Filing identity and reporting period
Important mismatch: The request identifies Onto Innovation Inc. and 2016 Q3, but the supplied filing is Nanometrics Incorporated’s Form 10-Q for the quarter ended September 29, 2018. The figures below summarize the supplied filing, not the company or period in the request. Amounts are in U.S. dollars; financial statement figures are in millions unless noted.
Nanometrics designs and sells metrology and inspection systems used primarily in semiconductor manufacturing, along with related services. The filing reports the three- and nine-month periods ended September 29, 2018, compared with the corresponding 2017 periods.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $76.6 | $56.7 | $247.5 | $180.4 |
| Gross profit | $43.6 | $30.7 | $142.1 | $92.7 |
| Operating income | $14.3 | $7.5 | $55.6 | $23.6 |
| Net income | $11.6 | $5.8 | $45.6 | $19.4 |
| Diluted EPS | $0.47 | $0.22 | $1.86 | $0.75 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $83.4 | $15.4 |
Revenue grew 35.1% in Q3 and 37.2% year to date. Product revenue rose 40.0% and 43.6%, respectively; service revenue rose 15.2% and 8.7%. Approximate gross margin was 57.0% for Q3 and 57.4% year to date, versus 54.1% and 51.4% in 2017. Operating margin was approximately 18.6% and 22.5%, compared with 13.2% and 13.1%. Net margin was approximately 15.1% and 18.4%, compared with 10.2% and 10.8%.
At September 29, 2018, cash and cash equivalents were $96.1 million and marketable securities were $76.8 million, totaling $172.9 million in cash, equivalents and securities. Working capital was $232.0 million; current assets were $291.1 million and current liabilities $59.1 million. Total liabilities were $62.4 million. The balance sheet presents no debt balance; the filing does not provide a clear total debt figure. Nine-month investing cash flow was positive $0.4 million and financing cash flow was negative $22.3 million, including $23.0 million of stock repurchases.
Material changes and management commentary
- Q3 product gross margin increased to 59.8% from 53.0%, attributed to favorable product and customer mix, faster installation cycles, and lower warranty costs. Service gross margin fell to 42.7% from 58.4%, reflecting lower labor utilization and higher material fulfillment costs. Similar trends applied year to date.
- Operating expenses increased 26.7% in Q3 and 25.1% year to date. Higher R&D spending reflected added headcount, variable compensation and product development; selling and administrative costs also increased, including executive transition and search costs.
- Operating cash flow improved year to date, supported by earnings and working-capital movements, including collections and higher accounts payable and deferred revenue. Inventory-related cash use remained a factor.
- The company adopted ASC 606 using the modified retrospective method; comparative 2017 figures were not restated. Relative to accounting without ASC 606, reported 2018 nine-month revenue was $2.8 million higher and net income $1.8 million higher; Q3 revenue was $0.9 million lower and net income $0.6 million lower.
Outlook, risks, contingencies and unusual items
- Management said existing cash, securities and projected operating cash flow should meet working-capital, capital spending and other needs for at least the next 12 months. No specific revenue or earnings guidance is provided.
- On October 26, 2018, Nanometrics agreed to acquire 4D Technology Corporation for $36 million cash and approximately $4 million in stock, subject to adjustments and customary closing conditions. Closing was expected before December 29, 2018. Management said 4D’s gross profit was expected to offset added operating expenses, but warned that weaker-than-expected performance or unsuccessful integration could harm results. The acquisition had not closed as of the filing.
- Revenue and spending are exposed to semiconductor customer capital expenditures, order and shipment timing, product mix, product acceptance, new-product adoption and broader economic conditions. Approximately 86% of Q3 and 88% of nine-month revenue came from Asia. Several customers each represented more than 10% of sales, creating customer concentration risk.
- The company disclosed litigation with Optical Solutions, Inc. concerning a disputed purchase arrangement; it reported no probable and reasonably estimable loss. The motion to dismiss was scheduled for February 2019, with trial set for May 2022.
- Tax uncertainties include the continuing evaluation of GILTI under the Tax Cuts and Jobs Act, valuation allowances on California and Switzerland deferred tax assets, and an anticipated approximately $0.5 million increase in unrecognized tax benefits over the next 12 months.
- After quarter-end, the company sold a Milpitas condominium for $1.0 million and expected to recognize an approximately $0.9 million gain, net of fees, in fiscal 2018.
Most important facts for investors to verify
- Confirm the filing identity and period: this source is Nanometrics Incorporated, Q3 2018, not Onto Innovation Inc., 2016 Q3.
- Verify the 4D acquisition’s closing, final purchase-price adjustments, financing from available liquidity and subsequent integration and performance.
- Assess whether product-margin strength can persist and whether weaker service margins and rising operating expenses improve or worsen.
- Monitor semiconductor spending, Asia and major-customer concentration, orders, shipments, acceptance timing, receivables and inventory.
- Review the OSI litigation, tax/GILTI exposure and the effect of ASC 606 when comparing reported results with prior periods.