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NANO > SEC Filings for NANO > Form 10-Q on 1-Aug-2014All Recent SEC Filings

Show all filings for NANOMETRICS INC

Form 10-Q for NANOMETRICS INC


1-Aug-2014

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 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 six months ended June 28, 2014, we derived 83% of our total net revenues from product sales and 17% of our total net revenues from services.

Overview

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.


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


• 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 35% of our total revenue in the six months ended June 28, 2014, and 27% of our total revenue in the six months ended June 29, 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 six months ended June 28, 2014. Please refer to Item 7, "Management's Discussion and Analysis of


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 were as follows (in thousands, except percentages):

                                  Three Months Ended                                  Six Months Ended
                    June 28,      June 29,          Changes In         June 28,      June 29,          Changes In
                      2014          2013         Amount        %         2014          2013         Amount        %
Automated Systems  $  33,456     $  23,366     $ 10,090        43 %   $  67,339     $  28,628     $ 38,711       135  %
Integrated Systems     2,853         1,761        1,092        62 %       9,775         3,916        5,859       150  %
Materials
Characterization       2,915         1,406        1,509       107 %       5,390         7,068       (1,678 )     (24 )%
Total product
revenues              39,224        26,533       12,691        48 %      82,504        39,612       42,892       108  %
Service revenues       8,805         8,019          786        10 %      17,101        19,492       (2,391 )     (12 )%
Total net revenues $  48,029     $  34,552     $ 13,477        39 %   $  99,605     $  59,104     $ 40,501        69  %

For the three and six months ended June 28, 2014, total net revenues increased by $13.5 million and $40.5 million, respectively, relative to the comparable 2013 periods. These increase were 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.
For the three and six months ended June 28, 2014, product revenues increased by $12.7 million and $42.9 million, respectively, relative to the comparable 2013 period. These increases were led by a $10.1 million and $38.7 million increase in the three and six months ended June 28, 2014, relative to the comparable 2013 periods, in Automated Systems sales (primarily from Atlas® II, followed by UniFireTM ) and a $1.1 million and $5.9 million increase in the three and six months ended June 28, 2014, relative to the comparable 2013 periods, in Integrated Systems sales (primarily from IMPULSE® systems), for the reasons cited above.
Service revenues increased by $0.8 million during the three months ended June 28, 2014, relative to the comparable 2013 period, due to an increase in demand for core services from customers. Service revenues decreased by $2.4 million during the six months ended June 28, 2014, 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 were as follows:
           Three Months Ended         Six Months Ended
          June 28,     June 29,    June 28,     June 29,
            2014         2013        2014         2013
Product     47.8 %        41.7 %     48.1 %        39.2 %
Services    47.1 %        42.7 %     42.9 %        48.5 %

The calculation of product gross margin includes both cost of products and amortization of intangible assets. Product gross margin for the three and six months ended June 28, 2014, was 47.8% and 48.1%, respectively, reflecting an increase of 6.1 percentage points and 8.9 percentage points, respectively, from the comparable periods in 2013. The increase during the three and six months ended June 28, 2014, compared to the same periods of the prior fiscal year, was primarily driven by the favorable impact of higher revenues against fixed costs, such as fixed overhead and amortization of intangible assets, and by the decrease in reserves for excess and obsolete inventory.
The gross margin for our services business was 47.1% and 42.9%, respectively, for the three and six months ended June 28, 2014, reflecting an increase of 4.4 percentage points and a decrease of 5.6 percentage points, respectively, from the comparable period in 2013. The increase in the three months ended June 28, 2014, as compared to the same period in 2013, was primarily driven by higher core services revenue. The decrease in the six months ended June 28, 2014, as compared to the same period in 2013, was due principally to a decrease in upgrade revenues, which typically have higher margins than core service revenue. Operating Expenses
Our operating expenses comprised the following (in thousands, except percentages):

