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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington,WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year endedFiscal Year Ended December 30, 201731, 2019

OR

For the transition period from     to

Commission file number: 000-13470File No. 001-39110

NANOMETRICS INCORPORATEDONTO INNOVATION INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (408) 545-6000(978) 253-6200

Securities registered pursuant to Section

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) of the Act:OF THE ACT:

Securities registered pursuant to Section

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) of the Act: OF THE ACT:

None

Indicate by check mark if the Registrantregistrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☐☒     No ☒.☐

Indicate by check mark if the Registrantregistrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ☐     No ☒.

Indicate by check mark whether the Registrantregistrant: (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 Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒     No ☐.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒     No ☐.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”,filer,” “accelerated filer”,filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

Indicate by check mark whether the Registrantregistrant is a shell company (as defined byin Rule 12b-2 of the Act).  Yes ☐     No ☒.

As of June 30, 2017, the last business day of the Registrant’s most recently completed second fiscal quarter, theThe aggregate market value of the common stock of Registrantregistrant’s voting Common Stock held by non-affiliates of the registrant was approximately $811,997,653 based uponon the closing sales price forof the Registrant’s common stock for such date, as quotedCommon Stock on the Nasdaq Global Select Market was approximately $468.3 million. Shares of common stock held by each officer and director and by each person who owned 5% or more of the outstanding common stock have been excluded because such persons may be deemed to be “affiliates” as that term is defined under the rules and regulations of the Exchange Act. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.on June 28, 2019.

The number of shares of the Registrant’s common stockregistrant’s Common Stock outstanding as of February 20, 20186, 2020 was 23,761,304.50,282,160.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant has incorporated by reference intoItems 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K portionsincorporate by reference information from the definitive proxy statement for the registrant’s annual meeting of its Proxy Statement for its 2018 Annual Meeting of Stockholdersstockholders scheduled to be filed pursuant to Regulation 14A. The Proxy Statement will be filed within 120 daysheld on May 12, 2020.

Table of Registrant’s fiscal year ended December 30, 2017. Contents

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NANOMETRICS INCORPORATED

FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 30, 2017

TABLE OF CONTENTS

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CAUTIONARY INFORMATION REGARDING Explanatory Note

On October 25, 2019, Onto Innovation Inc. (the “Company” or “Onto Innovation,” formerly known as Nanometrics Incorporated (“Nanometrics”)) consummated its previously announced merger (the “Merger”) with Rudolph Technologies, Inc. (“Rudolph”). Onto Innovation accounts for the Merger as a reverse acquisition using the acquisition method of accounting in accordance with generally accepted accounting principles, with Rudolph being treated as the acquiring entity for accounting purposes. Because Rudolph is treated as the accounting acquirer in the Merger, the financial statements filed with this annual report on Form 10-K include the financial results of Rudolph for all periods presented and the financial results of the former Nanometrics for the periods on or after October 26, 2019. As used in this report, unless the context suggests otherwise, the terms “we,” “us” or “our” refer to (i) Rudolph and its consolidated subsidiaries for periods through October 25, 2019 and (ii) Onto Innovation and its consolidated subsidiaries for periods on or after October 26, 2019. The terms the “Company” and “Onto Innovation” refer to the combined company following the consummation of the Merger.

FORWARD-LOOKING STATEMENTS

ThisCertain statements in this Annual Report on Form 10-K for the year ended December 30, 2017, or “Form 10-K,” containsof Onto Innovation are forward-looking statements, including those concerning our business operations,momentum and financial performancefuture growth, acceptance of our products and condition as well asservices, our plans, objectives,ability to deliver both products and services consistent with our customers’ demands and expectations and to strengthen our market position, our expectations of the semiconductor market outlook, future revenue, gross profits, research and development and engineering expenses, selling, general and administrative expenses, product introductions, technology development, manufacturing practices, cash requirements, our dependence on certain significant customers and anticipated trends and developments in and management plans for our business operations and financial performancethe markets in which we operate, our anticipated revenue as a result of acquisitions, and condition. Anyour ability to be successful in managing our cost structure and cash expenditures and results of litigation. The statements contained hereinin this Annual Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of historical factsSection 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be deemed to be forward-looking statements. You can identify these statementsidentified by words such as, but not limited to, “anticipate,” “believe,” “could,“continue,” “estimate,” “expect,” “intend,” “may,” “plan,” “should,” “may,” “could,” “will,” “would,” “forecast,” “project” and otherwords or phrases of similar expressions that are predictions ofmeaning, as they relate to our management or indicateus.

The forward-looking statements contained herein reflect our expectations with respect to future events and future trends. These forward-looking statements are based on current expectations, estimates, forecasts, and projections about our business and the industry in which we operate and management's beliefs and assumptions and are not guarantees of future performance or development and involve known and unknownsubject to certain risks, uncertainties and other factors that areassumptions. Actual results may differ materially from those included in some cases beyond our control. As a result, any or all of oursuch forward-looking statements in this Form 10-K may turn out to be inaccurate. Factors that could materially affect our business operations and financial performance and condition include,for a number of reasons including, but are not limited to, those risksthe following: variations in the level of orders which can be affected by general economic conditions; seasonality and uncertainties described herein under “Item 1A - Risk Factors.”growth rates in the semiconductor manufacturing industry and in the markets served by our customers; the global economic and political climates; difficulties or delays in product functionality or performance; the delivery performance of sole source vendors; the timing of future product releases; failure to respond adequately to either changes in technology or customer preferences; changes in pricing by us or our competitors; our ability to manage growth; changes in management; risk of nonpayment of accounts receivable; changes in budgeted costs; our ability to leverage our resources to improve our position in our core markets, to weather difficult economic environments, to open new market opportunities and to target high-margin markets; the strength/weakness of the back-end and/or front-end semiconductor market segments; the imposition of tariffs or trade restrictions and costs, burdens and restrictions associated with other governmental actions; the ability to successfully integrate the businesses of Rudolph and Nanometrics promptly and effectively and to achieve the anticipated synergies and value-creation contemplated by the Merger within the expected time frame; unanticipated difficulties or expenditures relating to the Merger and integration of the Rudolph and Nanometrics businesses; the response of business partners and retention as a result of the Merger; the diversion of management time in connection with the integration; the effect of litigation related to the Merger; and the “Risk Factors” set forth in Item 1A. You are urged to consider these factorsshould carefully in evaluatingreview the forward-lookingcautionary statements and are cautioned not to place undue reliance“Risk Factors” contained in this Annual Report on the forward-looking statements. The forward-looking statements are based on information available to us as of the filing date of this Form 10-K. Unless required by law, we do not intend to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. You should however,also review the factorsany additional disclosures and riskscautionary statements and “Risk Factors” we describe in the reports we will fileinclude from time to time in our quarterly reports on Form 10-Q, current reports on Form 8-K and other filings we make with the Securities and Exchange Commission or SEC, after(the “SEC”). The forward-looking statements reflect our position as of the date of this Form 10-K.report and we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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PART I

OverviewGeneral

Onto Innovation is the new entity resulting from the completion on October 25, 2019 of the Merger between Nanometrics Incorporated and its subsidiaries (“Nanometrics”,Rudolph, two long-time leaders in the “Company”, or “we”)semiconductor equipment industry that began operations in 1975 and 1940, respectively. Onto Innovation has been publicly traded since October 2019 (NYSE: ONTO).  

Onto Innovation is a leading providerworldwide leader in the design, development, manufacture and support of process control tools that perform macro defect inspections and metrology, lithography systems, and process control analytical software used by semiconductor wafer and advanced packaging device manufacturers. Our products are also used in a number of other high technology industries including: silicon wafer substrates; light emitting diode (“LED”); vertical-cavity surface-emitting laser (“VCSEL”); micro-electromechanical system (“MEMS”); CMOS image sensor (“CIS”); power device; RF filter; data storage; and certain industrial and scientific applications. We have a combined installed base of over 9,000 systems in the majority of advanced high-performancesemiconductor device production factories worldwide.

We provide process control metrology and yield management solutions used in bare silicon wafer production and wafer processing facilities, often referred to as “front-end” manufacturing and device packaging and test facilities (or “back-end” manufacturing), respectively through a portfolio of standalone systems for macro-defect inspection, systems used primarily in the fabrication of semiconductorspackaging lithography, probe card test and other solid-state devices, including sensors, optoelectronic devices, high-brightness LEDs, discretes,analysis, as well as transparent and data storages components.opaque thin film measurements. Our automated and integrated metrology systems measure critical dimensions, device structures, topography, shape, and various thin film properties, including three-dimensional features and film thickness, as well as optical, electrical and material properties. Our process control solutions are deployed throughoutprimary area of focus is products that provide critical yield-enhancing information, which is used by microelectronic device manufacturers to drive down costs and to decrease the fabrication process, from front-end-of-line substrate manufacturing,time to high-volume production of semiconductorsmarket their devices. All Onto Innovation systems feature sophisticated software and other devices, to advanced three-dimensional wafer-level packaging applications. Our systems enableproduction-worthy automation. In addition, our advanced process control software portfolio includes powerful solutions for device manufacturers, providing improved device yield at reduced manufacturing cycle time, supporting the accelerated product life cycles in the semiconductorstandalone tools, groups of tools, factory-wide, and other device markets.enterprise-wide suites to enhance productivity and achieve significant cost savings. Onto Innovation’s systems are backed by worldwide customer service and applications support.

We were incorporated in California in 1975,Nanometrics and reincorporated in Delaware in 2006. We have been publicly traded since 1984 (Nasdaq: NANO). We have an extensive installed base of thousands of systems in the majority of advanced semiconductor device production factories worldwide. Our major customers include Samsung Electronics Co. Ltd., SK Hynix Semiconductor, Inc., Micron Technology, Inc., Intel Corporation, Toshiba CorporationRudolph Merger

On October 25, 2019, Nanometrics and Taiwan Semiconductor Manufacturing Company Limited.

Additional information about us is available on our website at http://www.nanometrics.com. The information that can be accessed through our website, however, is not part of this Annual Report. The investor relations section of our website is located at http://www.nanometrics.com/investor.html. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports are available on the investor relations section of our website free of charge as soon as reasonably practicable after we electronically file or furnish such materialsRudolph consummated their previously announced Merger pursuant to the United States Securitiesagreement and Exchange Commission (“SEC”plan of merger, dated as of June 23, 2019 (the “Merger Agreement”). In addition, the reports, by and materials that we file with the SEC are available at the SEC's website (http://www.sec.gov)among Nanometrics, Rudolph and at the SEC's Public Reference Room at 100 F Street, NE, Washington DC 20549. Interested parties may obtain information on the operationPV Equipment Inc.  As a result of the Public Reference RoomMerger, Rudolph became a direct wholly-owned subsidiary of Nanometrics, which was renamed “Onto Innovation Inc.” At the effective time of the Merger, each issued and outstanding share of common stock of Rudolph, par value $0.001 per share (“Rudolph Common Stock”) (other than shares owned by callingRudolph or Nanometrics), was automatically converted into the SEC at 1-800-SEC-0330.right to receive 0.8042 (the “Exchange Ratio”) shares of Onto Innovation common stock, par value $0.001 per share (“Onto Innovation Common Stock”), and cash in lieu of any fractional shares of Onto Innovation Common Stock any former holder of Rudolph Common Stock would otherwise be entitled to receive. Immediately following the effective time of the Merger, each of Nanometrics’ and Rudolph’s stockholders owned approximately 50% of the combined company, Onto Innovation. Pursuant to the Merger Agreement, Onto Innovation accounts for the Merger as a reverse acquisition using the acquisition method of accounting in accordance with generally accepted accounting principles, with Rudolph being treated as the acquiring entity for accounting purposes.  

Industry Background

We participate in the sale, design, manufacture, marketing and support of process control systems for optical critical dimension metrology, thin film metrology, wafer defectinspection, 2D and 3D macro inspection and lithography tools for advanced analytics usedpackaging as well as advanced analytical software for semiconductor manufacturing.manufacturing and certain industrial applications and scientific research. Our principal market is semiconductors.  Semiconductors, primarily packaged as integrated circuits within electronic devices, include consumer electronics, server and enterprise systems, mobile computing (including smart phones and tablets), data storage devices, and embedded automotive and control systems. Integrated circuits are made up of semiconductor material layers integrating millions or billions of transistors and other electronic components, connected through a complex wiring scheme of small copper wires, ultimately packaged into thin form factors to be mounted on circuit boards or other substrates. Our core focus is the measurement and control of the structure, composition, and geometry of the devices from the transistor layer through advanced wafer-level packagingas they are fabricated on silicon wafers to improve device performance and manufacturing yields. Our end customers manufacture many types of integrated circuits for a multitude of applications, each having unique manufacturing challenges. This includes integrated circuits to enable information processing and management (logic integrated circuits), memory storage (NAND, 3D-NAND, NOR,(3D NAND and DRAM), analog devices (e.g., Wi-Fi and 4G5G radio integrated circuits, power devices), MEMS sensor devices (accelerometers, pressure sensors, and microphones), image sensors, thin film headand components for hard disk drives, LEDs, and alternative energy devices such as LEDs, power invertersmanagement.

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Current Trends

Advanced Nodes refer to leading edge integrated circuits in which the feature sizes of transistors and solar cells.

other features continue to shrink in specified steps, or nodes measured in nanometers (nm). Demand for our products continues to be driven by our customers'customers’ desire for higher overall chip performance including improvements inwithout increasing the chip size, while improving power efficiency, logic processing capability, data storage volume and manufacturing yield. To achieve these goals, our customers have increased their use of more complex materials and processing methods in their manufacturing flow. The majority of our chip customers manufacture devices in production runs defined by the smallest printed feature and the associated circuit manufacturing methods,primary paths for performance gains are geometric scaling, known as a technology node which are measuredshrinks, or scaling in nanometers ("nm"), or one-billionth of a meter. Current volume production is running from 28nm down to the 10nm nodes across foundry and logic devices, transitioning from 20nm to 1Xnm for DRAM memory (where X is IDM dependent and may be as low as 17nm), and third generation 3D-NAND with up to 64 layers of storage transistors. Our customers continue to develop next generation devices such as 7nm and 5nm devices in logic and foundry, shrink DRAM below the 17nm node, and scale 3D-NAND devices to 96 layers and beyond.three dimensions. In some cases, our customers are implementing new materials and methods in high volume manufacturing, including materials and device architectures to reduce power consumption, and stacked devices. To scale NAND memory devices including 3D-NAND, and advanced interconnect wiring schemes. To shrink features,a new methods, including multiple patterning lithography and extreme ultra-violet lithography (EUV), have3D stacking architecture has been developed.implemented with as many as 128 device layers in production. Additional innovation continues in Data Storage, Power Devices, MEMS, and Image Sensors. We believe the use of these new materials and manufacturing methods has increased demand for our products.products such as the Atlas III+ that is capable of measuring these advanced nodes as certain features shrink to 7nm, 5nm and 3nm.

To shrink features, new methods, including multiple patterning lithography and extreme ultra-violet (“EUV”) lithography, have been developed. The EUV process is driving significantly higher requirements for the silicon wafers that are entering the EUV chamber. Small particles on the backside of the wafer measuring a few micrometers (microns) can distort the images being projected onto the top side. Our BusinessNovusEdge inspection tool has been installed at major silicon wafer manufacturers to detect backside contamination and edge cracking as a final quality control mechanism before wafers are shipped to the semiconductor fabrication manufacturers. The top side of these wafers must also be scanned for any impurities contained in the silicon. This compositional analysis is measured using Onto Innovation’s Fourier Transform Infrared (“FTIR”) systems.  

