UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 29, 2018Fiscal Year Ended January 1, 2022
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-13470File No. 001-39110
NANOMETRICS INCORPORATEDONTO INNOVATION INC.
(Exact name of registrant as specified in its charter)
Delaware |
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(State or other jurisdiction of incorporation or organization) |
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16 Jonspin Road, Wilmington, MA 01887 (Address of principal executive offices) (Zip Code) |
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:
Title of | Trading Symbol | Name of | |
Common Stock, $0.001 par value per share |
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| New York Stock
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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 every Interactive Data File required to be submitted 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 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.
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Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
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Emerging growth company | ☐ |
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined byin Rule 12b-2 of the Act). Yes ☐ No ☒.
As of June 30, 2018, 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 $3,504,224,185 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 $787.4 million. Shares of common stock held by each officer and director and by each person affiliated with an officer or director have been excluded because such persons may be deemed to be “affiliates” as that term is defined under the rules and regulations of theNew York Stock Exchange Act. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.on June 25, 2021.
The number of shares of the Registrant’s common stockregistrant’s Common Stock outstanding as of February 22, 20198, 2022 was 24,463,681.49,359,739.
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 2019 Annual Meeting of Stockholdersstockholders scheduled to be filed pursuant to Regulation 14A. The Proxy Statement will be filed within 120 daysheld on May 10, 2022.
Table of Registrant’s fiscal year ended December 29, 2018. Contents
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FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2018
TABLE OF CONTENTS
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CAUTIONARY INFORMATION REGARDING
FORWARD-LOOKING STATEMENTS
ThisCertain statements in this Annual Report on Form 10-K for(this “Form 10-K”), or incorporated by reference in this Form 10-K, of Onto Innovation Inc. (referred to in this Form 10-K, together with its consolidated subsidiaries, unless otherwise specified or suggested by the year ended December 29, 2018,context, as the “Company,” “Onto Innovation,” “we,” “our” or “Form“us”) may be considered “forward-looking statements” or may be based on “forward-looking statements,” including, but not limited to, those concerning:
• | anticipated effects of, and future actions to be taken in response to, the COVID-19 pandemic; |
• | our business momentum and future growth; |
• | technology development, product introduction and acceptance of our products and services; |
• | our manufacturing practices and ability to deliver both products and services consistent with our customers’ demands and expectations and to strengthen our market position, including our ability to source components, materials, and equipment due to supply chain delays or shortages; |
• | our expectations of the semiconductor market outlook; |
• | future revenue, gross profits, research and development and engineering expenses, selling, general and administrative expenses, and cash requirements; |
• | our dependence on certain significant customers and anticipated trends and developments in and management plans for our business and the markets in which we operate; and |
• | our ability to be successful in managing our cost structure and cash expenditures and results of litigation. |
Statements contained or incorporated by reference in this Form 10-K” contains that are not purely historical are forward-looking statements concerning our business, operations, and financial performanceare subject to safe harbors created under Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and condition as well as our plans, objectives, and expectations for business operations and financial performance and condition. Anythe Private Securities Litigation Reform Act of 1995. Forward-looking statements contained herein that speak to future events, performance, results or other matters 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.
Forward-looking statements contained herein reflect our current expectations, assumptions and projections 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, such as those identified in some cases beyond our control. As a result, any or all of our forward-looking statementsPart I, Item 1A. “Risk Factors” and elsewhere in this Form 10-K10-K. Actual results may turn out to be inaccurate. Factors that coulddiffer materially affect our business operations and financial performance and condition include, but are not limited to,adversely from those risks and uncertainties described herein under “Item 1A - Risk Factors.” You are urged to consider these factors carefullyincluded in evaluating the forward-looking statements and are cautioned not to place undue reliance on thesuch forward-looking statements. The forward-lookingForward-looking statements are based on information available to usreflect our position 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, review the factors and risks we describe in the reports we will file from time to time with the Securities and Exchange Commission, or SEC, after 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
Nanometrics Incorporated and its subsidiaries (“Nanometrics”, the “Company”, or “we”)Onto Innovation is a leading providerworldwide leader in the design, development, manufacture and support of advanced, high-performance process control tools that perform macro-defect inspection and 2D/3D optical metrology, lithography systems, and inspectionprocess control analytical software used by bare silicon wafer manufacturers, semiconductor wafer fabricators, and advanced packaging manufacturers. Our products are also used for process control in a number of other high technology markets, including manufacturing of light emitting diodes (“LED”), vertical-cavity surface-emitting lasers (“VCSEL”), micro-electromechanical systems used primarily in the fabrication of semiconductors(“MEMS”), CMOS image sensors (“CIS”), compound semiconductor (SiC and other solid-stateGaN) power devices, as well asRF filters and modules, data storage, and certain industrial and scientific applications.
We provide process and yield management solutions used in bare silicon wafer production and wafer processing facilities, often referred to as “front-end” manufacturing, and advanced packaging of chips and test facilities, or “back-end” manufacturing, through a portfolio of standalone systems for optical metrology, macro-defect inspection, packaging lithography, probe card test and analysis, as well as transparent and opaque thin film measurements. Our automated and integrated metrology systems measure critical dimensions, device structures, topography, shape, and various thin film properties,compositions, including three-dimensional features and film thickness, as well as optical, electrical and material properties. Our process control solutionsprimary area of focus are deployed throughoutproducts that provide critical yield-enhancing and actionable information, which is used by microelectronic device manufacturers to drive down scrap costs and to decrease the semiconductor fabrication process, from front-end-of-line substrate manufacturing,time to high-volume productionmarket of semiconductors and other devices, to advanced three-dimensional wafer-level packaging and industrial applications.their next-generation devices. Our systems enablefeature sophisticated software and production-worthy automation. In addition, our advanced process control software portfolio includes powerful solutions for manufacturers, providing improved yield at reduced manufacturing cycle time, supporting accelerated product life cyclesstandalone tools, groups of tools, factory-wide, and enterprise-wide suites to enhance productivity and achieve significant cost savings. Our systems are backed by worldwide customer service and applications support.
2019Merger
On October 25, 2019, we became Onto Innovation Inc. upon the effectiveness of the merger (the “2019 Merger”) between Nanometrics Incorporated (“Nanometrics”) and Rudolph Technologies, Inc. (“Rudolph”). We accounted for the 2019 Merger as a reverse acquisition using the acquisition method of accounting in accordance with generally accepted accounting principles (“GAAP”). GAAP requires that either Nanometrics or Rudolph is designated as the acquirer for accounting and financial reporting purposes (“Accounting Acquirer”). Based on the evidence available, Rudolph was designated as the Accounting Acquirer while Nanometrics was the acquirer for legal purposes. Therefore, Rudolph’s historical results of operations replaced Nanometrics’ historical results of operations for all periods prior to the 2019 Merger. See Note 3 in Part II, Item 8 of this Form 10-K for more details regarding the 2019 Merger. However, ONTO stock price and volumes prior to October 25, 2019 are Nanometrics (NANO) stock data.
Key Events in Fiscal 2021
Business Combination. In the first quarter of 2021, the Company acquired Inspectrology, LLC, a supplier of overlay metrology for controlling lithography and etch processes in the compound semiconductor industrialmarket. The purchase consideration consisted of $24.0 million in cash paid at closing and scientific markets.an earnout subject to achievement of certain revenue targets earned for fiscal year 2021 and fiscal year 2022. As of January 1, 2022, $2.3 million of the earnout has been achieved with potential for up to an additional payment of $5.0 million based on fiscal 2022 results.
We were incorporated in California in 1975 and reincorporated in Delaware in 2006.Impact of the COVID-19 Pandemic on Our Business. To date, the COVID-19 pandemic has disrupted the way that we conduct business but has not had a material adverse impact on our operations. We have been publicly traded since 1984 (Nasdaq: NANO). We have an extensive installed basenot experienced significant delays in customer deliveries, but we are impacted by the global shortage in electronic components and our supply chain is strained in some cases as the availability of thousandsmaterials, logistics and freight options are challenging in many jurisdictions. The ultimate extent to which COVID-19 will impact our business depends on future developments, which are highly uncertain and very difficult to predict, including the effectiveness and utilization of systems in the majority of advanced semiconductor device production factories worldwide.
Additional information about us is available on our website at http://www.nanometrics.com. Thevaccines for COVID-19 and its variants, new information that can be accessed through our website, however, is not partmay emerge concerning the severity 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-KCOVID-19 and any amendmentsits variants, and actions to those reports are available on the investor relations section of our website free of charge as soon as reasonably practicable after we electronically filecontain or furnish such materials to the United States Securities and Exchange Commission (“SEC”). In addition, the reports and materials that we file with the SEC are available at the SEC's website (http://www.sec.gov).limit their spread.
Industry Background
We participate in the sale, design, manufacture, marketing and support of process control systems for optical critical dimension (“OCD”) metrology, thin film metrology, silicon wafer inspection, 2D and 3D macro inspection and lithography tools for advanced packaging and advanced analytics usedanalytical software for semiconductor manufacturing as well as inspection systems
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for certain industrial applications and scientific research. Our principal market is semiconductors.semiconductor capital equipment. Semiconductors primarily packaged as integrated circuits, within electronic devices, includeor “chips”, are used in consumer electronics, server and enterprise systems, mobile computing (including smart phones and tablets), data storage devices, and embedded automotive and control systems. Our core focus is the measurement and control of the structure, composition, and geometry of thesemiconductor devices as 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, and DRAM), analog devices (e.g., Wi-Fi and 4G5G radio integrated circuits, power devices), MEMS sensor devices (accelerometers, pressure sensors, microphones), CMOS image sensors, and other specialty end markets including components for hard disk drives, LEDs, and power management.management devices.
Current Trends
Business Environment
Our metrology systems and software are primarily used for controlling certain manufacturing processes utilized in the production of advanced, or leading-edge, wafer designs. The shrinking of features such as the constituents that form a single transistor are known as node reductions. The numeric identification of a specific node usually refers to a dimension associated with one of the transistor’s constituents. Advanced nodes are associated with transistor dimensions less than 16nm. One of our largest customers produces advanced nodes as small as 5nm and began pre-production of 3nm in 2021. Our metrology systems used to measure and characterize these small features are generally purchased when a customer is beginning to manufacture at a new, smaller node, in order to set up and test new manufacturing equipment being installed for the new node. Our process control/metrology equipment is generally installed prior to the installation of the actual process equipment for that reason. Additional process control equipment is normally purchased when the initial process yields have been stabilized and more manufacturing capacity is required to meet production demands. Therefore, our sales to customers for advanced nodes is generally higher when manufacturing lines for new nodes are being established and may not represent continuous sales revenue until our initial systems reach high levels of utilization driven by the need for greater capacity.
Our inspection systems, lithography systems, and software are primarily used for processing and inspecting advanced packaging associated with the back-end manufacturing. The advanced packaging techniques represent a very wide variety of assembly methods in order to connect individual chips to a larger PC board, or connecting a group of chips together to form a “system in a package” (“SIP”), also known as heterogeneous integration (“HI”), or chiplets. Many of these advanced packages require lithographic imaging to produce copper interconnections between the chip and the PC Board or between chips in the case of SIP or HI advanced packages. Our inspection systems and software are used for process control and detection of potential reliability failures in nearly all of these packages. Unlike the cyclical nature of our metrology equipment associated with node shrinks, our sales revenue for advanced packaging is generally driven by assembly volumes. Inspection rates for advanced packages are high throughout the assembly process to avoid a single defective chip from being assembled into a relatively expensive package, making the inspection process control systems attach rates quite linear with production volumes of these devices. The introduction of 5G handsets and high-performance computing (“HPC”) continue to drive demand for advanced packaging; however, macroeconomic conditions, including COVID-19 and U.S-China trade disputes could curtail demand for higher volumes in the future.
In 2020, a significant portion of the global workforce began working from home as part of corporate efforts to isolate and protect workers from COVID-19. This transition resulted in extremely high usage of data centers and cloud processing that drove higher demand for increased memory and HPC devices. In addition, wireless 5G networks drove demand for new 5G phones in 2021. That demand is expected to continue in the first half of 2022 as new phones from Apple and Samsung were introduced to the market in 2021. The building of the 5G network over the next several years will also bring more machine-to-machine communications. These macro-drivers will increase the need for semiconductors and advanced packaging to deliver higher computing power in a single package and faster speeds for memory and logic devices, while reducing power consumption and cost. Such advances are generally achieved by node reductions/shrinks and by advanced packaging for high bandwidth memory and HI packaging. As discussed above, these trends in front-end and back-end manufacturing complexity are driving the demand for sophisticated metrology and inspection systems in order to achieve the semiconductor performance required while achieving a profitable manufacturing yield.
Since the first fiscal quarter of 2020, Onto Innovation has launched eight new products that include five new metrology systems, one new macro defect inspection system, a panel lithography tool and a new metrology software engine. These new products were introduced as logic IDMs and foundries were increasing their capacity while following aggressive plans to transition their manufacturing to smaller nodes. Other customer interactions at memory and specialty device manufacturers as well as providers of advanced packaging centered around satisfying the immediate demand for these devices with our existing product portfolio, while partnering with R&D groups to prepare for the process controls needed for the next generation of
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semiconductors and packaging that will require the latest systems from Onto Innovation. We believe our strong engineering teams have delivered, and will continue to deliver, new products to our customers, followed by our field engineers providing customer support, while simultaneously achieving our gross and operating margin targets that were established in our long-term operating models. Revenues in the four quarters of 2021 increased sequentially as customers transitioned to advanced nodes and increased advanced packaging volumes, and the Company was able to achieve operating margins and earnings at the high end of our quarterly guidance and analysts’ estimates.
