SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q X Quarterly report pursuant to Section 13 or 15(d) of the Securities - --- Exchange Act of 1934 For the quarterly period ended June 30, 2001 ------------- 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, CA 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 ------- -------- At July 16, 2001 there were 11,683,480 shares of common stock, no par value, issued and outstanding. 1
NANOMETRICS INCORPORATED INDEX Part I. Financial Information Page ---- Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 .............................3 Consolidated Statements of Income - Three months and six months ended June 30, 2001 and 2000 ..........................................4 Consolidated Statements of Cash Flows - Six months ended June 30, 2001 and 2000 .........................6 Notes to Consolidated Financial Statements ......................................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ...................9 Item 3. Quantitative and Qualitative Disclosures about Market Risk ..............................................10 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders ............11 Item 6. Exhibits and Reports on Form 8-K ...............................11 Signatures ..................................................................12 2
PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS <TABLE> NANOMETRICS INCORPORATED CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share amounts) <CAPTION> June 30, December 31, ASSETS 2001 2000 (Unaudited) --------- --------- <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents $ 10,697 $ 16,934 Short-term investments 49,375 52,854 Accounts receivable, net of allowances of $415 and $418 13,396 14,319 Inventories 18,710 15,753 Deferred income taxes 3,894 2,760 Prepaid expenses and other 1,800 3,351 --------- --------- Total current assets 97,872 105,971 PROPERTY, PLANT AND EQUIPMENT, Net 43,400 37,223 DEFERRED INCOME TAXES 222 227 OTHER ASSETS 4,586 1,375 --------- --------- TOTAL $ 146,080 $ 144,796 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 3,409 $ 4,625 Accrued payroll and related expenses 1,268 1,610 Deferred revenue 3,436 3,015 Other current liabilities 2,467 3,049 Income taxes payable 830 331 Current portion of debt obligations 398 921 --------- --------- Total current liabilities 11,808 13,551 DEBT OBLIGATIONS 3,682 4,236 --------- --------- Total liabilities 15,490 17,787 --------- --------- SHAREHOLDERS' EQUITY: Common stock, no par value; 25,000,000 shares authorized; 11,669,140 and 11,607,839 outstanding 96,768 95,929 Retained earnings 34,941 31,783 Accumulated other comprehensive loss (1,119) (703) --------- --------- Total shareholders' equity 130,590 127,009 --------- --------- TOTAL $ 146,080 $ 144,796 ========= ========= <FN> See Notes to Consolidated Financial Statements </FN> </TABLE> 3
<TABLE> NANOMETRICS INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share amounts) (Unaudited) <CAPTION> Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 -------- -------- -------- -------- <S> <C> <C> <C> <C> NET REVENUES: Product sales $ 13,531 $ 14,926 $ 26,470 $ 30,131 Service 1,262 1,764 2,748 2,875 -------- -------- -------- -------- Total net revenues 14,793 16,690 29,218 33,006 -------- ------- -------- -------- COSTS AND EXPENSES: Cost of product sales 5,661 5,878 10,952 12,312 Cost of service 1,345 1,627 2,811 3,022 Research and development 2,724 2,374 5,319 4,119 Selling 2,185 2,395 4,218 4,755 General and administrative 1,065 1,007 2,004 2,006 -------- -------- -------- -------- Total costs and expenses 12,980 13,281 25,304 26,214 -------- -------- -------- -------- INCOME FROM OPERATIONS 1,813 3,409 3,914 6,792 OTHER INCOME (EXPENSE): Interest income 704 1,415 1,697 1,891 Interest expense (18) (20) (40) (41) Other, net (1) 128 (410) 57 -------- -------- -------- -------- Total other income, net 685 1,523 1,247 1,907 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 2,498 4,932 5,161 8,699 PROVISION FOR INCOME TAXES 961 1,982 2,001 3,484 -------- -------- -------- -------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 1,537 2,950 3,160 5,215 CUMULATIVE EFFECT OF CHANGE IN REVE- NUE RECOGNITION PRINCIPLE (SAB 101) - - - (1,364) -------- -------- -------- -------- NET INCOME $ 1,537 $ 2,950 $ 3,160 $ 3,851 ======== ======== ======== ======== BASIC NET INCOME (LOSS) PER SHARE: Income before cumulative effect of change in accounting principle $ 0.13 $ 0.26 $ 0.27 $ 0.50 Cumulative effect of change in revenue recognition principle (SAB 101) - - - (0.13) -------- -------- -------- -------- Net income $ 0.13 $ 0.26 $ 0.27 $ 0.37 ======== ======== ======== ======== 4
DILUTED NET INCOME (LOSS) PER SHARE: Income before cumulative effect of change in accounting principle $ 0.13 $ 0.24 $ 0.26 $ 0.45 Cumulative effect of change in revenue recognition principle (SAB 101) - - - (0.12) -------- -------- -------- -------- Net income $ 0.13 $ 0.24 $ 0.26 $ 0.33 ======== ======== ======== ======== SHARES USED IN PER SHARE COMPUTATION: Basic 11,658 11,295 11,637 10,494 ======== ======== ========= ======== Diluted 12,195 12,415 12,094 11,647 ======== ======== ========= ======== <FN> See Notes to Consolidated Financial Statements </FN> </TABLE> 5