Advanced Packaging refers to a variety of technologies that enable the miniaturization of electronic products, such as portable consumer devices, including smartphones, watches, and tablets. In electronics manufacturing, integrated circuit packaging is the final stage of semiconductor device fabrication, in which a single circuit made from semiconducting material (a die or chip) is encased in a molded package that provides external connections to a printed circuit board and also prevents physical damage to the chip and corrosion.  Advanced Packaging refers to the conductors and other structures that often connect multiple die, feed them with electric power and create signal paths to and from the PC board, dissipate their heat, and protect them from damage.  Today, the drive to pack more functions into a small space and reduce their power requirements demands that chip packages do much more than ever before to combine multiple chips and functions into a single molded package.

One example of the technology used in Advanced Packaging is the 3D integration of semiconductors and other devices. The technology involves stacking individual die in one integrated package. Through-silicon vias (“TSVs”) are vertical copper interconnects that are embedded from the bottom surface of a die to the top surface, which allows power and communication to be shared among the individually stacked components. The processes required for 3D integration vary from one manufacturer to another and many continue to be optimized for yield and to ensure the functioning of individual stacked chips.

Fan-out wafer level packages are another advanced packaging technology using copper pillars/bumps to vertically connect a wide variety of stacked die and are considered the next disruptive technology for several reasons. First, fan-out wafer level packages significantly reduce the space needed inside an electronic device, such as a smartphone, by combining multiple chips/functions into a single package, often called a System-in-Package (“SIP”). Next, it improves the system’s performance by reducing power and signal conductor lengths, which previously were routed from package to package through a printed circuit (“PC”) board. Using thin redistribution layers (“RDLs”) to “fan out” power and signal connections to the larger contacts on the PC board eliminates the need for a ceramic or laminated substrate, which accounts for 35 percent of the packaging cost.  As a result of the small overall form factor, fan-out wafer level packages provide the functionality needed in high-end mobile and wearable products. We believe the growth of advanced packaging has increased demand for our products such as the Dragonfly G2 System that is capable of inspecting two-dimensional (2D) features to find flaws/defects and detect unwanted residual residue as well as measuring and reporting vertical attributes of 3D pillars and bumps.

Panel Manufacturing. The current process to manufacture advanced packaging involves attaching known good die to a 300mm wafer, used as a temporary carrier when adding components such as RDLs and copper pillars.  SIP packages can often contain side-by-side die, meaning the package can be large and limit the number of packages being placed on a reconstituted wafer. In order to meet the growing demand at reduced average selling prices, manufacturers are looking to scalable technology. Advanced packaging facilities looking to improve cost of ownership and increase productivity are transitioning from round 300mm wafers to large rectangular panels, which can be as large as 600mm x 600mm. This larger size and shape enables companies manufacturing large area packages to efficiently increase the number of devices being

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processed at each step as they are no longer limited to operating within the constraints of a round wafer. By responding to market opportunities and addressing the stringent demands of customers’ technical roadmaps, we believe that Onto Innovation is optimally positioned to capitalize on the emerging market of high-volume panel manufacturing.  For example, the JetStep^® S lithography system is designed for processing RDLs on both glass and organic laminate panels in the semiconductor Advanced Packaging market. The Firefly™S Series, designed for high resolution inspection, can provide metrology and location information to the JetStep S tool for each die, which greatly improves lithography throughput using Onto Innovation’s exclusive StepFAST™ process.  The Firefly also delivers a combination of defect detection and substrate flexibility in a single platform, reducing capital investment requirements and providing a reliable pathway to transition from wafer to panel-based processes.

Technology

We believe that our expertise in our core technologies of optics and software and our combined investment in research and development will enable us to rapidly develop new technologies and products in order to quickly respond to emerging industry trends and competitive challenges. The breadth of our technology enables us to offer a diverse linecombination of process control products and technologiessolutions. Unique features have been designed into our lithography systems to address the manufacturing requirements of the semiconductor (and other solid-state device) manufacturing industry.meet our customers’ changing process requirements. Our metrology systems measure and characterize the physical dimensions, material composition, optical and electrical characteristics and other critical parameters of solid state devices, from initial wafer substrate manufacturing through final packaging.

We are continually working to strengthen our competitive position by developing innovative technologies and products in our market segment. We have expanded our product offerings to address growing applications within the semiconductor manufacturing and adjacent industries. In pursuit of our goals, we have:

NanometricsOnto Innovation’s Products

We offer a diverse line of systems to address the broad range of process control requirements of the semiconductor manufacturing industry. In addition, we believe that our product development and engineering expertise and strategic acquisitions will enable us to develop and offer advanced process control solutions that, in the future, should address industry advancement and trends.Metrology

Automated Systems

Metrology Systems.Our automated systems primarily consist of fully automated metrology systems that are employed in semiconductor production environments. The Atlas^® III, Atlas II+, and Atlas XP+ representAtlas® family of products represents our line of high-performance metrology systems providing optical critical dimension (“OCD”^®),OCD and thin film metrology and wafer stress metrology for transistor and interconnect metrology applications. The thin film and OCD technology in the Atlas is supported by our NanoCD suite of solutions including our NanoDiffract® software, SpectraProbe™ software and NanoGen™ scalable computing engine that enables visualization, modeling, and analysis of complex structures.  The UniFire™ system measures multiple parameters at any given process stepAdditionally, the S3000SX^™ System is used for ultra-thin transparent films metrology in the advanced packaging process flowsemiconductor fabrication applications for critical dimension, overlay, and topography applications and has recently added inspection capabilities for both front-end of line patterned wafer and advanced packaging related applications.nodes.

Integrated Systems

Our integrated metrology (“IM”) systems are installed directly onto wafer processing equipment to provide near real-time measurements for improved process control and maximum throughput. Our IM systems are sold directly to end user customers. The IMPULSE^®+ and IMPULSE represent our latest metrology platform for OCD, and thin film metrology, and have been successfully qualified on numerous independent Wafer Fabrication Equipment Suppliers’ platforms. Our NanoCD suite of solutions is sold in conjunction with our IMPULSE systems. Our Trajectory^® system provides in-line measurement of layers in thin film thickness and composition in semiconductor applications and is qualified in production with major device makers.

Software

NanoDiffract^®NanoDiffract® is a modeling, visualization and analysis software that takes signals from the automated and integrated metrology systems, providing critical dimension, thickness, and optical properties from in linein-line measurements. The software has an intuitive three-dimensional modeling interface to provide visualization of today’s advanced and complex semiconductor devices. There are proprietary fitting algorithms in NanoDiffract that enable very accurate and very fast calculations for signal processing for high fidelity model basedmodel-based measurements.

SpectraProbe™ SpectraProbe is a model-less fitting engine that enables fast time to solution for in-line excursion detection and control. SpectraProbe complements the high-fidelity modeling of NanoDiffract with a simple machine learning interface for rapid recipe deployment. SpectraProbe expands the types of structures that can be used for metrology and control including in-die and on-device areas. Both analysis packages areThe software is supported by the automated and integrated systems, can be deployed in run-time environments and support off-line processing as part of a factory control solution when deployed on NanoCentral and NanoGen, servers.

NanoGen is an enterprise scale computing hardware system that is deployed to run the computing intensive analysis software. NanoGen leverages commercial server chips and networking architecture and is optimized to support the workload of NanoDiffract and SpectraProbe analysis.  NanoCentral

Integrated Metrology Systems. Our integrated metrology (“IM”) systems are installed directly onto wafer processing equipment to provide near real-time measurements for improved process control and maximum throughput. Our IM systems are sold directly to end user customers. The IMPULSE family of products includes the latest technology for OCD, and thin film metrology, and have been successfully qualified on numerous independent Wafer Fabrication Equipment Suppliers’ platforms. Our NanoCD suite of software solutions including NanoDiffract and SpectraProbe, is sold in conjunction with our IMPULSE systems.

Opaque Film Metrology. The MetaPULSE^® systems allow customers to simultaneously measure the thickness and other properties of metal or non-metallic opaque film layers in a fab based networkingnon-destructive manner without physically contacting product wafers. PULSE Technology is used in copper or aluminum interconnect processes, as well as various layers in 3D NAND chips and server system providing connectivitythick advanced packaging interconnect applications.  PULSE technology is expanding into new process

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applications such as RF filters and compute supportmodules, driven by the need for on-product metrology as feature sizes decrease and pattern densities increase.

Inspection & Yield Management

Silicon Wafer All-surface Inspection/Characterization. All-surface refers to SpectraProbeinspection of the wafer frontside, edge, and connected measurement systems including Atlasbackside as well as the locator notch on the wafer. The AWX and Impulse productsNovusEdge tools utilize optical scattering and imaging technology to inspect these surfaces.  A primary reason for all-surface wafer inspection is to detect and contain any contamination that may spread throughout the wafer fab. For instance, it is critical that the wafer backside be free of defects prior to the EUV lithography process to prevent focus and exposure problems on the wafer frontside.

Materials Characterization

Epitaxial Thickness and Composition. Our materials characterization products include systems that are used to monitor the physical, optical, electrical and material characteristics of discrete electronic industry, opto-electronic, HB-LED (high brightness LEDs), solar PV (solar photovoltaics), compound semiconductor, strained silicon and silicon-on-insulator (“SOI”) devices, including composition, crystal structure, layer thickness, dopant concentration, contamination and electron mobility.

The RPMBlue™ is our Our portfolio of products for materials characterization includes photoluminescence mapping system designed specifically forin the HB-LED market,RPM Blue and is complemented by the RPMBlue-FS, enabling a breadth of researchVertex, and development configurability. We sell Fourier-TransformFourier Transform Infrared (“FTIR”) automated and manual systemsspectroscopy in the QS2200/3300 and QS1200 respectivelyQS Family (QS1200, QS2200, QS4300) systems for substitutesubstrate quality and epitaxial thickness metrology. The NanoSpec

Macro Defect Inspection. Chip manufacturers deploy advanced macro defect inspection throughout the production line to monitor key process steps, gather process-enhancing information and ultimately, lower manufacturing costs. Field-established tools such as the F30^™, NSX^®, and the latest Dragonfly G2 inspection systems are found in wafer fab (front-end) and packaging (back-end) facilities around the world. These high-speed tools incorporate features such as wafer-less recipe creation, tool-to-tool correlation and multiple inspection resolutions. Using Discover^® yield management software, the vast amounts of data gathered through automated inspection can be analyzed and classified to determine trends and locate root causes that directly affect yield.

Automated Defect Classification and Pattern Analysis. Automating the defect detection and classification process is best done by a system that can mimic, or even extend, the response of the human eye, but at a much higher speed, with higher resolution and more consistency. Our TrueADC software performs this rapid comparison and classification enabling yield improvement across facilities with consistent results.  

Yield Analysis. Using wafer maps, charts and graphs, the massive amounts of data gathered through automated inspection can be analyzed to determine trends across bumps, die, wafers and lots. Discover Yield and other tools in the Discover suite enable enterprise-wide analysis.  This analysis may determine where a process variation or deviation has occurred, allowing process engineers to make corrections or enhancements to increase yields. Defect data analysis is performed to identify, analyze and locate the source of defects and other manufacturing process excursions. Using either a single wafer map or a composite map created from multiple wafer maps, this analysis enables identification of defect patterns and distribution. When combined with inspection data from strategically placed inspection points, this analysis may pinpoint the source of the defects so corrective action can be taken.

Industrial, Scientific, and Research Markets: 4D Technology. In November of 2018, Nanometrics acquired 4D Technology Corporation, based in Tucson Arizona. The 4D business unit offers a line includingof interferometry systems for the NanoSpec II, supports thin film measurement across alland inspection of high precision surfaces. End markets include high precision optics surfaces and components, aerospace and defense components, automotive and powertrain systems, and unique research and scientific instrumentation that requires the unique high-speed results of the 4D systems.

Lithography

Advanced Packaging Lithography. Our lithography steppers from the JetStep product family, use projection optics to expose circuit patterns from a mask or reticle onto a substrate to expose images with optimal fidelity. The JetStep systems are used principally for package level interconnect and bump layer patterning.  Our JetStepsystems have been specifically designed for these layer applications. The JetStep W Series is designed for wafers and other round substrates while the JetStep S Series is designed for rectangular substrates (panels). Both systems boast a large printable field to maximize throughput while not limiting resolution. High-fidelity optics are able to image the fine features required while at the same time managing the non-flatness that is typical for advanced packaging applications. 

Flat Panel Display Lithography. In addition to semiconductor device applications with the JetStep S and W products, the JetStep G Series is engineered to address the needs of the flat panel display market.  The JetStep G is principally used in both low volume productionGen 4 and research applications.Gen 5 panels for displays used in high resolution, smaller form factor devices, such as smart phones and smart watches.  

Our

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Enterprise Software Solutions

Process Control Software. We provide a wide range of advanced process control solutions, all designed to improve factory profitability, including run-to-run control, fault detection, classification and tool automation. Our Advanced Process Control solutions are sold under the Discover™ brand and include Discover Enterprise, Discover Run-to-Run and other solutions.  Discover software can automatically detect or predict tool failure (fault detection) as well as calculate recipe settings for a process that will drive the yielded output to meet and exceed the target, despite variations in the incoming material and minor instabilities within the process equipment.  These process control software solutions enable the factory to increase capacity and yield while decreasing rework and scrap.

Yield Management Software. Semiconductor manufacturers use yield management software to obtain valuable process yield and equipment productivity information. Our Discover Yield, Discover Enterprise, and Discover Patterns software enables fab wide and enterprise wide (multiple factory) yield management based on data analytics from a broad range of sources.  These data sources include wafer fab inspection and metrology systems, can be categorized as follows:tool sensors, tool recipes, electrical tests and the fab environment. The Discover platform utilizes machine learning, advanced analytics, and other analysis and visualization to enable yield management and excursion prevention, and to maximize productivity across the entire semiconductor manufacturing value chain.

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Products

See Note 14

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Customers

Over 150 microelectronic device manufacturers have purchased Onto Innovation tools and software for installation at multiple sites. We support a diverse customer base in terms of both geographic location and type of device manufactured. Our customers are located in over 20 countries.

In 2019, sales to Taiwan Semiconductor Manufacturing Co. Ltd. and SK Hynix Inc. accounted for 13.4% and 13.1%, respectively, of our consolidated financial statements in Item 8, "Financial Statements and Supplementary Data,"revenue.  In 2018, sales to SK Hynix Inc. accounted for revenues by product type, which information is incorporated by reference here.

Customers

We sell our metrology and inspection systems worldwide to semiconductor manufacturers, and producers of solid state devices. The majority12.2% of our systems are sold to customers located in Asia and the United States.

The following customersrevenue.  No individual end user customer accounted for more than 10% or more of our total net revenues:revenue in 2017.  We do not have purchase contracts with any of our customers that obligate them to continue to purchase our products.

Sales, Customer Service and MarketingApplication Support

We believe that the capability for direct sales and support is beneficial for developing and maintaining close customer relationships and for rapidly responding to changing customer requirements. We provide local direct sales, service and application support through our worldwide offices located in the United States, South Korea, Japan, Taiwan, China, Singapore and France,Europe, and work with selected dealers and sales representatives on a more limited basis in Asia, in the United States and othervarious countries. Our applications team is composed of technically experienced sales engineers who are knowledgeable in the use of metrology systems generally and the unique features and advantages of our specific products. Supported by our technical applications team, our sales and support teams work closely with our customers to offer cost-effective solutions to complex measurement and process problems.

Net revenues from customers located in the United StatesAs of December 31, 2019, we employed 647 sales and in foreign countries, as a percentage of total net revenues were as follows:

See Note 14 of our consolidated financial statements in Item 8, "Financial Statementsmarketing, service and Supplementary Data," for segment and geographical financial information, including revenues and long-lived assets by geographic region, and our consolidated financial statements for net revenue information, which is incorporated by reference here.

Customer Service and Supportapplications support personnel.