                              Three Months Ended                                   Six Months Ended
                                                Changes in                                          Changes in
                June 28,      June 29,                              June 28,      June 29,
                  2014          2013        Amount         %          2014          2013        Amount         %
Research and
development    $   9,373     $   8,321     $ 1,052         13  %   $  17,687     $  15,768     $ 1,919         12  %
Selling            6,681         6,613          68          1  %      14,054        13,545         509          4  %
General and
administrative     6,001         5,507         494          9  %      12,339        11,019       1,320         12  %
Amortization
of intangible
assets               107           195         (88 )      (45 )%         215           393        (178 )      (45 )%
Total
operating
expenses       $  22,162     $  20,636     $ 1,526          7  %   $  44,295     $  40,725     $ 3,570          9  %

Research and development. Research and development expenses increased by $1.1 million for the three months ended June 28, 2014, over the comparable period in 2013, primarily due to the following:
•a $0.8 million increase in spending for non-recurring engineering projects, including product design and prototype development, along with related material spending; and
•a $0.5 million increase in personnel related costs, primarily related to increased headcount and personnel related benefit cost; partially offset by
•a $0.3 million decrease in use of outside consultants. Research and development expenses increased by $1.9 million for the six months ended June 28, 2014, over the comparable period in 2013, primarily due to the following:
•a $1.2 million increase in spending for non-recurring engineering projects, including product design and prototype development, along with related material spending; and
•a $1.0 million increase in personnel related costs, primarily related to increased headcount and personnel-related benefit cost; partially offset by


•a $0.3 million decrease in use of outside consultants. Selling. Selling expenses were unchanged for the three months ended June 28, 2014, over the comparable period in 2013. Increases in personnel related cost and sales commissions of $0.3 million were offset by a decrease of $0.2 million in demonstration equipment amortization. Selling expenses increased by $0.5 million for the six months ended June 28, 2014, over the comparable period in 2013, primarily due to the following:
•a $0.6 million increase in personnel related costs, including commissions and travel costs; partially offset by
•a $0.2 million decrease in demonstration tool amortization. General and administrative. General and administrative expenses increased by $0.5 million for the three months ended June 28, 2014, over the comparable period in 2013, primarily due to the increase in consulting, and software license fees and amortization related to the implementation of a new Enterprise Resource Planning ("ERP") system in the first quarter of 2014. General and administrative expenses increased by $1.3 million for the six months ended June 28, 2014, over the comparable periods in 2013, primarily due to a $0.9 million increase in consulting, and software license fees and amortization related to the implementation of the ERP system in the first quarter of 2014. Restructuring. In July 2014, the Company communicated a plan to consolidate a portion of its European operations to maximize efficiencies. In the second half of 2014, the Company anticipates recording a charge related to employee involuntary termination benefits of approximately $0.7 million. The Company will incur additional charges related to a facility lease which currently expires in 2017. The Company will measure and recognize the exit liability associated with this lease at the cease-use date. The Company expects to complete this restructuring plan by March 2015. Other related costs will be recognized as incurred. Amortization of intangible assets. Amortization of intangible assets decreased for the three and six months ended June 28, 2014, compared to the same periods 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):

                                 Three Months Ended                                              Six Months Ended
                                                       Changes in                                                      Changes in
              June 28, 2014     June 29, 2013      Amount          %         June 28, 2014      June 29, 2013      Amount          %
Interest
income       $          10     $          20     $     (10 )      (50 )%   $         24        $          45     $     (21 )      (47 )%
Interest
expense                (96 )            (205 )         109        (53 )%           (196 )               (431 )         235        (55 )%
Other income
(expense),
net                    (84 )            (637 )         553        (87 )%            168                 (597 )         765       (128 )%
Total other
income
(expense),
net          $        (170 )   $        (822 )   $     652        (79 )%   $         (4 )      $        (983 )   $     979       (100 )%

Interest expense for the three and six months ended June 28, 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 decrease in other expense, net, during the three and six months ended June 28, 2014, compared to the same periods in 2013, was primarily due to a change in fair value of contingent consideration payable as a result of fluctuation of unobservable inputs, which resulted in an increase of $0.5 million and $0.8 million in other expense during the three and six months ended June 30, 2013, compared to a nominal adjustment during the three and six months ended June 28, 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 . . .

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