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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended October 2, 2004
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OR
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________
Commission file number 0-13470
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NANOMETRICS INCORPORATED
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-2276314
- ---------------------------------------- -------------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
1550 Buckeye Drive, Milpitas, California 95035
- ------------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 435-9600
--------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO_____
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES NO X
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As of November 2, 2004 there were 12,413,966 shares of common stock, no par
value, issued and outstanding.
1
NANOMETRICS INCORPORATED
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
October 2, 2004 and January 3, 2004 . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations -
Three months and nine months ended
October 2, 2004 and September 27, 2003 . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended October 2, 2004 and September 27, 2003. . . 5
Notes to Condensed Consolidated Financial Statements. . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk . . . . . . . . . . . . . . . . . . . . . . 14
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . 14
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds . 16
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders . . . . . 16
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2
PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements
NANOMETRICS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share amounts)
October 2, January 3,
2004 2004
-------- --------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,652 $ 7,949
Short-term investments 17,939 21,943
Accounts receivable, net of allowances
of $581 and $576, respectively 20,948 14,522
Inventories 26,328 24,264
Prepaid expenses and other 863 1,015
-------- --------
Total current assets 78,730 69,693
PROPERTY, PLANT AND EQUIPMENT, Net 48,434 49,738
INTANGIBLE ASSETS 1,017 1,322
OTHER ASSETS 1,217 987
-------- --------
TOTAL ASSETS $129,398 $121,740
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,374 $ 2,047
Accrued payroll and related expenses 2,327 1,593
Deferred revenue 5,085 2,345
Other current liabilities 1,582 1,436
Income taxes payable 1,638 1,528
Current portion of debt obligations 1,238 1,157
-------- --------
Total current liabilities 14,244 10,106
DEFERRED INCOME TAXES AND OTHER LONG-TERM LIABILITIES 287 545
DEBT OBLIGATIONS 2,167 2,648
-------- --------
Total liabilities 16,698 13,299
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, no par value; 50,000,000 shares
authorized; 12,366,483 and
12,166,016, respectively, outstanding 102,649 101,099
Retained earnings 9,669 7,008
Accumulated other comprehensive income 382 334
-------- --------
Total shareholders' equity 112,700 108,441
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $129,398 $121,740
======== ========
See Notes to Condensed Consolidated Financial Statements
3
NANOMETRICS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
October 2, September 27, October 2, September 27,
2004 2003 2004 2003
-------- -------- -------- --------
NET REVENUES:
Product sales $ 18,372 $ 8,514 $ 44,209 $ 23,814
Service 1,855 1,617 5,900 5,401
-------- -------- -------- --------
Total net revenues 20,227 10,131 50,109 29,215
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of product sales 7,637 4,539 18,962 13,026
Cost of service 2,067 1,425 5,326 4,918
Research and development 3,358 3,357 9,517 10,199
Selling 2,795 2,867 8,952 8,465
General and administrative 1,369 1,130 4,027 3,464
-------- -------- -------- --------
Total costs and expenses 17,226 13,318 46,784 40,072
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS 3,001 (3,187) 3,325 (10,857)
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest income 69 60 174 230
Interest expense (28) (24) (78) (71)
Other, net (109) 208 (294) 176
-------- -------- -------- --------
Total other income (expense), net (68) 244 (198) 335
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 2,933 (2,943) 3,127 (10,522)
PROVISION FOR INCOME TAXES (360) (53) (464) (6,141)
-------- -------- -------- --------
NET INCOME (LOSS) $ 2,573 $ (2,996) $ 2,663 $(16,663)
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE:
Basic $ 0.21 $ (0.25) $ 0.22 $ (1.39)
======== ======== ======== ========
Diluted $ 0.20 $ (0.25) $ 0.20 $ (1.39)
======== ======== ======== ========
SHARES USED IN PER SHARE
COMPUTATION:
Basic 12,331 12,033 12,261 12,016
======== ======== ======== ========
Diluted 12,742 12,033 13,210 12,016
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements
4
NANOMETRICS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine Months Ended
----------------------------
October 2, September 27,
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,665 $(16,663)
Reconciliation of net loss to net cash
used in operating activities:
Depreciation and amortization 1,958 1,859
Deferred income taxes (138) 5,982
Changes in assets and liabilities
Accounts receivable (6,758) (1,355)
Inventories, net (2,091) 3,118
Prepaid expenses and other current assets (58) (86)
Accounts payable accrued and other current liabilities 4,043 655
Income taxes payable 120 (126)
-------- --------
Net cash used in operating activities (259) (6,616)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (17,996) (49,039)
Sales/maturities of short-term investments 22,000 55,000
Purchases of property, plant and equipment (465) (748)
-------- --------
Net cash provided by (used in) investing activities 3,539 5,213
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt obligations (417) (361)
Sale of shares under employee stock option plan and purchase plan 1,550 605
-------- --------
Net cash provided by financing activities 1,133 244
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 290 254
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,703 (905)
CASH AND CASH EQUIVALENTS, beginning of period 7,949 7,967
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 12,652 $ 7,062
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 75 $ 72
======== ========
Cash paid for income taxes $ 117 $ 146
======== ========
See Notes to Condensed Consolidated Financial Statements
5
NANOMETRICS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Condensed Consolidated Financial Statements
The condensed consolidated financial statements include the accounts of
Nanometrics Incorporated and its wholly-owned subsidiaries. All inter-company
accounts and transactions have been eliminated.
