NANO Nanometrics Inc

Strong Outlook and Revenue Growth Outperformance Continues for Full-Year 2018

Nanometrics Incorporated (NASDAQ: NANO), a leading provider of advanced process control systems, today announced financial results for its third quarter ended September 29, 2018.

Highlights for the Third Quarter and First Nine Months of 2018:

• Revenue Growth Surpassing Industry, with Strong Year-over-Year Financial Performance.  Nanometrics’ revenue growth continued to exceed the growth rate for the overall wafer fab equipment industry. With revenues of $76.6 million and earnings of $0.47 per diluted share, the third quarter showed significant increases in both sales and profitability year-over-year. For the first nine months of 2018, total revenues increased to $247.5 million, or 37% over the year-ago period, while gross margin and operating margin grew by six percentage points and nine percentage points, respectively, compared to the first nine months of 2017. Strength in the third quarter continued to be driven primarily by the memory market, with total foundry, logic and other devices rebounding strongly quarter-over-quarter to compose 20% of product sales for the quarter.
• 500th Shipment of IMPULSE® Integrated Metrology System. The company’s flagship integrated optical critical dimension (“OCD”) process control metrology system, the IMPULSE, has been adopted in high-volume production applications serving the latest-generation 3D-NAND, DRAM and logic devices. Celebrating the success of its flagship integrated platform, the company shipped its 500th IMPULSE during the third quarter.
• Continued Strong Free Cash Flow Generation, Record Cash and Investments.  The third quarter was another strong period of free cash flow generation, with cash flow from operations of $24.4 million and a net increase in cash and investments of $24.2 million. Year-to-date, the company has reported $83.4 million in cash flow from operating activities, and after capital expenditures of $2.9 million, generated $80.5 million in free cash flow for the first nine months of 2018. Since the end of fiscal 2017, the company has added $55.9 million in net cash and investments, after $23.0 million in stock repurchases, and ended the third quarter with a record balance of $172.9 million.

GAAP Results
	Q3 2018	Q2 2018	Q3 2017
Revenues (Millions)	$76.6	$88.6	$56.7
Gross Margin	57.0%	57.4%	54.1%
Operating Margin	18.6%	23.5%	13.2%
Net Income (Millions)	$11.6	$17.7	$5.8
Earnings per Diluted Share	$0.47	$0.72	$0.22
Non-GAAP Results
	Q3 2018	Q2 2018	Q3 2017
Gross Margin	57.0%	57.5%	54.4%
Operating Margin	19.0%	24.2%	13.9%
Net Income (Millions)	$11.4	$17.4	$5.7
Earnings per Diluted Share	$0.47	$0.71	$0.22
A reconciliation between GAAP operating results and non-GAAP operating results is provided following the financial statements that are part of this release and on the investor page of Nanometrics' website. Non-GAAP results exclude the impact of amortization of acquired intangibles, severance costs, executive transition and search costs and certain discrete tax items.

“Strong third-quarter results support our continued outlook for revenue growth significantly outperforming the overall increase in industry spending for the year,” commented Dr. Pierre-Yves Lesaicherre, president and chief executive officer of Nanometrics. “Our financial results to date in 2018 reflect the strong year-over-year increase in memory capital spending, our gains in market share, and significant increases in our profitability. With revenues for the first nine months growing 37% over the same period last year, gross profits have increased by 53% and operating profits have increased over 130%. While we have seen some shifts in expected sales between the third and fourth quarters, our outlook for 2018 revenue growth of at least 20% year-over-year is consistent with our prior forecast. We look forward to delivering our fifth straight year of double-digit revenue growth, with expanding gross and operating margins, increased earnings per share, and significant free cash flow generation.”

Third Quarter 2018 SummaryRevenues for the third quarter of 2018 were $76.6 million, down 14% from $88.6 million in the second quarter of 2018, and up 35% from $56.7 million in the third quarter of 2017.  On a GAAP basis, gross margin was 57.0%, compared to 57.4% in the prior quarter and 54.1% in the year-ago period. Operating income was $14.3 million, compared to $20.8 million in the prior quarter and $7.5 million in the year-ago period.  Net income was $11.6 million or $0.47 per diluted share, compared to $17.7 million or $0.72 per diluted share in the prior quarter and $5.8 million or $0.22 per diluted share in the third quarter of 2017.

