Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
NANO > SEC Filings for NANO > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for NANOMETRICS INC

Form 10-Q for NANOMETRICS INC


7-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements contained in this document that are not purely historical are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding future periods, financial results, revenues, margins, growth, customers, tax rates, product performance, and the impact of accounting rules on our business and the future implications of our statements regarding goals, strategy, and similar terms. We may identify these statements by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "likely," "may," "might," "plan," "potential," "predict," "project," "should," "will," "would," and other similar expressions. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements, except as may otherwise be required by law.
Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain risks, uncertainties and changes in circumstances, many of which may be difficult to predict or beyond our control, including those factors referenced in Part II, Item 1A "Risk Factors" and elsewhere in this document, and in Part I Item 1A "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 29, 2012. In particular our results could vary significantly based on: changes in customer and industry spending; rate and extent of changes in product mix; adoption of new products; timing of orders, shipments, and acceptance of products; our ability to secure volume supply agreements; and general economic conditions. In evaluating our business, investors should carefully consider these factors in addition to any other risks and uncertainties set forth elsewhere. The occurrence of the events described in the risk factors and elsewhere in this report as well as other risks and uncertainties could materially and adversely affect our business, operating results and financial condition. While management believes that the discussion and analysis in this report is adequate for a fair presentation of the information presented, we recommend that you read this discussion and analysis in conjunction with (i) our audited consolidated financial statements and notes thereto for the fiscal year ended December 29, 2012, which were included in our 2012 Annual Report on Form 10-K filed with the Securities Exchange Commission (SEC) on March 12, 2013, and (ii) our other filings with the SEC.
We are an innovator in the field of metrology and inspection systems for semiconductor manufacturing and other industries. Our systems are designed to precisely monitor film thickness and critical dimensions that are necessary to control the manufacturing process and to identify defects that can affect production yields and performance.
Principal factors that impact our revenue growth include capital expenditures by manufacturers of semiconductors to increase capacity and to enable their development of new technologies, and our ability to take market share. The increasing complexity of the manufacturing processes for semiconductors is an important factor in the demand for our innovative metrology systems, as are the adoption of optical critical dimension metrology across fabrication processes, adoption of immersion lithography and double patterning, adoption of new types of thin film materials, the adoption of advanced packaging strategies and wafer backside inspection and the need for improved process control to drive process efficiencies. Our strategy is to continue to innovate organically as well as to evaluate strategic acquisitions to address business challenges and opportunities.
Our revenues are primarily derived from product sales but are also derived from customer service and system upgrades ("services'') for the installed base of our products. For the three months ended September 28, 2013, we derived 77.3% of our total net revenues from product sales and 22.7% of our total net revenues from services. For the nine months ended September 28, 2013, we derived 71.1% of our total net revenues from product sales and 28.9% of our total net revenues from services.

Overview

Nanometrics Incorporated and its subsidiaries ("Nanometrics", the "Company", or "we") is a leading provider of advanced, high-performance process control metrology and inspection systems used primarily in the fabrication of integrated circuits, high-brightness LEDs ("HB-LED"), discrete components and data storage devices. Our automated and integrated systems address numerous process control applications, including critical dimension and film thickness measurement, device topography, defect inspection, overlay registration, and analysis of various other film properties such as optical, electrical and material characteristics. Our process control solutions are deployed throughout the fabrication process, from front-end-of-line substrate manufacturing, to high-volume production of semiconductors and other devices, to advanced wafer-scale packaging applications. Our systems enable device manufacturers to improve yields, increase productivity and lower their manufacturing


Table of Contents

costs. Our defect inspection systems locate large area and microscopic defects on patterned and unpatterned wafers. This system can be used for inspection at nearly every stage of the semiconductor production flow.