While the quarterly condensed financial statements are unaudited, the
financial statements included in this report reflect all adjustments (consisting
only of normal recurring adjustments), which Nanometrics considers necessary for
a fair presentation of the results of operations for the interim periods covered
and of our financial condition at the date of the interim balance sheet. The
operating results for interim periods are not necessarily indicative of the
operating results that may be expected for the entire year. The information
included in this report should be read in conjunction with the information
included in Nanometrics' 2003 Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
Note 2. Significant Accounting Policies
Fiscal Period - Nanometrics uses a 52/53 week fiscal year ending on the
Saturday nearest to December 31. All references to the quarter refer to
Nanometrics' fiscal quarter. The fiscal quarters and nine month periods
presented herein include 13 weeks and 39 weeks respectively.
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Revenue Recognition - Nanometrics recognizes revenue when persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, the seller's price is fixed or determinable, and collectibility is
reasonably assured. For product sales to existing customers, this generally
occurs at the time of shipment if we have met defined customer acceptance
experience levels with both the customer and the specific type of equipment. All
other product sales are recognized upon customer acceptance. In certain
geographical regions where risk of loss and title transfers to the customer upon
customer acceptance, revenue is recognized upon customer acceptance. Revenue
related to spare parts sales is recognized on shipment and is included as part
of service revenue. Service revenue also includes service contracts and
non-warranty repairs of systems. Whereas service revenue related to service
contracts is recognized ratably over the period under contract, service revenue
related to repairs of systems is recognized as services are performed. Unearned
maintenance and service contract revenue is included in deferred revenue.
Nanometrics does not sell software separately. Furthermore, we do not provide
our customers with any return rights. Service contracts may be purchased by the
customer when the warranty period expires.
Income Taxes - Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and
operating loss and tax credit carryforwards measured by applying currently
enacted tax laws. A valuation allowance is provided when necessary to reduce
deferred tax assets to an amount that is more likely than not to be realized.
During the quarter ended March 29, 2003, Nanometrics recorded a valuation
allowance of $6,020,000 and will continue to provide a full valuation allowance
against deferred tax assets for the foreseeable future. The valuation allowance
was recorded primarily as a result of pretax losses incurred over the past
several years coupled with uncertainty about future expected income in the then
current market environment making it more likely than not at that time that the
deferred tax asset would not be realized.
6
Short-Term Investments - Short-term investments consist of United
States Treasury bills and are stated at fair value based on quoted market
prices. Short-term investments are classified as available-for-sale based on
Nanometrics' intended use. The difference between amortized cost and fair value
representing unrealized holding gains or losses are recorded as a component of
shareholders' equity as accumulated other comprehensive income and was not
significant as of October 2, 2004. Gains and losses on sales of short-term
investments are determined on a specific identification basis.
Concentration of Credit Risk - Our accounts receivable are derived from
revenue earned from customers located in the U.S., Europe and Asia. We perform
credit evaluations of our customers' financial condition and generally require
no collateral from customers. At October 2, 2004, one customer accounted for
approximately 11% of the accounts receivable.
