Filing summary
Filing identity: The supplied filing is Nanometrics Incorporated’s unaudited Form 10-Q for the 13 weeks ended March 30, 2019, not an ONTO Innovation filing for 2017 Q1. Investors should verify the intended company and period.
Business context and reporting period
Nanometrics makes metrology and inspection systems for semiconductor manufacturing and other markets. Its 2018 acquisition of 4D Technology expanded its offerings in interferometry and scientific, aerospace, industrial, and optics markets. Product, upgrade, and software sales generated 80% of Q1 2019 revenue; services generated 20%.
Financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $67.1 million | $82.3 million | Down 18.5% |
| Product revenue | $53.9 million | $71.0 million | Down 24.2% |
| Service revenue | $13.2 million | $11.3 million | Up 17.3% |
| Gross profit | $33.8 million | $47.5 million | Down $13.7 million |
| Operating income | $3.3 million | $20.6 million | Down $17.2 million |
| Net income | $3.0 million | $16.4 million | Down $13.4 million |
| Diluted EPS | $0.12 | $0.67 | Down $0.55 |
| Cash from operations | $(0.9) million | $32.7 million | Down $33.6 million |
Gross margin was approximately 50.4%, versus 57.7% a year earlier. Product gross margin fell to 51.0% from 59.7%, reflecting product and customer mix, lower factory utilization, acquired-intangible amortization, and acquisition-related adjustments. Service gross margin improved to 47.5% from 45.5%. Operating expenses rose 13.0% to $30.5 million, including a 27.3% increase in R&D spending. The effective tax rate was 15.2%.
Liquidity, cash flow, and balance sheet
- Cash, cash equivalents, and marketable securities totaled $148.1 million at March 30, 2019, down $3.7 million from year-end 2018. Working capital was $214.0 million.
- Operating cash outflow of $0.9 million reflected $11.2 million of net outflows from operating asset and liability changes, partly offset by net income and noncash charges.
- Investing cash outflow was $16.0 million, primarily reflecting purchases of marketable securities and $4.1 million of capital expenditures. Financing provided $0.7 million; no shares were repurchased in the quarter.
- The balance sheet reports no borrowings or debt. Operating lease liabilities totaled $11.5 million following adoption of the new lease standard.
- Management said existing liquidity and projected operating cash generation should cover working capital, capital purchases, commitments, and other needs for at least the next 12 months. About $28.5 million of cash and investments was held by foreign subsidiaries.
Material changes, outlook, and risks
- Management attributed the revenue decline mainly to weaker overall wafer-fab-equipment demand, which reduced product revenue. U.S. revenue increased with a strategic customer’s fab expansion and technology adoption; Asia represented 68% of revenue, versus 88% a year earlier.
- The filing gives no specific revenue or earnings guidance. Management noted results may vary with customer spending, product mix, product adoption, order and shipment timing, supply agreements, economic conditions, and the 4D acquisition.
- Customer concentration is material: SK hynix, Intel, and Taiwan Semiconductor each accounted for more than 10% of Q1 2019 sales. Taiwan Semiconductor and SK hynix each exceeded 10% of receivables at quarter-end.
- The company faces foreign-exchange and investment interest-rate exposure. It uses short-term currency forwards but says hedging may not fully offset currency movements. A hypothetical 100-basis-point rate increase would have reduced marketable-securities fair value by about $0.2 million.
- OSI litigation continued; the company’s motion to dismiss was granted with leave to amend, and OSI filed a second amended complaint. The company reported no probable and reasonably estimable loss and stated it did not expect ordinary-course legal matters to materially affect results.
- A subsequent event: the company sold its last Milpitas condominium on April 2, 2019 and expected to recognize an approximately $0.8 million gain in the next quarter.
- Disclosure controls were judged effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Confirm the requested issuer and period: the source is Nanometrics Q1 2019, not ONTO Innovation Q1 2017.
- Assess whether the sharp revenue, product-margin, earnings, and operating-cash-flow declines are temporary or reflect sustained demand and utilization weakness.
- Review customer concentration, semiconductor capital-spending trends, and the timing of orders, shipments, and acceptance.
- Track the 4D acquisition’s integration, acquired-intangible amortization, and remaining purchase-price-allocation adjustments.
- Monitor the OSI litigation, tax valuation allowances and unrecognized tax benefits, and the use of foreign-held liquidity.