On a non-GAAP basis, which excludes amortization of acquired intangible assets and severance included in cost of revenues, gross margin was 57.0%, compared to 57.5% in the prior quarter and 54.4% in the year-ago period.  Non-GAAP operating income also excludes severance and executive search and transition costs and was $14.5 million, compared to $21.4 million in the prior quarter and $7.9 million in the third quarter of 2017. Non-GAAP net income also adjusts for certain discrete tax items and the tax effect of non-GAAP adjustments and was $11.4 million or $0.47 per diluted share, reflecting a non-GAAP tax rate of 22.8%. This compares to non-GAAP net income of $17.4 million or $0.71 per diluted share in the prior quarter and $5.7 million or $0.22 per diluted share in the third quarter of 2017. 

Business OutlookManagement expects fourth quarter 2018 revenues in the range of $69 to $75 million and gross margin is expected to be approximately 56.5%, plus or minus 1%, on both a GAAP and non-GAAP basis. Management expects fourth-quarter operating expenses of approximately $29 million, plus or minus $0.5 million, on both a GAAP and non-GAAP basis, and earnings in the range of $0.33 to $0.45 per diluted share on both a GAAP and non-GAAP basis.

Conference Call DetailsA conference call to discuss third quarter 2018 results will be held today at 4:30 p.m. EDT (1:30 p.m. PDT). To participate in the conference call, the dial-in numbers are (877) 374-4041 for domestic callers and (253) 237-1156 for international callers. The conference ID is 9599453. A live and recorded webcast and supplemental financial information will be made available on the investor page of the Nanometrics website at www.nanometrics.com.

Use of Non-GAAP Financial InformationThe non-GAAP gross profit, gross margin, operating income, operating income margin, net income and net income per share, which exclude certain expenses, charges and special items, and free cash flow, were not prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Management uses non-GAAP financial results, which exclude amortization of acquired intangibles assets, severance costs, executive transition and search costs, and certain discrete tax items, and with respect to free cash flow excludes capital expenditures from cash flow from operations, to evaluate the company’s ongoing performance and to enable comparison to other periods that did not include these items. The company believes the presentation of non-GAAP results is useful to investors for analyzing ongoing business trends, comparing performance to prior periods, and enhancing the investor’s ability to view the company’s results from management’s perspective; however, investors are cautioned that other companies may calculate these measures differently than Nanometrics does, which would limit the usefulness of these financial measures. A table presenting a reconciliation of GAAP results to non-GAAP results is included at the end of this press release and is available on the investor page of the Nanometrics website at www.nanometrics.com. 

About NanometricsNanometrics is a leading provider of advanced, high-performance process control metrology and inspection systems used primarily in the fabrication of semiconductors and other solid-state devices, including sensors, optoelectronic devices, high-brightness LEDs, discretes and data storage components.  Nanometrics’ automated and integrated metrology systems measure critical dimensions, device structures, topography and various thin film properties, including three-dimensional features and film thickness, as well as optical, electrical and material properties. The company’s 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 three-dimensional wafer-level packaging applications. Nanometrics’ systems enable advanced process control for device manufacturers, providing improved device yield at reduced manufacturing cycle time, supporting the accelerated product life cycles in the semiconductor and other advanced device markets. The company maintains its headquarters in Milpitas, California, with sales and service offices worldwide. Nanometrics is traded on Nasdaq Global Select Market under the symbol NANO. Nanometrics’ website is http://www.nanometrics.com. 

Forward Looking StatementsThe statements in this press release found in Dr. Lesaicherre’s quote and under the caption “Business Outlook” regarding expected future financial performance are forward-looking statements that involve a number of risks and uncertainties that could cause actual results to differ materially from those described in this press release.  Although Nanometrics believes that the expectations reflected in the forward-looking statements are reasonable, actual results could differ materially from these expectations due to a variety of factors, including, but not limited to, unexpected: decreased levels of industry spending; slowing adoption rate of Nanometrics’ new product; Nanometrics’ inability to gain additional market share, increase sales, ship products as scheduled, achieve customer acceptance of new products or outperform the industry; decreased demand for Nanometrics’ products; shifts in the timing of customer orders and product shipments; technology adoption rates; changes in customer and product mix; changes in market share; changes in operating expenses; and changes in general economic conditions. For additional information and considerations regarding the risks faced by Nanometrics that could cause actual results to differ materially, see its annual report on Form 10-K for the year ended December 30, 2017, as filed with the Securities and Exchange Commission on February 26, 2018, including under the caption “Risk Factors,” as well as other periodic reports filed with the SEC from time to time. Nanometrics disclaims any obligation to update information contained in any forward-looking statement, except as required by law. 