We believe that customer service and technical support for our systems are crucial factors that distinguish us from our competitors and are essential to building and maintaining close, long-term relationships with our customers. We generally provide a standard one-year warranty on partsfor our products which range from twelve to fourteen months to cover defects in material and labor for most of our products.workmanship. We provide system support to our customers through factory technical support and globally deployed field service personnel. The factory technical support operations provide customers with telephonic technical support access, direct training programs, operating manuals and other technical support information to enable effective use of our metrology and measurement instruments and systems. We have field service operations based in various locations throughout the United States, South Korea, Taiwan, China, Japan, Singapore, Israel, France, Italy, and Germany.

Service revenues, including sales of replacement parts, represented 17%, 16%, and 22% of total net revenues in 2017, 2016 and 2015, respectively.

Backlog

As of December 30, 2017, and December 31, 2016, our backlog was $34.0 million and $28.5 million, respectively. Backlog includes orders received and booked, both shipped and not yet recognized as revenue, and not shipped, for products, services and upgrades where written customer requests have been received and we expect to ship and/or recognize revenue within 12 months. Orders are subject to cancellation or delay by the customer subject to possible penalties. However, historically, order cancellations have not been significant. Because orders presently in backlog could be cancelled or rescheduled and some orders can be received and shipped within the same quarter, we do not believe that current backlog is an accurate indication of our future revenues or financial performance.

With the adoption of the new revenue guidance, ASC Topic 606, Revenue From Contracts With Customers in the first quarter of fiscal 2018, we expect backlog will be reduced as discussed in Note 2 to the Consolidated Financial Statements in Item 8.

Competition

We offer various products for various semiconductor manufacturing process steps, and several of our products extend across the same process flow. However, for process control of each of these process steps, we have multiple competitors. In every market in which we participate, the global semiconductor equipment industry is intensely competitive, and driven by rapid technological adoption cycles. Our ability to effectively compete depends upon our ability to continually improve our products, applications and services, and our ability to develop new products, applications and services that meet constantly evolving customer requirements.

We believe that our competitive position in each of our markets is based on the ability of our products and services to address customer requirements related to numerous competitive factors. Competitive selections are based on many factors involving technological innovation, productivity, total cost of ownership of the system, including impact on end of line yield, price, product performance and throughput capability, quality, reliability and customer support.

In automated systems for the semiconductor industry, our principal competitors are KLA-Tencor Corporation (“KLA-Tencor”) and Nova Measuring Instruments Ltd. ("Nova") for thin film and critical dimension OCD metrology, and other suppliers for advanced packaging. Our primary competitor in integrated systems is Nova. The opto-electronics and discrete device markets are addressed primarily by our material characterization systems, served by numerous competitors and no single competitor or group of competitors has established a majority position.European locations.

Manufacturing

Our manufacturing operations are in Milpitas California, Tucson Arizona, Wilmington Massachusetts, Bloomington Minnesota, and at various contract manufacturers around the world. It is our strategy to outsource all assemblies that do not contain elements that we believe lead to a direct competitive advantage. The majorityMost of our automated and integrated products are currently manufactured at our Milpitas facility. We also use contract manufacturers in other locations in the United States, China, Israel and Japan.Bloomington facilities. We currently do not expect our manufacturing operations to require additional major investments in capital equipment.

We producemanufacture key partsmodular assemblies and componentsintegrated tools and make reasonable efforts to ensure that any externally purchased parts or raw materials are available from multiple suppliers, but this is not alwaysif possible. Certain components, subassemblies and services necessary for the manufacture of our systems are obtained either from a sole supplier or limited group of suppliers. We also have an established long-term supply agreementagreements with strategic suppliers for the supply of our spectroscopic ellipsometers and interferometerskey assemblies for use in our products. Although we seek to reduce our dependence

We rely on sole anda number of limited source suppliers partialfor certain parts and subassemblies. This reliance creates a potential inability to obtain an adequate supply of required components, and reduced control over pricing and time of delivery of components. An inability to obtain adequate supplies would require us to seek alternative sources of supply or complete lossmight require us to redesign our systems to accommodate different components or subassemblies. To date, we have not experienced any significant delivery delays. However, if we were forced to seek alternative sources of these sourcessupply, manufacture such components or subassemblies internally, or redesign our products, this could disrupt production, delay scheduled deliveriesprevent us from shipping our products to our customers andon a timely basis, which could have a material adverse effect on our revenues and resultsoperations. As of operations.December 31, 2019, we employed 184 manufacturing personnel.

Research and Development

We continue to invest in research and development (“R&D”) to provide our customers with products that add value to their manufacturing processes and that provide a better and differentiated solution than our competitors so that our products stay in the forefront of current and future market demands. Whether it is for an advancement of current technology, yield and manufacturing improvement, enabling new end device technology, or the development of a new application in our core or emerging markets, we are committed to product excellence and longevity.

In our automated

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The markets our R&D efforts resulted infor equipment and systems for manufacturing semiconductor devices and for performing OCD metrology, macro-defect inspection, advanced packaging lithography and thin film transparent and opaque process control metrology are characterized by continuous technological development and product innovations. We believe that the successful product launchrapid and ongoing development of the Atlas III product in the marketplace, our flagship product for OCD. The Atlas III product provides enhanced OCD capability with a significantly lower cost of ownership model. In our integrated markets, the IMPULSE system has been further developed for inline lithography track configuration to extend our tool of record position for lithography OCD. The IMPULSE+ system, which incorporates performancenew products and productivity enhancements to the IMPULSE was introduced in 2015existing products is critical to our success. Accordingly, we devote a significant portion of our technical, management and has been qualified across numerous OEM platforms.

Modeling and analysis software including NanoDiffract and systems software has a regular refresh and release cadence.  NanoDiffract 4.0 was released in 2017.  NanoDiffract 4.0 includes improvements in the user interface, compute engine, and analysis leadingfinancial resources to an overall faster time to solution while enabling more complex measurements. SpectraProbe, launched in 2016, is gaining rapid acceptance by our OCD and films metrology customers as it expands the types of structures and applications that can be measured, while reducing time to solution in the factory. SpectraProbe has enabled new process tool monitoring strategies that extend our process control capabilities to process tool and chamber control. The model-less approach reduces the applications time and effort to develop a monitoring recipe, while providing rapid insight into shifting and changing factory conditions.

The Materials Characterization suite of products including the FTIR, Photoluminescence (RPM and Imperia), and NanoSpec families have had significant refresh and customization for customer needs.  The RPM Blue FS, Imperia, and NanoSpec family have all had improvements released in 2017 to improve productivity and measurement performance.

Our research and development expenses for fiscal 2017, 2016 and 2015 were $36.7 million, $31.4 million and $32.7 million, respectively. 

Patents and Intellectual Property

Our success depends in large part on the technical innovation of our products and protecting such innovations through a variety of methods. We actively pursue a program of filing patent applications to seek protection of technologically sensitive features of our metrology and inspection systems.

programs.  As of December 30, 2017,31, 2019, we had 192 patents, including foreign patents, with expiration dates ranging from 2018-2036. employed 376 engineering personnel in research and development.

Intellectual Property

We believe that our success will depend to a great degree upon innovation, technological expertise and our ability to adapt our products to new technology. WhileAs a result, we attempthave a policy of seeking patents on inventions governing new products or technologies as part of our ongoing research, development, and manufacturing activities. As of December 31, 2019, we have been granted, or hold exclusive licenses to, establish our intellectual property rights through484 U.S. and foreign patents. The patents we own, jointly own or exclusively license have expiration dates ranging from 2020 to 2038. We also have 85 pending regular and provisional applications in the U.S. and other countries. Our patents and trademarksapplications principally cover various aspects of metrology, macro-defect detection and protect intellectual property rights through non-disclosure agreements,classification, altered material characterization, lithography techniques and automation.

Our pending patents may never be issued, and even if they are, these patents, our existing patents and the patents we license may not provide sufficiently broad protection to protect our proprietary rights, or they may prove to be unenforceable. To protect our proprietary rights, we also rely on a combination of copyrights, trademarks, trade secret laws, contractual provisions and licenses and non-disclosure agreements. There can be no assurance (i) that any patents issued to or licensed by us will not be challenged, invalidated or circumvented, (ii) that the rights granted thereunder will provide us with a competitive advantage or (iii) that we will be able to fully protect our technology, and competitors may be able to develop similar technology independently. Otherstechnology. Additionally, others may obtain patents and assert them against us. In addition, the laws of certain foreign countries may not protect our intellectual property to the same extent as do the laws of the United States. From time to time, we receive communications from third parties asserting that our metrology systems may contain design features that thesuch third parties claim may infringe upon their proprietary rights.

The laws of some foreign countries do not protect our proprietary rights to the same degree as do the laws of the United States, and many U.S. companies have encountered substantial infringement problems in protecting their proprietary rights against infringement in such countries, some of which are countries in which we have sold and continue to sell products. There is a risk that our means of protecting our proprietary rights may not be adequate. For example, our competitors may independently develop similar technology or duplicate our products. If we fail to adequately protect our intellectual property, it would be easier for our competitors to sell competing products.

Competition

We offer various products for various semiconductor manufacturing process steps, and several of our products extend across the same process flow. However, for process control of each of these process steps, we have multiple established and potential competitors, some of which may have greater financial, research, engineering, manufacturing and marketing resources than we have. We may also face future competition from new market entrants from other overseas and domestic sources. We expect our competitors to continue to improve the design and performance of their current products and processes, and to introduce new products and processes with improved price and performance characteristics. In order to remain competitive, we believe that we will require significant financial resources to offer a broad range of products, and to maintain customer service and support centers worldwide, and to invest in product research and development.  

In every market in which we participate, the global semiconductor equipment industry is intensely competitive, and driven by rapid technological adoption cycles. Our ability to effectively compete depends upon our ability to continually improve our products, applications and services, and our ability to develop new products, applications and services that meet constantly evolving customer requirements.

In automated systems for the semiconductor industry, our principal competitors are KLA Corporation (“KLA”) and Nova Measuring Instruments Ltd. (“Nova”) for thin film and critical dimension OCD metrology. Our principal competitor for advanced packaging inspection is Camtek Ltd. (“Camtek”). While the advanced packaging lithography market is served by various competitors, our primary competitors are Veeco Instruments, Inc. (“Veeco Instruments”) and, to a lesser extent, Nikon Corporation (“Nikon”). Our primary competitor for integrated metrology systems for the semiconductor industry is Nova. The opto-electronics, discrete device and industrial and scientific markets are addressed primarily by our material characterization and 4D business unit systems, served by numerous competitors, of which no single competitor or group of competitors has established a majority position.

We believe that our competitive position in each of our markets is based on the ability of our products and services to address customer requirements related to numerous competitive factors. Competitive selections are based on many factors

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involving technological innovation, productivity, total cost of ownership of the system, including impact on end of line yield, price, product performance and throughput capability, quality, reliability and customer support.

Backlog

We schedule production of our systems based upon order backlog and informal customer forecasts. We use the term “backlog” to refer to only those orders to which the customer has been assigned a purchase order number and for which delivery is anticipated within 12 months. Because shipment dates may be changed and customers may cancel or delay orders with little or no penalty, our backlog as of any particular date may not be a reliable indicator of actual sales for any succeeding period. At December 31, 2019, we had a backlog of approximately $71.7 million compared with a backlog of approximately $62.7 million at December 31, 2018.

Employees

At December 30, 2017,31, 2019, we employed 592a total of 1,340 persons worldwide with sales, applications and service support in key geographic areas aligned with our customer locations. None of our employees are represented by a union and we have never experienced a work stoppage as a resultbecause of union actions. We consider our employee relations to be good. Many of our employees have specialized skills that are of value to us. Our future success will depend in large part upon our ability to attract, retain and motivate highly skilled scientific, technical and managerial personnel, who are in great demand in our industry.

Environmental Matters

Our operations are subject to various federal, state and local environmental protection regulations governing the use, storage, handling and disposal of hazardous materials, chemicals, and certain waste products. We believe that compliance with federal, state and local environmental protection regulations will not have a material adverse effect on our capital expenditures, earnings and competitive and financial position.

In the event thatIf we fail to comply with such laws and regulations, we could be liable for damages, penalties and fines. We further discuss the impact of environmental regulation under “Risk Factors- Wethe risk factor, “We are subject to various environmental laws and regulations that could impose substantial costs upon us and may harm our business, operating results and financial condition.” in Item 1A.

Executive OfficersAvailable Information

Our Internet website address is http://www.ontoinnovation.com. The information on our website is not incorporated into this Annual Report. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K (and any amendments to those reports) are made available free of charge, on or through our Internet website, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. All filings we make with the SEC are also available free of charge via EDGAR through the SEC’s website at http://www.sec.gov. In addition, the historic reports and materials that were filed by Nanometrics and Rudolph with the SEC are available at our investor relations website at https://investors.ontoinnovation.com. These filings may also be obtained through the SEC’s website. Documents that are not available through the SEC’s website may also be obtained by submitting an online request to the SEC at http://www.sec.gov.

We also make available, free of charge, through our investor relations website, our corporate governance summary, Code of Business Conduct and Ethics, charters of the Registrant

The namescommittees of our executive officersBoard of Directors, and their ages, titlesother information and biographiesmaterials, including information about how to contact our Board of Directors.

Investors and others should also note that we announce material financial information to our investors using our investor relations website, SEC filings, press releases, public conference calls and webcasts. We use these channels as well as social media to communicate with the public about the Company, our products and services and other matters. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in the Company to review the information we post on the social media channels listed on our investor relations website.

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Risks Related to Our Business

Our operating results have varied and will likely continue to vary significantly from quarter to quarter in the future, causing volatility in our stock price.

Our quarterly operating results have varied in the past and will likely continue to vary significantly from quarter to quarter in the future, causing volatility in our stock price. Some of the factors that may influence our operating results and subject our stock to extreme price and volume fluctuations include:

Dr. Pierre-Yves Lesaicherre joined Nanometrics as President and Chief Executive Officer in November 2017. From January 2012 to February 2017, Dr. Lesaicherre was Chief Executive Officer of Lumileds, an integrated manufacturer of LED components and Automotive Lighting Lamps, where he was responsible for all aspects of the company’s business. Prior to being named Chief Executive Officer, Dr. Lesaicherre also held other management positions at Lumileds from 2006 to 2012. Before Lumileds, Dr. Lesaicherre was Senior Vice President and general manager of the business lines Microcontrollers & Logic at NXP Semiconductors, formerly Philips Semiconductors. He holds an MBA with a focus on international business and strategy from INSEAD, and has MS and Ph.D. degrees in Material Science from the National Polytechnic Institute of Grenoble.

Greg Swyt assumed the role of principal financial officer of Nanometrics in November 2017. Mr. Swyt has served as the Vice President, Finance of Nanometrics from August 2016. Prior to joining Nanometrics, Mr. Swyt was Managing Director, Finance, at Intevac Corporation, a company delivering thin film solutions, from May 2008 to July 2016, where he managed the Global Financial Planning and Analysis Organization, which also included Manufacturing Finance, Government Finance and Regional Finance. Mr. Swyt received a MBA and a BS in Finance from San Jose State University.

Rollin Kocher joined Nanometrics in March 2013 as Vice President of Worldwide Sales and Service. In September 2016, Mr. Kocher was promoted to Senior Vice President, Commercial Operations. Prior to joining Nanometrics, Mr. Kocher held several senior management positions over 17 years at KLA-Tencor, including Global Sales for Films and Scatterometry, Sales for Taiwan, North America and Europe, and Sr. Director of Sales for the Samsung Business Unit. His last position at KLA-Tencor was General Manager of the Samsung Business Unit, and in that capacity, was responsible for Sales, Marketing, Applications, and Service. Mr. Kocher holds a B.S. degree in Electrical Engineering Technology from the University of North Texas.

Kevin Heidrich, Sr. Vice President, Strategic Marketing and Business Development, joined Nanometrics in 2006. Mr. Heidrich has participated in many functions, expanding his scope to include new product development, corporate marketing, product marketing and business development. Mr. Heidrich is now responsible for both corporate strategy and marketing, as Nanometrics expands its overall solution space within process control metrology. Prior to Nanometrics, Mr. Heidrich spent a decade at Intel Corporation in a variety of roles including process research and development at Intel’s Technology Development facility. Mr. Heidrich received B.S. and M.S. degrees from the Colorado School of Mines in Chemical Engineering.

