and development tax credits for fiscal 2013 and 2012 in the tax provision after the extension of the research and development tax credits as part of the American Taxpayer Relief Act of 2012 was signed into law during the third quarter of fiscal 2013. The income tax provision for the third quarter of fiscal 2013 also included U.S. federal, state and foreign taxes. Income tax expense for the nine months ended March 31, 2013 included the research and development tax credits and a tax benefit of $928 to correct an error in recording deferred tax asset balances as of June 30, 2012 primarily related to fixed assets recorded in an acquisition. Income tax expense for the three and nine months ended March 31, 2012 included income taxes for state and foreign jurisdictions only. In the prior year for both the three and nine month periods ended March 31, 2012, a valuation allowance was in place on substantially all net deferred tax assets, including those in the United States, effectively eliminating U.S. federal tax expense. Substantially all of the valuation allowance against deferred tax assets was eliminated at the end of fiscal 2012. The Company is subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax audit or tax adjustments for years prior to June 30, 2007, except to the extent there are NOLs and credits arising from any of those years. Those years are subject to audit at the time the NOLs or credits available from those years are utilized. The Company is no longer subject to state and foreign income tax audit or tax adjustments for years prior to June 30, 2006.

 

In the normal course of business, we analyze for uncertain tax positions and adjust our unrecognized tax benefits or liabilities accordingly. For the three and nine months ended March 31, 2013, we recognized an additional liability of $44 and $451, respectively, for changes in tax positions. We are not aware of any tax positions that would create a material adjustment to the unrecognized tax benefits during the next twelve months.

 

Note 17: Commitments and Contingencies

 

On November 12, 2010, we completed a transaction with ASML US, Inc. (“ASML”) to purchase substantially all the assets of their Richmond, California operations. These assets were acquired for $12,475, of which $7,142 was in cash, and the balance was future consideration, with a net present value of $5,333 using a discount factor of 14%, based on the level of shipments to ASML over the subsequent three years beginning January 1, 2011. On the acquisition date, the future consideration was recorded as a liability, 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 into with ASML that provided for a volume discount.

 

From time to time we are subject to certain legal proceedings and claims that arise in the normal course of business.

 

We are aware of certain levels of environmental contamination that are below reportable levels on one of our properties. 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. At this time, 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 a reserve for the exposure related to the environmental contamination when and if it is both probable that a liability has been incurred and the amount of any liability can be reasonably estimated, whether or not a claim has been asserted.

15

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

OVERVIEW

 

Zygo Corporation is a worldwide supplier of optical metrology instruments, precision optics and electro-optical design and manufacturing services, serving customers in the semiconductor capital equipment, research, defense, life sciences and industrial markets. We conduct the majority of our manufacturing in a 153,500 square foot facility in Middlefield, Connecticut, a 55,300 square foot facility in Richmond, California, and a 22,560 square foot facility in Tucson, Arizona. We are transitioning the Tucson operations into our recently purchased 110,020 square-foot facility which will then be the manufacturing location for our Tucson operation.

 

Bookings for the third quarter of fiscal 2013 were $50.2 million, an increase of 10% compared with bookings of $45.6 million in the third quarter of fiscal 2012 and an increase of 18% compared with bookings of $42.8 million in the second quarter of fiscal 2013. Bookings for the Metrology Solutions segment were 80% of the total; Optical Systems segment bookings were 20%. Backlog was $88.9 million at March 31, 2013, compared with $76.8 million at March 31, 2012, and $73.2 million at December 31, 2012. Over 40% of the bookings in the third quarter of fiscal 2013 were from one customer. Shipments related to these orders are expected to commence during the first quarter of fiscal 2014. Bookings and backlog consist of orders expected to be delivered and recognized as revenue within twelve months. Bookings are generally converted to revenue between one month and one year from receipt of order.

 

Our effective tax rate increased as a result of the reversal of the valuation allowance on deferred tax assets in the fourth quarter of fiscal 2012. Previous years’ results benefitted from the offset effect of reversing valuation allowance against tax provision, essentially eliminating U.S. Federal income tax expense. The valuation allowance against deferred tax assets was eliminated at the end of fiscal 2012 due to improved operating performance and improved business outlook. Current year results reflect tax expense at the full effective tax rate, modified by amounts recorded to adjust prior period deferred tax asset balances as components of the fiscal 2013 year tax provision, as well as the inclusion of research and development credits in the third quarter of fiscal 2013 after passage of legislation in January 2013 extending the credit.