Markets
Advanced Nodes. refers to leading-edge integrated circuits where the feature sizes of transistors and 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' 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 primary paths for performance gains are geometric scaling, known as node shrinks, or scaling in threeof transistor 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 shrink features, new methods, including multiple patterning lithography and extreme ultra-violet lithography (EUV), have been developed. To scale NAND memory, a new 3D stacking architecture has been implemented at several customers with as many as 96 devicemore than 150 storage cell layers for a devicedevices 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® product line that is capable of measuring these advanced nodes as certain features shrink to 7nm, 5nm and 3nm.
Our BusinessTo 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. The NovusEdge® 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 processes. The top side of wafers used for the EUV process is covered with an epitaxial layer, which must also be scanned for any impurities. This compositional analysis is measured using our Element® system using Fourier Transform Infrared (“FTIR”) algorithms.
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. Historically, integrated circuit packaging refers to 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 using small wires to provide connections to a carrier that can be soldered to a printed circuit board and also prevents physical damage and corrosion to the chip. Advanced Packaging refers loosely to the multi-layer conductors and chip structures (other than wires) that often interconnect 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. This technology involves stacking individual chips 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 and uses small copper/solder “bumps” to connect one chip to another, which allows power and communication to be shared among the individually stacked components. This offers the advantages of shorter signal paths and, in turn, reduced power consumption, enhanced bandwidths, integration of heterogeneous components such as memory and logic chips, and smaller surface area. 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.
Heterogeneous packages are another advanced packaging technology using copper pillars/bumps to vertically connect a wide variety of stacked die for 2.5D, and 3D integration techniques as well as horizontally connected chips and are considered the next disruptive technology for several reasons. First, heterogeneous integrated packages using 3D stacking can 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 connect chips that are side-by-side or “fan out” power and signal connections to the larger contacts on the PC board, which accounts for 35 percent of the packaging cost. Lastly, the technology is currently considered the preferred vehicle for next generation uses, such as SIP, and package on package formats. As a result of the small overall form factor, heterogeneous integrated packages provide the functionality needed in high-end mobile and wearable products.
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The current and projected adoption of smart mobile devices with designed-in capability to enable multiple functions in a single device continues to grow. There are no longer single function devices, but instead, a combined single device provides multiple functions such as phone, GPS, camera, and internet browser. Aided by a myriad of available “apps,” the potential uses seem endless. As a result, these added functions in mobile products are driving semiconductor advanced packaging and display manufacturers to implement next-generation technologies, such as 5G communications, to meet these requirements. These technology shifts encompass multiple high-value process steps that are creating opportunities for our solutions.
Panel Manufacturing. One 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 (“CoO”) and increase productivity are transitioning from 300mm wafers to large rectangular panels, which can be as large as 600mm x 600mm. This larger size enables companies manufacturing large area packages to increase the number of devices being 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® X500 lithography system, having emerged from the flat panel display market, is readily capable of processing RDLs on organic laminate panels in the semiconductor advanced packaging market. The Firefly® series, designed for high resolution inspection, can provide defect detection and location information to the JetStep X500 tool for each die, which greatly improves lithography throughput using our exclusive StepFAST™ process. It also delivers a combination of defect classification and process throughput in a single software platform. It reduces capital investment requirements and provides a reliable pathway to transition from wafer to panel-based processes.
Technology
We offer a diverse line of process control products and technologies to address the manufacturing requirements of the semiconductor (and other solid-state device) manufacturing industry. 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 strengthenbelieve that our competitive position by developing innovative technologies and productsexpertise in our market segment. We have expandedcore technologies of optics and software and our product offerings to address growing applications within the semiconductor manufacturingcombined investment in research and adjacent industries. In pursuit of our goals, we have:
Introduced new products, applications, and upgrades in every core product line and primary market served;
Diversified our product line and strengthened our position with our top customers securing tool of record positions of one or more products in each of the top six customers (as defined by capital expenditures for wafer fab equipment), who combined represent a substantial majority of all wafer fab equipment expenditures;
Acquired 4D Technology Corporation in November 2018, whose dynamic high-performance interferometric measurement and inspection systemsdevelopment will enable us to serverapidly develop new marketstechnologies and products as we have demonstrated over the past two years of operation in advancedorder to quickly respond to emerging industry trends and competitive challenges. The breadth of our technology enables us to offer a diverse combination of process and process control solutions. Unique features have been designed into our lithography systems to meet our customers’ changing process requirements. Our metrology and inspection; and
Continued development of new measurement and inspection technologies provide process control for the majority of advanced fabrication processes.node wafers processed today in a semiconductor wafer fab. In front-end processes, OCD metrology, thin film metrology, wafer stress metrology and macro defect detection and classification technologies allow yield enhancement for critical processes such as photolithography, diffusion, etch, chemical mechanical planarization (“CMP”) and outgoing quality control. Within the back-end manufacturing processes, our 2D/3D advanced macro defect inspection provides our customers with critical quality assurance and process information. Defects may be created during probing, bumping, dicing, assembly processes (RDLs, TSVs, copper pillars, etc.) or general handling and can have a major impact on device and process quality. Lastly, we turn the gathered data into useful knowledge for our customers to make yield-enhancing decisions, which lower their scrap cost and environmental impact and improve their margins.
NanometricsOnto Innovation’s Products
We offer a diverse line of systems to address the broad range of process control requirements of the semiconductor device and industrial manufacturing markets. 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.
Automated Metrology Systems
. Our automated systems primarily consist of fully automated metrology systems that are employed in semiconductor production environments. The Atlas® family of products representrepresents 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 is supported by our NanoCDNanoCD™ suite of solutions including our NanoDiffract®latest introduction AI Diffract™ software, SpectraProbe™ software and NanoGen™ scalable computing engine that enables visualization, modeling, and analysis of complex structures.
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 family of products include 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 solutions is sold in conjunction with our IMPULSE systems.
Software
NanoDiffract®AI Diffract is a modeling, visualization and analysis software that takes signals from the metrology systems, providing critical dimension, thickness, and optical properties from in-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 NanoDiffractAI Diffract that enable very accurate and very fast calculations for signal processing for high fidelity model-based measurements. 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 NanoDiffractAI Diffract with a simple machine learning interface for rapid recipe deployment. The software is supported by NanoGen, 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 NanoDiffractAI Diffract and SpectraProbe analysis.
Materials Characterization
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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.
Silicon Wafer All-surface Inspection/Characterization. “All-surface” refers to inspection of the wafer frontside, edge, and backside as well as wafer’s locator notch. The edge inspection process focuses on the area near the wafer edge, an area that poses difficulty for traditional wafer frontside inspection technology due to its varied topography and process variation. Edge bevel inspection looks for defects on the side edge of a wafer. Edge bead removal and edge exclusion metrology involve a topside surface measurement required exclusively in the lithography process, primarily to determine if wafers have been properly aligned for the edge exclusion region. The primary reason for wafer backside inspection is to determine if contamination has been created 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.
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.
We have a broad portfolio of products for materials characterization including photoluminescence mapping and Fourier-TransformFourier Transform Infrared (“FTIR”) spectroscope in automated and manual systems for substrate quality and epitaxial thickness metrology. The NanoSpec® line supports thin film measurement across all applications in both low volume production and research applications.
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® G3 inspection systems are found in the 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. To do this, our systems capture full-color whole wafer images using simultaneous dark and bright field illumination. The resulting bright and dark field images are compared to those from an “ideal” wafer having no defects. When a difference is detected, its image is broken down into mathematical vectors that allow rapid and accurate comparison with a library of known classified defects stored in the tool’s database. Patented and proprietary enhancements of this approach enable very fast and highly repeatable image classification. The system is pre-programmed with an extensive library of local, global, and color defects and can also store a virtually unlimited amount of new defect classes. This allows customers to define defects based on their existing defect classification system, provides more reliable automated rework decisions and enables more accurate statistical process control data. Reviewing defects off-line enables automated inspection systems to maintain their utilization for high throughput inspection. Using defect image files captured by automated inspection systems, operators are able to view high-resolution defect images to determine defects that cause catastrophic failure of a device, known as killer defects. Combining the review process with classifying defects enables faster analysis by grouping defects found together as one larger defect, a scratch for example, and defects of similar types across a wafer lot to be grouped based on size, repeating defects, and other user-defined specifications.
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. 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 inspection points -placed strategically, this analysis may pinpoint the source of the defects so corrective action can be taken.
Opaque Film Metrology. The MetaPULSE® systems allow customers to simultaneously measure the thickness and other properties of up to six metal or non-metallic opaque film layers without physically contacting product wafers. PULSE® technology uses an ultra-fast laser to generate acoustic waves that pass down through a stack of opaque films such as those used in copper or aluminum interconnect processes, as well as the hard mask layer in 3D NAND chips, sending back to the
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surface a reflected signal (echo) that indicates film thickness, density, and other process critical parameters. We believe we are a leader in providing systems that can measure opaque thin-film stacks non-destructively with the speed and accuracy semiconductor device manufacturers demand in order to achieve high yields with the latest fabrication processes. The technology is ideal for characterizing copper interconnect structures. The MetaPULSE systems, used initially for fast and accurate measurements of metal interconnect in front-end wafer fabs, have now been chosen by back-end manufacturers to perform system measurements in new process applications such as RF filters and modules, driven by the need for on-product metrology as feature sizes decrease and pattern densities increase.
Probe Card Test and Analysis. The combination of fast 3D-OCM (optical comparative metrology) technology with improved testing accuracy and repeatability is designed to reduce total test time for even the most advanced large area probe cards. The 3D capabilities enable users to analyze probe marks and probe tips in a rapid and information-rich format.
Industrial, Scientific, and Research Markets:Markets ― 4D Technology
In November of 2018 we acquired 4D Technology Corporation, based in Tucson Arizona.. The 4D business unit offers a line of interferometry systems for the measurement and inspection of high precision surfaces. End markets include high precision optics surfaces and components, aerospace and defense components, and unique research and scientific instrumentation that requires the unique high-speed results of the 4D systems.
Advanced Packaging Lithography. Our lithography steppers use projection optics to expose circuit patterns from a mask or reticle onto a substrate to expose images with optimal fidelity. These systems employ a bright light that is transmitted through a mask or reticle containing display circuit patterns. Substrates are aligned on the system and the mask is imaged through a projection lens onto photoresist material coated on the substrate. The substrate is then moved, or “stepped,” to a second position to expose an adjacent area. Images can be “stitched” together precisely to form larger circuit patterns without any noticeable change in circuit performance. The system repeats the step and exposure process until the entire substrate is patterned. Once the exposure process has been completed, the substrate is developed with an alkali solution to reveal the underlying material. The imaged photoresist serves as a stencil barrier that allows for the processing of the underlying metal or insulating layers. The substrates then continue through the etching, stripping and deposition processes until multi-layer circuits are completed.
In order to deal with increased input/output (“I/O”) resulting from devices with enhanced functionality, power distribution efficiency, and higher frequency, integrated device manufacturers (“IDMs”) and outsourced semiconductor assembly and test (“OSATs”) facilities must incorporate lithography capabilities to create RDLs for their advanced packaging technologies. However, the associated substrates and processes are significantly different than those used in front-end wafer processing. For advanced packaging, the lithography system must perform in a completely different application, with significantly different operating parameters. For example, most packaging is an additive process, while wafer processing is subtractive, and thick films, rather than thin films, are used to enable the creation of features. In order for equipment to effectively function in this environment, it must overcome these challenges. Our JetStep® systems have been specifically designed to meet these challenges head on. The new JetStep X500 System is designed for rectangular substrates (panels), which when combined with user-selectable wavelength options, maximizes throughput while not limiting resolution when needed. High-fidelity optics are able to image the fine features required while at the same time achieving superior depth of field to minimize non-flatness that is typical for advanced packaging applications. On-the-fly auto focus and an innovative reticle management system improve yield and utilization. These features result in a revolutionary lithography system specifically designed to meet advanced packaging challenges.
Process Control Software. We provide a wide range of advanced process control solutions, which are designed to improve factory profitability, including run-to-run control, fault detection, classification and tool automation. We are a leading provider of process control software in the semiconductor industry. Advanced process control (“APC”) employs software to 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. Process control software enables the factory to increase capacity and yield while decreasing rework and scrap. It enables reduced production costs by lowering consumables, process engineering time and manufacturing cycle time.
Yield Management Software. Semiconductor manufacturers use yield management software (“YMS”) to obtain valuable process yield and equipment productivity information. The data necessary to generate productivity information comes from many different sources throughout the wafer fab: inspection and metrology systems, tool sensors, tool recipes, electrical tests and the fab environment. As the complexity and cost of manufacturing processes increase, the value of faster, better analysis to support critical manufacturing decisions grows. As a result, customers are demanding robust yield management systems that can analyze large, complex data sets quickly and effectively. Our fully integrated YMS is designed to analyze data from disparate sources and multiple sites to maximize productivity across the entire value chain.
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Customers
Over 200 microelectronic device manufacturers purchased Onto Innovation tools or software in 2021. We sell our metrologysupport a diverse customer base in terms of both geographic location and inspection systems worldwide to semiconductor manufacturers, producerstype of solid-state devices, wafer manufacturers and industrial and scientific research customers. We sell the majority of our systems todevice manufactured. Our customers are located in Asia and the United States
With respect to customer concentration, theover 20 countries. The following presentschart identifies our customers whothat represented 10% or more of total net revenue for anyeach of the years ended December 29, 2018, December 30, 2017last three years:
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Taiwan Semiconductor Manufacturing Co. Ltd. |
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Samsung Semiconductor |
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SK Hynix Inc. |
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* The customer accounted for more than 10% of total revenue during the period. | ||||||
^ The customer accounted for less than 10% of total revenue during the period. |
Sales, Customer Service and December 31, 2016.