Janet Taylor joined Nanometrics as General Counsel in July 2015. Ms. Taylor served as Senior Vice President, General Counsel and Company Secretary of STATS ChipPAC Ltd., from June 2005 to June 2015, where she was responsible for all legal matters, including corporate governance, intellectual property, litigation and securities compliance. Prior to joining STATS ChipPAC Ltd, Ms. Taylor was engaged in transactional practices at international law firms in New York, Singapore and London. Ms. Taylor was admitted to the Bar in New York in 1990 and in Singapore in 2010. Ms. Taylor holds a J.D. from the Harvard Law School and a B.A. in History from the University of Texas at Austin.

In addition to the other information contained in this Annual Report on Form 10-K, we have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operations. Investors should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones we face. Additional risks not currently known to us or that we currently believe are immaterial may also impair our business operations. Our business could be harmed by anylight of these risks. The trading price of our common stock could decline due to any of these risks and investors may lose all or part of their investment. This section should be read in conjunction with the Consolidated Financial Statements and Notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Annual Report on Form 10-K.

The Global economic conditionsfactors and the cyclical nature of the semiconductor industry, can reduce demand for our products which in turn may cause uswe expect to operate unprofitably and may cause reductions in available cash, and may negatively impact our financial performance.

Global economic conditions, the gradual recovery of the global economy and the cyclical nature of the semiconductor industry have impacted and could impact future customer demand for our products and our financial performance. Demand for our products is largely dependent on our customers' capital spending on semiconductor equipment, which depends, in large part, on consumer spending, required manufacturing capacity, and customer accesscontinue to capital. Economic uncertainty, unemployment, higher interest rates, higher tax rates,experience significant fluctuations in foreign currency exchange rates,quarterly and other economic factors may lead to a decrease in consumer spending and may cause certain customers to cancel existing orders or delay placing orders. If weannual operating results. Moreover, many of our expenses are unable to timely and appropriately adapt to changes resulting from unfavorable economic conditions, it may cause volatility in our operating results, business, and financial condition, and results of operations may be adversely affected.

In addition, demand for our products is highly inelastic which means we have little ability to control product revenues created by customer demand for more capacity. The market for our products is characterized by constant and rapid technological change, price erosion, product obsolescence, evolving standards, short product life cycles and significant volatility in supply and demand. Due to the inelastic nature of demandfixed in the semiconductor industry, we mayshort-term which, together with the need to take actions to reduce costs in the future, which could reduce our ability to significantly investfor continued investment in research and development, at levels we believe are necessary. If we are unablemarketing and customer support, limits our ability to effectively align our cost structure with prevailing market conditions,reduce expenses quickly. As a result, declines in net sales could harm our business financial condition and results of operations may be materially and adversely affected.

We may also experience supplier or customer issues as a result of adverse macroeconomic conditions. If our customers have difficulties in obtaining capital or financing, this could result in lower sales. Customers with liquidity issues could also result in an increase in bad debt expense. These conditions could also affect our key suppliers, which could affect their ability to supply parts and result in delaysthe price of our customer shipments.common stock could substantially decline.

Our largest customers account for a substantial portion of our net revenues,revenue, and our net revenues would materiallyrevenue and cash flows could decline considerably if one or more of these customers were to purchase significantly fewer of our systems.systems or delay or cancel a large order.

Sales to end user customers that individually represent at least five percent of our revenue typically account for, in the aggregate, a considerable amount of our revenue. We operate in the highly concentrated, capital-intensive semiconductor device manufacturing industry. Historically, a significantsubstantial portion of our net revenuesrevenue in each quarter and each year has been derived from sales to relatively few customers, and we expect this trend is expected to continue. In fiscal year 2017, five customers represented 73%If any of our total net revenues. There are only a limited numberkey customers were to purchase significantly fewer of large companies operatingour systems in the semiconductor manufacturing industryfuture, or if they delay or cancel a large order, our revenue and our market is characterized by continued consolidation in the customer base. Accordingly, wecash flows could meaningfully decline. We expect that we will continue to depend on a small number of large customers for a significantsizable portion of our net revenues for the foreseeable future. If our currentrevenue. In addition, as large semiconductor device manufacturers seek to establish closer relationships with their suppliers, we expect that our largecustomer base will become even more concentrated.

Our customers are impaired, or if we aremay be unable to develop similar collaborative relationships with important customers in the future, our net revenues could decline significantly. In addition, because there are a limited number of customers, customers may seek concessions related to price, terms and conditions and intellectual property. Any of these changes could negatively impact our financial performance and results of operations.

We rely on a limited number of outside suppliers and subcontractors to supply certain components and subassemblies, and on a single or a limited group of outside suppliers for certain materialspay us for our products which could resultand services.

Our customers include some companies that may, from time to time, encounter financial difficulties. If a customer’s financial difficulties become severe, the customer may be unwilling or unable to pay our invoices in a potential inability to obtain an adequate supplythe ordinary course of required components due to the suppliers' failure or inability to provide such components in a timely manner, or at all, and reduced control over pricing and timely delivery of components and materials, any ofbusiness, which could adversely affect collections of both our resultsaccounts receivable balance and unbilled services. The bankruptcy of operations.

Our manufacturing activities consist of integrating, assembling and testing components and subassemblies. We rely on a limited number of outside suppliers and subcontractorscustomer with a substantial account balance owed to manufacture certain components and subassemblies. We order one of the most critical components of our technology, the spectroscopic ellipsometer component incorporated into our advanced measurement systems, from external suppliers.

We procure some of our other critical systems' components, subassemblies and services from single suppliers or a limited group of outside suppliers in order to ensure overall quality and timeliness of delivery. Many of these components and subassemblies have significant production lead times. To date, we have been able to obtain adequate supplies of components and subassemblies for our systems in a timely manner. However, disruption or termination of certain of these sourcesus could have a significant adverse impact on our ability to manufacture our systems. In addition, our failure to timely use components in our manufacturing processes due to delays or cancellation of orders may lead to write-downs of inventory. A disruption in supply or inventory window would, in turn, have a material adverse effect on our business, financial condition and results of operations. Our reliance onIn addition, if a sole suppliercustomer declares bankruptcy after paying us certain invoices, a court may determine that we are not properly entitled to that payment and may require repayment of some or a limited groupall of suppliers and our reliance on subcontractors involve several risks, including:

Although the timeliness, yield and quality of deliveries to date from our subcontractors have been acceptable, manufacture of certain of these components and subassemblies is an extremely complex process, and long lead times are required. Any inability to obtain adequate deliveries or any other circumstance that would require us to seek alternative sources of supply or to manufacture such components internally could delay our ability to ship our products,amount we received, which could damage relationships with current and prospective customers and have a material adverse effect onadversely affect our business, financial condition and results of operations.

SomeVariations in the amount of time it takes for us to sell our systems may cause fluctuations in our operating results, which could cause our stock price to decline.

Variations in the length of our currentsales cycles could cause our revenue and potential competitors have significantly greatercash flows, and consequently, our business, financial condition, operating results and cash flows to fluctuate widely from period to period. This variation could cause our stock price to decline. Our customers generally take a long time to evaluate our inspection and/or film metrology systems and many people are involved in the evaluation process. We expend significant resources than we do,educating and increased competition could impair salesproviding information to

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our prospective customers regarding the uses and benefits of our products.

We operate in the highly competitive semiconductor industry and face competition from a number of companies, some of which have greater financial, engineering, manufacturing, research and development, marketing and customer support resources than we do. As a result, our competitors may be able to respond more quickly to new or emerging technologies or market developments by devoting greater resources to the development, promotion and sale of products, which could impair sales of our products. Moreover, there has been merger and acquisition activity among our competitors and potential competitors. These transactions by our competitors and potential competitors may provide them with a competitive advantage over us by enabling them to rapidly expand their product offerings and service capabilities to meet a broader range of customer needs. Many of our customers and potential customerssystems in the semiconductor industry are large companies that require global support and servicefabrication process. The length of time it takes for their metrology systems. Some of our larger or more geographically diverse competitors might be better equippedus to provide this global support and service.make a sale depends upon many factors, including, but not limited to:

Because of the high costnumber of switching equipment vendorsfactors influencing the sales process, the period between our initial contact with a customer and the time when we recognize revenue from that customer and receive payment, if ever, varies widely in our markets,length. Our sales cycles, including the time it may be difficulttakes for us to attract customers from our competitors even if our metrology systems are superiorbuild a product to theirs.

We believe that once a semiconductor customer has selected one vendor's metrology system, the customer generally relies upon that system and,specifications after receiving an order to the extent possible, subsequent generationstime we recognize revenue, typically range from three to twenty-four months. Sometimes our sales cycles can be much longer, particularly with customers in Asia. During these cycles, we commit substantial resources to our sales efforts in advance of the same vendor's system, for the life of the application. Once a vendor's metrology system has been installed,receiving any revenue, and we may never receive any revenue from a customer mustdespite our sales efforts. If we do make a sale, our customers often make substantial technical modifications and may experience downtime to switch to another vendor's metrology system. Accordingly, unlesspurchase only one of our systems, offerthe performance or cost advantages that outweighof which they then evaluate for a customer's expense of switching to our systems; it will be difficult for us to achieve significant sales from that customer once it has selected another vendor's system for an application.

Our integrated metrology systems are integrated onto systems sold independently by Wafer Fabrication Equipment Suppliers, and a decrease in sales by these suppliers, or the development of competing systems by these suppliers, could harm our business.

We believe that sales of integrated metrology systems will continue to be an important sourcelengthy period before purchasing any more of our net revenues. Sales of our integrated metrology systems depend upon the ability of a smallsystems. The number of Wafer Fabrication Equipment Suppliersadditional products a customer purchases, if any, depends on many factors, including the customer’s capacity requirements. The period between a customer’s initial purchase and any subsequent purchases can vary from three months to sell semiconductor manufacturing equipment products that are compatible witha year or longer, and variations in the length of this period could cause further fluctuations in our metrology systems as components. If these suppliers, such as Applied Materials, Inc., Ebara Corporation, Lam Research Corporationoperating results and, Tokyo Electron, are unable to sell such products, if they choose to focus their attention on products that do not integratepossibly, in our systems, or if they choose to develop competing systems, our business could suffer.stock price.

We are subject to order and shipment uncertainties. Our profitability will decline if we fail to accurately forecast customer demand when managing inventory.

We typically plan production and inventory levels based on internal forecasts of customer demand, which can be highly unpredictable and can fluctuate substantially, which could lead to excess inventory write-downs and resulting negative impacts on gross margin and net income. We have limited visibility into our customers' inventories, future customer demand and the product mix that our customers will require, which could adversely affect our production forecasts and operating margins. In addition, innovation in our industry could render significant portions of our inventory obsolete. If we overestimate our customers' requirements, we may have excess inventory, which could lead to obsolete inventory and unexpected costs. Conversely, if we underestimate our customers' requirements, we may have inadequate inventory, which could lead to foregone revenue opportunities, loss of potential market share and damage to customer relationships as product deliveries may not be made on a timely basis, disrupting our customers' production schedules. In response to anticipated long lead times to obtain inventory and materials from outside suppliers and foundries, we periodically order materials in advance of customer demand. This advance ordering has in the past and may in the future result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize, or other factors make our products less saleable. In addition, any significant future cancellation or deferral of product orders could adversely affect our revenue and margins, increase inventory write-downs due to obsolete inventory, and adversely affect our operating results and stock price.

IfMost of our revenue has been derived from customers outside of the United States, subjecting us to operational, financial and political risks, such as unexpected changes in regulatory requirements, tariffs, political and economic instability, outbreaks of hostilities, natural disasters, climate change and difficulties in managing foreign sales representatives and foreign branch operations, as well as risks associated with foreign currency fluctuations.

Due to the significant level of our international sales, we are subject to a number of material risks, including:

Compliance with foreign laws. Our business is subject to risks inherent in doing business internationally, including compliance with, inconsistencies among, and unexpected changes in, a wide variety of foreign laws and regulatory environments with which we are not familiar, including, among other issues, with respect to employees, protection of our intellectual property, and a wide variety of operational regulations and trade and export controls under domestic, foreign, and international law.

Unexpected changes in regulatory requirements including tariffs and other market barriers. The semiconductor device industry is a high-visibility industry in many of the European and Asian countries in which we sell our products. Because the governments of these countries have provided extensive financial support to our semiconductor device manufacturing customers in these countries, we believe that our customers could be disproportionately affected by any trade embargoes, excise taxes, tariffs or other restrictions imposed by their governments on trade with United States companies such as ourselves, particularly with respect to the ongoing trade negotiations between the United States and China. As of January

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2020, trade delegations from the United States and China reached partial agreement over tariffs on certain products, but if the United States and China do not managecontinue negotiations and reach agreement on a trade policy, tariffs imposed by China may result in lower sales to customers in China as the costs of our supply chain effectively,products become more expensive to such customers. In addition, tariffs imposed by the United States will increase the cost of raw materials that we import from China.  Any restrictions of these types could result in a reduction in our operating results maysales to customers in these countries. In addition, given the relatively fluid regulatory environment in China, there could be adversely affected.

We need to continually evaluate our global supply chainsadditional tax or other regulatory changes in the future. Such actions in the future, as well as other changes in Chinese laws and assess opportunities to reduce costs. We must also enhance quality, speed and flexibility to meet changingregulations, including actions in furtherance of China’s stated policy of reducing its dependence on foreign semiconductor manufacturers, could increase the cost of doing business in China, foster the emergence of Chinese-based competitors, decrease the demand for our customers’ products in China, or reduce the supply of critical materials for our customers’ products, which could have a material adverse effect on our business and product mixresults of operations.

Political and uncertain market conditions. Our success also dependseconomic instability. We are subject to various global risks related to political and economic instabilities in partcountries in which we derive sales. If terrorist activities, armed conflict, civil or military unrest or political instability occurs outside of the U.S., these events may result in reduced demand for our products. There is considerable political instability in Taiwan related to its disputes with China and in South Korea related to its disputes with North Korea. In addition, several Asian countries, particularly Japan, have experienced significant economic instability. An outbreak of hostilities or other political upheaval in China, Taiwan or South Korea, or an economic downturn in Japan or other countries, would likely harm the operations of our customers in these countries. The effect of these types of events on refining our cost structurerevenue and supply chains so thatcash flows could be material because we have flexibilityderive substantial revenue from sales to semiconductor device foundries in Taiwan such as Taiwan Semiconductor Manufacturing Company Ltd., from memory chip manufacturers in South Korea such as Samsung Electronics Co., Ltd., and can maintainfrom semiconductor device manufacturers in Japan such as Toshiba Corporation.

Natural disasters and improve profitability. To improve our margins on a product, we will need to establish high volume supply agreements with our vendors. We cannot be certain that we will be able to timely negotiate vendor supply agreements on improved termsclimate change. Natural disasters, changes in climate and conditions, or at all. Failure to achieve the desired level of cost reductionsgeo-political events could materially adversely affect our financial results. Despiteworldwide operations (or those of our efforts to control costsbusiness partners). The occurrence of one or more natural disasters such as hurricanes, tropical storms, fires, cyclones, earthquakes, tsunamis, flooding, typhoons, volcanic eruptions and increase efficiency in our facilities, changes in demand could still cause us to realize lower operating marginsweather conditions such as major or extended winter storms, droughts and profitability.

If we choose to acquire new and complementary businesses, or products or technologies instead of developing them ourselves, we may be unable to complete these acquisitions or may not be able to successfully integrate an acquired business in a cost-effective and non-disruptive manner.

