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NANO > SEC Filings for NANO > Form 10-Q on 6-May-2014All Recent SEC Filings

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Quarterly Report


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 28, 2013. 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 28, 2013, which were included in our 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 7, 2014, 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 gain 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, the adoption of immersion lithography and double patterning, the 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 March 29, 2014, we derived 84% of our total net revenues from product sales and 16% of our total net revenues from services.


Nanometrics Incorporated, together with its subsidiaries, 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 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.

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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 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 UniFireTM 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").
System Platform
The Lynx® platform enables cluster metrology factory automation for improved cost of ownership to our customers by combining our Atlas® II and IMPULSE®, UniFire metrology and SPARK inspection systems in configurations to provide high throughput, reduced footprint systems for leading 300mm wafer metrology applications including OCD 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 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 Photo-Voltaics ("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, including the NanoSpec II products supporting 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;

• 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

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• 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. 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 (e.g. 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 comprise 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 fin-fet 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 oligopsonistic trend which drives customer concentration. Our largest customer accounted for 51.7% of our total revenue in the three months ended March 29, 2014 and 29.3% of our total revenue in the three months ended March 30, 2013.

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, impairment 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. There were no significant changes in our critical accounting policies during the three months ended March 29, 2014. Please refer to Item 7, "Management's Discussion and Analysis of

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Financial Condition and Results of Operations," in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013 for a complete discussion of our critical accounting policies.
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 our results of operations and financial condition.

Results of Operations
Net Revenues
Our net revenues by category for the three months ended March 29, 2014 and March
30, 2013 were as follows (in thousands, except percentages):

                                           Three Months Ended
                            March 29,      March 30,          Changes In
                               2014           2013         Amount        %
Automated Systems          $    33,883    $     5,262    $ 28,621     543.9  %
Integrated Systems               6,922          2,155       4,767     221.2  %
Materials Characterization       2,475          5,662      (3,187 )   (56.3 )%
Total product revenues          43,280         13,079      30,201     230.9  %
Service revenues                 8,296         11,473      (3,177 )   (27.7 )%
Total net revenues         $    51,576    $    24,552    $ 27,024     110.1  %

For the three month period ended March 29, 2014, total revenues increased by $27.0 million relative to the comparable 2013 period.
This increase was primarily from an industry-wide improvement in memory-related semiconductor capital spending and from an increase in foundry penetration, supported by the adoption of multiple Atlas®, UniFireTM and IMPULSE® systems by multiple customers. The $30.2 million increase in net product revenues was led by a $28.6 million year-over-year increase in Automated Systems sales (primarily from Atlas® II, followed by UniFireTM ) and a $4.8 million increase in Integrated Systems sales (primarily from IMPULSE® systems). Net revenues from our Materials Characterization products decreased by $3.2 million during this period, primarily due to non-recurring sales of several relatively high priced products into the bare silicon substrate market in the first quarter of 2013. Service revenues decreased by $3.2 million during this period, relative to the comparable 2013 period, primarily due to upgrades of a large number of installed tools by a customer during 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.
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 for the three months ended March 29,
2014 and March 30, 2013 were as follows:

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            Three Months Ended
         March 29,     March 30,
            2014          2013
Product     48.4 %         34.1 %
Services    38.4 %         52.5 %

The calculation of product gross margin includes both cost of products and amortization of intangible assets. Product gross margin for the three month period ended March 29, 2014, was 48.4% reflecting an increase of 14.3 percentage points from the comparable period in 2013. The increase during the three month period ended March 29, 2014, compared to the same period of the prior fiscal year, was primarily driven by the favorable impact of fixed costs, such as fixed overhead and amortization of intangible assets, against a significantly higher revenue base, and by the decrease in reserves for excess and obsolete inventory. The gross margin for our services business was 38.4% for the three month period ended March 29, 2014, reflecting a decrease of 14.1 percentage points from the comparable period in 2013, due principally to a decrease in upgrade revenues, which typically have higher margins than system sales. Operating Expenses
Our operating expenses for the three months ended March 29, 2014 and March 30, 2013 comprised the following (in thousands, except percentages):

                                                      Three Months Ended
                                                                             Changes in
                                   March 29, 2014     March 30, 2013     Amount        %
Research and development          $         8,314    $         7,447    $   867      11.6  %
Selling                                     7,373              6,932        441       6.4  %
General and administrative                  6,338              5,512        826      15.0  %
Amortization of intangible assets             108                198        (90 )   (45.5 )%
Total operating expenses          $        22,133    $        20,089    $ 2,044      10.2  %