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10% or more of total net revenues |
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Intel Corporation |
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Micron Technology, Inc. |
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Samsung Electronics Co. Ltd. |
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SK hynix |
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Taiwan Semiconductor Manufacturing Company Limited |
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Toshiba Corporation |
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* The customer accounted for more than 10% of total revenues during the period |
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^ The customer accounted for less than 10% of total revenues during the period |
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Product revenues represented 85%, 83%, and 84% of total net revenues in 2018, 2017 and 2016, respectively.
Sales 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.
Customer Service and Support
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 non-consumable parts and labor for most of our products under which we provide the non-consumable partsthat ranges from twelve to fourteen months to cover defects in material and labor necessary to repair the systems during the warranty period.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, and other locations in Europe.European locations.
Service revenues, including sales of replacement parts, represented 15%, 17%, and 16% of total net revenues in 2018, 2017 and 2016, respectively.
As of December 29, 2018, and December 30, 2017, our backlog was $36.4 million and $34.0 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.
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 whomwhich 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 compete effectively compete depends upon our ability to continuallycontinuously 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 Ltd. (formerly Nova Measuring Instruments Ltd. ("Nova") (“Nova”) for thin film and critical dimension OCD metrology, and other suppliersmetrology. Our principal competitor for advanced packaging. Ourpackaging inspection is Camtek Ltd. (“Camtek”). While the advanced packaging lithography market is served by various competitors, our primary competitors are Ushio, Inc. (“Ushio”) and Canon, Inc. (“Canon”). The primary competitor infor our software products is PDF Solutions, Inc. (“PDF Solutions”) and 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, inof 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.
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 allthe assemblies that do not contain elements that we believe lead to a direct competitive advantage. Most of our automated and integrated products are currently manufactured at our Milpitas facility.and Bloomington facilities. We currently do not expect our manufacturing operations to require additional major investments in capital equipment.
We manufacture key modular assemblies and integrated tools and make reasonable efforts to ensure that 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 long-term supply agreements with strategic suppliers for the supply of key assemblies for use in our products.
We rely on limited source suppliers for 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 might 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 supply, manufacture such components or subassemblies internally, or redesign our products, this could prevent us from shipping our products to our customers on a timely basis, which could have a material adverse effect on our operations.
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.
InThe markets for 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 rapid and ongoing development of new products and enhancements to existing products is critical to our automated markets,success. Accordingly, we devote a significant portion of our R&D efforts resulted in the successful product launch of the Atlas III product in the marketplace, our flagship product for OCD. In our integrated markets, the IMPULSE system has been further developed for which incorporates performancetechnical, management and productivity enhancements. Nano Diffractfinancial resources to research and SpectraProbe have regular semi-annual customer releases with a focus
on improved capability and performance. The materials characterization suite of products has had significant refresh and customization for customer needs including the latest FTIR for improved substrate metrology. 4D Technology has ongoing projects for the interferometry line of products including the recently launched InSpec for industrial shop floor inspection as well as new versions of the AccuFiz line for large aperture interferometers.development programs.
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.
As of December 29, 2018, we had 181 patents, including foreign patents, with expiration dates ranging from 2019-2036. 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 January 1, 2022, we have been granted, or hold exclusive licenses to establish436 U.S. and foreign patents. The patents we own, jointly own or exclusively license have expiration dates ranging from 2022 to 2040. We also have 80 pending patent applications in the United States and other countries. Our patents and patent applications principally cover various aspects of metrology, macro-defect detection and classification, altered material characterization, lithography techniques and automation.
Our pending patent applications 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 intellectual property, rights through patents and trademarks andor they may prove to be unenforceable. To protect our intellectual property, we also rely on a combination of patents, copyrights, trademarks, trade secret laws, contractual provisions and licenses and non-disclosure agreements. There can be no assurance (i) that any patents or trademarks issued to or licensed by us will not be challenged, invalidated or circumvented, (ii) that the rights through non-disclosure agreements,granted thereunder will provide us with a competitive advantage or (iii) that we may notwill be able to fully protect our technology, and competitors may be able to develop similar technology independently. Othersintellectual property. Additionally, others may obtain patents or trademarks 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, software and/or methods may contain design features that thesuch third parties claim may infringe upon their proprietaryintellectual property rights.
EmployeesFrom time to time, we may find it necessary to initiate litigation against other persons or entities to protect and/or enforce our intellectual property rights or contractual rights. However, litigation is costly and time consuming and there is no assurance that any lawsuit we bring will yield the result that we seek, as (i) the lawsuit may be dismissed or there could be an adverse finding, (ii) we may not be able to pursue the lawsuit due to the laws of the applicable country or (iii) there may be a subsequent
At December 29, 2018,
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unfavorable change in the laws that limit our ability to pursue the lawsuit. There is a risk that our means of protecting our intellectual property may not be adequate. For example, our competitors may independently develop similar technology or duplicate our products. If we employed 701 persons worldwide withfail to adequately protect our intellectual property, it would be easier for our competitors to sell competing products.
Human Capital and Talent
As of January 1, 2022, we had approximately 1,411 staff globally, 367 in research and development, 270 in operations, 131 in administration and 643 in sales, applications and service supportsupport. A large percentage of our employees have technical backgrounds and undergraduate and/or advanced degrees. Many of our employees have specialized skills and experience that are of value to our business, products and services. Our future success will depend, in key geographic areas aligned withlarge part, upon our customer locations.ability to attract, motivate and retain our highly skilled, technical, operational and managerial team members, who are in great demand in our industry and business communities.
Approximately 62% of our employees are located in the United States, 35% in Asia Pacific and 3% in Europe. None of our employees are represented by a union and we have never experienced a work stoppage because of union actions. We consider our employee relations to be good. Manyfavorable.
Purpose and Culture. All of our employees have specialized skills that are of valueexpected to us. Our future success will depend in large part uponuphold the following core values which are foundational to our ability to attract, retain and motivate highly skilled scientific, technical and managerial personnel, who are in great demandculture:
• | Passion – ownership, pride and caring in our work |
• | Integrity – honesty, dependable, predictable and accountable |
• | Collaboration – working together toward a common goal |
• | Results – meeting and exceeding goals, focused toward innovation and growth |
These core values define the way we do business in our industry.everyday actions and choices. We strive to create a respectful work environment characterized by mutual trust and the absence of intimidation, oppression, discrimination and exploitation.
Environmental MattersTalent Development and Acquisition. Successful execution of our strategy is dependent on attracting, developing and retaining key employees and members of our management and leadership teams. The skills, experience and industry knowledge of our employees significantly benefit our operations and performance. We continuously evaluate, modify, and enhance our internal processes, tools and technologies to increase employee engagement, productivity, quality and efficiency. We offer employees access to internal and external training and development courses to support individual development. We review succession plans and focus on promoting internal talent to help grow our employees, both professionally and personally.
We are committed to promoting and cultivating an inclusive and diverse culture that welcomes and celebrates everyone without bias. In addition, we look to actively engage within our communities to foster and attain social equity.
In order to ensure that we are meeting our human capital and talent objectives, we frequently utilize employee surveys to understand the effectiveness of our employee and Company programs and where we can improve across the Company. Our latest survey, completed during fiscal 2021, had a participation rate of over 77% of all our employees. Through the survey, our employees indicated that the Company’s greatest strengths include ensuring that employees know what is expected of them, providing a caring work environment, fostering an environment where employees have the opportunity to do their best and commitment to quality.
Compensation Philosophy. Our compensation philosophy creates the framework and building blocks for our rewards and recognition programs. We have a pay-for-performance culture that ties compensation to the performance of the individual and the Company. We provide balanced compensation programs that focus on the following five key elements:
• | Pay-for-performance - Reward those who achieve or exceed set goals and objectives, while also recognizing those making significant, impactful contributions; |
• | External market based - Pay levels that are competitive with respect to the labor market in which we compete for talent; |
• | Internal equity - Providing fair compensation programs within the Company; |
• | Fiscal responsibility - Providing programs which can be responsibly supported by our operations; and |
• | Legal compliance - Ensure compliance with the applicable laws of the states and countries in which we operate in all material respects. |
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Safety, Health and Wellness. We are committed to providing an environment which is safe and where our employees can be productive. We have rigorous health and safety programs focused on awareness, recognition, risk assessment and management, as well as teamwork.
In response to the COVID-19 pandemic, we implemented a response plan that we believe was in the best interest and health of our employees and the communities in which we operate. We continue to follow local statutory safety requirements while also monitoring COVID case numbers, in the communities in which operate, to constantly update our safety protocols and requirements
Our operationsbenefit plans are competitive and comprehensive. We provide each of our employees educational programs and initiatives focused on holistic wellness supporting nutritional, physical, emotional, mental and financial wellbeing.
Corporate Social Responsibility
Our stakeholders are essential to our business – shareholders, customers, suppliers, employees, communities as well as the environment and society. We are working to make our workforce more inclusive, our business more sustainable, and our communities more engaged by maintaining strong environmental, social and governance (“ESG”) practices. Actions we have taken in pursuit of these commitments include the following environmental and social programs:
• | Demanded excellence in our quality and environmental performance, as demonstrated through our product and process qualification commitments, including ISO 9001 Quality Management; |
• | Set goals to reduce our environmental impact, including a reduction of our carbon footprint, an increase in our use of renewable energy, a decrease in hazardous waste landfill, and a reduction in our freshwater usage; |
• | Produced systems responsibly by offering tool trade-in, refurbishment and technology upgrade programs; |
• | Provided corporate matching for employee donations to qualified nonprofit organizations; and |
• | Engaged in community service projects in our communities globally. |
We encourage you to review our 2020 Corporate Social Responsibility Annual Report (located on our website at https://ontoinnovation.com/company/corporate-social-responsibility) for more detailed information regarding our ESG initiatives. Nothing on our website, including our Corporate Social Responsibility Report or sections thereof, is deemed incorporated by reference into this Form 10-K.
Compliance with Governmental Regulations
We are subject to variousinternational, federal, state and local environmental protection regulations governingthat are customary to businesses in the use, storage, handling and disposal of hazardous materials, chemicals, and certain waste products. We believe thatsemiconductor capital equipment manufacturing industry. Such regulations include, but are not limited to:
• | The Restriction of Hazardous Substances Directive (“RoHS”), which restricts the use of certain hazardous substances in electrical and electronic equipment; |
• | General Data Protection Regulation (“GDPR”), which provides guidelines for the collection and processing of personal information from individuals who live in the European Union; |
• | The U.S. Foreign Corrupt Practices Act (“FCPA”), which prohibits companies and their individual officers from influencing foreign officials with any personal payments or rewards; and |
• | Conflict minerals reporting, which imposes disclosure requirements regarding the use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries in products. |
Our compliance with federal, statethese laws and local environmental protection regulations willhas not havehad a material adverse effectimpact on our financial position, results of operations, capital expenditures, earnings andor competitive and financial position.
If 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- We are subject to various environmental laws and regulations that could impose substantial costs upon us and may harmAvailable Information
Our Internet website address is http://www.ontoinnovation.com. The information on our business, operating results and financial condition.” in Item 1A.
Executive Officers of the Registrant
The names of our executive officers and their ages, titles and biographies as of February 25, 2019, are set forth below:
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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 Microcontrollers & Logic business lines 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 from November 2017 to February 2018 and subsequently from June 2018. 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 public 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 an MBA and a BS in Finance from San Jose State University.
Rollin Kocher joined Nanometrics in March 2013 as Vice President, Global Sales. In September 2016, Mr. Kocher was promoted to Senior Vice President, Commercial Operations. He has assumed the role of Senior Vice President, Sales and Marketing in January 2018. Prior to joining Nanometrics, Mr. Kocher held several senior management positions over 17 years at KLA, including Global Sales for Films and Scatterometry, Sales for Taiwan, North America and Europe, and Senior Director of Sales for the Samsung Business Unit. His last position at KLA 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, Senior Vice President, Corporate Development, joined Nanometrics in 2006. Mr. Heidrich has participated in many functions, expanding his scope to include corporate marketing and business development. He assumed the role of Vice President, Marketing and Business Development in May 2009; Senior Vice President, Strategic Marketing and Business Development in September 2012; and Senior Vice President, Corporate Development in January 2018. Mr. Heidrichwebsite 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.
Jim Barnhart joined Nanometrics as Senior Vice President, Operations in March 2018. After completing U.S. Naval Nuclear Power postgraduate school, Mr. Barnhart joined Applied Materials where for 17 years he held progressively higher positions including Strategic Worldwide Account Operations General Manager, Chief Operating Officer of the etch products business group, and Managing Director of corporate asset services. Mr. Barnhart left Applied Materials in 2006 to serve in senior operational roles at Johnson & Johnson and AREVA Solar as Senior Vice President, Global Operations. Most recently, he served as Senior Vice President, Global Operations for Cymer Light Sources from April 2010 until joining Nanometrics. Mr. Barnhart holds a B.S. in Electrical Engineering from Washington State University and an MBA from the University of California at Berkeley, Walter A. Haas School of Business.
In addition to the other information contained innot incorporated into this Form 10-K. Our Annual Report 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 have identifiedmake with the followingSEC 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.
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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 committees of our Board of Directors, and other information and materials, 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.