Our success depends on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures. To achieve this, from time to time we have acquired complementary businesses, products, or technologies instead of developing them ourselves and may choose to do so in the future. If we do identify suitable transactions in the future, we may not be able to complete them on commercially acceptable terms, or at all. We also face intense competition for acquisitions from other acquirers in our industry. These competing acquirers may have significantly greater financial and other resources than us, which may prevent us from successfully pursuing a transaction.

Potential risks associated with acquisitions could include, among other things:

If an acquisition is not successfully completed or integrated into our existing operations,other adverse public health developments in China and Taiwan may have a material adverse effect on our business, financial condition and results of operations.

Difficulties in staffing and managing foreign branch operations. During periods of tension between the governments of the United States and certain other countries, it is often difficult for United States companies such as us to staff and manage operations in such countries. Language and other cultural differences may also inhibit our sales and marketing efforts and create internal communication problems among our U.S. and foreign research and development teams, increasing the difficulty of managing multiple remote locations performing various development, quality assurance, and yield ramp analysis projects.

Currency fluctuations as compared to the U.S. Dollar. A substantial portion of our international sales are denominated in U.S. dollars. As a result, if the dollar rises in value in relation to foreign currencies, our systems will become more expensive to customers outside the United States and less competitive with systems produced by competitors outside the United States. These conditions could negatively impact our international sales. Foreign sales also expose us to collection risk in the event it becomes more expensive for our foreign customers to convert their local currencies into U.S. dollars. Additionally, in the event a larger portion of our revenue becomes denominated in foreign currencies, we would be adversely impacted.

In addition,subject to financea potentially significant exchange rate risk.

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FCPA and Other Anti-Corruption Laws. We are subject to the Foreign Corrupt Practices Act of 1977 ("FCPA"), and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. Also, similar worldwide anti-bribery laws, such as the U.K. Bribery Act and Chinese anti-corruption laws, generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Some of our distribution partners are located in parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. The policies and procedures we have implemented to discourage these practices by our employees, our existing safeguards and any acquisitionsfuture improvements may prove to be less than effective, and our employees, consultants, sales agents or distributors may engage in conduct for which we might be held responsible. Violations of the FCPA or international anti-corruption laws may result in severe criminal or civil sanctions, and we may be requiredsubject to raise additional funds through public or private equity or debt financings; however:

Our success depends on the performance of key personnel, includingnegligent acts committed by our senior management and on our ability to identify, hire and retain key management personnel.

We believe our continued ability to recruit, hire, retain and motivate highly-skilled engineering, operations, sales, administrative and managerial personnel is key to our future success. Competition for these employees, is intense, particularly with respect to attracting and retaining qualified technical and senior management personnel. We do not have employment agreements with key members of our technical staff and all of our senior management team. Further, we do not have key person life insurance on any of our executives and these individualsdistributors, partners, consultants or other key employees may leave us. We have experienced turnover in our senior management team in the past. Our business may be harmed if we are unable to recruit, retain and effectively integrate our senior management into our business operations and our ability to implement our strategy could be compromised.agents.

If we deliver systems with defects, our credibility will be harmed revenue from,and the sales and market acceptance of our systems will decrease and we could expend significant capital and resources as a result of such defects.decrease.

Our productssystems are complex and frequently operate in high-performance, challenging environments. Notwithstanding our internal quality specifications, our systems have sometimesoccasionally contained errors, defects and bugs when introduced. If we deliver systems with errors, defectsDefects may be created during probing, bumping, dicing or bugs,general handling, and can have a major impact on device and process quality. When this occurs, our credibility and the market acceptance and sales of our systems wouldcould be harmed. Further, if our systems contain errors, defects or bugs, computer viruses or malicious code as a result of cyber-attacks to our computer networks, we may be required to expend significant capital and resources to alleviate such problems and incur significant costs for product recalls and inventory write-offs.these problems. Defects could also lead to product liability as a result of product liability lawsuits against us or against our customers. We have agreed to indemnify our customers in someunder certain circumstances against liability arising from defects in our systems. Our product liability insurance policy currently provides $2.0 million of aggregate coverage, with an overall umbrella limit of $14.0 million. In the event of a successful product liability claim, we could be obligated to pay damages significantly in excess of our product liability insurance limits.

If we are not successful in developing new and enhanced products for the semiconductor device manufacturing industry, we will lose sales and market share to our competitors.

We operate in an industry that is highly competitive and subject to evolving industry standards, rapid technological changes, rapid changes in consumer demands and the rapid introduction of new, higher performance systems with shorter product life cycles. To be competitive in our demanding market, we must continually design, develop and introduce in a timely manner new lithography, inspection and metrology process control systems that meet the performance and price demands of semiconductor device manufacturers. We must also continue to refine our current systems so that they remain competitive. We expect to continue to make significant investments in our research and development activities. We may experience significantdifficulties or delays in shipping our productsdevelopment efforts with respect to our customers, our businessnew systems, and reputationwe may suffer.

Our products are complex and require technical expertise to design and manufacture properly. Various problems occasionally arise during the manufacturing process that may cause delays and/or impair product quality. Any significant delays stemming from the failure of our products to meet or exceed our internal quality specifications, or for any other reasons, would delay our shipments. Shipment delays could harm our business and reputation in the industry.

Net average selling prices of our products may decrease over time, which could have a material adverse effect on our revenues and profitability.

It is commonnot ultimately be successful in our industry for the average selling price of a given product enhancement efforts to decrease over timeimprove and advance products or in responding effectively to technological change, as production volumes increase, competing products are developed or latest technologies featuring higher performance or lower cost emerge. To combat the negative effects that erosion of average selling prices have had in the pastnot all research and may in the future have on our net revenues, we attempt to actively manage the prices of our existing products and regularly introduce new process technologies and products in the market that exhibit higher performance, that are in demand, or that lower manufacturing cost. Failure to maintain our current prices or to successfully execute on our new product development strategy will cause our net revenues and gross margin to decline, which adversely affect our operating results and stock price.

Third party infringement claims could be costly to defend, and successful infringement claims by third parties couldactivities result in substantial damages, lost product sales and the loss of important intellectual property rights by us.

The semiconductor industry is generally subject to frequent litigation regarding patents and other intellectual property rights. Ourviable commercial success depends, in part, on our ability to avoid infringing or misappropriating patents or other proprietary rights owned by third parties. From time to timeproducts. In addition, we may receive communications from third parties asserting that our metrology systems may contain design features which are claimed to infringe on their proprietary rights. Our new or current products may infringe valid intellectual property rights, but even if our products do not infringe, we may be required to expend significant sums of money to defend against infringement claims, or to actively protect our intellectual property rights through litigation. In the event that a claim is made and there is an adverse result of any intellectual property rights litigation, we could be required to pay substantial damages for

infringement, expend significant resources to develop non-infringing technology, incur material liability for royalty payments or fees to obtain licenses to the technology covered by the litigation, or be subjected to an injunction, which could prevent us from selling our products and materially and adversely affect our net revenues and results of operations. We cannot be sureprovide assurance that we will be successful in any such non-infringing development or that any such license would be available on commercially reasonable terms, if at all. Any claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, lost sales or damaged customer relationships, and diversion of management's attention and resources.

Our intellectual property may be infringed by third parties despite our efforts to protect it, which could threaten our future success and competitive position and harm our operating results.

Our future success and competitive position depend in part upon our ability to obtain and maintain proprietary technology for our principal product families, and we rely, in part, on patent, trade secret and trademark law to protect that technology. If we fail to adequately protect our intellectual property, it will be easier for our competitors to sell competing products. We own or may license patents relating to our systems, and have filed applications for additional patents. Any of our pending patent applications may be rejected, and we may not in the future be able to develop additional proprietary technology that is patentable. In addition, the patents we own, have been issued or licensed, may not provide us with competitive advantages and may be challenged by third parties. Third parties may also design around these patents.

In addition to patent protection, we rely upon trade secret protection for our confidential and proprietary information and technology. We routinely enter into confidentiality agreements with our employees. However, in the event that these agreements may be breached, we may not have adequate remedies. Our confidential and proprietary information and technology might also be independently developed by or become otherwise known to third parties.

We may be required to initiate litigation to enforce patents issued to or licensed by us, or to determine the scope or validity of a third party's patent or to enforce trade secret, confidentiality or other proprietary rights. Any such litigation, regardless of outcome, could be expensive and time consuming, and could subject us to significant liabilities or require us to re-engineer our product or obtain expensive licenses from third parties, any of which would adversely affect our business and operating results.

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain or use our products or technology. Our ability to enforce our patents and other intellectual property is limited by our financial resources and is subject to general litigation risks. If we seek to enforce our rights, we may be subject to claims that the intellectual property rights are invalid, are otherwise not enforceable or are licensed to the party against whom we assert a claim. In addition, our assertion of intellectual property rights could result in the other party seeking to assert alleged intellectual property rights of its own against us, which is a frequent occurrence in such litigation.

Our efforts to protect our intellectual property may be less effective in some foreign countries where intellectual property rights are not as well protected as in the United States.

In 2017, 2016, and 2015, 87%, 86% and 80%, respectively, of our total net revenues were derived from sales to customers in foreign countries, including certain countries in Asia, such as Japan, South Korea, China, Singapore and Taiwan. The laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States, and many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement in these countries. If we fail to adequately protect our intellectual property in these countries, it would be easier for our competitors to sell competing products and our business would suffer.

Variations in the amount of time it takes for us to sell our systems may cause volatility in our operating results, which could cause our stock price to decline.

Variations in the length of our sales and product acceptance cycles could cause our revenues to fluctuate widely from period to period. Our customers generally take long periods of time to evaluate our metrology systems. We expend significant resources educating and providing information to our prospective customers regarding the uses and benefits of our systems. The length of time that it takes for us to complete a sale depends upon many factors, including:

Because of the number of factors influencing the sales process, the period between our initial contact with a customer and the time at which we recognize revenue from that customer, if at all, varies widely. Our sales cycles, including the time it takes for us to build a product to customer specifications after receiving an order, typically range from three to nine months. Occasionally our sales cycles can be much longer, particularly with customers in Asia who may require longer evaluation and acceptance periods. During the sales cycles, we commit substantial resources to our sales efforts in advance of receiving any revenue, and we may never receive any revenue from a customer despite our sales efforts.

If we do complete a sale, customers often purchase only one of our systems and then evaluate its performance for a lengthy period of time before purchasing additional systems. The purchases are generally made through purchase orders rather than through long-term contracts. The number of additional products that a customer purchases, if any, depends on many factors, including a customer’s capacity requirements, and/or shifting to more and advanced manufacturing processes that require more or different products to control. If they change their rate of capacity or have technological change, we cannot compensate for this fluctuation in demand by adjusting the price of our products. The period between a customer’s initial purchase and any subsequent purchases and acceptance is unpredictable and can vary from three months to a year or longer. Variations in the length of this period could cause fluctuations in our operating results, which could adversely affect our stock price.

Relatively small fluctuations in our system sales volume may cause our operating results to vary significantly each quarter.

During any quarter, a significant portion of our revenue is derived from the sale of a relatively small number of systems. Our automated metrology systems can be priced from $800,000 to $2,400,000 per system, and our integrated metrology systems can be priced up to $500,000 per system. Accordingly, a slight change in the number or mix of systems that we sell could cause significant changes in our operating results.

Lack of market acceptance for our products may affect our ability to generate revenue and may harm our business.

We have invested substantial time and resources into the development of new products servicesfor the most opportunistic new markets and technologies. However, we cannot accurately predict the future level of acceptance of our products and services by our customers. As a result, we may not be able to generate anticipated revenue from sales of these products and services, or future new products, services and improvements.

We depend on new products and processes for our success. Consequently, we are subject to risks associated with rapid technological change.

Rapid technological changes in semiconductor manufacturing processes subject us to increased pressure to develop technological advances enabling such processes. We believe that our future success depends in part upon our ability to develop and offer new products with improved capabilities and to continue to enhance our existing products. We cannot make assurances if or when the products and solutions where we have focused our research and development expenditures will become commercially successful. If new products have reliability or quality problems, our performance could be impacted by reduced orders, higher manufacturing costs, and delays in acceptance or payment for new products, and additional service and warranty expenses. We might not be able to develop and manufacture new products successfully, or new products that we introduce may fail in the marketplace. Our failure to complete commercialization of these new products in a timely manner could result in unanticipated costs and inventory obsolescence, which would adversely affect our financial results.applications. Any significant delay in releasing new systems could cause our products to become obsolete, adversely affect our reputation, give a competitor a first-to-market advantage or allowcause a competitor to achieve greater market share.

To develop new products and processes, we expect to continue to make significant investments in research and development and to pursue joint development relationships with customers, suppliers or other members of the industry. We must manage product transitions and joint development relationships successfully, as introduction of new products could adversely affect our sale of existing products.

We are subject to risks associated with our competitors’ strategic relationships and their introduction of new products, and we may lack the financial resources or technological capabilities of certain of our competitors needed to capture increased market share.

We expect to face significant competition from multiple current and future competitors. We believe that other companies are developing systems and products that are competitive to our products and are planning to introduce new products, which may affect our ability to sell our existing or future products. We face a greater risk if our competitors enter into strategic relationships with leading semiconductor manufacturers covering products similar to those we sell or may develop, as this could adversely affect our ability to sell products to those manufacturers.

Some of our competitors have substantially greater financial, resourcesengineering, manufacturing, research and more extensive engineering, manufacturing,development, marketing and customer service and support resources than we do and therefore have the potential to increasingly dominate the semiconductor equipment industry. These competitors may deeply discount products similar to those that we sell, challenging or even exceeding our ability to make similar accommodations and threatening our ability to sell those products.do. As a result, weour competitors may failbe able to continuerespond more quickly to compete successfully worldwide.new or emerging technologies or market developments by devoting greater resources to the development, promotion and sale of products, which could impair sales of our products. Moreover, there has been merger and acquisition activity among our competitors and potential competitors. These transactions by our competitors and potential competitors may provide them with a competitive advantage over us by enabling them to rapidly expand their product offerings and service capabilities to meet a broader range of customer needs. Many of our customers and potential customers in the semiconductor industry are large companies that require global support and service for their metrology systems. Some of our larger or more geographically diverse competitors might be better equipped to provide this global support and service.

In addition, our competitors may provide innovative technology that may have performance advantages over systems we currently offer or may offer in the future. They may be able to develop products comparable or superior to those that we offer or may adapt more quickly to new technologies or evolving customer requirements. In particular, while we currently are developing additional product enhancements that we believe will address future customer requirements, we may fail in a

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timely manner to complete the development or introduction of these additional product enhancements successfully, or these product enhancements may not achieve market acceptance or be competitive. Accordingly,

Further, customers that may otherwise desire to purchase our products from us and purchase other products from our competitors may nevertheless purchase competing products from our competitors rather than purchase our products due to a variety of reasons, including to gain favor or volume pricing from our competitors.

If new products developed by us do not gain general market acceptance, we will be unable to generate revenue and recover our research and development costs.

Inspection, lithography and metrology product development is inherently risky because it is difficult to foresee developments in semiconductor device manufacturing technology, coordinate technical personnel, and identify and eliminate system design flaws. Further, our products are complex and often the applications to our customers’ businesses are unique. Any new systems we introduce may not achieve or sustain a significant degree of market acceptance and sales.

We expect to spend a significant amount of time and resources developing new systems and refining our existing systems. In light of the long product development cycles inherent in our industry, these expenditures will be made well in advance of the prospect of deriving revenue from the sale of those systems. Our ability to commercially introduce and successfully market new systems are subject to a wide variety of challenges during the development cycle, including start-up bugs, design defects, and other matters that could delay introduction of these systems. In addition, since our customers are not obligated by long-term contracts to purchase our systems, our anticipated product orders may not materialize, or orders that are placed may be canceled. As a result, if we do not achieve market acceptance of new products, we may be unable to generate sufficient revenue and cash flow to recover our research and development costs and our market share, revenue, operating results or stock price would be negatively impacted.