Nanometrics Products
We offer a diverse line of systems to address the broad range of process control requirements of the semiconductor manufacturing industry. In addition, we believe that our engineering expertise, strategic acquisitions, supplier alliances and short-cycle production strategies enable us to develop and offer advanced process control solutions in the future that should address industry advancement and trends. We categorize our systems as follows:
Automated Standalone Systems
Our automated systems are made up of both semi-automated and fully automated metrology systems which are employed in both high-volume and low-volume production environments. The Atlas® II, Atlas XP/Atlas XP+ and Atlas-M represent our line of high-performance metrology systems providing optical critical dimension ("OCD®"), thin film metrology and wafer stress for transistor and interconnect metrology applications. The OCD technology is supported by our NanoCD® suite of solutions including our NanoDiffract® software and NanoGenTM scalable computing engine that enables visualization, modeling, and analysis of complex structures. The UniFire® system enables users to measure multiple parameters at any given process step in the advanced packaging process flow for critical dimension, overlay, and topography applications. Our SPARKTM defect inspection system, offers ultra-fast inspection of patterned and unpatterned semiconductor wafers.
We continue to offer automated products for 200mm factories running at 90nm nodes and above, as well as systems supporting micro-electrical mechanical systems ("MEMS"). Our Q240AT is a 200mm overlay metrology system that extends the technology capability of our customers' existing factories. System Platform
The Lynx platform enables cluster metrology factory automation for improved cost of ownership to our customers by combining our Atlas II, IMPULSE®, UniFire metrology and SPARK inspection systems in configurations to provide high throughput, reduced footprint systems for leading 300mm wafer metrology applications including OCD, overlay, and thin film process control. Integrated Systems
Our integrated metrology ("IM") systems are installed directly onto wafer processing equipment to provide near real-time measurements for improved process control and maximum throughput. Our IM systems are sold directly to end customers and through OEM channels. The IMPULSE system is our latest metrology platform for OCD, DBO, and thin film metrology and has been successfully qualified on numerous OEM platforms. Our 90x0 system is qualified for OEM and direct sales supporting thin film and OCD applications. Our NanoCD solutions suite is sold in conjunction with our IMPULSE and legacy 90x0 systems. Our Trajectory™ system provides in-line measurement of layers in thin film thickness and composition in semiconductor applications. Materials Characterization
Our Materials Characterization products include systems that are used to monitor the physical, optical, electrical and material characteristics of discrete electronic industry, HB-LED, solar PV, compound semiconductor, strained silicon and silicon-on-insulator ("SOI") devices, including composition, crystal structure, layer thickness, dopant concentration, contamination and electron mobility.
Our Vertex™ is a photoluminescence ("PL") mapping system designed for high-volume compound semiconductor metrology applications including power control and photonics applications. The RPMBlue™ is our latest PL mapping system designed specifically for the HB-LED market. We sell Fourier-Transform Infrared ("FTIR") automated and manual systems in the QS2200/3300 and QS1200 respectively. The FTIR systems are spectrometers designed for non-destructive wafer analysis for various applications. The NanoSpec® line of products includes the 6100 which supports thin film measurement across all applications in both low volume production and research applications.
We are continually working to strengthen our competitive position by developing new technologies and products in our market segment. In furtherance of our goals, we have:

• Introduced new products in every core product line and primary market served;


Table of Contents

• Diversified our product line and addressed new markets through acquisitions, such as the 2011 acquisition of Nanda Technologies GmbH, a supplier of high sensitivity, high throughput defect inspection systems;

• Continued development of new measurement and inspection technologies for advanced fabrication processes; and

• Researched and developed innovative applications of existing technology to new market opportunities within the solar PV, HB-LED, and data storage industries.

Important Themes and Significant Trends
The semiconductor equipment industry is characterized by cyclical growth. Changing trends in the semiconductor industry continue to drive the need for metrology as a major component of manufacturing systems. These trends include:

• Proliferation of Optical Critical Dimension Metrology across Fabrication Processes. Our customers use photolithographic processes to create patterns on wafers. Critical dimensions must be carefully controlled during this process. In advanced node device definition, additional monitoring of thickness and profile dimensions on these patterned structures at CMP, Etch, and Thin Film processing is driving broader OCD adoption. Our proprietary OCD systems can provide the critical process control of these circuit dimensions that is necessary for successful manufacturing of these state of the art devices. Nanometrics OCD technology is broadly adopted across NAND, DRAM, HDD, and logic semiconductor manufacturing processes.