NANOMETRICS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
	September 29, 2018				December 30, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	96,103			$	34,899
Marketable securities		76,835				82,130
Accounts receivable, net		50,349				62,457
Inventories		58,884				52,860
Inventories-delivered systems		1,858				1,534
Prepaid expenses and other		7,070				6,234
Total current assets		291,099				240,114
Property, plant and equipment, net		43,135				44,810
Goodwill		10,611				10,232
Intangible assets, net		4,101				2,206
Deferred income tax assets		7,050				11,924
Other assets		456				413
Total assets	$	356,452			$	309,699
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	20,870			$	13,857
Accrued payroll and related expenses		14,895				12,901
Deferred revenue		11,698				7,408
Other current liabilities		8,470				7,249
Income taxes payable		3,183				2,680
Total current liabilities		59,116				44,095
Deferred revenue		1,575				1,661
Income taxes payable		1,003				860
Deferred tax liabilities		172				179
Other long-term liabilities		511				521
Total liabilities		62,377				47,316
Stockholders’ equity:
Common stock		24				26
Additional paid-in capital		241,318				255,368
Retained earnings		55,380				9,113
Accumulated other comprehensive loss		(2,647	)			(2,124	)
Total stockholders’ equity		294,075				262,383
Total liabilities and stockholders’ equity	$	356,452			$	309,699

 

NANOMETRICS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
	Three Months Ended								Nine Months Ended
	September 29, 2018				September 30, 2017				September 29, 2018				September 30, 2017
Net revenues:
Products	$	63,798			$	45,571			$	211,521			$	147,322
Service		12,792				11,104				35,986				33,094
Total net revenues		76,590				56,675				247,507				180,416
Costs of net revenues:
Cost of products		25,589				21,276				85,417				72,014
Cost of service		7,332				4,549				19,929				15,191
Amortization of intangible assets		35				52				105				156
Restructuring		-				138				-				327
Total costs of net revenues		32,956				26,015				105,451				87,688
Gross profit		43,634				30,660				142,056				92,728
Operating expenses:
Research and development		12,717				8,825				35,410				26,514
Selling		8,902				7,553				28,077				22,606
General and administrative		7,744				6,730				22,950				19,628
Restructuring		-				68				-				336
Total operating expenses		29,363				23,176				86,437				69,084
Income from operations		14,271				7,484				55,619				23,644
Other income (expense):
Interest income		4				2				8				6
Interest expense		(108	)			(25	)			(253	)			(84	)
Other income, net		322				59				508				330
Total other income, net		218				36				263				252
Income before income taxes		14,489				7,520				55,882				23,896
Provision for income taxes		2,921				1,756				10,258				4,492
Net income	$	11,568			$	5,764			$	45,624			$	19,404
Net income per share:
Basic	$	0.48			$	0.23			$	1.90			$	0.77
Diluted	$	0.47			$	0.22			$	1.86			$	0.75
Shares used in per share calculation:
Basic		24,059				25,494				24,065				25,320
Diluted		24,466				25,932				24,551				25,933

 

