Nanometrics Incorporated — Form 10-Q Summary
Filing and period: The supplied filing is Nanometrics Incorporated’s unaudited Form 10-Q for the quarter ended June 29, 2019, filed July 31, 2019. This does not match the request metadata identifying Onto Innovation and 2017 Q2. The company described in the filing provides metrology and inspection systems primarily for semiconductor manufacturing, plus industrial and scientific markets.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $67.6 | $88.6 | $134.7 | $170.9 |
| Gross profit | $35.2 | $50.9 | $69.0 | $98.4 |
| Operating income | $3.7 | $20.8 | $7.1 | $41.3 |
| Net income | $3.9 | $17.7 | $6.9 | $34.1 |
| Diluted EPS | $0.16 | $0.72 | $0.28 | $1.39 |
| Operating cash flow | Not separately presented for the quarter | $(2.3) | $59.0 |
- Q2 revenue fell 23.7% year over year; product revenue declined 31.5% to $52.5 million, partly offset by a 26.7% increase in service revenue to $15.1 million. First-half revenue declined 21.2%.
- Q2 product gross margin was 52.9%, down from 59.2%; service gross margin improved to 49.0% from 45.9%. First-half product margin was 51.9% versus 59.5%, while service margin was 48.3% versus 45.7%.
- Q2 operating expenses rose 4.4% to $31.4 million, including $0.9 million of merger expenses. R&D increased; selling costs declined. First-half operating income fell to $7.1 million from $41.3 million.
- Cash, cash equivalents and marketable securities were $145.0 million at June 29, 2019, down from $151.8 million at year-end 2018. Working capital increased to $221.2 million from $211.1 million. Current assets were $272.2 million and current liabilities $51.0 million.
- The balance sheet reports no borrowings or debt line item; interest expense was minimal. Operating lease liabilities totaled $10.9 million following adoption of the new lease standard.
- First-half cash used in operations was $2.3 million, versus $59.0 million provided in the prior-year period. The filing attributes the outflow mainly to compensation and tax payment timing and higher inventory purchases. Investing used $17.2 million, including $8.3 million of capital spending; financing provided $2.2 million.
Material changes and management commentary
- Management attributed weaker product sales mainly to lower overall wafer-fab-equipment demand and slower memory demand, with fewer fab expansions in Korea and Japan. Taiwan foundry expansion partly offset the declines. Service growth reflected a larger installed base and refurbished-system sales.
- Product margins were pressured by unfavorable product and customer mix, lower factory utilization, higher intangible amortization and, for the first half, $1.3 million of acquisition-related adjustments. Service margins benefited from labor utilization and higher-margin spare parts and refurbished systems.
- Asia contributed 82% of Q2 revenue and 75% of first-half revenue, compared with 89% and 88% in the corresponding 2018 periods. Major customers accounted for more than 10% of sales in the reported periods, creating customer concentration exposure.
- The company completed its 2018 acquisition of 4D Technology for approximately $42.5 million. 4D broadened the business into scientific, aerospace, industrial and optics markets; acquisition-related amortization and expenses affected 2019 results.
- On June 23, 2019, Nanometrics agreed to merge with Rudolph Technologies in an all-stock transaction. Rudolph shareholders would receive 0.8042 Nanometrics shares per Rudolph share, with each legacy shareholder group expected to own approximately 50% of the combined company on a fully diluted basis. Completion is subject to regulatory and shareholder approvals.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance is provided. Management said existing cash, securities and projected operating cash generation should meet working-capital, capital-expenditure and other needs for at least the next 12 months.
- Management cautioned that results depend on semiconductor customer spending, product mix, new-product adoption, order, shipment and acceptance timing, supply agreements, economic conditions and the 4D acquisition. The filing emphasizes that interim results may not indicate full-year performance.
- If the Rudolph merger is terminated under specified circumstances, Nanometrics may owe a $26.0 million termination fee; failure to close could also adversely affect operations and share price. Integration challenges could harm the combined business if the merger closes.
- The company reported an ongoing dispute with Optical Solutions, Inc.; a motion to dismiss was pending, with a hearing scheduled for November 14, 2019 and trial set for May 16, 2022. Management said it did not consider losses from current proceedings probable and reasonably estimable.
- Other unusual items included a $0.9 million gain on sale of a condominium and higher investment income, partly offset by foreign-exchange effects. A $2.9 million inventory write-down was included in the first-half cash-flow reconciliation.
- Tax valuation allowances remained against deferred tax assets in California and Switzerland, and were recorded for the U.K. The company anticipated approximately $1.2 million of increases in unrecognized tax benefits over the next 12 months.
- The board authorized an $80 million share repurchase plan in March 2019; no shares were repurchased under it during the first half. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Confirm the correct issuer and reporting period: the provided document is Nanometrics’ Q2 2019 10-Q, not an Onto Innovation 2017 Q2 filing.
- Review the Rudolph merger’s approval and closing conditions, potential $26 million termination fee, expected ownership split and integration risks.
- Track semiconductor equipment demand, especially memory spending in Korea and Japan, and the resulting product revenue, utilization and margins.
- Reconcile the sharp year-over-year decline in operating cash flow with inventory growth, cash payments and the company’s liquidity outlook.
- Assess customer concentration, the Optical Solutions litigation, tax valuation allowances and the expected increase in unrecognized tax benefits.