Item 1A. | Risk Factors. |
The 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. AdditionalIf any of the following risks not currently known to us or that we currently believe are immaterial may also impairactually occurs, our business, operations. Our businessfinancial condition or results of operations could be harmed by any of these risks. The trading price ofmaterially adversely affected.
Summary Risk Factors
Below is a summary the principal factors and uncertainties that make investing in our common stock could decline due to any of these risks and investors may lose all or part of their investment. This sectioncompany risky. You should be read in conjunctionthis summary together with the Consolidatedmore detailed description of each risk factor contained further below.
Risks Related to the Covid-19 Pandemic
• | The effects of the COVID-19 pandemic have affected our business and could in the future adversely affect our business, results of operations, and financial condition. |
Risks Related to Our Operations
• | If we do not manage our supply chain effectively, our operating results may be adversely affected, and any increases in material, labor, supplier, logistics and other operating costs, or supply chain delays and shortages, could lower our margins or result in lost sales. |
• | Variations 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. |
• | We are subject to order and shipment uncertainties. Our profitability will decline if we fail to accurately forecast customer demand when managing inventory. |
• | If we deliver systems with defects, our credibility will be harmed, and the sales and market acceptance of our systems will decrease. |
• | 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 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. |
• | Any prolonged disruption in the operations of our manufacturing facilities could have a material adverse effect on our revenue. |
• | 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. |
• | Our ability to fulfill our backlog may have an effect on our long-term ability to procure contracts and fulfill current contracts. |
Risks Related to Our Customers
• | Our largest customers account for a substantial portion of our revenue, and our revenue and cash flows could decline considerably if one or more of these customers were to purchase significantly fewer of our systems or delay or cancel a large order. |
Risks Related to Product Development
• | 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. |
• | 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. |
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• | 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. |
• | If our relationships with our large customers deteriorate, our product development activities could be adversely affected. |
Risks Related to Intellectual Property and Data Security
• | We may fail to adequately protect our intellectual property and, therefore, lose our competitive advantage. |
• | 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. |
• | 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 and may experience disruptions in our operations. |
Risks Related to Competition
• | 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. |
• | 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. |
Risks Related to Our International Operations
• | We are subject to compliance with foreign laws and regulations, and the burden of complying with such laws and regulations, or any failure to comply, may adversely affect our business, financial condition and results of operations. |
• | Tariffs and other market barriers have impacted and may continue to impact our competitiveness with non-U.S. customers, which may adversely affect our results of operations. |
• | Political and economic instability may result in reduced demand for our products. |
• | Natural disasters, changes in climate and geo-political events could materially adversely affect our worldwide operations (or those of our business partners). |
• | We may face difficulties in staffing and managing foreign branch operations due to political tensions or cultural differences. |
• | Currency fluctuations may impact our international sales or expose us to exchange rate risk. |
• | Our internal controls with respect to anti-corruption laws may not be effective, and any failure to comply with such laws may result in severe sanctions and liabilities, which may negatively affect our business, operating results and financial condition. |
Risks Related to Tax Laws, Financial StatementsMarkets and Notes thereto,the Environment
• | Changes in tax rates or tax liabilities could affect results. |
• | Turmoil or fluctuations in the credit markets and the financial services industry may negatively impact our business, results of operations, financial condition or liquidity, and our factoring arrangements may expose us to additional risks. |
• | We are subject to various environmental laws and regulations that could impose substantial costs upon us, and failure to comply with such laws and regulations may harm our business, operating results and financial condition. |
• | Customer and investor focus on our environmental, social and governance responsibility practices and policies, and related regulatory requirements, may make our supply chain more complex, and any failure to comply with customer or investor guidelines or applicable laws and regulations may adversely affect our relationship with customers and investors or our reputation and results of operations. |
Risks Related to Growth and Management’s DiscussionAcquisitions
• | 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 cost-effective and non-disruptive manner. |
• | If we cannot effectively manage growth, our business may suffer. |
Risks Related to the Global Economy and Analysisthe Semiconductor Industry
• | Cyclicality in the semiconductor device industry has led to substantial decreases in demand for our systems in the past and may, from time to time, continue to do so. |
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• | Our future rate of growth is highly dependent on the development and growth of the market for microelectronic device inspection, lithography and metrology equipment. |
General Risk Factors
• | 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. |
• | Our stock price is volatile. |
Risks Related to the COVID-19 Pandemic
The Global economic conditions and the cyclical natureeffects of the semiconductor industry can affect demand forCOVID-19 pandemic have affected our products which in turn may negatively impact our financial performance.
Global economic conditions, and the cyclical nature of the semiconductor industry have impacted,business and could in the future impact, customer demand foradversely affect 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 access to capital. Economic uncertainty, unemployment, higher interest rates, higher tax rates, fluctuations in foreign currency exchange rates, tariffs and other trade barriers, 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 we are unable timely and appropriately to 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.and financial condition.
In addition, demand for our products is highly inelastic which means we have little abilityThe effects of the public health crisis caused by the COVID-19 pandemic and the measures being taken to control product revenues created by customer demand for more capacity. The market for our products is characterized by constantlimit the spread of COVID-19 are uncertain and rapid technological change, price erosion, product obsolescence, evolving standards, short product life cycles and significant volatility in supply and demand. Duedifficult to predict, but pose the inelastic nature of demand in the semiconductor industry, we may needfollowing risks 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 and financial condition:
• | Disruptions to our supply chain in connection with the sourcing of materials, equipment and engineering support, and services from geographic areas that have been impacted by COVID-19 and by efforts to contain the spread of COVID-19, which have resulted and may continue to result in increased costs, material shortages, the inability to fully satisfy customer demand in a timely manner and increased risk of inventory obsolescence due to the resulting need to commit to increased purchases and provide longer lead times to secure critical components; |
• | Disruption of operations if employees are unavailable due to illness, risk of illness, travel restrictions, remote work or other factors that may limit our access to key personnel or critical skills, or reduce productivity, and a shortage of available skilled personnel; |
• | A potential decrease in short-term and/or long-term demand for our products and disruptions to our operations resulting from the immediate consequences of and responses to the pandemic, including precautionary measures instituted by governments and businesses to mitigate its spread, which have raised the prospect of an extended global recession, which would adversely impact the businesses of our customers, suppliers and partners; |
• | Changes in our operations in response to COVID-19 and employee illnesses resulting from the pandemic have resulted in, and may continue to result in, a reduction in qualification activities with customers and a reduction in production levels, and may further result in a reduction in sales to our customers and product development efforts. |
In addition, there may be materiallyincremental costs related to business continuity initiatives, which cannot be avoided or alleviated through succession planning, employees working remotely or teleconferencing technologies as well as inefficiencies, delays, and adversely affected.
We may also experience supplier or customer issues as a resultincreased costs resulting from our efforts to mitigate the impact and spread of adverse macroeconomic conditions. IfCOVID-19 through the changes in our customersoperations which we have difficulties in obtaining capital or financing, this could result in lower sales. Customers with liquidity issues could also resultenacted at certain of our locations around the world in an increase in bad debt expense. These conditions could also affecteffort to protect our key suppliers, which could affect their ability to supply partsemployees’ health and result in delayswell-being (including the implementation of our customer shipments.
Our largest customers account for a substantial portionwork-from-home policies, social-distancing measures, modified work schedules and shifts, the suspension of our net revenues,employee travel, and our net revenues would materially decline if one or more of these customers were to purchase significantly fewer of our systems.
Historically, a significant portion of our net revenues in each quarter and each year has been derived from sales to relatively few customers, and we expect this trend to continue. In fiscal year 2018, five customers represented a substantial majority of our total net revenues. There are only a limitedlimits on the number of large companies operating inemployees attending in-person meetings and the semiconductor manufacturing industry. Accordingly, we expect that we will continue to depend on a small number of large customers for a significant portionpeople permitted to be present at our facilities at any one time);
• | Management focus on mitigating the impact of the COVID-19 pandemic, which has required and will continue to require a substantial investment of time and resources across our enterprise, which has resulted and can be expected to continue to result in a diversion of management attention and resources; |
• | Delays in our ability to install or service our products due to travel bans or the requirement to quarantine for a lengthy period after entering a jurisdiction; |
• | An increase in potential opportunities for the Company to be subject to an adverse cybersecurity event as a result of the implementation of our work-from-home policy, which could give rise to business disruptions, loss of information, intellectual property and critical data as well as other negative impacts; |
• | A potential decrease in availability under our credit agreement, which permits us to borrow up to 70% of the value of eligible securities held at the time the line of credit is accessed, if there is a decrease in the value of eligible securities resulting from the impact of COVID-19 on global markets; and |
• | Potential difficulty accessing capital, if needed in the future, through a sale of securities, or in obtaining favorable terms of such securities, due to market conditions generally or a decline or volatility in the market for our securities. |
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The resumption of normal business operations after such interruptions may be delayed or if we are 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 numberconstrained by lingering effects 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 materials for our products, which could result in a potential inability to obtain an adequate supply 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 of which could adversely affect our results of operations.
Our manufacturing activities consist of integrating, assembling and testing components and subassemblies. We rely on a limited number of outside suppliers and subcontractors 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 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 sources could have a significant adverse impactCOVID-19 on our ability to manufacture our systems. In addition, our failure to timely use components in our manufacturing processes due to delays suppliers, third-party service providers, and/or cancellation of orders may lead to write-downs of inventory. A disruption in supplycustomers. These effects, alone or inventory window would, in turn,taken together, could have a material adverse effect on our business, financial condition and results of operations. Our reliance on a sole supplieroperations, legal exposure, or a limited groupfinancial condition. The duration of suppliersthe COVID-19 pandemic, resurgences, the severity of newly identified strains of the virus and our reliance on subcontractors involve several risks, including:
a potential inability to obtain an adequate supplythe efficacy of required components due to the suppliers' failure or inability to provide such components in a timely manner, or at all;vaccines and
reduced control over pricing and timely delivery of components.
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, which could damage relationships treatments with current and prospective customers and have a material adverse effect on our business, financial condition and results of operations.
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 operate in the highly competitive semiconductor industry and 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 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 quicklyrespect to new strains cannot be determined. Additional sustained or emerging technologiesprolonged outbreaks of virus variants, delays in rollout of any needed boosters or market developments by devoting greater resourcesmodifications to vaccines to address variants, or continued widespread hesitancy to utilize vaccines could exacerbate the development, promotion and saleadverse impact 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 themsuch measures.
Risks Related 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 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.
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.
Because of the high cost of switching equipment vendors in our markets, it may be difficult for us to attract customers from our competitors even if our metrology systems are superior to theirs.
We believe that once a semiconductor customer has selected one vendor's metrology system, the customer generally relies upon that system and, to the extent possible, subsequent generations of the same vendor's system, for the life of the application. Once a vendor's metrology system has been installed, a customer must often make substantial technical modifications and may experience downtime to switch to another vendor's metrology system. 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 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 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.
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.Operations
If we do not manage our supply chain effectively, our operating results may be adversely affected.affected, and any increases in material, labor, supplier, logistics and other operating costs, or supply chain delays and shortages, could lower our margins or result in lost sales.
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 deteriorationDeteriorations 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 control costs and increase efficiency in our facilities, changes in demand could still cause us to realize lower operating margins and profitability.
Further, our gross margins and financial performance may be adversely affected by increases in our operating costs, such as material, labor, supplier costs, logistics and energy costs, all of which have been and may continue to be subject to inflationary pressures. Operating costs have increased and may continue to increase further as a result of supply chain disruptions in connection with the sourcing of components, materials, equipment, engineering support, and services, labor shortages and other cost increases due to the COVID-19 pandemic and related government restrictions on travel and business operations. We may also experience production delays, disruptions and cost increases due to the worldwide shortage of semiconductor components as a result of sharp increases in demand for semiconductor products in general.
These risks may be heightened because 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. A significant number of our suppliers are the sole source or single source for certain components or subassemblies. If such a supplier is unable or unwilling to manufacture and deliver components to us on the time schedule and of the quality or quantity that we choose to acquire new and complementary businesses, or products or technologies instead of developing them ourselves,require, we may be forced to seek to engage an additional or replacement supplier or redesign our product to use alternative components, which could result in additional expenses and delays in product development or shipment of product to our customers. Disruption or termination of the supply of components has delayed and could continue to delay shipments of some of our systems. Such delays may damage our customer relationships and reduce our sales. From time to time in the past, we have experienced temporary difficulties, and supply chain disruptions and logistics and shipping challenges caused by the COVID-19 pandemic and related restrictions on movement and business operations are currently causing difficulties and delays, in receiving shipments from our suppliers. The lead-time required for shipments of some of our components can be greater than 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. In some cases, we may need to purchase components in advance of receiving customer orders for product. If we are unable to completeaccurately predict our component needs, or if our component supply is disrupted, as it has been due to supply chain disruptions, logistics difficulties and shipping delays due to the COVID-19 pandemic, we may miss market opportunities by not being able to meet the demand for our systems. Further, a significant increase in the price of one or more of these acquisitionscomponents or subassemblies could seriously harm our results of operations and cash flows.
Our efforts to mitigate any cost increases, labor impacts and supply chain delays and shortages may not be successful, and we cannot predict the duration of these current trends or other future increases in operating costs. We 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. For example, in November 2018 we acquired 4D Technology Corporation (“4D”), which we are currently in the process of integrating into Nanometrics. If we do identify suitable additional 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, such as our acquisition of 4D, include, among other things:
our inability to realize the benefits orpass cost savings that we expect to realize as a result of the acquisition;
diversion of management's attention;
motivating, recruiting and retaining executives and key employees; conforming standards, controls, procedures and policies, business cultures and compensation structures among our company and the acquired company;
consolidating and streamlining sales, marketing and corporate operations;
potential exposure to unknown liabilities of acquired companies;
loss of key employees and customers of the acquired business; and
managing tax costs or inefficiencies associated with integrating our operations following completion of the acquisitions.