16

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, revenue, and expenses, and related disclosures at the date of our condensed consolidated financial statements. On an ongoing 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, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012, management considers the Company’s policies on revenue recognition and allowance for doubtful accounts; inventory valuation; other-than-temporary impairment of marketable securities; share-based compensation; warranty costs; accounting for income taxes; valuation of long-lived assets; and accruals for health insurance to be critical accounting policies due to the estimates, assumptions and application of judgment involved in each.

 

Recent Accounting Guidance Not Yet Adopted

In February 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The objective of ASU No. 2013-02 is to improve the reporting of reclassifications out of accumulated other comprehensive income (“AOCI”). Entities are required to disclose changes in AOCI balances by component and significant items reclassified out of AOCI. The effective date for ASU No. 2013-02 for Zygo is the first quarter of fiscal year 2014.

17

Results of Operations

 

Net Revenue by Segment

 

   Fiscal 2013   Fiscal 2012  
(Amounts in millions)  Amount   Percentage
of Total
   Amount   Percentage
of Total
 
Quarter ended March 31                    
                     
Metrology Solutions  $21.3    62%  $24.2    63%
Optical Systems   13.2    38%   14.3    37%
Total  $34.5    100%  $38.5    100%
                     
Nine Months ended March 31                    
                     
Metrology Solutions  $68.6    63%  $79.5    65%
Optical Systems   40.8    37%   43.0    35%
Total  $109.4    100%  $122.5    100%

 

Net revenue for the three months ended March 31, 2013 decreased $4.0 million, or 10%, compared with the prior year period, reflecting decreases in the Metrology Solutions segment revenue of 12% and in the Optical Systems segment of 7%. The decrease in the Metrology Solutions segment was primarily due to volume decreases of $3.5 million in instruments product lines primarily related to optical profilers and, to a lesser degree, large aperture systems. The decrease in instruments revenue was partially offset by an increase of $0.6 million in semiconductor-related products despite the still sluggish semiconductor industry demand. Revenue for products introduced in new semiconductor product lines more than offset a decrease in lithography revenue. The decrease in the Optical Systems segment revenue was primarily due to volume decreases in optical components of $0.4 million and the extreme precision optics group of $0.7 million related to the semiconductor capital equipment market.

 

Net revenue for the nine months ended March 31, 2013 decreased $13.1 million, or 11%, compared with the prior year period, reflecting decreases in the Metrology Solutions segment revenue of 14% and in the Optical Systems segment of 5%. The decrease in the Metrology Solutions segment revenue of $10.9 million was primarily due to volume decreases in instruments products of $5.3 million and semiconductor-related products of $5.6 million attributable to reduced capital spending across a number of industries, including automotive and semiconductor. Revenue of the Optical Systems segment declined $2.2 million year over year with volume decreases in contract manufacturing of $2.7 million and optical components of $2.5 million, partially offset by an increase in the extreme precision optics group of $3.0 million.

 

Revenue from one customer accounted for 11% of net revenue for the three months ended March 31, 2013, and revenue from two customers accounted for 13% and 10% of net revenue for the three months ended March 31, 2012. Revenue from each of two customers accounted for 11% of net revenue for the nine months ended March 31, 2012. No customer accounted for over 10% of net revenue for the nine months ended March 31, 2013. Revenues from these customers were included in both reporting segments.

 

Revenue denominated in U.S. dollars for the three months ended March 31, 2013 and 2012 were 73% and 80%, respectively, and 76% and 81% for the nine months ended March 31, 2013 and 2012, respectively. The balance of revenue was denominated in Euro, Yen and Yuan. Revenue denominated in foreign currency is 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 revenue from these markets and our consolidated financial position and results of operations.