Stock-Based Compensation - Nanometrics accounts for stock-based
compensation using the intrinsic value method in accordance with the provision
of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, as allowed by Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock Based Compensation as amended by SFAS No. 148,
Accounting for Stock Based Compensation-Transition and Disclosures, an Amendment
of SFAS No. 123.
Under the intrinsic value method, Nanometrics does not recognize any
compensation expense, as the exercise price of all stock options is equal to the
fair market value at the time the options are granted. Had compensation expense
been recognized using the fair value-based methods under SFAS No. 123,
Nanometrics' pro forma consolidated loss and loss per share would have been as
follows (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
------------------------- -------------------------
October 2, September 27, October 2, September 27,
2004 2003 2004 2003
--------- --------- --------- ----------
Net Income (Loss)
As reported $ 2,573 $ (2,996) $ 2,663 $ (16,663)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related income tax effects (1,201) (1,362) (3,556) (7,086)
--------- --------- --------- ----------
Pro forma net income (loss) $ 1,372 $ (4,358) $ (893) $ (23,749)
========= ========= ========= ==========
As reported net income (loss) per share:
Basic $ 0.21 $ (0.25) $ 0.22 $ (1.39)
Diluted $ 0.20 $ (0.25) $ 0.20 $ (1.39)
Pro forma net income (loss) per share:
Basic $ 0.11 $ (0.36) $ (0.07) $ (1.97)
Diluted $ 0.11 $ (0.36) $ (0.07) $ (1.97)
Under SFAS No. 123, as amended, the fair value of stock-based awards to
employees is calculated through the use of option pricing models, even though
such models were developed to estimate fair value of freely tradable, fully
transferable options without vesting restrictions, which differ significantly
from Nanometrics' stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. Our fair value
calculations on stock-based awards under the employee and director stock option
plans were made using the Black-Scholes option pricing model with the following
weighted average assumptions: expected life, three and a half years from date of
grant in 2004 and three years in 2003; stock volatility 90% in 2004 and 2003;
risk free interest rate 1.60% in 2004 and 2.18% in 2003; and no dividends
expected during the term. Our calculations are based on a single option
valuation approach and forfeitures are recognized at a historical rate of 27%
for 2004 and 25% for 2003. Our fair value calculations on stock-based awards
under the Purchase Plan were also made using the Black-Scholes option pricing
model with the following assumptions for 2004: expected life six months;
volatility 90%; risk free rate 1.10%; and no dividends expected during the term.
There were no options outstanding under the Purchase Plan in 2003.
7
Note 3. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following (in thousands):
October 2, January 3,
2004 2004
------- -------
Raw materials and subassemblies $13,792 $15,450
Work in process 4,273 4,506
Finished goods 8,263 4,308
------- -------
Total inventories $26,328 $24,264
======= =======
Note 4. Other Current Liabilities
Other current liabilities consist of the following (in thousands):
October 2, January 3,
2004 2004
------ ------
Commissions payable $ -- $ 32
Accrued warranty 673 513
Accrued professional services 151 254
Other 758 637
------ ------
Total other current liabilities $1,582 $1,436
====== ======
Note 5. Shareholders' Equity
Net Income (Loss) Per Share - The reconciliation of the share
denominator used in the basic and diluted net income (loss) per share
computations are as follows (in thousands):
Three Months Ended Nine Months Ended
-------------------------- --------------------------
October 2, September 27, October 2, September 27,
2004 2003 2004 2003
------ ------ ------ ------
Weighted average common shares
outstanding-shares used in basic
net income (loss) per share computation 12,331 12,033 12,261 12,016
Dilutive effect of common stock equivalents,
using the treasury stock method 411 -- 949 --
------ ------ ------ ------
Shares used in dilutive net income (loss)
per share computation 12,742 12,033 13,210 12,016
====== ====== ====== ======
As of October 2, 2004, Nanometrics had common stock options outstanding
which could potentially dilute basic net income per share in the future, but
were excluded from the computation of diluted net income per share as the common
stock options' exercise prices were greater than the average market price of the
common shares for the period. At October 2, 2004, options to purchase 1,077,076
shares of common stock with a weighted average exercise price of $17.18 per
share were excluded from the diluted net income per share computation as their
exercise prices were greater than the average market price of the common shares
for the period. As of September 27, 2003, diluted net loss per share excludes
common equivalent shares outstanding of 2,851,000 as their effect is
anti-dilutive.