If an acquisition is not successfully completed or integrated into our existing operations, our business, financial condition and results of operations could be adversely impacted.
In addition, to finance any acquisitions we may be required to raise additional fundsincreases through public or private equity or debt financings; however:
to obtain such financing we may be forced to obtain financing on terms that are not favorable to us and, in the case of equity or convertible debt financing, the financing may result in dilution to our stockholders; or
such financing may not be available to us at all, which could prevent us from entering or completing the acquisition.
Our success depends on the performance of key personnel, including 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 individuals 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.
If we deliver systems with defects, our credibility will be harmed, revenue from, and market acceptance of, our systems will decrease, and we could expend significant capital and resources as a result of such defects.
Our products are complex and frequently operate in high-performance, challenging environments. Notwithstanding our internal quality specifications, our systems have sometimes contained errors, defects and bugs, when introduced. If we deliver systems with errors, defects or bugs, our credibility and the market acceptance and sales of our systems would be harmed. Further, if our systems contain errors, defects or bugs, 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. Defects could also lead to product liability lawsuits against us or against our customers. We have agreed to indemnify our customers in some circumstances against liability arising from defects in our systems. 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 experience significant delays in shipping our products to our customers our businessfully (or at all), and reputation may suffer.
Our products are complexif supply chain delays 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 failureshortages delay delivery of our products, our customers may seek to meet or exceedpurchase from 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 productscompetitors. Any such occurrence may decrease over time, which could have a material adverse effectimpact on our revenuesgross margins and profitability.
It is common in our industry for the average selling price of a given product to decrease over time 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 past and may have in the future 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 could result in substantial damages, lost product sales and the loss of important intellectual property rights by us.
The semiconductor industry is generally subject to litigation regarding patents and other intellectual property rights. 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 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 andbusiness, financial position, results of operations. We cannot be sure 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 infringementoperations and cash flows.
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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 2018, 2017, and 2016, 91%, 87% and 86%, 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 volatilityfluctuations 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 revenuesrevenue and cash 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 periods of time to evaluate our inspection and/or film metrology systems.systems and many people are involved in the evaluation process. We expend significant resources educating and providing information to our prospective customers regarding the uses and benefits of our systems.systems in the semiconductor fabrication process. The length of time that it takes for us to completemake a sale depends upon many factors, including:including, but not limited to:
the efforts of our sales force and our independent sales representatives;
• | the efforts of our sales force; |
the complexity of the customer’s metrology needs;
• | the complexity of the customer’s fabrication processes; |
the internal technical capabilities and sophistication of the customer;
• | the internal technical capabilities and sophistication of the customer; |
the customer’s budgetary constraints; and
• | the customer’s budgetary constraints; and |
the quality and sophistication of the customer’s current processing equipment.
• | the quality and sophistication of the customer’s current metrology, inspection or lithography equipment. |
Because of the number of factors influencing the sales process, the period between our initial contact with a customer and the time at whichwhen we recognize revenue from that customer and receive payment, if at all,ever, varies widely.widely in length. Our sales cycles, including the time it takes for us to build a product to customer specifications after receiving an order to the time we recognize revenue, typically range from three to ninetwenty-four months. OccasionallySometimes our sales cycles can be much longer, particularly with customers in Asia who may require longer evaluation and acceptance periods.Asia. During the salesthese 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 completemake a sale, our customers often purchase only one of our systems, andthe performance of which they then evaluate its performance for a lengthy period of time before purchasing additionalany more of our 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 athe 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.requirements. 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. Variationslonger, and variations in the length of this period could cause further fluctuations in our operating results and, possibly, in our 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 stock price.
Relatively small fluctuationsproduction forecasts and operating margins. In addition, innovation in our system sales volume may cause our operating results to vary significantly each quarter.
During any quarter, aindustry could render significant portionportions 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, or if we experience sustained disruptions to our supply chain or shipping delays, including those we are currently experiencing due to the COVID-19 pandemic, we may have inadequate inventory, which could lead to foregone revenue is derivedopportunities, 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 the saleoutside suppliers and foundries, we periodically order materials in advance of a relatively small number of systems, which have a vast range of selling prices depending on the system. Accordingly, a slight changecustomer demand. This advance ordering has in the number or mix of systems that we sell could cause significant changes in our operating results.
We depend on new productspast 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 couldfuture result in excess inventory levels or unanticipated costs and inventory obsolescence, which would adversely affectwrite-downs if expected orders fail to materialize, or other factors make our financial results. Anyproducts less saleable. In addition, any significant delay in releasing new systemsfuture cancellation or deferral of product orders could adversely affect our reputation, give a competitor a first-to-market advantage or allow a competitorrevenue and margins, increase inventory write-downs due to achieve greater market share.
To develop new productsobsolete inventory, 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.operating results and stock price.
IfOur 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 the scale of our business in response to rapid changes in demandorders for parts and subcomponents in the semiconductor equipment industry,event that our operating results and our abilityneeds increase or decrease materially due 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 growthunexpected increases or declinedecreases 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.
If we deliver systems with defects, our credibility will be harmed, and services,the sales and market acceptance of our systems will decrease.
Our systems are complex and have occasionally contained errors, defects and bugs when introduced. Defects may be created during probing, bumping, dicing or general handling, and can have a major impact on device and process quality. When
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this occurs, our credibility and the market acceptance and sales of our systems could 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 facemay be required to expend significant challengescapital and resources to alleviate 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 under certain circumstances against liability arising from defects in maintaining adequate financialour systems provided that we also include a cap on our liability in the related sales agreements. Our product liability insurance policy currently provides both aggregate coverage as well as an overall umbrella coverage. 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.
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 with our systems, or if they choose to develop competing systems, our business controls, management processes, information systemscould suffer.
We must attract and procedures and in training, managing, and appropriately sizing our supply chain, our work force,retain experienced senior executives and other componentskey personnel with knowledge of semiconductor device manufacturing and inspection, metrology or lithography equipment and related software to help support our business on a timely basis. future growth, and competition for such personnel in our industry is high.
Our success will depend,depends, to a significant extent, ondegree, upon the abilitycontinued contributions of our key executive officersmanagement, 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. Despite our employment and noncompetition agreements with key members of our senior management team, these individuals or other key employees may 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 identifysupport our future growth, we will need to attract and respond to these challenges,retain additional qualified employees. Competition for such personnel in our gross margins and earnings may be impaired during periods of demand decline,industry is intense, and we may lacknot be successful in attracting and retaining qualified employees.
The expansion of high technology companies worldwide and growth in the infrastructuredemand for semiconductors following the onset of the COVID-19 pandemic have increased demand and resourcescompetition for qualified personnel. Competition for engineering and other technical personnel in some of the markets in which we operate is especially intense due to scale up our businesscontinued increases in the number of technology companies worldwide. In order to meet customer expectationsattract and compete successfully during periods of demand growth.
We manufacture allretain executives and other key employees, we must provide a competitive compensation package, including cash and stock-based compensation. If the anticipated value of our systems at a limited number of facilities,stock-based incentive awards does not materialize so that they cease to be viewed as valuable, if our profits decrease, or if our total compensation package is not viewed as competitive, our ability to attract, retain and anymotivate executives and key employees could be weakened.
Any prolonged disruption in the operations of thoseour manufacturing facilities could reducehave a material adverse effect on our revenues.revenue.
We produce the 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. Shelter-in-place orders and other measures, including work-from-home and social distancing policies implemented during the COVID-19 pandemic to protect employees, have resulted in reduced workforce availability at product manufacturing sites and reduced output at some of our vendors and suppliers. Restrictions on our access to or operation of manufacturing facilities or on our support operations or workforce, or similar limitations for our vendors and suppliers, may impact our ability to meet customer demand and could have a material adverse effect on our financial condition and results of operations. If we cannot timely deliver our systems, our results from operations and cash flows could be materially and adversely affected.
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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.
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.
Risks Related to Our Customers
Our largest customers account for a substantial portion of our revenue, and our revenue and cash flows could decline considerably if one or more of these customers were to purchase significantly fewer of our systems or delay or cancel a large order.
Sales to end user customers that individually represent at least ten 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 substantial portion of our revenue in each quarter and year has been derived from sales to relatively few customers, and this trend is expected to continue. If any of our key customers were to purchase significantly fewer of our systems in the future, or if they delay or cancel a large order, our revenue and cash flows could meaningfully decline. We expect that we will continue to depend on a small number of large customers for a sizable portion of our revenue. In addition, as large semiconductor device manufacturers seek to establish closer relationships with their suppliers, we expect that our customer base will become even more concentrated.
Risks Related to Product Development
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 and at times may make inventory investments prior to commercialization. We may experience difficulties or delays in our development efforts with respect to new systems, and we may not ultimately be successful in our product enhancement efforts to improve and advance products or in responding effectively to technological change, as not all research and development activities result in viable commercial products. In addition, we cannot provide assurance that we will be able to develop new products for the most opportunistic new markets and 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 cause a competitor to achieve greater market share.
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, we currently are developing additional product enhancements that we believe will address future customer requirements, but we may fail in a 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.
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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 investments.
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 leading edge and 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. The long lead times for some components may also require us to place orders for components and accumulate inventory in advance of market acceptance of our products. Our ability to commercially introduce and successfully market new systems is 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. 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. 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 may result in a write down of our investments in inventory. As a result, 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.
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.
Risks Related to Intellectual Property and Data Security
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, copyright 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 metrology, lithography, wafer and macro-defect inspection systems, including both embedded and application software, 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 copyrights for protection of our proprietary software and documentation, trademarks for protection of our brand and source of goods, and trade secrets for protection of our confidential and proprietary information and technology. However, we can give no assurance that our copyrights will be upheld or will successfully deter infringement by third parties. We routinely enter into confidentiality agreements with our employees and other third parties. Even though
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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. It also possible that third parties will misappropriate our trade secrets or other confidential information. We may be subject to cybersecurity breaches in which a third party obtains our confidential information. Third parties may also reverse engineer our products to copy our technology. Any of these circumstances could result in harm to our competitive position in the market. Failure to protect our trademarks can lead to other companies selling products using confusing similar names, thereby damaging our brand. In some countries, it can be difficult to register trademarks because of the strict examination process or blocking trademarks for other goods. Costly and time-consuming litigation might be necessary to enforce and determine the scope of our intellectual property rights, and failure to obtain or maintain trade secret protection might adversely affect our ability to continue our research or bring products to market.
From time to time, we may find it necessary to initiate litigation against other persons or entities to protect and/or enforce our intellectual property or contractual rights. However, litigation is costly and time consuming and there is no assurance that any lawsuit we bring will yield the result that we seek, as (i) the lawsuit may be dismissed or there could be an adverse finding, (ii) we may not be able to pursue the lawsuit due to the laws of the applicable country or (iii) there may be a subsequent unfavorable change in law that limits our ability to pursue the lawsuit. For example, litigation discovery practice in China, Japan, South Korea, continental Europe and Taiwan is not as robust as the United States, so it can be more difficult to determine if a company is infringing on our patents and more challenging to bring a lawsuit. 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 intellectual property rights poses a serious risk of doing business. There is a risk that we may be unable to adequately protect our intellectual property rights in certain foreign countries. For example, our competitors may independently develop similar technology or duplicate our products.If this occurs, it would be easier for our competitors to develop and sell competing products in these countries.
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 our intellectual property rights or to determine the noninfringement, scope or validity of a third party’s intellectual property 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, copyrights or other intellectual property rights 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. Furthermore, there is no assurance that any litigation we are involved in will yield the result that we seek as (i) the lawsuit may be dismissed or there could be an adverse finding, (ii) we may not be able to pursue the lawsuit due to the laws of the applicable country or (iii) there may be a subsequent unfavorable change in law that limits our ability to pursue the lawsuit.
In addition, our commercial success depends in part on our ability to avoid infringing or misappropriating patents or other intellectual property 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 intellectual property 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 intellectual property 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 an intellectual property dispute could hinder our ability to sell our products or systems or make the sale of our products or systems more expensive, which could lead to reduced revenue or lower margins, respectively.
If our network security measures are breached and unauthorized access is obtained to a customer'scustomer’s data, to our data, or to our information technology systems, we may incur significant legal and financial exposure and liabilities.liabilities and may experience disruptions in our operations.
As part of our business, we store our data and certain data about our customers, vendors and employees in our information technology system. While we haveIf there is a breach as a result of third-party action, employee error, malfeasance, break-ins or otherwise, of our security measures in place that are designed to protect this information and prevent data loss and other security breaches, if these measures are breached as a result of third-party action, employee error, malfeasance, break-ins or otherwise, and someone obtains unauthorized access to our customers’, vendors’ or employees’ data, we could face loss of business, regulatory
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investigations or court orders, our reputation could be severely damaged, we could be required to expend significant capital and other 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 regulations, and costs for remediation and other incentives offered to customers. In December 2021, a vulnerability was reported for the widely used Java logging library, Apache Log4j 2. We have reviewed the use of this library within our software product portfolio and in our IT environment, determined that it has not had a material adverse impact on our business or operations, and have taken steps to mitigate the vulnerability.