Even if we are able to develop new products that gain market acceptance, sales of these new products could impair our ability to sell existing products.

Competition from our new systems could have a negative effect on sales of our existing systems and the prices that we could charge for these systems. We may also divert sales and marketing resources from our current systems in order to successfully launch and promote our new or next generation systems. This diversion of resources could have a further negative effect on sales of our current systems and the value of inventory.

Our integrated metrology systems are integrated with systems sold independently by Wafer Fabrication Equipment Suppliers, and a decrease in sales by these suppliers, or the development of competing systems by these suppliers, could harm our business.

We believe that sales of integrated metrology systems will continue to be an important source of our net revenues. Sales of our integrated metrology systems depend upon the ability of a small number of Wafer Fabrication Equipment Suppliers to sell semiconductor manufacturing equipment products that are compatible with our metrology systems as components. If these suppliers, such as Applied Materials, Inc., Ebara Corporation, Lam Research Corporation and Tokyo Electron, are unable to sell such products, if they choose to focus their attention on products that do not integrate our systems, or if they choose to develop competing systems, our business could suffer.

If our relationships with our large customers deteriorate, our product development activities could be adversely affected.

The success of our product development efforts depends on our ability to anticipate market trends and the price, performance and functionality requirements of semiconductor device manufacturers. In order to anticipate these trends and ensure that critical development projects proceed in a coordinated manner, we must continue to collaborate closely with our largest customers. Our relationships with these and other customers provide us with access to valuable information regarding trends in the semiconductor device industry, which enables us to better plan our product development activities. If our current relationships with our large customers are impaired, or if we are unable to develop similar collaborative relationships with important customers in the future, our product development activities could be adversely affected.

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We may fail to adequately protect our intellectual property and, therefore, lose our competitive advantage.

Our future success and competitive position depend in part upon our ability to obtain and maintain proprietary technology for our principal product families, and we rely, in part, on patent and trade secret law and confidentiality agreements to protect that technology. If we fail to adequately protect our intellectual property, it will give our competitors a significant advantage. We own or have licensed a number of patents relating to our transparent and opaque thin film metrology, lithography and macro-defect inspection systems, and have filed applications for additional patents.  Any of our pending patent applications may be rejected, and we may be unable to develop additional proprietary technology that is patentable in the future.

In addition, the patents that we do own or that have been issued or licensed to us may not provide us with competitive advantages and may be challenged by third parties. Further, third parties may also design around these patents. In addition to patent protection, we rely upon trade secret protection for our confidential and proprietary information and technology. We routinely enter into confidentiality agreements with our employees and other third parties. Even though these agreements are in place, there can be no assurances that trade secrets and proprietary information will not be disclosed, that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets, or that we can fully protect our trade secrets and proprietary information. Violations by others of our confidentiality agreements and the loss of employees who have specialized knowledge and expertise could harm our competitive position and cause our sales and operating results to decline as a result of increased competition. Costly and time-consuming litigation might be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection might adversely affect our ability to continue our research or bring products to market.

Protection of our intellectual property rights, or the efforts of third parties to enforce their own intellectual property rights against us, may result in costly and time-consuming litigation, substantial damages, lost product sales and/or the loss of important intellectual property rights.

We may be required to initiate litigation in order to enforce any patents issued to or licensed by us or to determine the scope or validity of a third party’s patent or other proprietary rights. Any litigation, regardless of outcome, could be expensive and time consuming and could subject us to significant liabilities or require us to re-engineer our products or obtain expensive licenses from third parties. There can be no assurance that any patents issued to or licensed by us will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide us with a competitive advantage.

In addition, our commercial success depends in part on our ability to avoid infringing or misappropriating patents or other proprietary rights owned by third parties. From time to time, we receive communications from third parties asserting that our products or systems infringe, or may infringe, on the proprietary rights of these third parties. These claims of infringement may lead to protracted and costly litigation, which could require us to pay substantial damages or have the sale of our products or systems stopped by an injunction. Infringement claims could also cause product or system delays or require us to redesign our products or systems, and these delays could result in the loss of substantial revenue. We may also be required to obtain a license from the third party or cease activities utilizing the third party’s proprietary rights. We may not be able to enter into such a license or such a license may not be available on commercially reasonable terms. Accordingly, the loss of important intellectual property rights could hinder our ability to sell our systems or to make the sale of these systems more expensive.

Our efforts to protect our intellectual property may be less effective in certain foreign countries where intellectual property rights are not as well protected as in the United States.

The laws of some foreign countries, including China, Japan, South Korea and Taiwan, where we do business, do not protect our proprietary rights to as great an extent as do the laws of the United States, and many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement abroad. For example, Taiwan is not a signatory of the Patent Cooperation Treaty, which is designed to specify rules and methods for defending intellectual property internationally. The publication of a patent in Taiwan prior to the filing of a patent in Taiwan would invalidate the ability of a company to obtain a patent in Taiwan. Similarly, in contrast to the United States where the contents of patents remain confidential during the patent application process, in Taiwan, the contents of a patent are published upon filing, which provides competitors an advance view of the contents of a patent application prior to the establishment of patent rights. Similarly, China’s protection of intellectual property rights historically has been less stringent and robust compared to other countries such as the United States, and consequently intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries.  Monitoring and preventing unauthorized use are also difficult and the measures we take to protect our intellectual property rights may not be adequate.  Accordingly, infringement of our

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intellectual property rights poses a serious risk of doing business in China. Consequently, there is a risk that we may be unable to adequately protect our proprietary rights in certain foreign countries. If this occurs, it would be easier for our competitors to develop and sell competing products in these countries.

Some of our current and potential competitors have significantly greater resources than we do, and increased competition could impair sales of our products or cause us to reduce our prices.

The market for semiconductor capital equipment is highly competitive. We face substantial competition from established companies in each of the markets we serve. We principally compete with KLA Corporation, Nova Measuring Instruments, Camtek and Veeco Instruments. We compete to a lesser extent with Nikon. Each of our products also competes with products that use different metrology, inspection or lithography techniques. Some of our competitors have greater financial, engineering, manufacturing and marketing resources, broader product offerings and service capabilities and larger installed customer bases than we do. As a result, these competitors may be able to respond more quickly to new or emerging technologies or market developments by devoting greater resources to the development, promotion and sale of products, which, in turn, could impair sales of our products. Further, there may be significant merger and acquisition activity among our competitors and potential competitors, which, in turn, may provide them with a competitive advantage over us by enabling them to rapidly expand their product offerings and service capabilities to meet a broader range of customer needs.

Many of our customers and potential customers in the semiconductor device manufacturing industry are large companies that require global support and service for their semiconductor capital equipment. We believe that our global support and service infrastructure is sufficient to meet the needs of our customers and potential customers. However, some of our competitors have more extensive infrastructures than we do, which could place us at a disadvantage when competing for the business of global semiconductor device manufacturers. Many of our competitors are investing heavily in the development of new systems that will compete directly with our systems. We have, from time to time, selectively reduced prices on our systems in order to protect our market share, and competitive pressures may necessitate further price reductions. We expect our competitors in each product area to continue to improve the design and performance of their products and to introduce new products with competitive prices and performance characteristics. These product introductions would likely require us to decrease the prices of our systems and increase the level of discounts that we grant our customers. Price reductions or lost sales as a result of these competitive pressures would reduce our total revenue and could adversely impact our financial results.

Because of the high cost of switching equipment vendors in our markets, it is sometimes difficult for us to win new customers from our competitors even if our systems are superior to theirs.

We believe that once a semiconductor device manufacturer has selected one vendor’s capital equipment for a production-line application, the manufacturer generally relies upon that capital equipment and, to the extent possible, subsequent generations of the same vendor’s equipment for the life of the application. Once a vendor’s equipment has been installed in a production line application, a semiconductor device manufacturer must often make substantial technical modifications and may experience production-line downtime in order to switch to another vendor’s equipment. Accordingly, unless our systems offer performance or cost advantages that outweigh a customer’s expense of switching to our systems, it will be difficult for us to achieve significant sales to that manufacturer once it has selected another vendor’s capital equipment for an application.

We must attract and retain experienced senior executives and other key personnel with knowledge of semiconductor device manufacturing and inspection, metrology or lithography equipment and related software to help support our future growth, and competition for such personnel in our industry is high.

Our success depends, to a significant degree, upon the continued contributions of our key executive management, engineering, sales and marketing, customer support, finance and manufacturing personnel. The loss of any of these key personnel through resignations, retirement or other circumstances, each of whom would be extremely difficult to replace, could harm our business and operating results. Although we have employment and noncompetition agreements with key members of our senior management team, these individuals or other key employees may intensify,still leave us, which could have a material adverse effect on our business. We do not have key person life insurance on any of our executives. In addition, to support our future growth, we will need to attract and retain additional qualified employees. Competition for such personnel in our industry is intense, and we may not be successful in attracting and retaining qualified employees.

In order to attract and retain executives and other key employees, the Company must provide a competitive compensation package, including cash and stock-based compensation. If the anticipated value of the Company’s stock-based

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incentive awards does not materialize so that they cease to be viewed as valuable, if the Company’s profits decrease, or future competition, operating results, financial condition, and/if the Company’s total compensation package is not viewed as competitive, the Company’s ability to attract, retain and motivate executives and key employees could be weakened.

We obtain some of the components and subassemblies included in our systems from a limited group of suppliers, and the partial or cash flowscomplete loss of one of these suppliers could suffer.cause production delays and a substantial loss of revenue.

We obtain some of the components and subassemblies included in our systems from a limited group of suppliers and do not have long-term contracts with many of our suppliers. Our dependence on limited source suppliers of components and our lack of long-term contracts with many of our suppliers expose us to several risks, including a potential inability to obtain an adequate supply of components, price increases, late deliveries and poor component quality. Disruption or termination of the supply of these components could delay shipments of our systems, damage our customer relationships and reduce our sales. From time to time in the past, we have experienced temporary difficulties in receiving shipments from our suppliers. The lead-time required for shipments of some of our components can be as long as six months. In addition, the lead time required to qualify new suppliers for lasers and certain optics could be as long as a year, and the lead time required to qualify new suppliers of other components could be as long as nine months. If we are unable to adjustaccurately predict our component needs, or if our component supply is disrupted, we may miss market opportunities by not being able to meet the scale of our business in response to rapid changes in demand in the semiconductor equipment industry, our operating results and our ability to compete successfully may be impaired.

The business cycle in the semiconductor equipment industry has historically been characterized by frequent periods of rapid change in demand that challenge our management to adjust spending and resources allocated to operating activities. During periods of growth or decline in demand for our products and services, we face significant challenges in maintaining adequate financial and business controls, management processes, information systems and procedures and in training, managing, and appropriately sizing our supply chain, our work force, and other components of our business on a timely basis. Our success will depend, tosystems. Further, a significant extent, onincrease in the abilityprice of one or more of these components or subassemblies could seriously harm our executive officersresults of operations and other members of our senior management to identify and respond to these challenges, our gross margins and earnings may be impaired during periods of demand decline, and we may lack the infrastructure and resources to scale up our business to meet customer expectations and compete successfully during periods of demand growth.cash flows.

We manufacture all of our systems at a limited number of facilities, and anyAny prolonged disruption in the operations of thoseour manufacturing facilities could reducehave a material adverse effect on our revenues.revenue.

We produce allthe majority of our systems in our manufacturing facilities located in Milpitas, California.California and Bloomington, Minnesota. We use contract manufacturers in China, Israel, Japan and the United States. Our manufacturing processes are highly complex and require sophisticated and costly equipment and a specially designed facilities.facility. As a result, any prolonged disruption in the operations of our manufacturing facilities, such as those resulting from acts of war, terrorism, political instability, health epidemics, fire, earthquake, flooding or other natural disaster could seriously harm our ability to satisfy our customer order deadlines. If we cannot timely deliver our systems, our results from operations and cash flows could be materially and adversely affected.

We may outsource select manufacturing activities to third-party service providers, which decreases our control over the performance of these functions and may result in lower quality and functionality of our products.

We may outsource product manufacturing to third-party service providers. Outsourcing reduces our control over the performance of the outsourced functions. Dependence on outsourcing may also adversely affect our ability to bring new products to market. If we do not effectively manage our outsourcing strategy or if third party service providers do not perform as anticipated, we may experience operational difficulties, increased costs, manufacturing interruptions or inefficiencies in the operation of our supply chain, any or all of which could delay our delivery of products to our customers, and materially and adversely affect our business, financial condition, and results of operations.

If our network security measures are breached and unauthorized access is obtained to a customer's data, to our data, or to our information technology systems, we may incur significant legal and financial exposure and liabilities.

As part of our business, we store our data and certain data about our customers, vendors and employees in our information technology system.  While our system iswe have security measures in place that are designed with accessto protect this information and prevent data loss and other security breaches, if these measures are breached as a third party gainsresult of third-party action, employee error, malfeasance, break-ins or otherwise, and someone obtains unauthorized access to our customers’, vendors’ or employees’ data, including any data regarding our customers, the security breachwe could expose us to a risk of loss of this information,face loss of business, litigation and possible liability. These security measures mayregulatory investigations or court orders, our reputation could be breached because of cyber-attacks, data breaches, malicious code such as viruses and worms, phishing attempts, employee error, malfeasance or otherwise. Additionally, third parties may attemptseverely damaged, we could be required to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information to gain access to our customers' data or our data, including our intellectual propertyexpend significant capital and other confidential business information,resources to alleviate the problem, as well as incur significant costs and liabilities, including due to litigation, indemnity obligations, damages for contract breach, penalties for violation of applicable laws or our information technology systems.regulations, and costs for remediation and other incentives offered to customers.

Cyber-attacks and other malicious internet-based activities continue to increase. Because the techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognizedidentified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, third parties may attempt to fraudulently induce employees or users to disclose information to gain access to our data or our customers’ data. If any of these events occur, our or our customers’ and vendors’ information could be accessed or disclosed

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improperly. Any or all of these issues could negatively affect our ability to attract new customers, cause existing customers to choose to purchase from our competitors, result in reputational damage or subject us to third-party lawsuits, regulatory fines or other action or liability, which could adversely affect our operating results.

The General Data Protection Regulation (GDPR) is a regulation in European Union (EU) law on data protection and privacy for all individuals within the EU and the European Economic Area (EEA). It also addresses the export of personal data outside the EU and EEA areas. We need to put in appropriate technical and organizational measures despiteto implement these data protection principles. The GDPR requirements have been reviewed and are in the process of being implemented. We may also be subject to other data privacy laws in the United States and the other countries in which we operate.

Failure to adjust our orders for parts and subcomponents in an accurate and timely manner in response to changing market conditions or customer acceptance of our products could adversely affect our financial position and results of operations.

Our earnings could be negatively affected and our inventory levels could materially increase if we are unable to predict our inventory needs in an accurate and timely manner and adjust our orders for parts and subcomponents in the event that our needs increase or decrease materially due to unexpected increases or decreases in demand for our products. Any material increase in our inventories could result in an adverse effect on our financial position, while any material decrease in our ability to procure needed inventories could result in an inability to supply customer demand for our products, thus adversely affecting our revenue.

Our ability to fulfill our backlog may have an effect on our long-term ability to procure contracts and fulfill current contracts.

Our ability to fulfill our backlog may be limited by our ability to devote sufficient financial and human capital resources and may be limited by available material supplies. If we do not fulfill our backlog in a timely manner, we may experience delays in product delivery, which would postpone receipt of revenue from those delayed deliveries. Additionally, if we are consistently unable to fulfill our backlog, this may be a disincentive to customers to award large contracts to us in the future until they are comfortable that we can effectively manage our backlog.

If we do not manage our supply chain effectively, our operating results may be adversely affected.