<TABLE> NANOMETRICS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) <CAPTION> Six Months Ended June 30, 2001 2000 ---- ---- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,160 $ 3,851 Reconciliation of net income to net cash (used in) provided by operating activities: Depreciation and amortization 558 256 Deferred rent - (13) Deferred income taxes (1,158) (45) Changes in assets and liabilities: Accounts receivable 603 (3,337) Inventories (3,466) (3,024) Prepaid expenses and other 1,064 (2,082) Accounts payable, accrued expenses and other current liabilities (1,929) 5,905 Income taxes payable 664 2,814 ------------- ------------- Net cash (used in) provided by operating activities (504) 4,325 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments (79,810) (64,518) Sales/maturities of short-term investments 83,289 10,859 Purchases of property, plant and equipment (6,999) (135) Other assets (2,226) - ------------- ------------- Net cash used in investing activities (5,746) (53,794) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowing - 828 Repayments of debt obligations (665) (231) Issuance of common stock 515 73,045 ------------- ------------- Net cash (used in) provided by financing activities (150) 73,642 ------------- ------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 163 (30) ------------- ------------- NET CHANGE IN CASH AND EQUIVALENTS (6,237) 24,143 CASH AND CASH EQUIVALENTS, beginning of period 16,934 3,442 ------------- ------------- CASH AND CASH EQUIVALENTS, end of period $ 10,697 $ 27,585 ============= ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 31 $ 39 ============= ============= Cash paid for income taxes $ 2,619 $ 695 ============= ============= <FN> See Notes to Consolidated Financial Statements </FN> </TABLE> 6
NANOMETRICS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Consolidated Financial Statements The consolidated financial statements include the accounts of Nanometrics Incorporated and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. While the quarterly 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' 2000 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Note 2. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following (in thousands): June 30, December 31, 2001 2000 ------------- -------------- Raw materials and subassemblies $ 10,088 $ 8,126 Work in process 4,666 1,434 Finished goods 3,956 6,193 ------------- -------------- $ 18,710 $ 15,753 ============= ============== Note 3. Other Current Liabilities Other current liabilities consist of the following (in thousands): June 30, December 31, 2001 2000 ------------- -------------- Commissions payable $ 262 $ 1,249 Accrued warranty 769 809 Other 1,436 991 ------------- -------------- $ 2,467 $ 3,049 ============== ============== 7
<TABLE> Note 4. Shareholders' Equity Net Income Per Share - The reconciliation of the share denominator used in the basic and diluted net income per share computations is as follows (in thousands): <CAPTION> Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Weighted average common shares outstanding-shares used in basic net income per share computation 11,658 11,295 11,637 10,494 Dilutive effect of common stock equivalents, using the treasury stock method 537 1,120 457 1,153 ---------- ---------- ---------- ---------- Shares used in dilutive net income per share computation 12,195 12,415 12,094 11,647 ========== ========== ========== ========== </TABLE> During the three and six month periods ended June 30, 2001 and 2000, 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 June 30, 2001, 630,034 common stock options with a weighted average exercise price of $35.49 per share were excluded from the diluted net income per share computations as their exercise prices were greater than the average market price of the common shares for the period. Note 5. Comprehensive Income For the three months ended June 30, 2001 and 2000, comprehensive income, which consisted of net income for the periods and changes in accumulated other comprehensive income, was $1,749,000 and $2,756,000, respectively. For the six months ended June 30, 2001 and 2000 comprehensive income was $2,711,000 and $3,690,000, respectively. Note 6. Recently Issued Accounting Standards In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. Nanometrics will adopt SFAS No. 142 for its fiscal year beginning January 1, 2002. Upon adoption of SFAS No. 142, Nanometrics will stop the amortization of goodwill with an expected net carrying value of $1,077,000 at the date of adoption and annual amortization of $204,000 that resulted from business combinations completed prior to the adoption of SFAS No. 141. Goodwill acquired subsequent to June 30, 2001 will not be amortized. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Total net revenues for the three months ended June 30, 2001 were $14,793,000, a decrease of $1,897,000 or 11% from the comparable period in 2000. For the six months ended June 30, 2001, total revenues of $29,218,000 decreased by $3,788,000 or 11% from the comparable period in 2000. Product sales of $13,531,000 and $26,470,000 for the three months and six months ended June 30, 2001, respectively, decreased $1,395,000 or 9% and $3,661,000 or 12%, respectively, as compared with the same periods during 2000. The lower levels of product sales resulted from weaker demand for semiconductor process control equipment, particularly in the U.S. and Far East. Service revenue of $1,262,000 and $2,748,000 for the three months and six months ended June 30, 2001, respectively, decreased $502,000 or 28% and $127,000 or 4%, respectively, as compared to the same periods in 2000 as a result of lower service sales, particularly in the U.S. and the Far East. Cost of product sales as a percentage of product sales increased to 42% in the second quarter of 2001 from 39% in the second quarter of 2000 and stayed consistent at 41% for the six months ended June 30, 2001 and 2000. Cost of service as a percentage of service revenue increased to 107% in the second quarter of 2001 from 92% in the second quarter of 2000, primarily