Note 6. Comprehensive Income (Loss)
Comprehensive income (loss), which consisted of net income (loss) for
the periods and changes in accumulated other comprehensive income (loss), was
$2,470,000 for the three months ended October 2, 2004 compared to a loss of
$2,378,000 for the three months ended September 27, 2003. For the nine months
ended October 2, 2004 the comprehensive income was $2,711,000 compared to a loss
8
of $16,014,000 for the nine months ended September 27, 2003. Substantially all
of the accumulated other comprehensive loss consists of accumulated translation
adjustments for all periods presented.
Note 7. Warranty Obligations and Other Guarantees
Nanometrics sells the majority of its products with a one-year repair
or replacement warranty and records a provision for estimated claims at the time
of sale. Components of the warranty accrual, which was included in the
accompanying consolidated balance sheets as other current liabilities, were as
follows (in thousands):
Nine Months Ended
----------------------------
October 2, September 27,
2004 2003
----- -----
Balance as of beginning of period $ 513 $ 261
Actual warranty costs (580) (132)
Revision to existing warranty 184 (195)
Provision for warranty 556 398
----- -----
Balance as of end of period $ 673 $ 332
===== =====
An accrual for estimated future costs relating to warranty expense is
recorded, as a percentage of revenue based on prior experience, when revenue is
recorded and is included in cost of goods sold. Factors that affect our warranty
liability include historical and anticipated rates of warranty claims and cost
of claims. We periodically assess the adequacy of our recorded warranty
liabilities and adjust the amounts as necessary.
The following is a summary of our agreements that we have determined
are within the scope of the Financial Accounting Standards Boards ("FASB")
Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for
Guarantees" ("FIN 45"):
We have agreed to indemnify each of our executive officers and
directors for certain events or occurrences arising as a result of the officer
or director serving in such capacity. The term of the indemnification period is
unspecified. The maximum potential amount of future payments we could be
required to make under these indemnification agreements is unlimited. We
believe, based on our history, that the estimated fair value of these
indemnification agreements is minimal; as such, we have not recorded any
liabilities for these agreements as of January 3, 2004 and October 2, 2004.
We enter into agreements with other companies containing
indemnification provisions in the ordinary course of business, typically with
business partners, contractors, customers and landlords. Under these provisions,
we generally agree to indemnify and hold harmless the indemnified party for
losses suffered or incurred by the indemnified party as a result of our
activities or, in some cases, as a result of the indemnified party's activities
under the agreement. These indemnification provisions often relate to
representations made by us with regard to our intellectual property rights.
These indemnification provisions generally survive termination of the underlying
agreement. The maximum potential amount of future payments we could be required
to make under these indemnification provisions is unlimited. To date, we have
not incurred material costs to defend lawsuits or settle claims related to these
indemnification provisions. As a result, we believe the estimated fair value of
these agreements is minimal. Accordingly, we have no liabilities recorded for
these agreements as of January 3, 2004 and October 2, 2004.
9
Note 8. Intangible Assets
Intangible assets are recorded at cost, less accumulated amortization.