18
Gross Margin by Segment                 
                  
   Fiscal 2013     Fiscal 2012 
                
(Amounts in millions)  Gross Profit  Gross Margin   Gross Profit   Gross Margin 
                  
Quarter ended March 31                    
                     
Metrology Solutions  $ 11.8   55%  $14.0    58%
Optical Systems    3.5   26%   5.4    38%
Total  $ 15.3   44%  $19.4    51%
                     
Nine months ended March 31                    
                     
Metrology Solutions  $ 37.7   55%  $46.5    58%
Optical Systems    10.3   25%   14.2    33%
Total  $ 48.0   44%  $60.7    50%

 

Gross margin for the three months ended March 31, 2013 was 44%, a decrease of seven percentage points from the comparable prior year period. Within the Metrology Solutions segment, the decrease in gross margin for the three months ended March 31, 2013 compared with the prior year period was primarily due to overall lower volumes resulting in a decrease in labor and overhead absorption and, to a lesser extent, product mix with a lower percentage of revenue derived from higher-margin product shipments. The gross margin of the Optical Systems segment for the three months ended March 31, 2013 decreased by twelve percentage points compared with the prior year period due to lower volumes resulting in a decrease in labor and overhead absorption and lower than expected margins achieved on certain custom orders.

 

Gross margin for the nine months ended March 31, 2013 was 44%, a decrease of six percentage points from the comparable prior year period. Within the Metrology Solutions segment, the decrease in gross margin was primarily due to lower margins achieved on certain custom orders in the instruments product line and the negative effect of lower volumes on labor and overhead absorption. The gross margin of the Optical Systems segment for the nine months ended March 31, 2013 decreased by eight percentage points compared with the prior year period, primarily due to a decrease in labor and overhead absorption on lower volumes.

 

Selling, General and Administrative Expenses (“SG&A”)        
         
   Fiscal 2013   Fiscal 2012 
(Amounts in millions)  Amount   Percentage of
Net Revenue
   Amount   Percentage of
Net Revenue
 
                 
Quarter ended March 31  $9.4    27%  $8.7    23%
Nine months ended March 31  $26.5    24%  $26.3    21%

 

SG&A increased in the three and nine months ended March 31, 2013 by $0.7 million and $0.2 million, respectively, from the comparable prior year period, primarily due to increased employee benefit and compensation expenses.

19
Research, Development and Engineering Expenses (“RD&E”)        
         
   Fiscal 2013   Fiscal 2012 
(Amounts in millions)  Amount   Percentage of
Net Revenue
   Amount   Percentage of
Net Revenue
 
                 
Quarter ended March 31  $5.0    15%  $4.0    10%
Nine months ended March 31  $14.1    13%  $12.2    10%

 

RD&E for the three and nine months ended March 31, 2013 increased by $1.0 million and $1.9 million, respectively, compared with the prior year periods, primarily due to increases in spending in semiconductor-related product lines and lithography stage and advanced packaging metrology.

 

Other Income (Expense)                
                 
   Fiscal 2013   Fiscal 2012 
(Amounts in millions)  Amount   Percentage of
Net Revenue
   Amount   Percentage of
Net Revenue
 
                 
Quarter ended March 31  $(0.3)   0%  $    0%
Nine months ended March 31  $(0.4)   0%  $(0.2)   0%

 

Other expense for the three and nine months ended March 31, 2013 consisted primarily of foreign currency remeasurement adjustments and interest on a contingent liability. Other expense for the nine months ended March 31, 2012 included interest on a contingent liability, partially offset by a gain recorded due to a reduction in the anticipated future consideration expected to be paid related to a previous acquisition.

 

Income Tax (Benefit) Expense                
                 
   Fiscal 2013   Fiscal 2012 
(Amounts in millions)  Amount   Tax Rate %   Amount   Tax Rate % 
                 
Quarter ended March 31  $(0.9)      $0.8    12%
Nine months ended March 31  $0.9    12%  $2.4    11%

 

