-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E2na0iEF4C2oYuzJbdKcZPjok8hS9/dMqxo5xPycxsTtRW7cF79WJwNphaRdW3Xw ZHjsToFK698a3OZQLuyz0g== 0000950005-04-000834.txt : 20041116 0000950005-04-000834.hdr.sgml : 20041116 20041115192812 ACCESSION NUMBER: 0000950005-04-000834 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20041002 FILED AS OF DATE: 20041116 DATE AS OF CHANGE: 20041115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NANOMETRICS INC CENTRAL INDEX KEY: 0000704532 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 942276314 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13470 FILM NUMBER: 041147626 BUSINESS ADDRESS: STREET 1: 1550 BUCKEYE DRIVE CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 408-435-9600 MAIL ADDRESS: STREET 1: 1550 BUCKEYE DRIVE CITY: MILPITAS STATE: CA ZIP: 95035 10-Q 1 p18997_10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ----------- 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 --------------- 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 --------------------------------------------------- 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_____ ------- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES NO X ------- ----- 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 EX-31 2 p18997-ex31_1.txt EXHIBIT 31.1 Exhibit 31.1 I, John D. Heaton, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Nanometrics Incorporated; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 15, 2004 By: /s/ John D. Heaton --------------------------------- Name: John D. Heaton Title: Chief Executive Officer 19 EX-31 3 p18997-ex31_2.txt EXHIBIT 31.2 Exhibit 31.2 I, Paul B. Nolan, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Nanometrics Incorporated; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered in this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 15, 2004 By: /s/ Paul B. Nolan ------------------------------------ Name: Paul B. Nolan Title: Chief Financial Officer 20 EX-32 4 p18997-ex32_1.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, John D. Heaton, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Nanometrics Incorporated on Form 10-Q for the quarterly period ended October 2, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Nanometrics Incorporated. November 15, 2004 By: /s/ John D. Heaton --------------------------------- Name: John D. Heaton Title: Chief Executive Officer I, Paul B. Nolan, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Nanometrics Incorporated on Form 10-Q for the quarterly period ended October 2, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Nanometrics Incorporated. November 15, 2004 By: /s/ Paul B. Nolan --------------------------------- Name: Paul B. Nolan Title: Chief Financial Officer 21 -----END PRIVACY-ENHANCED MESSAGE-----