Intangible assets as of October 2, 2004 and January 3, 2004 consist of (in
thousands):
Gross Net
Carrying Accumulated Intangible
October 2, 2004 Amount Amortization Assets
--------------- ---------- -------------- -----------
Technology $ 2,290 $ 1,315 $ 975
Other 250 208 42
---------- ------------ ----------
Total $ 2,540 $ 1,523 $ 1,017
========== ============ ==========
Gross Net
Carrying Accumulated Intangible
January 3, 2004 Amount Amortization Assets
--------------- ---------- -------------- -----------
Technology $ 2,709 $ 1,466 $ 1,243
Other 250 171 79
---------- ------------ ----------
Total $ 2,959 $ 1,637 $ 1,322
========== ============ ==========
Amortization expense for the three-month and nine-month periods ended
October 2, 2004 was $102,000 and $305,000, respectively. Amortization expense
for the three-month and nine-month periods ended September 27, 2003 was $101,000
and $325,000, respectively. The estimated future amortization expense as of
October 2, 2004 is as follows (in thousands):
Fiscal Years
------------
2004 (remaining three months) $ 92
2004 285
2005 256
2006 256
2007 128
Thereafter --
----------
Total amortization $ 1,017
==========
Note 9. Segment Information and Geographic Data
Nanometrics has operations in four geographic operating locations, in
the United States, Japan, South Korea and Taiwan. All such operating locations
have similar economic characteristics, as defined in SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information, and accordingly,
Nanometrics operates in one reportable segment: the sale, design, manufacture,
marketing and support of thin film, optical critical dimension and overlay
dimension metrology systems. The product sales revenue and total assets of
Nanometrics' operating locations are as follows (in thousands):
Three months ended
-------------------------------
October 2, September 27,
2004 2003
------------ -------------
Total Product Revenues:
US $ 5,014 $ 1,902
Japan 4,940 1,715
Korea 3,475 1,182
Taiwan 4,007 3,471
All Other 936 244
------------ -------------
Total Product Revenues 18,372 8,514
Total Service Revenues 1,855 1,617
------------ -------------
Total Net Revenues $ 20,227 $ 10,131
============ =============
10
Long-lived Assets
US $ 40,401
Japan 6,871
Korea 3,364
Taiwan 32
---------
Total Long-lived Assets $ 50,668
========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This report including the following Management's Discussion and
Analysis of Financial Condition and Results of Operations contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. Such forward-looking statements are based upon current expectations
and beliefs that involve risks and uncertainties, such as our plans, objectives
and intentions, regarding, among other things: (i) customer demand for
Nanometrics' products, which may be affected by several factors including the
cyclicality of the semiconductor, flat panel display and other industries that
we serve, patterns of capital spending by its customers, technological changes
in the markets served by Nanometrics and its customers, and market acceptance of
products of both Nanometrics and its customers; (ii) the timing, cancellation or
delay of Nanometrics' customer orders and shipments; (iii) competition,
including competitive pressures on product prices and changes in pricing by
Nanometrics' customers or suppliers; (iv) fluctuations in foreign currency
exchange rates, particularly the Japanese yen; (v) market acceptance of new and
enhanced versions of Nanometrics' products; (vi) the timing of new product
announcements and releases of products by Nanometrics or its competitors,
including our ability to design, introduce and manufacture new products on a
timely and cost effective basis; (vii) the size and timing of acquisitions of
businesses, products or technologies and fluctuations in the availability and
cost of components and subassemblies of our products; and (viii) the impact of
regulatory compliance costs and diversion of management resources.
In some cases, forward-looking statements can be identified by words
such as "believe," "expect," "anticipate," "plan," "potential," "continue" or
similar expressions. Forward-looking statements also include the assumptions
underlying or relating to any of the foregoing statements. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain risk factors, including those set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors That May Affect Future Operating Results" in Nanometrics'
2003 Annual Report on Form 10-K. We believe that it is important to communicate
our expectations to our investors. However, there may be events in the future
that we are not able to predict accurately or over which we have no control. You
should be aware that the occurrence of the events described in such risk factors
and elsewhere in this report could materially and adversely affect our business,
operating results and financial condition.
All forward-looking statements included in this report are based on
information available to us on the date hereof. We undertake no obligation to
update forward-looking statements made in this report to reflect events or
circumstances after the date of this report or to update reasons why actual
results could differ from those anticipated in such forward-looking statements.
Overview
- --------
We are a leader in the design, manufacture, marketing and support of
high-performance process control metrology systems used in the manufacture of
semiconductors and flat panel displays. Our systems precisely measure a wide
range of film types deposited on substrates during manufacturing in order to
control manufacturing processes and increase production yields.
Historically, the most significant variable in our operating quarterly
results has been our revenues. Our revenue in any given quarter depends upon a
combination of orders received in that quarter for shipment in that quarter and
shipments from backlog. Our backlog at the beginning of each quarter does not
include all system sales needed to achieve expected revenues for that quarter.
11
Consequently, we are dependent on obtaining new orders for our systems, and on
fulfilling those new orders in the same quarter that they are received. Because
our customers may reschedule their orders and we may experience difficulties in
fulfilling them, we have limited visibility into future product shipments.
Additionally, our results of operations may be subject to significant
variability from quarter to quarter.