• Adoption of Advanced Packaging Processes: Our customers use photolithographic, etching, metallization and wafer thinning to enable next generation advanced packaging solutions for semiconductor devices. The new packaging leads to increased functionality in smaller, less expensive form factors. Advanced packages can be broken down into high density flip chip or bump packages that increase pin density allowing for more complex I/O on advanced CPU parts. Or, similar or different devices can be stacked at the wafer level using a Through Silicon Via ("TSV") process. The TSV process enables high density small form factor parts, being primarily driven by mobile consumer products (i.e. cellular telephones with integrated CMOS camera sensors). Increasingly, advanced packaging technologies are being adopted by our end customers.

• Adoption of New Types of Thin Film Materials. The need for ever increasing device circuit speed coupled with lower power consumption has pushed semiconductor device manufacturers to begin the replacement of the traditional aluminum etch back interconnect flows as well as conventional gate dielectric materials, all which drive a broader adoption of thin film and OCD metrology systems. To achieve greater semiconductor device speed, manufacturers have adopted copper in Logic/IDM and it is now proliferating in next generation DRAM and Flash nodes. Additionally, to achieve improved transistor performance in logic devices and higher cell densities in memory devices, new materials including high dielectric constant (or high-k) gate materials are increasingly being substituted for traditional silicon-oxide gate dielectric materials. High-k materials are comprised of complex thin films including layers of hafnium oxide and a bi-layer of thin film metals. Our advanced metrology and inspection solutions are required for control of process steps, which are critical to enable the device performance improvements that these new materials allow.

• Development of 3D Transistor Architectures. Our end customers continue to improve device density and performance by scaling front end of line transistor architectures. Many of these designs, including FinFET transistors and 3D-NAND have buried features and high aspect ratio stacked features that enable improved performance and density. The advanced designs require additional process control to manage the complex shapes and materials properties, driving additional applications for both OCD and our UniFire systems.

• Need for Improved Process Control to Drive Process Efficiencies. Competitive forces influencing semiconductor device manufacturers, such as price-cutting and shorter product life cycles, place pressure on manufacturers to rapidly achieve production efficiency. Device manufacturers are using our integrated and automated systems throughout the fabrication to ensure that manufacturing processes scale rapidly, are accurate and can be repeated on a consistent basis.

• Reduced Number of Customers. Our market is characterized by an ongoing oligopolistic trend which drives customer concentration. Our largest customer accounted for 34.3% of our total revenue for the third quarter of 2013, and our largest customer accounted for 17.4% of our total revenue for the third quarter of 2012. Our largest customer accounted for 29.8% of our total revenue for the first nine months of 2013, and our largest customer accounted for 31.6% of our total revenue for the first nine months of 2012.


Table of Contents

Critical Accounting Policies
The preparation of our financial statements conforms to accounting principles generally accepted in the United States of America, which requires management, in applying our accounting policies, to make estimates and judgments that have an important impact on our reported amounts of assets, liabilities, revenue, expenses and related disclosures at the date of our financial statements. On an on-going basis, management evaluates its estimates including those related to bad debts, inventory valuations, warranty obligations and income taxes. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from management's estimates. Since December 29, 2012, there have been no significant changes to our critical accounting policies discussed in our Annual Report on Form 10-K for the fiscal year ended December 29, 2012.
Recent Accounting Pronouncements
See Note 2 of the Unaudited Condensed Consolidated Financial Statements for a description of recent accounting pronouncements, including the respective dates of adoption and effects or anticipated effects on results of operations and financial condition.