NANOMETRICS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
	Nine Months Ended
	September 29, 2018				September 30, 2017
Cash flows from operating activities:
Net income	$	45,624			$	19,404
Reconciliation of net income to net cash from operating activities:
Depreciation and amortization		4,962				5,219
Stock-based compensation		8,229				6,775
Loss on disposal of fixed assets		38				98
Inventory write down		870				1,412
Deferred income taxes		4,668				2,153
Changes in assets and liabilities:
Accounts receivable		11,520				1,418
Inventories		(6,351	)			(16,828	)
Inventories-delivered systems		(324	)			(864	)
Prepaid expenses and other		(1,224	)			(3,850	)
Accounts payable, accrued and other liabilities		9,623				709
Deferred revenue		5,126				(1,204	)
Income taxes payable		647				942
Net cash provided by operating activities		83,408				15,384
Cash flows from investing activities:
Payment for acquisition of certain assets		(2,000	)			(2,000	)
Sales of marketable securities		19,776				28,624
Maturities of marketable securities		32,195				62,923
Purchases of marketable securities		(46,604	)			(104,984	)
Purchase of property, plant and equipment		(2,942	)			(2,342	)
Net cash provided by (used in) investing activities		425				(17,779	)
Cash flows from financing activities:
Proceeds from sale of shares under employee stock option and purchase plans		3,826				3,678
Taxes paid on net issuance of stock awards		(3,122	)			(3,838	)
Repurchases of common stock under share repurchase plans		(22,987	)			-
Net cash used in financing activities		(22,283	)			(160	)
Effect of exchange rate changes on cash and cash equivalents		(346	)			(466	)
Net increase in cash and cash equivalents		61,204				(3,021	)
Cash and cash equivalents, beginning of period		34,899				47,062
Cash and cash equivalents, end of period	$	96,103			$	44,041

 

NANOMETRICS INCORPORATED
RECONCILIATION OF GAAP TO NON-GAAP RESULTS
(In thousands, except per share amounts)
(Unaudited)
	Three Months Ended
	September 29, 2018							June 30, 2018							September 30, 2017
Reconciliation of GAAP gross profit and gross margin to non-GAAP gross profit and gross margin
GAAP gross profit and gross margin, respectively	$	43,634			57.0	%		$	50,891			57.4	%		$	30,660			54.1	%
Non-GAAP adjustments:
Severance included in cost of revenues		-			0.0	%			21			0.0	%			138			0.2	%
Amortization of intangible assets		35			0.0	%			35			0.0	%			52			0.1	%
Non-GAAP gross profit and gross margin, respectively	$	43,669			57.0	%		$	50,947			57.5	%		$	30,850			54.4	%
Reconciliation of GAAP operating income to non-GAAP operating income
GAAP operating income and operating margin, respectively	$	14,271			18.6	%		$	20,784			23.5	%		$	7,484			13.2	%
Non-GAAP adjustments:
Amortization of intangible assets included in cost of revenues		35			0.0	%			35			0.0	%			52			0.1	%
Severance included in cost of revenues		-			0.0	%			21			0.0	%			138			0.2	%
Severance included in operating expenses		-			0.0	%			339			0.4	%			68			0.1	%
Executive transition costs		236			0.3	%			236			0.3	%			-			0.0	%
Executive search costs		-			0.0	%			-			0.0	%			125			0.2	%
Total non-GAAP adjustments to operating income		271			0.4	%			631			0.7	%			383			0.7	%
Non-GAAP operating income and operating margin, respectively	$	14,542			19.0	%		$	21,415			24.2	%		$	7,867			13.9	%
Reconciliation of GAAP net income to non-GAAP net income
GAAP net income	$	11,568						$	17,675						$	5,764
Non-GAAP adjustments:
Total non-GAAP adjustments to non-GAAP operating income		271							631							383
Discrete tax items and tax effect of non-GAAP adjustments		(448	)						(912	)						(491	)
Tax Reform		-							-							-
Non-GAAP net income	$	11,391						$	17,394						$	5,656
GAAP net income per diluted share	$	0.47						$	0.72						$	0.22
Non-GAAP net income per diluted share	$	0.47						$	0.71						$	0.22
Shares used in diluted net income per share calculation		24,466							24,442							25,932
Reconciliation of net cash provided by operating activities to free cash flow
GAAP net cash provided by operating activities	$	24,437						$	26,257						$	5,126
Purchase of property and equipment		(1,181	)						(442	)						(806	)
Free cash flow	$	23,256						$	25,815						$	4,320

Investor Relations Contact:
Claire McAdams
Headgate Partners LLC
530.265.9899
claire@headgatepartners.com

Company Contact:
Greg Swyt
Vice President, Finance
408.545.6088
ir@nanometrics.com