We need to continually evaluate our global supply chains and assess opportunities to reduce costs. We must also enhance quality, speed and flexibility to meet changing demand for our products and product mix and uncertain market conditions. Our success also depends in part on refining our cost structure and supply chains so that we have flexibility and can maintain and improve profitability. Although the current tariff environment has not had a material adverse effect on our costs to date, further deterioration in the tariff environment, or changes in suppliers, may cause our costs to increase, which if we are not able to offset by charging higher sales prices, will cause a decline in our margins. To improve our margins on a product, we will need to establish high volume supply agreements with our vendors. We cannot be certain that we will be able to timely negotiate vendor supply agreements on improved terms and conditions, or at all. Failure to achieve the desired level of cost reductions could adversely affect our financial results. Despite our efforts to create security barrierscontrol costs and increase efficiency in our facilities, changes in demand could still cause us to such threats. Any security breach could resultrealize lower operating margins and profitability.

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We may choose to acquire new and complementary businesses, products or technologies instead of developing them ourselves, and we may be unable to complete these acquisitions or may not be able to successfully integrate an acquired business in a losscost-effective and non-disruptive manner.

Our success depends on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures. To this end, we have, from time to time, engaged in the process of confidence byidentifying, analyzing and negotiating possible acquisition transactions, and, from time to time, acquiring one or more businesses, and we expect to continue to do so in the future. We may choose to acquire new and complementary businesses, products, technologies and/or services instead of developing them ourselves. We may, however, face competition for acquisition targets from larger and more established companies with greater financial resources, making it more difficult for us to complete acquisitions. We cannot provide any assurance that we will be successful in consummating future acquisitions on favorable terms or that we will realize the benefits that we anticipate from one or more acquisitions that we consummate. Integrating any business, product, technology or service into our customers, damage our reputation,current operations could be expensive and time-consuming and/or disrupt our ongoing business. Further, there are numerous risks associated with acquisitions and potential acquisitions, including, but not limited to:

Our inability to consummate one or more acquisitions on favorable terms, or our failure to realize the intended benefits from one or more acquisitions, could have a material adverse effect on our business, lead to legal liability and negatively impact our future sales.

Ourliquidity, financial position and/or results of operations, could varyincluding as a result of the methods, estimatesour incurrence of indebtedness and judgments we use in applying our accounting policies.

The methods, estimates and judgments we use in applying our accounting policies have a significant impact on our results of operations. See “Note 1. Nature of Business, Basis of Presentation and Significant Accounting Policies” in Part II, Item 8 of our consolidated financial statements. These methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that leads us to change our methods, estimates and judgments. Changes in these methods, estimates and judgments could significantly affect our results of operations. In particular, our operating results have been affected by changes in our valuation allowance against our deferred tax assets, the calculation of share-based compensationrelated interest expense and byour assumption of unforeseen contingent liabilities. We might need to raise additional funds through public or private equity or debt financings to finance any acquisition. In that event, we could be forced to obtain financing on terms that are not favorable to us and, in the testing and potentialcase of equity financing, that result in dilution to our stockholders. In addition, any impairment of long-lived assets such as goodwill andor other intangible assets. For example, duringassets, amortization of intangible assets, write-down of other assets or charges resulting from the year ended December 31, 2016, we recorded a $27.4 million releasecosts of valuation allowance againstacquisitions and purchase accounting could harm our U.S, certain state and certain foreign deferred tax assets as we determined, based upon an evaluation of all available objectively verifiable evidence, including but not limited to our operations, current earnings and anticipated future earnings that a release is required. The valuation allowance release had a significant impact to our operating results. The process of evaluating the valuation allowance is highly subjective and requires significant judgment, and our results of operations could vary significantly from estimates. To the extent that we believe it is more likely that we will not realize our deferred tax assets, our financial statements will reflect another significant change to our tax provisionbusiness and operating results.

If we cannot effectively manage growth, our business may suffer.

Over the long-term, we intend to grow our business by increasing our sales efforts and completing strategic acquisitions. To effectively manage growth, we must, among other things:

Growth of our business will likely place a significant strain on our management, financial, operational, technical, sales and administrative resources. Any failure to effectively manage our growth may cause our business to suffer and our stock price to decline.

Risks Related to Tax Laws, Financial Markets and the Environment

Changes in our effective income tax raterates or tax liabilities could affect our results of operations.results.

WeAs a global company, we are subject to taxation in numerous U.S. statesthe United States and territories. As a result, our effectivevarious other countries. Significant judgment is required to determine and estimate worldwide tax rate is derived from a combination of applicableliabilities. Our future annual and quarterly tax rates in the various places that we operate. In preparing our financial statements, we estimate the amount of tax that will become payable in each of such places. Our effective tax rate, however, maycould be different than experienced in the past due toaffected by numerous factors, including the passage of the Tax Cuts and Jobs Act, changes in the jurisdictions(1) applicable tax laws; (2) composition of earnings in which our profits are determined to be earned and taxed, increases in expenses not deductible forcountries with differing tax purposes, the results of examinations and auditsrates; or (3) recoverability of our deferred tax filings,assets and liabilities.  In addition, we are subject to regular examination of our inability to secure or sustain acceptable agreements with

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income tax authorities, our utilization of net operating losses, changes in available tax credits, changes in accounting for income taxes, and changes in tax laws. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations and may result in tax obligations in excess of amounts accrued in our financial statements.

The recently passed comprehensive tax reform bill could adversely affect our business and financial condition.

On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act that significantly reformsreturns by the Internal Revenue CodeService and other tax authorities. We regularly assess the likelihood of 1986, as amended,favorable or unfavorable outcomes resulting from these examinations to determine the Code. The Tax Cuts and Jobs Act, among other things, contains significant changes to corporate taxation, including reductionadequacy of our provision for income taxes. Although we believe our tax estimates are reasonable, there can be no assurance that any final determination will not be materially different from the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction of future net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new capital investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits, including the deductibility of executive compensation. Notwithstanding the reductiontreatment reflected in the corporateour historical income tax rate, the overall impact of the Tax Cutsprovisions and Jobs Act is uncertain and our business and financial condition could be adversely affected. The impact of this tax reform on holders of our common stock is also uncertain and could be adverse. We urge our stockholders to consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.

We may incur impairments to goodwill or long-lived assets.

We review our long-lived assets, including goodwill and other intangible assets, for impairment annually or more frequently when events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable or it becomes more likely than not that the fair value is reduced below the carrying value of the reporting unit. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance.

Our recently announced share repurchase program may increase the volatility of our stock and impact our cash position and working capital balances.

In November 2017, our Board of Directors approved a program to repurchase up to $50 million of our common stock. Stock repurchases under the program may be made through open market and privately negotiated transactions, at times and in such amounts as management deems appropriate. Although our share repurchase program is intended to enhance long-term stockholder value, we are unable to ensure the repurchase program’s effectiveness. In addition, the repurchase program could affect the price and increase the volatility of our stock. The program may also diminish our cash reserves that may be needed for business investments, acquisitions of products and technologies or any other purposes.

Our investment portfolio may suffer losses from changes in market interest rates and changes in market conditions,accruals, which could materially and adversely affect our results of operations.

The Organization for Economic Co-operation and Development (“OECD”), released guidance covering various topics, including country-by-country reporting, definitional changes to permanent establishment and Base Erosion and Profit Shifting (“BEPS”), an initiative that aims to standardize and modernize global tax policy. Depending on the final form of guidance adopted by OECD members and legislation ultimately enacted, if any, there may be significant consequences for us due to our international business activities, including, but not limited to, an increase in our tax uncertainty and adverse effects on our provision for income taxes.

Turmoil or fluctuations in the credit markets and the financial services industry may negatively impact our business, results of operations, financial condition and liquidity.

Our investment portfolio primarily comprises corporate debt securities, commercial paper, debt securities issued by U.S. governmental agencies and certificates of deposits. These investments are subject to general credit,or liquidity, and marketour factoring arrangements may expose us to additional risks.

In the past, global credit markets and interest rate risks. Substantially allthe financial services industry have experienced a period of these securities are subject to interest rateunprecedented turmoil and credit risk and will decline in value if interest rates increase or one or moreupheaval characterized by the tightening of the issuers’ credit ratings is reduced. As a result of anymarkets, the weakening of the foregoing, we may experienceglobal economy and an unprecedented level of intervention from the United States and other governments. Adverse economic conditions, such as sustained periods of economic uncertainty or a reductioncrisis in value or loss of liquidity of our investments, whichthe financial markets may have a negativematerial adverse effect on our results of operations, liquidity and financial condition. We follow an established investment policy and set of guidelines to monitor, manage and limit our exposure to interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer, as well as our maximum exposure to various asset classes.

Our operating results have varied in the past and probably will continue to vary significantly in the future, which will cause volatility in our stock price.

Our quarterly and annual operating results have varied significantly in the past and are likely to vary in the future, which volatility could cause our stock price to decline. Some of the factors that may influence our operating results and subject our stock to extreme price and volume fluctuations include:

The foregoing factors are difficult to forecast, and these, as well as other factors, could materially and adversely affect our quarterly and annual operating results. If our operating results in any period fall below the expectations of securities analysts and investors, the market price of our common stock would likely decline.

We are highly dependent on international sales and operations, which exposes us to foreign political and economic risks.

A majority of our sales and operations are outside of the United States. As a result, we are subject to regulatory, geopolitical and other risks associated with doing business in foreign countries. We anticipate that international sales will continue to account for a significant portion of our revenues. International sales and operations carry inherent risks such as:

If any of these risks materialize and we are unable to manage them, our international sales and operations would suffer.

We are exposed to fluctuations in the foreign currency exchange rates.

As a global concern, we face exposure to adverse movements in foreign currency exchange rates. Our exposure to foreign currency exchange rate fluctuations arise in part from current intercompany accounts in which costs are charged between our U.S. headquarters and foreign subsidiaries. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results and cash flow.

We are exposed to risks related to our banking arrangements and accounts receivable factoring.

We maintain bank accounts with both domestic and foreign financial institutions, any one of the institutions may prove to not be financially viable. If any of these financial institutions experiences financial difficulties or otherwise are unable to honor our deposit arrangements, we may experience material financial losses due to lack of access to our funds which could have an adverse impact on our operating results, financial condition and cash flows.operations. In addition, we enter into factoring arrangements with certain financial institutions to sell a certain portion of our trade receivables. If we were to stop entering into these factoring arrangements, our operating results, financial condition and cash flows could be adversely impacted by delays or failure to collect the trade receivables.

Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.

The anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company However, by limiting our ability to engage in a business combination with an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our certificate of incorporation and bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our certificate of incorporation and bylaws:

Weentering into these arrangements, we are exposed to various risks relatedadditional risks.  If any of these financial institutions experiences financial difficulties or is otherwise unable to legal proceedings that could result in substantial costs and disruption to normal business operations.

From time to time, and inhonor the future,terms of our factoring arrangements, we may be, involved in legal proceedings or claims that involve breachexperience material financial losses due to the failure of contract, product liability, employment, possible infringement of patents and intellectual property rights of third parties or by third parties. It is difficult to predict the outcome of litigation matters, and there can be no assurance that we will prevail in any litigation. Adverse determinations in such litigation could result in loss of our property rights, subject us to significant liabilities, any ofarrangements, which could significantly and adversely affecthave an adverse impact upon our business,operating results, financial condition and results of operations.

If we are unable to maintain our internal control over financial reporting free of material weaknesses, it could adversely affect our business and results of operations.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to perform evaluations of our internal control over financial reporting and our independent auditors are required to publicly attest to the effectiveness of our internal control over financial reporting.

In our Annual Report on Form 10-K for our fiscal year ended December 31, 2016, management has concluded that, due to a material weakness in internal control surrounding our inventory accounts, our internal control over financial reporting was not effective as of December 31, 2016. In response to the material weakness, we have implemented additional reporting and monitoring controls over additions to or changes to our master records. Also, we have designed an automated methodology for determining and assigning the frequency levels of counting each inventory item. As of December 30, 2017, our management believe our remediation efforts resulted in the elimination of the previously identified material weakness, and has concluded that it has been remediated. While this material weakness has been remediated, we cannot be certain that we will not, in the future, have additional material weaknesses. We will continue to evaluate the effectiveness of our internal controls to ensure that our financial statements continue to be fairly stated in all material respects.cash flows.

We are subject to various environmental laws and regulations that could impose substantial costs upon us and may harm our business, operating results and financial condition.

Some of our operations use substances regulated under various federal, state, local, and international laws governing the environment, including those relating to the storage, use, discharge, disposal, labeling, and human exposure to hazardous and toxic materials. We could incur costs, fines and civil or criminal sanctions, third-party property damage or personal injury claims, or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental laws. Liability under environmental laws can be joint and several and without regard to comparative fault. Compliance with current or future environmental laws and regulations could restrict our ability to expand our facilities or require us to acquire additional expensive equipment, modify our manufacturing processes, or incur other significant expenses. We may unintentionally violate environmental laws or regulations in the future as a result of human error, equipment failure or other causes.

Compliance with federal securities laws, rulesRisks Related to Our Recently Completed Merger

Combining the businesses of Rudolph and regulations,Nanometrics may be more difficult, costly or time-consuming than expected and we may fail to realize the anticipated benefits of the Merger, which may adversely affect our business results and negatively affect the value of our common stock.

The success of the Merger depends on, among other things, our ability to combine the businesses of Rudolph and Nanometrics in a manner that realizes cost savings and facilitates growth opportunities.

In addition, we must achieve the anticipated growth and cost savings without adversely affecting current revenues and investments in future growth. If we are not able to successfully achieve these objectives, the anticipated benefits of the Merger may not be realized fully, or at all, or may take longer to realize than expected.

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An inability to realize the full extent of the anticipated benefits of the Merger, as well as Nasdaq requirements, is becoming increasingly complex,any delays encountered in the integration process, could have an adverse effect upon our revenues, level of expenses and operating results, which may adversely affect the value of our common stock.

In addition, the integration may result in additional and unforeseen expenses, and the significantanticipated benefits of the integration plan may not be realized. Actual growth and cost savings, if achieved, may be lower than what we expect and may take longer to achieve than anticipated. If we are not able to adequately address integration challenges, we may be unable to realize the anticipated benefits of the integration of Rudolph and Nanometrics.

The failure to successfully integrate the businesses and operations of Rudolph and Nanometrics in the expected time frame may adversely affect our future results.

Prior to completion of the Merger, Rudolph and Nanometrics operated independently. There can be no assurances that their businesses can be integrated successfully. It is possible that the integration process could result in the loss of key Rudolph employees or key Nanometrics employees, the loss of customers, the disruption of our ongoing businesses, inconsistencies in standards, controls, procedures and policies, unexpected integration issues, higher than expected integration costs or an overall post-completion integration process that takes longer than originally anticipated. Specifically, the following issues, among others, must be addressed in integrating the operations of Rudolph and Nanometrics in order to realize the anticipated benefits of the Merger so we perform as expected:

•combining the companies’ operations and corporate functions;

•combining the businesses of Rudolph and Nanometrics and meeting our capital requirements, in a manner that permits us to achieve any cost savings or revenue synergies anticipated to result from the Merger, the failure of which would result in the anticipated benefits of the Merger not being realized in the time frame currently anticipated or at all;

•integrating personnel from the two companies;

•integrating and unifying the offerings and services available to customers;

•harmonizing the companies’ operating practices, employee development and compensation programs, internal controls and other policies, procedures and processes;

•maintaining existing agreements with customers, distributors, providers and vendors and avoiding delays in entering into new agreements with prospective customers, distributors, providers and vendors;

•addressing possible differences in business backgrounds, corporate cultures and management philosophies;

•consolidating the companies’ administrative and information technology infrastructure;

•coordinating distribution and marketing efforts; and

•coordinating geographically dispersed organizations.

In addition, at times the attention of certain members of management and expenseresources may be focused on the integration of the businesses of the two companies and diverted from day-to-day business operations or other opportunities that may have been beneficial, which may disrupt our business.