as a result of lower service sales in the second quarter of 2001. Cost of service as a percentage of service revenue decreased to 102% in the six months ended June 30, 2001 from 105% for the same period in 2000. Research and development expenses for the three month and six month periods ended June 30, 2001 increased by $350,000 or 15% and $1,200,000 or 29%, respectively, compared to the same periods in 2000 resulting primarily from increased headcount and related expenses for the development of new and enhanced products. Selling expenses for the three month and six month periods ended June 30, 2001 decreased by $210,000 or 9% and $537,000 or 11%, respectively, compared to the same periods in 2000 primarily because of decreased commission expenses and other expenses associated with lower sales levels. General and administrative expenses for the three months ended June 30, 2001 increased $58,000 or 6% compared to the same period in 2000. General and administrative expenses for the six months ended June 30, 2001 decreased $2,000 compared to the same period in 2000. Total other income, net for the three month and six month periods ended June 30, 2001 decreased $838,000 or 55% and $660,000 or 35%, respectively, from the comparable periods in 2000 due primarily to lower interest income. The cumulative effect of change in revenue recognition principle (SAB 101) of $1.4 million in the first quarter of 2000 is the net result of recording $2.5 million in net revenues, which were previously recorded in 1999, offset by $1.1 million in related costs and expenses. Nanometrics' income from operations was $1,813,000 and net income was $1,537,000 for the second quarter of 2001 compared to income from operations of $3,409,000 and net income of $2,950,000 for the same period in 2000. For the first six months of 2001, Nanometrics' income from operations was $3,914,000 and net income was $3,160,000 which compared to income from operations of $6,792,000 and net income of $3,851,000 for the same period in 2000. 9
Liquidity and Capital Resources At June 30, 2001, Nanometrics had working capital of $86,064,000 compared to $92,420,000 at December 31, 2000. The current ratio at June 30, 2001 was 8.3 to 1. We believe that working capital including cash, cash equivalents and short-term investments of $60,072,000 at June 30, 2001 will be sufficient to meet our needs through at least the next twelve months. Operating activities for the first six months of 2001 used cash of $504,000 primarily from increases in inventory balances and decreases in accounts payable, accrued expenses and other current liabilities, while sales/maturities of short-term investments net of purchases provided $3,479,000, capital expenditures used $6,999,000 and debt repayment used $665,000. Forward Looking Statements The foregoing 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, and Section 21E of the Securities Exchange Act of 1934. These statements involve risks and uncertainties and actual results could differ materially as a result of a number of variables, such as (i) customer demand for Nanometrics' products, which may be affected by several factors including the cyclicality of the semiconductor, magnetic recording head and flat panel display industries served by Nanometrics, 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) fluctuation in foreign currency exchange rates, particularly the Japanese yen, (v) the proportion of sales Nanometrics makes directly to its customers versus sales through distributors and representatives, (vi) market acceptance of new and enhanced versions of Nanometrics' products, (vii) 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, (viii) the size and timing of acquisitions of business, products or technologies and fluctuations in the availability and cost of components and subassemblies of Nanometrics' products, and (ix) the factors set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" in Nanometrics' 2000 Annual Report on Form 10-K. Nanometrics undertakes 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. 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 June 30, 2001 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 June 30, 2001. We also have fixed rate yen denominated debt obligations in Japan that have no interest rate risk. At June 30, 2001, our total debt obligation was $4,080,000 with a long-term portion of $3,682,000. A hypothetical 10% change in interest rates at June 30, 2001 would not have a material impact on our results of operations. 10
NANOMETRICS INCORPORATED PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A. The annual meeting of shareholders was held on May 16, 2001. B. The following directors were elected to the board of directors: Vincent J. Coates Nathaniel Brenner Norman V. Coates John D. Heaton William G. Oldham Edmond R. Ward <TABLE> C. The following matters were voted upon at the annual meeting: <CAPTION> For Against Abstain ------- ------- ------- <S> <C> <C> <C> 1. To elect the following directors to serve until the next annual meeting of shareholders or until their successors are elected: Vincent J. Coates, Chairman 9,896,379 0 31,908 Nathaniel Brenner, Director 9,896,379 0 31,908 Norman V. Coates, Director 9,896,379 0 31,908 John D. Heaton, Director 9,896,379 0 31,908 William G. Oldham, Director 9,896,379 0 31,908 Edmond R. Ward, Director 9,896,379 0 31,908 2. To ratify the appointment of Deloitte & Touche LLP as independent auditors for the fiscal year ending December 31, 2001. 9,908,835 18,784 668 </TABLE> ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits. None B. Reports on Form 8-K. None 11
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: August 6, 2001 12