Critical Accounting Policies
- ----------------------------
Income Tax Assets and Liabilities - We account for income taxes based
on Statement of Financial Accounting Standards (SFAS) No. 109 Accounting for
Income Taxes, whereby deferred tax assets and liabilities must be recognized
using enacted tax rates for the effect of temporary differences between the book
and tax accounting for assets and liabilities. Also, deferred tax assets must be
reduced by a valuation allowance if it is more likely than not that a portion of
the deferred tax assets will not be realized in the future. We evaluate the
deferred tax assets on a quarterly basis to determine whether or not a valuation
allowance is appropriate. Factors used in this determination include future
expected income and the underlying asset or liability which generated the
temporary tax difference. Our income tax provision is based on estimates of our
effective income tax rate for the year. The effective tax rate is estimated on
the geographic distribution of profits, the tax rates in different regions and
the availability of tax credits.
Revenue Recognition - Nanometrics recognizes revenue when persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, the seller's price is fixed or determinable, and collectibility is
reasonably assured. For product sales, this generally occurs at the time of
shipment if we have met defined customer acceptance experience levels with both
the customer and the specific type of equipment. All other product sales are
recognized upon customer acceptance. In certain geographical regions where risk
of loss and title transfers to the customer upon customer acceptance, revenue is
recognized upon customer acceptance. Revenue related to spare parts sales is
recognized on shipment and is included as part of service revenue. Service
revenue also includes service contracts and non-warranty repairs of systems.
Whereas service revenue related to service contracts is recognized ratably over
the period under contract, service revenue related to repairs of systems is
recognized as services are performed. Unearned maintenance and service contract
revenue is included in deferred revenue. Nanometrics does not sell software
separately. Furthermore, we do not provide our customers with any return rights.
Service contracts may be purchased by the customer when the warranty period
expires.
Allowance for Doubtful Accounts - We maintain allowances for estimated
losses resulting from the inability of our customers to make required payments.
Credit limits are established through a process of reviewing the financial
history and stability of our customers. Where appropriate and available, we
obtain credit rating reports and financial statements of customers when
determining or modifying their credit limits. We regularly evaluate the
collectibility of our trade receivable balances based on a combination of
factors such as the length of time the receivables are past due or our
historical collection experience with customers. We believe our reported
allowances are adequate. If however, the financial conditions of customers were
to deteriorate, resulting in their inability to make payments, we may need to
record additional allowances which would result in additional general and
administrative expenses being recorded for the period in which such
determination was made.
Warranty Reserves - We accrue the estimated costs to be incurred in
performing warranty services at the time of revenue recognition and shipment of
the products to our customers. Because there is no contractual right of return
other than for defective products, we estimate such returns and record a
warranty reserve at the time of shipment. Our estimate of costs to service our
warranty obligations is based on historical experience and expectation of future
conditions. To the extent that we experience increased warranty claim activity
or increased costs associated with servicing those claims, the warranty may
increase, resulting in decreased gross margin.
Inventories - We are exposed to a number of economic and industry
factors that could result in portions of our inventory becoming either obsolete
or in excess of anticipated usage, or subject to lower of cost or market issues.
These factors include, but are not limited to, technological changes in our
market, our ability to meet changing customer requirements, competitive
pressures in products and prices, and the availability of key components from
our suppliers. We have established inventory reserves when conditions exist that
suggest that our inventory may be in excess of anticipated demand or is obsolete
based upon our assumptions about future demand for our products and market
12
conditions. We regularly evaluate our ability to realize the value of our
inventory based on a combination of factors including the following: historical
usage rates, forecasted sales of usage, product end-of-life dates, estimated
current and future market values and new product introductions. Purchase
practices and alternative usage avenues are also explored to mitigate inventory
exposure. When recorded, our reserves are intended to reduce the carrying value
of our inventory to its net realizable value. If actual demand for our products
deteriorates, or market conditions are less favorable than those that we
project, additional reserves may be required. Inventories are stated at the
lower of cost, using the first-in, first-out method, or market value.