We may not be able to retain customers or suppliers, or customers or suppliers may seek to modify contractual obligations with us, which could have an adverse effect on our business and operations. Third parties may terminate or alter existing contracts or relationships with Rudolph or Nanometrics.

As a result of the Merger, we must devotemay experience impacts on relationships with customers and suppliers that may harm our business and results of operations. Certain customers, licensors, business partners or suppliers may seek to terminate or modify contractual obligations whether or not contractual rights were triggered as a result of the Merger. There can be no guarantee that customers and suppliers of Rudolph or Nanometrics will remain with or continue to have a relationship with us or do so on the same or similar contractual terms to those areasthey had with Rudolph or Nanometrics prior to the Merger. If any customers or suppliers seek to terminate or modify contractual obligations or discontinue the relationship with us, then our business and results of operations may be harmed. Furthermore, we do not have long-term arrangements with many of our significant suppliers. If our suppliers were to seek to terminate or modify an arrangement with us, then we may be unable to procure necessary supplies from other suppliers in a timely and efficient manner and on acceptable terms, or at all. Any of the aforementioned disruptions could limit our ability to achieve the anticipated benefits of the Merger.

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We may be exposed to increased litigation due to the Merger, which could have an adverse effect on our business and operations.

We may be exposed to increased litigation from stockholders, customers, suppliers, consumers and other third parties due to the combination of Rudolph’s business and Nanometrics’ business. Such litigation may have an adverse impact on our business.

Federal securities laws, rulesbusiness and regulations, as well as Nasdaq rules and regulations, require companies to maintain extensive corporate governance measures, impose comprehensive reporting and disclosure requirements, set strict independence and financial expertise standards for audit and other committee members and impose civil and criminal penalties for companies and their chief executive officers, chief financial officers and directors for securities law violations. These laws, rules and regulations have increased, and in the future, are expected to continue to increase, the scope, complexity and cost of our corporate governance, reporting and disclosure practices, which could harm our results of operations and divert management's attention from businessor may cause disruptions to our operations.

We may be exposedunable to liabilities underretain former Rudolph and Nanometrics personnel successfully.

The success of the FCPA and other anti-corruption laws, and any determination that we violated these laws could have a material adverse effectMerger will depend in part on our business.ability to retain the talents and dedication of the professionals previously separately employed by Rudolph and Nanometrics. It is possible that these employees may decide not to remain with us. If key employees terminate their employment, or if an insufficient number of employees are retained to maintain effective operations, our business activities may be adversely affected and management’s attention may be diverted from successfully integrating Rudolph and Nanometrics to hiring suitable replacements, all of which may cause our business to suffer. In addition, we may not be able to locate suitable replacements for any key employees that leave the Company or offer employment to potential replacements on reasonable terms.

WeRisks Related to the Global Economy and Semiconductor Industry

Cyclicality in the semiconductor device industry has led to substantial decreases in demand for our systems and may, from time to time, continue to do so.

Our operating results are subject to significant variation due to global economic conditions and the Foreign Corrupt Practice Actcyclical nature of 1977 ("FCPA"),the semiconductor device industry. Our business depends upon the capital expenditures of semiconductor device manufacturers, which, in turn, depend upon the current and other lawsanticipated market demand for semiconductors and products using semiconductors. The timing, length and severity of the up-and-down cycles in the semiconductor equipment industry are difficult to predict. In recent years, the industry has experienced significant downturns, generally in connection with declines in economic conditions. This cyclical nature of the industry in which we operate affects our ability to accurately predict future revenue and, thus, future expense levels. When cyclical fluctuations result in lower than expected revenue levels, operating results may be adversely affected, and cost reduction measures may be necessary in order for us to remain competitive and financially sound. During a down cycle, we must be in a position to adjust our cost and expense structure to prevailing market conditions and to continue to motivate and retain our key employees. In addition, during periods of rapid growth, we must be able to increase manufacturing capacity and personnel to meet customer demand. We can provide no assurance that prohibit improper paymentsthese objectives can be met in a timely manner in response to industry cycles. If we fail to respond to industry cycles, our business could be seriously harmed.

In addition, demand for our products is highly inelastic which means we have little ability to control product revenues created by customer demand for more capacity. The market for our products is characterized by constant and rapid technological change, price erosion, product obsolescence, evolving standards, short product life cycles and significant volatility in supply and demand. Due to the inelastic nature of demand in the semiconductor industry, we may need to take actions to reduce costs in the future, which could reduce our ability to significantly invest in research and development at levels we believe are necessary. If we are unable to effectively align our cost structure with prevailing market conditions, our business, financial condition and results of operations may be materially and adversely affected.

We may also experience supplier or offerscustomer issues as a result of paymentsadverse macroeconomic conditions. If our customers have difficulties in obtaining capital or financing, this could result in lower sales. Customers with liquidity issues could also result in an increase in bad debt expense. These conditions could also affect our key suppliers, which could affect their ability to foreign governmentssupply parts and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. Also, similar worldwide anti-bribery laws, such as the U.K. Bribery Act and Chinese anti-corruption laws, generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Someresult in delays of our distribution partners are located in partscustomer shipments.

Our future rate of growth is highly dependent on the development and growth of the worldmarket for microelectronic device inspection, lithography and metrology equipment.

We target our products to address the needs of microelectronic device manufacturers for defect inspection, metrology and lithography.  If for any reason the market for microelectronic device inspection, lithography or metrology equipment fails to grow in the long term, we may be unable to maintain current revenue levels in the short term and maintain our historical growth in the long term. Growth in the inspection market is dependent to a large extent upon microelectronic manufacturers replacing manual inspection with automated inspection technology. Growth in the metrology market is dependent to a large extent upon new chip designs and capacity expansion of microelectronic manufacturers. Growth in the lithography market is

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dependent on the development of cost-effective packaging with high fine pitch RDLs, ultimately migrating to multi-die, large, form-factor packages. There can be no assurance that have experienced governmental corruptionmanufacturers will undertake these actions at the rate we expect.

Risks Related to some degreeour Stock

Provisions of our charter documents and of Delaware law could discourage potential acquisition proposals and/or delay, deter or prevent a change in control of our company.

Provisions of our certificate of incorporation and by-laws may inhibit changes in control of our company not approved by our Board of Directors. These provisions also limit the circumstances in which a premium can be paid for our common stock and in certain circumstances, strict compliance with anti-bribery lawswhich a proxy contest for control of our board may conflict with local customs and practices. Although we have implemented policies and proceduresbe initiated. These provisions provide for:

We are also entitled to discourage these practices by our employees, our existing safeguards and any future improvements may prove to be less than effective, and our employees, consultants, sales agents or distributors may engage in conduct for which we might be held responsible. Violationsavail ourselves of the FCPA or international anti-corruption lawsprotections of Section 203 of the Delaware General Corporation Law, which could inhibit changes in control of the Company.

Our stock price is volatile.

The market price of our common stock has fluctuated widely. Consequently, the current market price of our common stock may result in severe criminal or civil sanctions,not be indicative of future market prices, and we may be subjectunable to other liabilities, which could negatively affectsustain or increase the value of an investment in our business, operating results and financial condition. common stock. Factors affecting our stock price may include:

In addition, the U.S. government may seek to hold us liable for successor liability FCPA violations committed bystock market has experienced periods of significant price and volume fluctuations. These fluctuations have particularly affected the market prices of the securities of high technology companies in which we invest or that we acquire. We cannot assure you that our internal control policies and procedures will protect us from reckless or negligent acts committed by our employees, distributors, partners, consultants or agents.

Regulations related to conflict minerals could adversely impact our business.

The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of tin, tantalum, tungsten and gold, known as conflict minerals, originating from the Democratic Republic of Congo, or DRC, and adjoining countries. As a result, in August 2012 the United States Securities and Exchange Commission, or SEC, adopted annual disclosure and reporting requirements for public companies that use conflict minerals mined from the DRC and adjoining countries in their products. We have determined that we use at least one of these conflict mineralslike ours. Any such market fluctuations in the manufacture of our products, although we have not yet determined the source of the minerals that we use. These disclosure requirements require us to use diligent efforts to determine which conflict minerals we use and the source of those conflict minerals, and disclose the results of our findings. There have been and will continue to be costs associated with complying with these disclosure requirements, including those costs incurred in conducting diligent efforts to determine which conflict minerals we use and the sources of conflict minerals used in our products. Further, the implementation of these rulesfuture could adversely affect the sourcing, supplymarket price of our common stock.

There are various risks related to the legal and pricing of materials usedregulatory environments in which we perform our products. As thereoperations and conduct our business that may expose us to risk.

We are faced with various risks that may be only aassociated with our compliance with existing, new, different, inconsistent or conflicting laws, regulations and rules enacted by governments and/or their regulatory agencies in the countries in which we operate as well as rules and policies implemented at our customer sites. These laws, regulations, rules and policies could relate to any of an array of issues including, but not limited number of suppliers offering conflict free minerals, we cannot be sureto, environmental, tax, intellectual property, trade secrets, product liability, contracts, antitrust, employment, securities, import/export and unfair competition. In the event that we willfail to comply with or violate U.S. or foreign laws or regulations or customer policies, we could be ablesubject to obtain necessary conflict free conflict mineralscivil or criminal claims or proceedings that may result in sufficient quantitiesmonetary fines, penalties or at competitive prices. In addition, weother costs against us or our employees, which may face reputational challenges if we determine thatadversely affect our products contain minerals not determinedoperating results, financial condition, customer relations and ability to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used inconduct our products through the procedures we implement. If we determine it is necessary to redesign our products to not use conflict minerals, we would incur costs associated with doing so.business.

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None.

At December 30, 2017,Our principal executive office building is located at 16 Jonspin Road in Wilmington, Massachusetts.  We own our owned or leasedMilpitas and Richardson facilities included those described below:and lease facilities for corporate, engineering, manufacturing, sales and service-related purposes in the United States and six other countries - China, Japan, South Korea, Singapore, Taiwan and France. The following table indicates the location, the general purpose and the square footage of our material facilities. Our leases expire at various times through July 1, 2029.

We also lease office space for other smaller sales and service offices in several locations throughout the world.

We believe that our existing facilities and capital equipment are suitable for their respective uses and adequate forto meet our current needsrequirements and anticipated growth.

that suitable additional or substitute space is available on commercially reasonable terms if needed.

The information set forth under Note 9, Commitments10, “Commitments and Contingencies, inContingencies” to the Notes to Consolidated Financial Statements is incorporated herein by reference.

N/A.Item 4.Mine Safety Disclosures.

None.

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PART II

Market Information for Common Stock

Our common stock is quoted on the New York Stock Exchange (“NYSE”) under the symbol “ONTO.” Prior to the Merger, Nanometrics’ common stock was quoted on the Nasdaq Global Select Market under the symbol “NANO.“NANO” and Rudolph’s common stock was quoted on the NYSE under the symbol “RTEC.” The following table setsSet forth below is a line graph comparing the annual percentage change in the cumulative return to the stockholders of the Company’s common stock with the cumulative return of the NYSE Composite Index, the Nasdaq Composite Index and the industry specific index, PHLX Semiconductor Index, for the fiscal periods indicated,period commencing on December 31, 2014 and ending on December 31, 2019.  Historical data for Onto Innovation in the highline graph for the period commencing on December 31, 2014 and low closing sales prices per shareending on October 25, 2019 reflects the cumulative return to the stockholders of ourNanometrics.

The information contained in the performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference into such filing.

The graph assumes that $100 was invested on December 31, 2014 in the Company’s common stock on a quarterly basis as reportedand in each index. No cash dividends have been declared or paid on the Nasdaq Global Select Market.Company’s common stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.

Stockholders

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As of February 20, 2018,3, 2020, there were approximately 133 holders153 stockholders of record of our common stock. Because brokersstock and the institutions on behalf of stockholders hold many of our shares of common stock, we are unable to estimate the total number of stockholders represented by these record holders.

Dividend Policyapproximately 16,358 beneficial stockholders.

We have never declared or paid anya cash dividendsdividend on our capitalcommon stock. We currently expect to retainThe declaration of any future earnings, if any, for use individends by us is within the operation, expansiondiscretion of our business and repurchase of shares and do not anticipate paying any cash dividends in the foreseeable future.

Issuer Purchases of Equity Securities

On May 29, 2012, our Board of Directors authorizedand will be dependent on our earnings, financial condition and capital requirements as well as any other factors deemed relevant by our Board of Directors.

Following the Merger, we assumed the share repurchase authorization approved on March 14, 2019, by the former Nanometrics Board of Directors.  This share repurchase authorization allows us to purchase up to $20.0$80.0 million worth of shares of our common stockstock. Under the terms of which $4.4 million remainedthis share repurchase authorization, shares may be repurchased through open market or privately negotiated transactions. No shares have been repurchased under this repurchase authorization as of December 31, 2016. On November 15, 20172019.

For further information, see Note 18 in the accompanying Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

In addition to our Board of Directors authorized theshare repurchase of up to $50.0 million of ourprogram, we withhold common stock which supersededshares associated with net share settlements to cover tax withholding obligations upon the 2012 repurchase program. This new plan is referred to as the Stock Repurchase Plan. Stock repurchasesvesting of restricted stock unit awards and stock option exercises under the Stock Repurchase Plan may be madeCompany’s equity incentive program. During the three and twelve months ended December 31, 2019, we withheld 51 thousand and 78 thousand shares through open marketnet share settlements, respectively.  For the three and privately negotiated transactions at timestwelve month periods ended December 31, 2019, net share settlements cost $1.8 million and $2.5 million, respectively. Please refer to Note 12 of the Notes to the Consolidated Financial Statements included in such amounts as management deems appropriate. The timing and actual number of shares repurchased is dependentthis Annual Report on a variety of factors including price, corporate and regulatory requirements and other market conditions.

During fiscal year 2017, we repurchased and retired 1,065,848 shares ofForm 10-K for further discussion regarding our common stock at the weighted average price of $25.33 per share under the Stock Repurchase Plan, all of which were purchased in the fourth quarter of fiscal year 2017.equity incentive plan.

The following table summarizes repurchasesprovides details of our common stock purchased during the fourth quarter of fiscal 2017:three month period ended December 31, 2019 (in thousands, except per share data):

The Stock Repurchase Plan was completed in February 2018, with purchases since December 30, 2017 of 896,187 shares of our common stock at the weighted average price of $25.65 for a cost of $23.0 million. No shares were repurchased in fiscal 2016.

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Stock Performance Graph

The following graph presentation compares cumulative five-year stockholder returns on an indexed basis, assuming a $100 initial investment and reinvestmentTable of dividends, of Nanometrics Incorporated, a broad-based equity market index and an industry-specific index. The broad-based equity market index used is the Nasdaq Composite Index and the industry-specific index used is the PHLX Semiconductor Index.Contents

This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended or the Exchange Act.

Recent Sales of Unregistered Securities

None.

The following selected consolidated financial data set forth below is not necessarily indicative of results of future operations and should not be relied upon as an indicator of our future performance. This data should be read in conjunction with our Consolidated Financial Statements and the related Notes thereto appearing elsewhere in this Annual Report on Form 10-K, and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations.” The Merger has been accounted for as a reverse acquisition under which Rudolph was considered the accounting acquirer.  As such, the selected financial data below comprises the operating results of Rudolph and its consolidated subsidiaries for periods through October 25, 2019 and Onto Innovation and its consolidated subsidiaries for periods on or after October 26, 2019. The balance sheet data as of December 31, 2019 and 2018 and the statement of operations data for the years ended December 31, 2019, 2018 and 2017 set forth below were derived from our audited Consolidated Financial Statements included elsewhere in this Form 10-K. The balance sheet data as of December 31, 2017, 2016 and 2015, and the statement of operations data for the years ended December 31, 2016 and 2015 were derived from our audited consolidated financial statements not included herein.