Nanometrics Incorporated — Form 10-Q summary
Period and filing identity: The supplied filing is Nanometrics Incorporated’s unaudited 10-Q for the 13 weeks and six months ended June 30, 2018, with comparisons to periods ended July 1, 2017. This does not match the request metadata identifying Onto Innovation Inc. and 2016 Q2.
Business context and results
Nanometrics designs and sells metrology and inspection systems, software, upgrades, and services used mainly in semiconductor manufacturing. The company reported one operating segment. Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $88.6 | $64.4 | $170.9 | $123.7 |
| Gross profit | $50.9 | $33.6 | $98.4 | $62.1 |
| Income from operations | $20.8 | $10.7 | $41.3 | $16.2 |
| Net income | $17.7 | $8.3 | $34.1 | $13.6 |
| Diluted EPS | $0.72 | $0.32 | $1.39 | $0.53 |
| Gross margin | 57.4% | 52.2% | 57.6% | 50.2% |
Revenue increased 37.5% in Q2 and 38.1% for the first half year over year. Product revenue drove most of the increase: up 43.2% in Q2 and 45.2% year to date, while service revenue rose 9.7% and 5.5%, respectively. Q2 operating margin was approximately 23.5%, versus 16.5% a year earlier.
Q2 product gross margin rose to 59.2% from 52.6%, which management attributed to favorable product and customer mix, improved installation cycle times, and lower warranty costs. Service gross margin fell to 45.9% from 50.1%, due to lower service labor utilization. R&D and selling costs increased with headcount and variable compensation; G&A growth included executive transition and search costs, variable compensation, and professional services.
Cash, liquidity, and balance sheet
- Cash, cash equivalents, and marketable securities totaled $148.7 million at June 30, 2018, up from $117.0 million at December 30, 2017. Working capital was $216.2 million, compared with $196.0 million.
- First-half operating cash flow was $59.0 million, versus $10.3 million in the comparable 2017 period. Investing activities provided $15.8 million, largely reflecting marketable-security sales and maturities; financing activities used $23.0 million, primarily for share repurchases.
- Total liabilities were $56.3 million, including $53.0 million of current liabilities. The balance sheet reports no borrowings or debt line item; interest expense was $0.1 million for the first half.
- 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 $14.3 million of cash, cash equivalents, and securities was held by foreign subsidiaries; some funds would need to be repatriated to the U.S.
Material changes, outlook, and risks
- Revenue standard: The company adopted ASC 606 in 2018 using the modified retrospective method; comparative 2017 results remain under the prior standard. For Q2, reported revenue was $0.5 million lower and net income $0.6 million lower than under the prior method. For the first half, reported revenue was $3.7 million higher and net income $2.4 million higher. This affects period-to-period comparability.
- Geography and customer concentration: Asia remains a substantial source of revenue. Q2 revenue from China was $28.3 million, versus $7.3 million in the prior-year quarter; South Korea revenue was $31.0 million versus $31.5 million. Several customers each exceeded 10% of sales, including Samsung, Yangtze Memory Technologies, Intel, and Toshiba in Q2. Management identified customer spending, product mix, new-product adoption, and order, shipment, and acceptance timing as factors that can cause significant variation.
- Outlook: No specific revenue, earnings, or margin guidance is provided. Management cited demand drivers including semiconductor technology complexity and process-control needs, while noting that customer capital spending and industry conditions affect results.
- Capital allocation: The company completed its $50 million-authorized repurchase plan in Q1, buying back 896,187 shares for $23.0 million at an average $25.65 per share. The filing reports no issuer purchases in the quarter ended June 30.
- Legal and other items: Nanometrics is in litigation with Optical Solutions, Inc. concerning an alleged exclusive purchase contract; the case was consolidated with Nanometrics’ complaint against OSI. The company said it had no probable, reasonably estimable losses from current proceedings. A former CFO’s post-quarter separation agreement provided $150,000 severance plus COBRA premiums through June 2019.
- Taxes and controls: The first-half effective tax rate was 17.7%; valuation allowances remain against California and Switzerland deferred tax assets. Management anticipated approximately $0.5 million of increases in unrecognized tax benefits over the next 12 months. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Confirm the intended issuer and period: this source is Nanometrics’ Q2 2018 10-Q, not Onto Innovation’s 2016 Q2 filing.
- Assess how ASC 606 timing effects influence comparisons of 2018 growth with 2017 and future quarters.
- Track whether strong product growth and product margins persist, and whether service utilization and margins recover.
- Evaluate exposure to semiconductor capital-spending cycles, Asia and China demand, major customers, and shipment or acceptance timing.
- Review developments in the OSI litigation, tax positions, and the availability and repatriation of foreign-held liquidity.