The income tax benefit for the three months ended March 31, 2013 resulted from the inclusion of research and development tax credits for fiscal 2013 and 2012 in the tax provision after the extension of the research and development tax credits as part of the American Taxpayer Relief Act of 2012 was signed into law during the third quarter of fiscal 2013. The income tax provision for the third quarter of fiscal 2013 also included U.S. federal, state and foreign taxes. Income tax expense for the nine months ended March 31, 2013 included the research and development tax credits and a tax benefit of $0.9 million to correct an error in recording deferred tax asset balances as of June 30, 2012 primarily related to fixed assets recorded in an acquisition. Income tax expense for the three and nine months ended March 31, 2012 included income taxes for state and foreign jurisdictions only. In the prior year for both the three and nine month periods ended March 31, 2012, a valuation allowance was in place on substantially all net deferred tax assets, including those in the United States, effectively eliminating U.S. federal tax expense. Substantially all of the valuation allowance against deferred tax assets was eliminated at the end of fiscal 2012.

20

TRANSACTIONS WITH SHAREHOLDER

 

Revenue from Canon Inc., a shareholder, 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 $3.7 million and $5.0 million (11% and 13% of net revenue, respectively) for the three months ended March 31, 2013 and 2012, respectively. For the nine months ended March 31, 2013 and 2012, revenue from Canon amounted to $9.4 million and $14.0 million (9% and 11% of net revenue, respectively). Selling prices of products sold to Canon are based, generally, on the terms customarily given to distributors. At March 31, 2013 and June 30, 2012, there were, in the aggregate, $1.9 million and $1.6 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 operating, investing and financing activities. Our principal source of liquidity is cash reserves and operating cash flows. In addition to operating cash flows, other significant factors that could affect our overall management of liquidity include: capital expenditures, customer credit requirements, investments in businesses and the availability of bank lines of credit.

 

At March 31, 2013, cash and cash equivalents were $79.9 million, a decrease of $4.2 million from $84.1 million at June 30, 2012. Cash in a money market account is invested primarily in U.S. government securities. We do not believe there is any risk to liquidity in the money market account, nor are there currently any limits on redemptions.

 

Cash provided by operating activities from continuing operations decreased period over period by $25.7 million to $5.4 million, due primarily to a decrease in net income, net of changes in deferred taxes, of $16.9 million and a decrease in cash flows from fiscal 2012 to fiscal 2013 attributable to increases in receivables. The receivable balance is essentially equivalent to the level at June 30, 2012.

 

Cash used for investing activities increased $5.9 million over the prior year period to $7.5 million, due primarily to the purchase of the noncontrolling interest of ZygoLOT for 2.5 million ($3.2 million) and an increase in additions to property, plant and equipment of $1.8 million.

 

Cash used for financing activities increased to $1.8 million from the prior year period cash provided by financing activities of $0.7 million. There was $1.8 million less funds generated from the exercise of employee stock options in fiscal 2013 compared with fiscal 2012.

 

The Company currently does not have lines of credit in place. In the future, if the need for debt or credit lines arises, there is no assurance that we would be able to secure such financing. We believe we have sufficient cash flows from operations and cash reserves to maintain adequate amounts of liquidity and to meet our future liquidity requirements for at least the next twelve months.

21

OFF-BALANCE SHEET ARRANGEMENTS

 

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt, or operating parts of our business that are not consolidated into our financial statements. We have not guaranteed any obligations of a third party.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

There have been no material changes in our quantitative and qualitative market risk disclosures during the three months ended March 31, 2013. Please refer to Item 7a., “Quantitative and Qualitative Disclosures about Market Risk,” of our Annual Report on Form 10-K for the year ended June 30, 2012, filed with the Securities and Exchange Commission (the “2012 Annual Report”) for a discussion of our exposure to market risk.

 

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 management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

We identified a material weakness as of June 30, 2012 related to inadequate design of processes, procedures and controls regarding our accounting for income taxes and, subsequently, concluded that our internal control over financial reporting was not effective at June 30, 2012. During the period since June 30, 2012, we have implemented, and are continuing to implement, additional controls in our financial reporting process, including adding control processes to aid in preparing the amounts related to certain tax assets and liabilities and the current and deferred income tax expense to ensure those amounts are recorded in accordance with accounting principles generally accepted in the United States of America, and have added external accounting resources to prepare and assist in the review of our accounting for income taxes. Certain controls designed and implemented to address the identified material weakness in the period-end financial reporting process have not had sufficient time to operate for our management to conclude that they are operating effectively at March 31, 2013.