Cyber-attacks and other malicious internet-based activities continue to increase. BecauseIn response to the COVID-19 pandemic, our expanded reliance on remote access to our information systems has further increased our exposure to potential cybersecurity breaches. As the techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unableour ability to anticipate these techniques or to implement adequate preventative measures.measures is reduced. In addition, third parties may attempthave made attempts to fraudulently induce employees or users to disclose information to gain access to our data or our customers’ data. IfAs a result of any of these events, occur, our or our customers’ and vendors’ information could be accessed or disclosed improperly. In addition, cybersecurity incidents affecting our customers could result in substantial delays in our ability to ship to those customers or install our products, which could result in delays in revenue recognition or the cancellation of orders, and cybersecurity incidents affecting our suppliers could result in substantial delays in our ability to obtain necessary components for our products from those suppliers, which could hamper our ability to ship our products to our customers, harming our results of operations and our customer relationships. 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)(“GDPR”) is a regulation in European Union (EU)(“EU”) law on data protection and privacy for allthe individuals within the EU and the European Economic Area (EEA)(“EEA”). It also addresses the export of personal data outside the EU and EEA areas. We needare also subject to putthe California Consumer Privacy Act (“CCPA”). Moreover, a new privacy law, the California Privacy Rights Act (“CPRA”), was approved by California voters in appropriate technical and organizational measures to implement these data protection principles.November 2020. The GDPR requirements have been reviewed and areCPRA will significantly modify the CCPA when it becomes effective in the process of being implemented.most material respects on January 1, 2023. We may also be subject to other data privacy laws in the United States and the other countries in which we operate.
Changes In many cases, these laws apply not only to third-party transactions, but also to transfers of information between us and our subsidiaries, and among the subsidiaries and other parties with which we have commercial relations. The introduction of new products or expansion of our activities in certain jurisdictions may subject us to additional laws and regulations. These U.S. federal and state and foreign laws and regulations, including GDPR which can be enforced by private parties or government entities, are constantly evolving and can be subject to significant change. In addition, the application and interpretation of these laws and regulations, including GDPR, are often uncertain, particularly in our effective income tax rateevolving industry, and may be interpreted and applied differently from country to country. Appropriate technical and organizational measures are necessary to implement these data protection principles. These laws and regulations can be costly to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, or subject us to inquiries or investigations, claims or other remedies, including fines, which may be significant, or demands that we modify or cease existing business practices. A failure by us, our suppliers, or other parties with whom we do business to comply with posted privacy policies or with other federal, state, or international privacy-related or data protection laws and regulations, including GDPR, CCPA, CPRA and other new or changing privacy laws and regulations, could affectresult in proceedings against us by governmental entities or others, which could have a material adverse effect on our business, results of operations.operations, and financial condition.
Risks Related to Competition
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 are subjectface substantial competition from established companies in each of the markets we serve. We principally compete with KLA Corporation, Nova Measuring Instruments, Camtek, Ushio, Canon, and PDF Solutions. We compete to taxation in numerous U.S. statesa 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 territories.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 effective tax rate is derived fromproducts. Further, there may be significant merger and acquisition activity among our
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competitors and potential competitors, which, in turn, may provide them with a combinationcompetitive advantage over us by enabling them to rapidly expand their product offerings and service capabilities to meet a broader range of applicable tax ratescustomer needs.
Many of our customers and potential customers in the various placessemiconductor 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 operate. In preparinggrant our financial statements, we estimate the amount of tax that will become payable in each of such places. Our effective tax rate, however, may be different than experienced in the past due to numerous factors, including the passage of the Tax Cuts and Jobs Act, changes in the jurisdictions in which our profits are determined to be earned and taxed, increases in expenses not deductible for tax purposes, the results of examinations and audits of our tax filings, our inability to securecustomers. Price reductions or sustain acceptable agreements with tax authorities, our utilization of net operating losses, changes in available tax credits, changes in accounting for income taxes, and changes in tax laws. Anylost sales as a result of these factors could cause us to experience an effective tax rate significantly different from previous periods orcompetitive pressures would reduce our current expectationstotal revenue and may result in tax obligations in excess of amounts accrued in our financial statements.
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act that significantly reforms the Internal Revenue Code of 1986, as amended, or the Code. The Tax Cuts and Jobs Act, among other things, contains significant changes to corporate taxation, including reduction of 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 reduction in the corporate income tax rate, the overall impact of the Tax Cuts and Jobs Act is uncertain and our business and financial condition could be adversely affected. The Tax Act became law in December 2017, and interpretations of this legislation are being released by various regulatory agencies and it is possible that there could be significant changes in interpretations that we may not be yet aware of, and which could adversely impact our financial results.
We may incur impairmentsBecause of the high cost of switching equipment vendors in our markets, it is sometimes difficult for us to goodwill or long-lived assets.win new customers from our competitors even if our systems are superior to theirs.
We review our long-lived assets, including goodwillbelieve 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, other intangible assets, for impairment annually or more frequently when events or changes in circumstances indicate thatto 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 valueextent possible, subsequent generations 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. As of December 29, 2018, the carrying value of our goodwill was $26.4 million, and the carrying value of our intangible assets, net, was $27.3 million. If we determine that any of our long-lived assets are impaired, we may be required to take a significant chargesame vendor’s equipment for the impairment, which could significantlylife 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 negatively affectmay experience production-line downtime in order to switch to another vendor’s equipment. Accordingly, unless our resultssystems offer performance or cost advantages that outweigh a customer’s expense of operations.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.
Risks Related to Our investment portfolio may suffer losses from changes in market interest rates and changes in market conditions, which could materially and adversely affect our financial condition and liquidity.International Operations
Our investment portfolio primarily comprises corporate debt securities, commercial paper, debt securities issued by U.S. governmental agencies and certificates of deposits. These investmentsWe are subject to general credit, liquidity,compliance with foreign laws and market and interest rate risks. Substantially all of these securities are subject to interest rate and credit risk and will decline in value if interest rates increase or one or more of the issuers’ credit ratings is reduced. As a result of any of the foregoing, we may experience a reduction in value or loss of liquidity of our investments, which may have a negative 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:
general economic growth or decline in the U.S. or foreign markets;
changes in customer demand for our systems;
the gain or loss of a key customer or significant changes in the financial condition or one or more key customers;
economic conditions in the semiconductor industries;
the timing, cancellation or delay of customer orders and shipments;
market acceptance of our products and our customers' products;
our ability to recover the higher costs associated with meeting our customers' increasing service demands;
competitive pressures on product prices and changes in pricing by our customers or suppliers;
the timing of new product announcements and product releases by us or our competitors and our ability to design, introduce and manufacture new products on a timely and cost-effective basis;
fluctuations in foreign currency exchange rates, particularly the Japanese yen, the Korean won, European euroregulations, and the British pound sterling;
the occurrenceburden of trade warscomplying with such laws and regulations, or barriers, or the perception that trade wars or barriers will occur;
the occurrence of tax valuation allowances;
the occurrence of potential impairments of long-lived assets;
the timing of acquisitions of businesses, products or technologies;
the effects of war, natural disasters, acts of terrorism or political unrest;
the loss of key personnel; and
the levels of our fixed expenses, relative to our revenue level.
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:
regulatory limitations imposed by foreign governments;
trade wars between the United States and other foreign countries where we sell our products;
obstacles to the protection of our intellectual property, political, military and terrorism risks;
foreign currency controls and currency exchange rate fluctuations;
periodic local or international economic downturns;
political instability, natural disasters, acts of war or terrorism in regions where we have operations;
repatriation of cash earned in foreign countries;
longer payment cycles and difficulties in collecting accounts receivable outside of the U.S.;
disruptions or delays in shipments caused by customs brokers or other government agencies;
uncertainty regarding liability under foreign laws;
changes in regulatory requirements (including import and export requirements), tariffs, customs, duties and other trade barriers;
difficulties in staffing and managing foreign operations;
potentially adverse tax consequences resulting from changes in tax laws; and
other challenges caused by distance, language and cultural differences.
On June 23, 2016, the U.K. held a referendum in which British citizens approved an exit from the European Union (EU), commonly referred to as “Brexit.” We ship some spare parts from the EU to the U.K that would possibly be subject to some delays if
the trade agreements between the EU and the U.K. are not finalized, however the volume of these shipments is immaterial, and we have alternative shipment methods to meet the needs of our customers.
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. 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 andcomply, 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 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:
authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to thwart a takeover attempt;
limit who may call special meetings of stockholders; and
prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders.
We are exposed to various risks related to legal proceedings that could result in substantial costs and disruption to normal business operations.
From time to time, and in the future, we may be, involved in legal proceedings or claims that involve breach 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. For example, in August 2017, we were named as a defendant in a complaint brought by Optical Solutions, Inc. alleging claims arising from a purported exclusive purchase contract between OSI and us pertaining to certain product. Adverse determinations in such litigation could result in loss of our property rights, subject us to significant liabilities, any of which could significantly and adversely affect our business, financial condition and results of operations.operations.
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.
We are faced with various risks that may be associated 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 to, environmental, tax, intellectual property, trade secrets, product liability, contracts, antitrust, employment, securities, import/export and unfair competition. The cost of maintaining compliance under multiple and changing regulatory regimes may adversely affect our business, financial condition and results of operations. In the event that we fail to comply with or violate U.S. or foreign laws or regulations or customer policies, we could be subject to civil or criminal claims or proceedings that may result in monetary fines, penalties or other costs against us or our employees, which may adversely affect our operating results, financial condition, customer relations and ability to conduct our business.
Tariffs and other market barriers have impacted and may continue to impact our competitiveness with non-U.S. customers, which may adversely affect our results of operations.
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 U.S. companies such as ourselves, particularly with respect to the ongoing tensions between the United States and China.
Over the last several years, the U.S. government has significantly expanded export controls on certain technologies and commodities to certain markets, particularly with respect to semiconductor and other high technology exports to China. For example, effective June 29, 2020, the U.S. Department of Commerce imposed new export controls on the transfer of many U.S. products and technologies, including many commercial-grade electronics, to “military end users” or for “military end use” in China, which may include many Chinese commercial companies that sell products to or do business with the Chinese military. Likewise, since May 2019, the U.S. Department of Commerce has imposed significant restrictions on the transfer of any products from the United States, as well as many products produced overseas that incorporate U.S. content or rely upon certain critical informationon U.S.
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software or technology, to Huawei Technologies Co., Ltd., and a large number of its overseas affiliates, including HiSilicon, followed by a comparable action in December of 2020, related to Semiconductor Manufacturing International Corporation (SMIC). and a large number of its overseas affiliates, including Ningbo Semiconductor International Corporation (NSIC) and SJ Semiconductor (Jiangyin) Corporation. It is possible that the U.S. government will impose additional export controls on our products or systems, which could lead to further revenue losses.
The effect of these changes, among others, is that U.S. companies are now required to obtain export licenses before providing commodities, software, and technology that are subject to the regulations to customers for whom licensing requirements did not previously apply. The administrative processing, attendant delays and risk of ultimately not obtaining required export approvals put us at a disadvantage relative to our non-U.S. competitors who are not required to comply with U.S. export controls. This difficulty and uncertainty has adversely affected our ability to compete for and win business from domestic customers in China. Foreign customers affected by these and any future U.S. government sanctions or threats of sanctions may respond by developing their own solutions to replace our products or by utilizing our foreign competitors’ products.
Further, we hold inventory of products that may be affected by the recent U.S. government actions, including potential order cancellations. If the sale of these products is delayed or we are unable to return or dispose of our inventory on favorable economic terms, we may incur additional carrying costs for the inventory or otherwise record charges associated with this inventory.
The U.S. government is also engaged in an ongoing process of assessing which “emerging and foundational technologies” warrant new or additional controls, which could subject additional U.S.-origin products and services to more stringent export restrictions. It is possible that these modified regulations, and any future regulations, could reduce demand for our daily business operations. Our inability to useproducts. In particular, these restrictive measures may reduce overall global demand for our customers’ products or accessfor other products produced or manufactured in the United States or based on U.S. technology, in turn reducing demand for our information systems at critical points in timeproducts, which could unfavorably impacthave a material adverse effect on our business, financial condition and results of operations.
Our global operations are dependent upon certain information systems, including telecommunications, Additionally, given the internet,continued tensions between the United States and Russia there is potential for new stricter export controls for Russia, which could affect our corporate intranet, network communications, emailsales both into Russia and various computer hardwareinto secondary markets selling to Russia. International trade disputes could result in increases in tariffs and software applications. System failures or malfunctionsother trade restrictions and protectionist measures that could disruptadversely impact our operations and our ability to timely and accurately process and report key componentsreduce the competitiveness of our financial results. Difficultiesproducts relative to local and global competitors.
Political and economic instability may result in reduced demand for our products.
We are subject to various global risks related to political and economic instabilities in countries in which we derive sales. If terrorist activities, armed conflict, civil or military unrest or political instability occurs outside of the United States, these events may result in reduced demand for our products. Based on the complex relationships among China, Hong Kong, Taiwan, and the United States, there is risk that political, diplomatic, and national security influences might lead to trade, technology, or capital disputes, or disruptions, in particular those affecting the semiconductor industry. This may adversely affect our business in Asia or have a negative impact on the regional or global economy.
In addition, an outbreak of hostilities or other political upheaval in China, Taiwan, Japan, or South Korea, or an economic downturn in Asia or globally, would likely harm the operations of our customers in these countries. The effect of these types of events on our revenue and cash flows could be material because we derive 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 from semiconductor device manufacturers in Japan such as Toshiba Corporation.
Natural disasters, changes in climate and geo-political events could materially adversely affect our worldwide operations (or those of our business partners).