Results of Operations
Three and Nine Month Periods Ended September 28, 2013 and September 29, 2012
Total net revenues - Our net revenues comprised the following categories (in
thousands, except percentages):

                                                  Three Months Ended                                                   Nine Months Ended
                             September 28,       September 29,            Changes In             September 28,       September 29,            Changes In
                                 2013                2012            Amount           %              2013                2012            Amount           %
Automated Systems          $        22,965     $        26,588     $  (3,623 )      (13.6 )%   $        51,593     $       104,675     $ (53,082 )      (50.7 )%
Integrated Systems                   4,453               2,663         1,790         67.2  %             8,369               9,453        (1,084 )      (11.5 )%
Materials Characterization           2,746               3,063          (317 )      (10.3 )%             9,814               7,600         2,214         29.1  %
Total product revenues              30,164              32,314        (2,150 )       (6.7 )%            69,776             121,728       (51,952 )      (42.7 )%
Service revenues                     8,880              11,624        (2,744 )      (23.6 )%            28,372              30,883        (2,511 )       (8.1 )%
Total net revenues         $        39,044     $        43,938     $  (4,894 )      (11.1 )%   $        98,148     $       152,611     $ (54,463 )      (35.7 )%

For the three and nine month periods ended September 28, 2013, total product revenues decreased by $2.2 million and $52.0 million, respectively, relative to the comparable 2012 periods. In the three and nine month periods ended September 28, 2013, net revenues from automated systems decreased by $3.6 million and $53.1 million, respectively, relative to the comparable 2012 periods. The year over year decrease in Automated Systems and Integrated Systems was primarily due to a substantial decline in demand and capital spending by two of our largest customers, as a result of their lack of capacity expansion in memory and logic production. Net revenues from our materials characterization products decreased by $0.3 million and increased by $2.2 million in the three and nine month periods ended September 28, 2013, respectively, relative to the comparable 2012 periods. The year over year increase in sales of Materials Characterization was primarily due to non-recurring sales of several relatively high priced products into the bare silicon substrate market in the first quarter of 2013.
For the three and nine month periods ended September 28, 2013, service revenues decreased by $2.7 million and $2.5 million, respectively, relative to the comparable 2012 periods. The decrease in the three month period and the increase in the nine month period was primarily due to upgrades of a large number of installed tools by a customer during the second quarter of 2012 and the first quarter of 2013. Upgrades tend to fluctuate from quarter to quarter based on availability of new functionality from upgrades and customer production cycles which determine when customers purchase available upgrades.


Table of Contents

With a significant portion of the world's semiconductor manufacturing capacity located in Asia, a substantial portion of our revenues continue to be generated in that region. Although sales to customers within individual countries of that region will vary from time to time, we expect that a substantial portion of our revenues will continue to be generated in Asia.

Gross margin. Our gross margin for product and services was as follows:

                Three Months Ended                 Nine Months Ended
         September 28,     September 29,    September 28,     September 29,
              2013              2012             2013              2012
Product         37.8 %             49.2 %          38.6 %             46.5 %
Services        49.7 %             53.7 %          48.9 %             49.8 %

The calculation of product gross margin includes both cost of products and amortization of intangible assets. Product gross margin for the three and nine month periods ended September 28, 2013, was 37.8% and 38.6%, respectively, reflecting a decrease of 11.4 percentage points and 7.9 percentage points, respectively, from the comparable periods in 2012. The decrease is primarily due to an adverse impact of additional reserves for excess and obsolete inventory for the discontinued MosaicTM product line in the three months ended September 28, 2013, as well as fixed costs such as fixed overhead, amortization of intangible assets against lower revenue in the three and nine month periods ended September 28, 2013.
The gross margin for our services business was 49.7% and 48.9% for the three and nine month periods ended September 28, 2013, respectively, reflecting a decrease of 4 percentage points and an decrease of 0.9 percentage points, respectively, from the comparable periods in 2012, due principally to decreased upgrade revenues, which typically have higher margins than system sales, and the effects of lower labor and material costs associated with delivery of services under contracts.
Operating expenses. Our operating expenses comprised the following (in thousands, except percentages):