 

Our management, with the participation of our Chief Executive Officer and Principal Financial Officer, carried out an evaluation, as of the end of the period covered by this report (the quarter ended March 31, 2013), of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), including controls and procedures implemented to address the material weakness described above. Based upon their evaluation and the lack of a sufficient period of time for the additional controls and processes to operate, the Chief Executive Officer and Principal Financial Officer concluded that, as of the end of such period, a material weakness still existed, and our disclosure controls and procedures were not effective in recording, processing, summarizing and reporting within the time periods specified in the Securities and Exchange Commission’s rules and forms information required to be disclosed by us in the reports that we file or submit under the Exchange Act and were not effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Except as described above, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred in the most recent fiscal quarter (the quarter ended March 31, 2013) that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

22

PART II - Other Information

 

Item 1A. Risk Factors

 

Part I, “Item 1A. Risk Factors” in our 2012 Annual Report on Form 10-K includes a listing of risk factors that could materially affect our business, financial condition, or future results. There have been no material changes in risk factors, except for risks related to the integration of manufacturing facilities as described below, from those set forth in our 2012 Annual Report; however, the risks described in our 2012 Annual Report and below may not be the only risks facing the Company.

 

Integration of manufacturing facilities may entail certain operational risk.

 

We regularly review our manufacturing operations to maximize the effectiveness and cost benefit of those operations. As our business evolves, it becomes necessary to rationalize our manufacturing facilities requirements. Securing additional manufacturing facilities or integrating existing manufacturing facilities involve certain risks. These risks include substantial cash expenditures and capital expenditures, potentially in excess of budgeted amounts; difficulties in assimilating or moving existing operations; loss of orders or customers due to the failure to obtain all necessary permits and regulatory approvals, including those that may be required by our customers; diverting management’s attention away from other business concerns; and disruption of manufacturing schedules and forecasted revenue which could adversely affect our results of operations. We are in the process of transitioning our existing Tucson facility into a recently purchased facility in Tucson.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table provides information about stock repurchases during the quarter ended March 31, 2013 under our authorized purchase plan and restricted stock repurchases in connection with the surrender of shares to cover taxes upon the vesting of restricted stock awards.

 

Period   Total number of
shares purchased
  Average price
paid per share
  Total number of
shares purchased as
part of publicly
announced
plans or programs (1)
  Approximate dollar
value of shares that
may yet be purchased
under the plans or
programs (in millions)
                 
January 1, 2013 - January 31, 2013   6,126   $  15.99     $  5.0
February 1, 2013 - February 28, 2013     n/a     $  5.0
March 1, 2013 - March 31, 2013     n/a     $  5.0

 

(1)In August 2007, our Board of Directors authorized the repurchase of up to $25.0 million of our outstanding common stock. During the three months ended March 31, 2013, there were no repurchases of common stock in the open market. The previous share repurchases under this program 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.
23

Item 6. Exhibits

 

(a)   Exhibits:
       
    31.1 Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
       
    31.2 Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
       
    32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       
    32.2   Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       
    101.INS*   XBRL Instance Document
       
    101.SCH*  XBRL Taxonomy Extension
       
    101.CAL*  XBRL Taxonomy Extension Calculation Linkbase
       
    101.DEF*  XBRL Taxonomy Extension Definition Linkbase
       
    101.LAB*  XBRL Taxonomy Extension Label Linkbase
       
    101.PRE*   XBRL Taxonomy Extension Presentation Linkbase

 

*     Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

24

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  
  President and Chief Executive Officer  
     
  /s/ John P. Jordan  
  John P. Jordan  
  Vice President, Chief Financial Officer and Treasurer
   
  Date:  May 10, 2013

25

EXHIBIT INDEX

 

31.1 Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2 Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
101.INS*   XBRL Instance Document
 
101.SCH*  XBRL Taxonomy Extension
 
101.CAL*  XBRL Taxonomy Extension Calculation Linkbase
 
101.DEF*  XBRL Taxonomy Extension Definition Linkbase
 
101.LAB*  XBRL Taxonomy Extension Label Linkbase
 
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase

 

*     Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.