Intangible Assets - We adopted the Financial Accounting Standards Board
("FASB") Statements of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets"
on accounting for business combinations and goodwill as of the beginning of
fiscal 2002. Accordingly, we will not amortize goodwill from acquisitions, but
will continue to amortize other acquisition-related intangibles and costs. As
required by these rules, we will perform an impairment review annually, or
earlier if indicators of potential impairment exist. The annual impairment
review was completed during the fourth quarter of fiscal year 2003, and no
impairment was found.
New Accounting Pronouncements
- -----------------------------
In March 2004, the Emerging Issues Task Force reached a consensus on
recognition and measurement guidance under EITF 03-1, which clarifies the
meaning of other-than-temporary impairment and its application to investments in
debt and equity securities. In particular, investments within the scope of SFAS
No. 115 "Accounting for Certain Investments in Debt and Equity Securities," and
investments accounted for under the cost method are addressed. In September
2004, the Financial Accounting Standards Board approved the issuance of a FASB
Staff Position to delay the requirements to record impairment losses under EITF
03-1 until new guidance is issued. We do not believe that this consensus will
have a material affect on our consolidated results of operations.
Results of Operations
- ---------------------
Total net revenues for the three months ended October 2, 2004 were
$20,227,000, an increase of $10,096,000 or 100% from the comparable period in
2003. For the nine months ended October 2, 2004, total net revenues of
$50,109,000 increased by $20,894,000 or 72% from the comparable period in 2003.
Product sales of $18,372,000 for the three months ended October 2, 2004,
increased $9,858,000 or 116% as compared with the same period in 2003. Product
sales of $44,209,000 for the nine months ended October 2, 2004, increased
$20,395,000 or 86% as compared with the same period in 2003. In the third
quarter of 2004, sales of automated systems increased by 105%, integrated
systems sales increased 181% and tabletop system sales increased 44% from their
third quarter 2003 levels, primarily due to higher volume sales for each product
group. The increase in product sales resulted from demand for 300mm
semiconductor wafer process control equipment and flat panel display equipment,
primarily in the U.S. and Far East. Service revenue of $1,855,000 and $5,900,000
for the three months and nine months ended October 2, 2004, respectively,
increased $238,000 or 15% and $499,000 or 9%, respectively, as compared to the
same periods in 2003 primarily due to higher sales of parts and services,
particularly in the U.S. and the Far East, due in part to a large installed base
of systems that have passed their warranty periods.
Cost of product sales as a percentage of product sales decreased to 42%
in the third quarter of 2004 from 53% in the third quarter of 2003 and decreased
to 43% in the nine months ended October 2, 2004 from 55% for the same period in
2003 due primarily to increased product sales volume in 2004 resulting in lower
per unit manufacturing costs. Cost of service as a percentage of service revenue
increased to 111% in the third quarter of 2004 from 88% in the third quarter of
2003. This increase resulted from increased materials costs and an increase in
headcount and related overhead to provide additional support for our growing
customer base. Cost of service as a percentage of service revenue decreased
slightly to 90% in the nine months ended October 2, 2004 from 91% for the same
period in 2003.
13
Research and development expenses for the three months ended October 2,
2004 was comparable to that of the same period last year. Research and
development expenses for the nine months ended October 2, 2004 decreased
$682,000 or 7% compared to the same period in 2003 primarily from lower
materials expenses in 2004 as a result of cost cutting measures in the first
half of the year.
Selling expenses for the three months ended October 2, 2004 decreased
by $72,000 or 3%. Selling expenses for the nine months ended October 2, 2004
increased by $487,000 or 6% compared to the same periods in 2003 primarily
because of higher sales commissions, which were about 13% higher during the
first nine months of this year and other expenses incurred from promoting our
products to existing and potential customers, such as travel and related costs
which increased by about 33% during the first nine months of 2004.
General and administrative expenses for the three-month and nine-month
periods ended October 2, 2004 increased $239,000 or 21% and 563,000 or 16%,
respectively, compared to the same periods in 2003 due in part to higher
regulatory compliance expenses. We expect the trend with respect to regulatory
expenses to continue in the future. In addition, salary expenses were lower in
2003 resulting from shutdown days taken during that time as a cost cutting
measure.
Total other income, net for the three months and nine month periods
ended October 2, 2004 decreased $312,000 and $533,000, respectively, from the
comparable periods in 2003 due primarily to foreign currency transaction losses.