                                           Three Months Ended                                                             Nine Months Ended
                                                                        Changes in                                                                     Changes in
                 September 28, 2013       September 29, 2012        Amount          %          September 28, 2013       September 29, 2012        Amount           %
Research and
development    $              8,926     $              7,176     $    1,750         24.4 %   $             24,695     $             22,296     $    2,399         10.8  %
Selling                       6,758                    6,308            450          7.1 %                 20,303                   20,560           (257 )       (1.3 )%
General and
administrative                5,424                    4,861            563         11.6 %                 16,442                   16,525            (83 )       (0.5 )%
Amortization
of intangible
assets                          195                      193              2          1.0 %                    588                      580              8          1.4  %
Restructuring                 1,740                        -          1,740        100.0 %                  1,740                        -          1,740        100.0  %
Total
operating
expenses       $             23,043     $             18,538     $    4,505         24.3 %   $             63,768     $             59,961     $    3,807          6.3  %

Research and development. Research and development expenses increased $1.8 million for the three month period ended September 28, 2013, over the comparable period in 2012. The result is primarily due to an $1.2 million increase in spending for development projects and related activities and a $0.3 million increase in labor costs.
Research and development expenses increased by $2.4 million for the nine month period ended September 28, 2013, over the comparable period in 2012, primarily due to a $2.6 million increase in spending for development projects and related activities, a $0.2 million increase in depreciation on capital equipment, a $0.2 million increase in facilities costs, offset in part by a $0.6 million decrease in labor costs associated with a decrease in headcount.
Selling. Selling expenses increased by $0.5 million for the three month period ended September 28, 2013, over the comparable period in 2012, primarily due to a $0.2 million increase in depreciation, a $0.1 million increase in marketing costs and a $0.1 million increase in recruiting expenses.
Selling expenses decreased by $0.3 million for the nine month period ended September 28, 2013, over the comparable period in 2012, primarily due to a $0.7 million decrease in labor costs, including bonus expense, a $0.2 million decrease in travel expenses related to lower sales activities, and a $0.2 million decrease in marketing activities,


Table of Contents

offset in part by a $0.7 million increase in depreciation of additional equipment used by our sales and applications departments and evaluation tools at customers sites, and a $0.3 million increase in recruiting expenses. General and administrative. General and administrative expenses increased by $0.6 million for the three month period ended September 28, 2013, over the comparable period in 2012, primarily due to a $0.4 million increase in labor costs and a $0.2 million increase in legal and accounting fees.
General and administrative expenses decreased by $0.1 million for the nine month period ended September 28, 2013, over the comparable period in 2012, primarily due to a $0.6 million decrease in facilities expense offset in part by a $0.5 million increase in labor costs.
Amortization of intangible assets. Amortization of intangible assets increased slightly for the three and nine month periods ended September 28, 2013, when compared to the same periods in 2012, due primarily to the fluctuation of foreign currency exchange rates.
Restructuring. We recorded a restructuring charge of $1.7 million during the three month period ended September 28, 2013 as a result of our decision to consolidate a portion of our European operations to maximize efficiencies. This amount includes charges primarily related to employee severance and non-cash acceleration of vesting of RSUs in the amount of $0.8 million and $0.9 million, respectively. No cash payments related to employee severance have been made as of September 28, 2013. We expect to complete this restructuring plan by May 2014, and expect to incur an additional $0.2 million million over the next seven months.
Other Income (expense), net. Our net other income (expense) consisted of the following categories (in thousands, except percentages):

                                Three Months Ended                                        Nine Months Ended
                                                     Changes in                                              Changes in
             September 28,    September 29,                               September      September
                  2013             2012          Amount          %         28, 2013       29, 2012       Amount         %
Interest
income       $        7       $       28       $     (21 )    (75.0 )%   $       51     $      113     $    (62 )    (54.9 )%
Interest
expense            (118 )           (262 )           144      (55.0 )%         (549 )         (795 )        246      (30.9 )%
Other
expense, net       (334 )           (121 )          (213 )    176.0  %         (930 )         (345 )       (585 )    169.6  %
Total other
income
. . .
  Add NANO to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for NANO - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.