The occurrence of one or more natural disasters such as hurricanes, tropical storms, fires, cyclones, earthquakes, tsunamis, flooding, typhoons, volcanic eruptions and weather conditions such as major or extended winter storms, droughts and tornadoes, whether as a result of climate change or otherwise, may disrupt manufacturing or other operations. For example, our Milpitas operations are located near major earthquake fault lines in California. There may also be conflict or uncertainty in the countries in which we operate, including public health issues (for example, an outbreak of a contagious disease such as COVID-19, avian influenza, measles or Ebola), safety issues, natural disasters, fire, disruptions of service from utilities, nuclear power plant accidents or general economic or political unrest, including war, civil unrest or terrorist attacks. We cannot provide any assurance that alternate means of conducting our operations (whether through alternate production capacity or service providers or otherwise) would be available if a major disruption were to occur or that, if such alternate means were available, they could be obtained on favorable terms.
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We may face difficulties in staffing and managing foreign branch operations due to political tensions or cultural differences.
During periods of tension between the governments of the United States and certain other countries, it is often difficult for U.S. companies such as ours 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 may impact our international sales or expose us to exchange rate risk.
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 enterprise resource planning (“ERP”) system (whetherinternational sales. Foreign sales also expose us to collection risk in connection with the regular operation, periodic enhancements, modificationsevent 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 subject to a potentially significant exchange rate risk, and any failure to sufficiently hedge or upgrades, or the integration of an acquired business into such system), which is integral to our ability to accuratelyotherwise manage these risks could materially and efficient maintain our books and records, record transactions, provide critical information to our management, and prepareadversely affect our financial statements,condition, results of operations, and liquidity.
Our internal controls with respect to anti-corruption laws may not be effective, and any failure to comply with such laws may result in severe sanctions and liabilities, which may negatively affect our business, operating results and financial condition.
We are subject to the Foreign Corrupt Practices Act of 1977, as amended (the “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 future improvements may prove to be ineffective, 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 subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold us liable for successor liability FCPA violations committed by 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.
Risks Related to Tax Laws, Financial Markets and the Environment
Changes in tax rates or tax liabilities could affect results.
As a global company, we are subject to taxation in the United States and various other countries. Significant judgment is required to determine and estimate worldwide tax liabilities. Our future annual and quarterly tax rates could be affected by numerous factors, including changes in the (1) applicable tax laws; (2) composition of earnings in countries with differing tax rates; or (3) recoverability of our deferred tax assets and liabilities. Beginning in 2022, the U.S. Tax Cuts and Jobs Act of 2017 (“TCJA”) eliminates the option to deduct research and development expenditures currently and requires taxpayers to amortize them over five years pursuant to IRC Section 174. Although Congress is considering legislation that would defer the amortization requirement to later years, we have no assurance that the provision will be repealed or otherwise modified. If the requirement is not modified, it will reduce our cash flows beginning in 2022. In addition, recent proposals to increase the U.S. corporate income tax rate, increase U.S. taxation of international business operations and impose a global minimum tax could have a negative impact on our tax position depending upon the terms of the final enacted legislation. Based on the nature of the uncertainties around specific legislation to be enacted, we have not quantified the impact of this risk. Many countries and organizations such as the Organization for Economic Cooperation and Development are also actively considering changes to existing tax laws or have proposed or enacted new laws that could increase our tax obligations in countries where we do
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business or cause us to change the way we operate our business. Any of these developments or changes in federal, state, or international tax laws or tax rulings could adversely affect our effective tax rate and our results of operations.
In addition, we are subject to regular examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy 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 treatment reflected in our historical income tax provisions and 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 or liquidity, and our factoring arrangements may expose us to additional risks.
In the past, global credit markets and the financial services industry have experienced periods of turmoil and upheaval characterized by the tightening of the credit markets, the weakening of the global 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 crisis in the financial markets may have a material adverse effect on our liquidity and financial condition if our ability to complete importantobtain credit from the capital financial markets, or from trade creditors was impaired. In addition, a worsening economy or an economic crisis could also adversely impact our customers’ ability to finance the purchase of systems from us or our suppliers’ ability to provide us with product, either of which may negatively impact our business processes, such as the evaluationand results of our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.operations.
We are subject to various environmental laws and regulations that could impose substantial costs upon us, and failure to comply with such laws and regulations 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. In addition to the potential adverse effects on our business operations of such an event, we are committed to maintaining safe working conditions for our employees and sourcing, manufacturing, and distributing our products in a responsible and environmentally friendly manner, and any failure on our part to do so may cause reputational harm for the Company.
Customer and investor focus on our environmental, social and governance responsibility practices and policies, and related regulatory requirements, may make our supply chain more complex, and any failure to comply with customer or investor guidelines or applicable laws and regulations may adversely affect our relationship with customers and investors or our reputation and results of operations.
There is an increasing focus on corporate environmental, social and governance (“ESG”) responsibility in the semiconductor industry, particularly with OEMs that manufacture consumer electronics. A number of our customers have adopted, or may adopt, procurement policies that include ESG provisions or requirements that their suppliers should comply with, or they may seek to include such provisions or requirements in their procurement terms and conditions. An increasing number of investors are also requiring companies to disclose corporate ESG policies, practices and metrics. Legal and regulatory requirements, as well as investor expectations, on corporate ESG practices and disclosure, are subject to change, can be unpredictable, and may be difficult and expensive for us to comply with, given the complexity of our supply chain and manufacturing. If we are unable to comply, or are unable to cause our suppliers or contract manufacturers to comply, with such policies or provisions or meet the requirements of our customers and our investors, a customer may stop purchasing products
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from us or an investor may sell their shares, and may take legal action against us, which could harm our reputation, revenue and results of operations.
Risks Related to Growth and Acquisitions
We may choose to acquire new and complementary businesses, products or technologies instead of developing them ourselves, and we may be exposedunable to liabilities undercomplete 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 this end, we have, from time to time, engaged in the FCPAprocess of identifying, analyzing and other anti-corruption laws,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 determinationassurance that we violated these lawswill 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 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:
• | diversion of management’s attention from day-to-day operational matters and current products and customers; |
• | lack of synergy or the inability to successfully integrate the new business or to realize expected synergies; |
• | integration of acquired businesses and their operations, including enterprise resource planning systems, may be costly and time-consuming and divert resources away from other projects; |
• | failure to commercialize the new technology or business; |
• | failure to meet the expected performance of the new technology or business; |
• | failure to retain key employees and customer or supplier relationships; |
• | lower-than-expected market opportunities or market acceptance of any new products; and |
• | unexpected reduction of sales of existing products as a result of the introduction of new products. |
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.business, liquidity, financial position and/or results of operations, including as a result of our incurrence of indebtedness and related interest expense and our 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 case of equity financing, that result in dilution to our stockholders. In addition, any impairment of goodwill or other intangible assets, amortization of intangible assets, write-down of other assets or charges resulting from the costs of acquisitions and purchase accounting could harm our business 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:
• | engage, train and manage a larger sales force and additional service personnel; |
• | expand the geographic coverage of our sales force; |
• | expand our information systems; |
• | identify and successfully integrate acquired businesses into our operations; and |
• | administer appropriate financial and administrative control procedures. |
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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 the Global Economy and the Semiconductor Industry
Cyclicality in the semiconductor device industry has led to substantial decreases in demand for our systems in the past 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 cyclical nature of the semiconductor device industry. Our business depends upon the capital expenditures of semiconductor device manufacturers, which, in turn, depend upon the current and anticipated 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 history, 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 these objectives can be met in a timely manner in response to industry cycles, and we cannot predict when and to what extent sales may normalize, or when and to what extent gross margins may improve, following any such occurrence. If we fail to respond to industry cycles, our business could be seriously harmed.
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 delays of our customer shipments.
Our future rate of growth is highly dependent on the development and growth of the market 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 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 manufacturers will undertake these actions at the rate we expect.
General Risk Factors
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 which a proxy contest for control of our board may be initiated. These provisions provide for:
• | a prohibition on stockholder actions through written consent; |
• | a requirement that special meetings of stockholders be called only by the chairperson of our Board of Directors or majority of our directors; |
• | advance notice requirements for stockholder proposals and director nominations by stockholders; |
• | the authority of our Board of Directors to issue, without stockholder approval, preferred stock with such terms as the Board may determine; and |
• | the authority of our board, without stockholder approval, to adopt a stockholder rights plan. |
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We are subjectalso entitled to avail ourselves of the Foreign Corrupt Practice Actprotections of 1977 ("FCPA"), and other laws that prohibit improper payments or offersSection 203 of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, forDelaware General Corporation Law, which could inhibit changes in control of 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. SomeCompany.
Our stock price is volatile.
The market price of our distribution partners are located in partscommon stock has fluctuated widely. Consequently, the current market price of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery lawsour common stock may conflict with local customs and practices. Although we have implemented policies and procedures to discourage these practices by our employees, our existing safeguards and anynot be indicative of 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. Violations of the FCPA or international anti-corruption laws may result in severe criminal or civil sanctions,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:
• | variations in operating results from quarter to quarter; |
• | changes in earnings estimates by analysts or our failure to meet analysts’ expectations; |
• | changes in the market price per share of our public company customers; |
• | market conditions in the semiconductor and other industries into which we sell products; |
• | general economic conditions; |
• | political changes, hostilities or natural disasters such as hurricanes and floods; |
• | the impact of the COVID-19 pandemic, or other future infectious disease pandemics, on the global economy and on our customers, suppliers, employees, and business; |
• | low trading volume of our common stock; and |
• | the number of firms making a market in our common stock. |
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, supply and pricingmarket price of materials used in our products. As there may be only a limited numbercommon stock.
Item 1B. | Unresolved Staff Comments. |
None.
28
None.
At December 29, 2018,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 seven other countries - China, Japan, South Korea, Singapore, Taiwan, Germany 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.
| Location |
| Facility Purpose | Approximate Square Footage | ||||
Wilmington, Massachusetts | Corporate Headquarters, Engineering, Manufacturing and Service |
|
|
| ||||
|
| |||||||
Milpitas, California |
|
|
|
|
| |||
|
|
|
|
|
| |||
Bloomington, Minnesota | Engineering, Manufacturing, Service and Administration |
|
|
| ||||
|
| |||||||
Bend, Oregon | Engineering and Service | 12,700 | ||||||
Hillsboro, Oregon | Engineering and Service | 10,000 | ||||||
Richardson, Texas | Engineering | 21,000 | ||||||
Snoqualmie, Washington | Engineering and Service | 20,300 | ||||||
Tucson, Arizona | Engineering, Manufacturing and Service | 18,900 | ||||||
Sudbury, Massachusetts | Engineering, Manufacturing and Service | 10,000 | ||||||
Taiwan | Sales and Service | 30,200 | ||||||
China | Sales, Service and Engineering | 22,800 | ||||||
South Korea |
|
|
|
|
| |||
|
|
|
|
|
| |||
Singapore | Sales and Service |
|
|
| ||||
|
|
|
| |||||
|
|
|
| |||||
|
|
|
| |||||
|
|
|
| |||||
|
| 9,800 |
|
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 10, Commitments9, “Commitments and Contingencies, inContingencies” to the Notes to Consolidated Financial Statements is incorporated herein by reference here.reference.
Item 4. | Mine Safety Disclosures. |
None.
| 29 Table of Contents |
N/A.
Market for our Common Stock
Our common stock, $0.01 par value per share, is quoted on the New York Stock Exchange (“NYSE”) under the symbol “ONTO.” As of February 8, 2022, there were approximately 117 stockholders of record. Prior to the 2019 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.” Set 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 and the industry specific index, PHLX Semiconductor Index, for the period commencing on December 31, 2016 and ending on December 31, 2021. Historical data for Onto Innovation in the line graph for the period commencing on December 31, 2016 and ending on October 25, 2019 reflects the cumulative return to the stockholders of Nanometrics.
StockholdersThe 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.
On February 22, 2019, there were approximately 127 holders of record of ourThe graph assumes that $100 was invested on December 31, 2016 in the Company’s common stock and in each index. No cash dividends have been declared or paid on the Company’s common stock. Because brokers andStockholder returns over the institutions on behalfindicated period should not be considered indicative of stockholders hold many of our shares of common stock, we are unable to estimate the total number of stockholders representedfuture stockholder returns.
Prepared by these record holders.Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2022.
Dividend Policy
|
| 12/16 |
|
| 12/17 |
|
| 12/18 |
|
| 12/19 |
|
| 12/20 |
|
| 12/21 |
| ||||||
Onto Innovation Inc. |
|
| 100.0 |
|
|
| 99.4 |
|
|
| 109.1 |
|
|
| 145.8 |
|
|
| 189.7 |
|
|
| 404.0 |
|
NYSE Composite |
|
| 100.0 |
|
|
| 118.7 |
|
|
| 108.1 |
|
|
| 135.7 |
|
|
| 145.2 |
|
|
| 175.2 |
|
PHLX Semiconductor |
|
| 100.0 |
|
|
| 140.5 |
|
|
| 132.1 |
|
|
| 215.6 |
|
|
| 331.3 |
|
|
| 473.2 |
|
We have never declared or paid anya cash dividendsdividend on our capital stock. Wecommon stock and we currently expect to retaindo not intend to. The declaration of any future earnings, if any, for use individends by us is within the operation, expansiondiscretion of our businessBoard of Directors and will be dependent on our earnings, financial condition and capital requirements as well as any other factors deemed relevant by our Board of Directors.
