Filing summary
Entity and period: The supplied filing is Nanometrics Incorporated’s unaudited Form 10-Q for the quarter ended September 28, 2013—not an Onto Innovation filing and not a 2011 quarter. It reports the three- and nine-month periods ended September 28, 2013, compared with periods ended September 29, 2012. Nanometrics makes metrology and inspection systems used mainly in semiconductor manufacturing.
Financial results
Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $39.0 | $43.9 | $98.1 | $152.6 |
| Gross profit | $15.8 | $22.2 | $40.8 | $72.0 |
| Gross margin | 40.5% | 50.4% | 41.5% | 47.2% |
| Operating income (loss) | ($7.2) | $3.6 | ($23.0) | $12.0 |
| Net income (loss) | ($4.6) | $1.9 | ($14.7) | $8.1 |
| Diluted EPS | ($0.20) | $0.08 | ($0.63) | $0.34 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | ($3.9) | $12.8 |
- Product revenue was $30.2 million in Q3, down 6.7%; service revenue was $8.9 million, down 23.6%. For the first nine months, product revenue fell 42.7% and service revenue fell 8.1%.
- Product gross margin was 37.8% in Q3 and 38.6% year to date, down from 49.2% and 46.5%, respectively. Service gross margin was 49.7% and 48.9%, versus 53.7% and 49.8%.
- At September 28, cash and cash equivalents were $43.8 million and marketable securities were $49.1 million, totaling $92.9 million. Working capital was $140.7 million. Total assets were $251.3 million and total liabilities were $47.5 million.
- The company had no debt outstanding after repaying the $4.8 million remaining mortgage balance in July 2013. Its revolving credit facility had $11.2 million available and no amount drawn; the facility matures April 30, 2014.
- Cash declined $19.1 million during the first nine months to $43.8 million. Investing cash outflow was $6.3 million and financing cash outflow was $8.3 million, including $5.2 million of debt repayment and $5.0 million of share repurchases.
Material changes and drivers
- Nine-month revenue declined 35.7% year over year, principally reflecting weaker demand and capital spending by two major customers in memory and logic production. Automated-system revenue fell 50.7% year to date.
- Q3 gross margin was pressured by additional reserves for excess and obsolete inventory related to the discontinued Mosaic product line, as well as fixed costs against lower revenue. The filing reports a $6.3 million inventory write-down in the nine-month cash flow reconciliation.
- Operating expenses rose 24.3% in Q3 and 6.3% year to date. Q3 included a $1.7 million restructuring charge for consolidating part of the European operations, including $0.9 million of non-cash accelerated RSU vesting and $0.8 million primarily for severance.
- The company recorded a $9.7 million income tax benefit for the first nine months, compared with a $2.9 million tax provision in the prior-year period. It maintains a valuation allowance against certain deferred tax assets due to cumulative losses and uncertainty about future taxable income.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided. Management said cash, investments, and borrowing availability should be sufficient for at least the next 12 months, subject to operating performance, cash flow, economic conditions, and other factors.
- Management cited semiconductor-industry cyclicality, changing customer spending, product mix, new-product adoption, and the timing of orders, shipments, and customer acceptance as factors that could materially affect results.
- Customer concentration is significant: Intel represented 34.3% of Q3 revenue and 29.8% of nine-month revenue; SK Hynix represented 23.3% and 17.5%, respectively. SK Hynix accounted for 46% of accounts receivable at quarter-end.
- The company expects to complete the European restructuring by May 2014 and incur about $0.2 million in additional costs over the next seven months. It also anticipates approximately $0.7 million of increases in unrecognized tax benefits over the next 12 months.
- Contingent consideration payable related to Zygo was $2.8 million at quarter-end; its fair value increased during the period based on revised estimates of future unit purchases. The filing reported no legal proceedings and no material changes to the risk factors in the prior annual report.
Important facts to verify
- Confirm the issuer and period: the source is Nanometrics Incorporated, Q3 2013, despite the request metadata identifying Onto Innovation and 2011 Q3.
- Review the causes and potential persistence of the steep year-to-date revenue decline and lower product margins, including the inventory write-down and Mosaic product discontinuation.
- Assess exposure to major customers and semiconductor capital-spending cycles, including the quarter-end receivables concentration in SK Hynix.
- Verify cash-flow trajectory, working-capital needs, and the availability and covenant terms of the revolving facility, which was scheduled to mature in April 2014.
- Evaluate the recoverability of deferred tax assets and the assumptions behind Zygo contingent consideration and restructuring costs.