Research and development. Research and development expenses increased by $0.9 million for the three month period ended March 29, 2014, over the comparable period in 2013, primarily due to a $0.5 million increase in labor costs associated with an increase in headcount, a $0.3 million increase in spending for non-recurring engineering projects, including product design and prototype development, and a $0.2 million increase in material spending to support the related development initiatives.
Selling. Selling expenses increased by $0.4 million for the three month period ended March 29, 2014, over the comparable period in 2013, primarily due to a $0.4 million increase in commission costs resulting from the 110.1% increase in net revenues during the period.
General and administrative. General and administrative expenses increased by $0.8 million for the three month period ended March 29, 2014, over the comparable period in 2013, primarily due to a $0.2 million increase in consulting fees to support the implementation of a new Enterprise Resource Planning ("ERP") system, a $0.2 million increase in software amortization costs associated with our new ERP system, a $0.2 million increase in legal and accounting fees, and a $0.2 million increase in temporary employment costs. Amortization of intangible assets. Amortization of intangible assets decreased for the three month period ended March 29, 2014, compared to the same period in 2013, as a result of the reduction in amortization due to intangible assets that became fully amortized in 2013.
Other Income (expense), net. Our other income (expense), net, consisted of the following categories (in thousands, except percentages):

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                                                      Three Months Ended
                                                                              Changes in
                                   March 29, 2014      March 30, 2013     Amount        %
Interest income                   $          14       $           25     $  (11 )    (44.0 )%
Interest expense                           (100 )               (226 )      126      (55.8 )%
Other expense, net                          252                   40        212      530.0  %
Total other income (expense), net $         166       $         (161 )   $  327     (203.1 )%

Interest expense for the three months ended March 29, 2014 was lower than the comparable prior year period due to the repayment of the entire outstanding balance of the mortgage on our headquarters during 2013. The increase in other expense, net, during the three month period ended March 29, 2014, compared to the same period of the prior fiscal year, was primarily from the change in fair value of contingent consideration payable as a result of fluctuation of unobservable inputs, which resulted in an increase of $0.4 million in other expense during the three months ended March 30, 2013, compared to a nominal decrease adjustment during the three months ended March 29, 2014. Income Taxes
We account for income taxes under the provisions of ASC 740, Accounting for Income Taxes. We adjust the effective tax rate each quarter to be consistent with the estimated annual effective tax rate. We also record the tax effect of unusual or infrequently occurring discrete items, including changes in judgment about valuation allowances and effects of changes in tax laws or tax rates, in the interim period in which they occur. Our effective tax rate reflects the impact of a portion of its earnings being taxed in foreign jurisdictions as well as a valuation allowance maintained on certain deferred tax assets. We recorded a tax provision of $0.6 million and a tax benefit of $4.2 million for the three month periods ended March 29, 2014 and March 30, 2013, respectively. The change during the three months ended March 29, 2014, compared to the corresponding period in 2013, was primarily related to our profitability during the three months ended March 29, 2014, as well as a one-time benefit of $0.6 million recorded during the three month period ended March 30, 2013 related to the retroactive reinstatement of the 2012 Federal R&D tax credit.

As of March 29, 2014, we continued to maintain a valuation allowance against certain net deferred tax assets as a result of uncertainties regarding the realization of the asset due to cumulative losses and uncertainty of future taxable income in various tax jurisdictions. In the event that we determine that the deferred tax assets are realizable, an adjustment to the valuation allowance will be reflected in the tax provision for the period such determination is made.
We are subject to taxation in the United States and various states including California, and foreign jurisdictions including South Korea, Japan and the United Kingdom. Due to tax attribute carry-forwards, we are subject to examination by the IRS for tax years beginning from the 2003 tax year for U.S. tax purposes. We are also subject to examination in various states for tax years beginning from the 2002 tax year. We are also subject to examination in various foreign jurisdictions beginning from the 2006 tax year.

On September 13, 2013, the U.S. Treasury Department and the IRS issued final regulations that address costs incurred in acquiring, producing, or improving tangible property (the "tangible property regulations"). The tangible property regulations are generally effective for tax years beginning on or after January 1, 2014. The tangible property regulations required us to make additional tax accounting method changes as of January 1, 2014. The impact of these changes was not material to our consolidated financial position or our results of operations.

We accrue interest and penalties related to unrecognized tax benefits in the provision for income taxes. The total amount of accrued penalties and interest was immaterial for the three month period ended March 29, 2014. During the next twelve months, we anticipate increases in our unrecognized tax benefits of approximately $0.3 million.
Liquidity and Capital Resources
We maintain an ongoing investment strategy of maintaining a portion of our cash and investments in available-for-sale investments with the objective of preserving capital and maintaining liquidity while mitigating concentration risk and increasing yields. Our policy is to maintain a marketable securities portfolio consisting of highly rated investments that may include: obligations issued by the US Treasury and its agencies, corporate bonds and commercial paper, tax

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exempt debt obligations of US municipalities, and time deposits at commercial . . .

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