The effective tax rates of 12% and 15% for the three and nine months
ended October 2, 2004 were primarily a result of the utilization of net
operating loss carryforwards and the release of the related valuation allowance,
foreign taxes and alternative minimum taxes. A provision for income taxes of
$6,141,000 was recorded for the nine month period ended September 27, 2003,
which primarily represents a charge to record a valuation allowance against
deferred income tax assets. This charge was taken primarily as a result of
pretax losses incurred over the past several quarters coupled with uncertainty
about future expected income in the then-existing market environment, making it
more likely than not at that time that the deferred tax asset would not be
realized.
As a result of the factors discussed above, our income from operations
was $3,001,000 and net income was $2,573,000 for the third quarter of 2004
compared to a loss from operations of $3,187,000 and a net loss of $2,996,000
for the same period in 2003. For the first nine months of 2004, our income from
operations was $3,325,000 and net income was $2,663,000 compared to a loss from
operations of $10,857,000 and a net loss of $16,663,000 for the same period in
2003.
The warranty accrual at October 2, 2004 was $673,000, an increase of
103% compared to the same period in 2003. This increase resulted primarily from
increased revenue and the associated warranty costs.
Liquidity and Capital Resources
- -------------------------------
At October 2, 2004, our cash, cash equivalents and short-term
investments totaled $30,591,000. The short-term investments consist primarily of
U.S. Treasury Bills. At October 2, 2004, Nanometrics had working capital of
$64,486,000 compared to $59,885,000 at January 3, 2004. The current ratio at
October 2, 2004 was 5.5 to 1. We believe working capital including cash and
short-term investments will be sufficient to meet our needs through at least the
next twelve months.
Operating activities for the first nine months of 2004 used cash of
$259,000 primarily from higher accounts receivable resulting from increased
sales and the timing of shipments and receipt of payments and increased
inventory needed to support our higher sales. These uses of cash were offset to
some extent by net income and higher current liabilities. Investing activities
provided $3,539,000 primarily due to sales of short-term investments of
$22,000,000 offset to some extent by purchases of short-term investments in the
amount of $17,996,000 and capital expenditures of $465,000 used to continue the
process of internalizing our manufacturing capacity in the U.S. Financing
activities provided $1,133,000 primarily due to stock issuances from the
exercise of stock options by employees which were offset to some extent by
repayment of long-term debt in Japan.
14
We have evaluated and will continue to evaluate the acquisition of
products, technologies or businesses that are complementary to our business.
These activities may result in product and business investments, which may
affect our cash position and working capital balances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, which include changes in
foreign currency exchange rates and interest rates. We do not use derivative
financial instruments. Instead, we actively manage the balances of current
assets and liabilities denominated in foreign currencies to minimize currency
fluctuation risk. As a result, a hypothetical 10% change in the foreign currency
exchange rates at October 2, 2004 would not have a material impact on our
results of operations. Our investments in marketable securities are subject to
interest rate risk but due to the short-term nature of these investments,
interest rate changes would not have a material impact on their value at October
2, 2004. We also have fixed rate yen denominated debt obligations in Japan that
have no interest rate risk. At October 2, 2004, our total debt obligation was
$3,405,000 with a long-term portion of $2,167,000. A hypothetical 10% change in
interest rates at October 2, 2004 would not have a material impact on our
results of operations.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the periodic reports filed
by us with the Securities and Exchange Commission (the "Commission") is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Commission and that such information is
accumulated and communicated to our management. In designing and evaluating the
disclosure controls and procedures, our management recognized that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Based on their most recent evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act
of 1934, as amended) are effective as of the end of the period covered by this
Quarterly Report on Form 10-Q. There were not any significant changes in
internal controls or in other factors that could significantly affect our
internal controls during our last fiscal quarter.
15
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings
Not applicable.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits
See Exhibit Index.
16
NANOMETRICS INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NANOMETRICS INCORPORATED
(Registrant)
/s/ Vincent J. Coates
- ----------------------------------
Vincent J. Coates
Chairman of the Board
/s/ John Heaton
- ----------------------------------
John Heaton
Chief Executive Officer
/s/ Paul B. Nolan
- ----------------------------------
Paul B. Nolan
Chief Financial Officer
Dated: November 15, 2004
17
Exhibit Index
No. Exhibit Title
- --- -------------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
18