Business context and reporting period
Onto Innovation Inc. filed this Form 10-Q on November 7, 2019, reporting the fiscal third quarter ended September 28, 2019, and the nine months then ended. The financial statements are Nanometrics Incorporated’s pre-merger results; the company changed its name to Onto Innovation after its October 25, 2019 merger with Rudolph Technologies. Unless otherwise noted, amounts below are in millions of dollars.
The company sells metrology and inspection systems, software, and related services primarily to semiconductor manufacturers. Its results are sensitive to customers’ capital spending, technology transitions, product mix, order and shipment timing, and factory utilization.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $73.1 | $76.6 | $207.8 | $247.5 |
| Gross profit | $38.7 | $43.6 | $107.6 | $142.1 |
| Gross margin | 52.9% | 57.0% | 51.8% | 57.4% |
| Operating income | $5.9 | $14.3 | $13.0 | $55.6 |
| Net income | $4.2 | $11.6 | $11.1 | $45.6 |
| Diluted earnings per share | $0.17 | $0.47 | $0.45 | $1.86 |
Q3 revenue declined 4.5% year over year; nine-month revenue fell 16.0%. Product revenue declined 5.8% for the quarter and 21.3% for the nine months, mainly reflecting weaker wafer-fab-equipment demand. Service revenue rose 1.8% and 14.9%, respectively, supported by a larger installed base and refurbished-system sales.
Product gross margin fell to 54.8% in Q3 and 53.0% for nine months, reflecting unfavorable product and customer mix, lower factory utilization, higher intangible amortization, and, for the nine-month comparison, acquisition-related adjustments. Service gross margin improved to 44.3% and 47.1%, respectively, on higher labor utilization and a richer mix of spare parts and refurbishment tools. Q3 operating expenses rose 11.5% to $32.7 million, including $2.4 million of merger costs; nine-month expenses rose 9.5% to $94.6 million, including $3.3 million of merger costs and $0.9 million of intangible amortization.
For the nine months, operating cash flow was negative $1.1 million, versus positive $83.4 million in 2018. Management attributed the 2019 cash use chiefly to timing of vendor, compensation and tax payments, and higher inventory purchases. Investing cash flow was negative $60.9 million, including $51.9 million of net purchases of marketable securities and $9.9 million of capital expenditures. Financing cash flow was positive $2.0 million. Cash and cash equivalents were $51.0 million at quarter-end; cash, cash equivalents, and marketable securities totaled $144.1 million, down from $151.8 million at year-end 2018.
At September 28, 2019, working capital was $228.5 million, total assets $396.2 million, and total liabilities $60.5 million. No borrowings are presented on the balance sheet; net interest expense was $0.1 million for the nine months. Operating lease liabilities totaled $10.0 million, including $2.8 million current. The filing reports no off-balance-sheet arrangements.
Material changes, outlook, and risks
- Merger: The October 25 merger closed after the reporting date. Rudolph shareholders and pre-merger Nanometrics shareholders each held approximately 50% of the combined company on a fully diluted basis. Rudolph is treated as the accounting acquirer. The filing does not provide pro forma combined financial results or quantified synergy guidance.
- Liquidity outlook: Management said the combined company’s cash, cash equivalents, marketable securities, and projected operating cash generation should cover working capital, capital purchases, commitments, and other liquidity needs for at least the next 12 months. No specific revenue, earnings, or margin guidance is provided.
- Market and customer exposure: Asia generated 76% of revenue in Q3 and the nine-month period, compared with 86% and 88% in the comparable 2018 periods. The company cited weaker memory demand and fewer fab expansions in Korea and Japan, partly offset by foundry expansion in Taiwan. Several major semiconductor customers each represented more than 10% of sales; the filing does not disclose each customer’s exact share.
- Legal matters: The company described ongoing litigation with Optical Solutions, Inc.; it said no loss was probable and reasonably estimable based on current information. Merger-related shareholder suits agreed in principle to dismiss claims following supplemental disclosures, while reserving the right to seek attorneys’ fees.
- Other items: A $4.1 million inventory write-down was included in the nine-month cash-flow reconciliation. The company reported a $0.8 million gain from selling a condominium. Foreign-currency forward contracts resulted in settlement losses of $0.7 million for Q3 and $1.4 million for nine months.
- Risks: Management highlighted semiconductor spending and demand variability, product mix and order timing, execution and integration of the Rudolph merger, possible employee or customer losses, and potential integration costs exceeding expectations. It also cited foreign-exchange and interest-rate exposure.
Important facts for investors to verify
- Track post-merger revenue, margins, cash generation, integration costs, and whether anticipated merger benefits are realized; this filing contains only pre-merger financial statements.
- Assess whether product demand and factory utilization recover, and whether service growth can offset weakness in product sales.
- Monitor working-capital and inventory movements after the shift to negative operating cash flow.
- Review customer and geographic concentration, including the effects of semiconductor memory-market conditions.
- Follow the Optical Solutions litigation and any fees or other consequences from merger-related shareholder actions.