In November 2020, the Onto Innovation Board of Directors approved a new share repurchase authorization, which allows us to repurchase up to $100 million worth of shares and do not anticipate paying any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
On November 15, 2018, we closed our acquisition of 4D Technology Corporation ("4D"). As part of the consideration, we issued an aggregate of 125,117 shares of our common stock. Repurchases may be made through both public
30
market and private transactions from time to time. At January 1, 2022, there was $100 million available for future share repurchases.
For further information, see Note 17 in the accompanying Notes to the Consolidated Financial Statements included in this Form 10-K.
In addition to our share repurchase program, we withhold common stock shares associated with net share settlements to James Wyant, James Millerdcover tax withholding obligations upon the vesting of restricted stock unit awards and Neal Brock,stock option exercises under the Company’s equity incentive program. During the three principal stockholdersand twelve months ended January 1, 2022, we withheld 7 thousand and 108 thousand shares through net share settlements, respectively. For the three and twelve month periods ended January 1, 2022, net share settlements cost $0.6 million and $7.4 million, respectively. Please refer to Note 11 of 4D (the “Principal Stockholders”). Pursuantthe Notes to the terms of the Stock Purchase Agreement and related Escrow Agreement, the shares ofConsolidated Financial Statements included in this Form 10-K for further discussion regarding our common stock were placed in escrow to fund any post-closing adjustments to the purchase price and to secure the indemnification obligations of the Principal Stockholders to Nanometrics. The Principal Stockholders agreed to indemnify us for inaccuracies in the representations or the breach of the warranties or covenants made by 4D, and for certain other matters, subject to certain limitations. The shares of our common stock were issued to the Principal Stockholders in consideration for the shares of 4D common stock held by the Principal Stockholders and were sold in reliance on Section 4(a)(2) under the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder, as the Principal Stockholders represented that they are “accredited investors” as defined in Regulation D.
Stock Performance Graphequity incentive plan.
The following graph presentation compares cumulative five-year stockholder returns on an indexed basis, assuming a $100 initial investment and reinvestmenttable provides details of dividends, of Nanometrics Incorporated, a broad-based equity market index and an industry-specific index. The broad-based equity market index used iscommon stock purchased during the Nasdaq Composite Index and the industry-specific index used is the PHLX Semiconductor Index.three month period ended January 1, 2022 (in thousands, except per share data):
Period |
| Total Number of Shares Purchased (1) |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Program |
|
| Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program |
| ||||
September 26, 2021 - November 1, 2021 |
|
| 1 |
|
| $ | 75.08 |
|
|
| — |
|
| $ | 100,000 |
|
November 2, 2021 - December 1, 2021 |
|
| 6 |
|
| $ | 93.54 |
|
|
| — |
|
| $ | 100,000 |
|
December 2, 2021 - January 1, 2022 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | 100,000 |
|
Three Months Ended January 1, 2022 |
|
| 7 |
|
| $ | 91.86 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Includes shares withheld through net share settlements. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
| 12/13 |
|
| 12/14 |
|
| 12/15 |
|
| 12/16 |
|
| 12/17 |
|
| 12/18 |
| ||||||
Nanometrics Incorporated |
|
| 100.00 |
|
|
| 88.29 |
|
|
| 79.48 |
|
|
| 131.55 |
|
|
| 130.81 |
|
|
| 143.46 |
|
Nasdaq Composite |
|
| 100.00 |
|
|
| 114.62 |
|
|
| 122.81 |
|
|
| 133.19 |
|
|
| 172.11 |
|
|
| 165.84 |
|
PHLX Semiconductor |
|
| 100.00 |
|
|
| 129.03 |
|
|
| 120.80 |
|
|
| 159.29 |
|
|
| 223.53 |
|
|
| 203.91 |
|
Item 6. | [Reserved] |
31
The selected consolidated financial data set forth below is not necessarily indicativeTable 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 “Management’sContents
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations.
Executive Summary
We are a worldwide leader in the design, development, manufacture and support of process control tools that perform macro-defect inspection and metrology, lithography systems, and process control analytical software used by semiconductor and advanced packaging device manufacturers. We deliver comprehensive solutions throughout the semiconductor fabrication process with our families of proprietary products that provide critical yield-enhancing information, enabling microelectronic device manufacturers to drive down costs and time to market of their devices. We provide process and yield management solutions used in both wafer processing facilities, often referred to as “front-end” manufacturing, and in device packaging and test facilities, commonly referred to as “back-end” manufacturing. Our advanced process control software portfolio includes powerful solutions for standalone tools, groups of tools, or factory-wide suites to enhance productivity and achieve significant cost savings.
Our principal market is semiconductor capital equipment. Semiconductors packaged as integrated circuits, or “chips”, are used in consumer electronics, server and enterprise systems, mobile computing (including smart phones and tablets), data storage devices, and embedded automotive and control systems. Our core focus is the measurement and control of the structure, composition, and geometry of semiconductor devices as they are fabricated on silicon wafers to improve device performance and manufacturing yields.
Our products and services are used by our customers who 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, and DRAM), analog devices (e.g., Wi-Fi and 5G radio integrated circuits, power devices), MEMS sensor devices (accelerometers, pressure sensors, microphones), image sensors, and other end markets including components for hard disk drives, LEDs, and power management.
The semiconductor and electronics industries have also been characterized by constant technological innovation. We believe that, over the long term, our customers will continue to invest in advanced technologies and new materials to enable smaller design rules and higher density applications that fuel demand for process control equipment.
During fiscal 2021, there was an increase in wafer fabrication equipment spending by semiconductor manufacturers, driven by the growing importance of semiconductor technology across a broadening range of industries, from mobile devices to cloud computing and high-performance computers. We are also seeing increasing global emphasis on more advanced power devices for electric vehicles and smart power grids to help combat climate change. Customer demand was strong throughout the year and we continued to increase our production output levels. Revenues in the four quarters of 2021 increased sequentially as customers transitioned to advanced nodes and increased advanced packaging volumes. While we have seen improvements in our own operations, we experienced higher costs of goods sold related to freight and logistics costs during the year. Risks and uncertainties related to the COVID-19 pandemic and the consolidatedsupply chain remain and we expect this uncertainty especially in the supply chain to continue to be a factor through at least the first half of 2022, and possibly the entire year. Over the longer term, we believe that demand for semiconductors will continue to drive sustainable growth for our products and services across all of the markets we serve.
The following table summarizes certain key financial statementsinformation for the periods indicated below (in thousands, except per share and related notes included elsewhere in this Annual Report on Form 10-K. Our fiscal years 2018, 2017, 2016, 2015, and 2014, as referred to below, refer to our fiscal years ended December 29, 2018, December 30, 2017, December 31, 2016, December 26, 2015 and December 27, 2014, respectively.
percent data):
|
| Fiscal Year |
| |||||||||||||||||
|
| 2018(1) |
|
| 2017(2) |
|
| 2016(3) |
|
| 2015 |
|
| 2014(4) |
| |||||
|
| (in thousands, except per share data) |
| |||||||||||||||||
Consolidated Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
| $ | 324,523 |
|
| $ | 258,621 |
|
| $ | 221,129 |
|
| $ | 187,367 |
|
| $ | 166,443 |
|
Gross profit |
| $ | 184,094 |
|
| $ | 136,701 |
|
| $ | 114,124 |
|
| $ | 89,667 |
|
| $ | 75,822 |
|
Income (loss) from operations |
| $ | 66,487 |
|
| $ | 42,806 |
|
| $ | 29,095 |
|
| $ | 4,973 |
|
| $ | (11,653 | ) |
Net income (loss) |
| $ | 57,648 |
|
| $ | 30,202 |
|
| $ | 44,035 |
|
| $ | 2,905 |
|
| $ | (31,118 | ) |
Basic net income (loss) per share |
| $ | 2.39 |
|
| $ | 1.19 |
|
| $ | 1.79 |
|
| $ | 0.12 |
|
| $ | (1.30 | ) |
Diluted net income (loss) per share |
| $ | 2.34 |
|
| $ | 1.17 |
|
| $ | 1.75 |
|
| $ | 0.12 |
|
| $ | (1.30 | ) |
| Year Ended |
| |||||
| January 1, |
|
| December 26, |
| ||
| 2022 |
|
| 2020 |
| ||
Revenue | $ | 788,899 |
|
| $ | 556,496 |
|
Gross profit | $ | 429,086 |
|
| $ | 278,453 |
|
Gross profit as a percent of revenue |
| 54 | % |
|
| 50 | % |
Total operating expenses | $ | 272,679 |
|
| $ | 251,776 |
|
Net income | $ | 142,349 |
|
| $ | 31,025 |
|
Diluted earnings per share | $ | 2.86 |
|
| $ | 0.63 |
|
|
| In fiscal 2021, revenue increased 41.8% compared to the |
| • | Gross margin as a percentage of revenue increased to 54% during fiscal 2021 compared to 50% in fiscal 2020 primarily driven by a favorable impact from higher revenue volume of products and services, charges to cost of goods sold in the 2020 period for both the sale of inventory written-up to fair value upon the 2019 Merger and inventory reserve charges for a discontinued product line. |
32
• | The increase in operating expenses in fiscal 2021 compared to fiscal 2020 was mainly driven by onboarding of new headcount to support the growth we are experiencing and an increase in employee-related expenses as a result of higher variable compensation plan costs recorded during the year. |
Our cash, cash equivalents and marketable securities balance increased to $511.3 million at the end of fiscal 2021 compared to $373.7 million at the end of the fiscal 2020. This increase was primarily the result of $175.3 million of cash generated from operating activities. This source of cash was partially offset by net cash of $23.8 million used for the purchase of Inspectrology and $12.0 million used for capital expenditures.
Key Events
Business Combination. In the first quarter of 2021, the Company acquired Inspectrology, LLC, a supplier of overlay metrology for controlling lithography and etch processes in the compound semiconductor market. The purchase consideration consisted of $24.0 million in cash paid at closing and an earnout subject to achievement of certain revenue targets for fiscal year 2021 and fiscal year 2022. As of January 1, 2022, $2.3 million of the earnout has been achieved with potential for up to an additional payment of $5.0 million based on fiscal 2022 results.
Impact of the COVID-19 Pandemic on Our Business. As of February 25, 2022, our operations have been impacted by our pandemic response, as described below, given the global nature of our workforce and our operations, but we have not experienced significant financial impact directly related to the pandemic. The ultimate extent to which COVID-19 will impact our business depends on future developments, which are highly uncertain and very difficult to predict, including the effectiveness and utilization of vaccines for COVID-19 and its variants, new information that may emerge concerning the severity of COVID-19 and its variants, and actions to contain or limit their spread.
We have prioritized the health and safety of our employees and customers in our pandemic response. As governmental authorities implement restrictions on commercial operations, we have continued to ensure compliance with these directives while also maintaining business continuity for our essential operations. We have a global workforce. Although our manufacturing facilities are in the United States, we maintain offices and have employees in the United States, South Korea, Japan, Taiwan, China, Singapore and Europe. Our operations at these offices are subject to various governmental directives and, as a result thereof, we have instituted a work-from-home policy for these employees to the extent practical. Where our essential employees are required to continue to report to work to perform their responsibilities, we have implemented staggered shifts or otherwise adjusted work schedules to maximize our operating capacity while adhering to applicable restrictions, including recommended distancing between persons. We have also provided our essential employees with appropriate protective equipment and have enhanced and increased cleanings at our facilities. At this time, we have not experienced any reduction in productivity, though we have incurred certain costs related to the implementation of these policies and practices. In addition, we have enhanced our email screening and cyber monitoring of our devices to further support our work from home policy. As certain countries have relaxed restrictions over the past few months, we have restarted certain activities in accordance with local guidelines. We may take further actions that we determine to be in the best interests of our employees or as may be required by federal, state, or local authorities.
To date, the COVID-19 pandemic has disrupted the way that we conduct business but has not had a material adverse impact on our operations. We have not experienced significant delays in customer deliveries, but we are impacted by the global shortage in electronic components and our supply chain is strained in some cases as the availability of materials, logistics and freight options are challenging in many jurisdictions. Demand for our products was consistent with or exceeded our expectations for the fourth quarter of fiscal 2021. However, further disruptions to our supply chain in connection with the sourcing of materials, equipment and engineering support, and services from geographic areas that have been impacted by COVID-19 may pose risks to our business, results of operations and financial condition. In this time of uncertainty as a result of the COVID-19 pandemic, we are continuing to serve our customers while taking appropriate precautionary measures to provide a safe work environment for our employees and customers.
The extent of the pandemic’s effect on our operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include the duration, scope and severity of the pandemic, the severity of newly identified strains of COVID-19, the actions taken to contain or mitigate its impact, such as the extent of restrictions on gatherings and travel, the impact on governmental programs and budgets, the development, administration, efficacy and public utilization of treatments and vaccines, and the resumption of widespread economic activity. Trade tensions between the United States and China may escalate as a result of COVID-19 or otherwise and could result in the imposition of additional tariffs, trade restrictions or policy changes, any of which could increase costs of our product components and pricing of, and consumer demand for, our products, which could have a negative effect on our results of operations.
33
Although the inherent uncertainty of the unprecedented and rapidly evolving crisis makes it difficult to predict with any confidence the likely impact on our future operations, the COVID-19 pandemic could have a material adverse impact on our consolidated business, results of operations and financial condition.
For a discussion of certain risks related to the international nature of our business and our operations and the COVID-19 pandemic, see Part I, Item 1A – Risk Factors of this 2021 Form 10-K.
Results of Operations
The following table sets forth, for the periods indicated, our results of operations as percentages of our revenue. Our results of operations are reported as one business segment.
|
| Year Ended |
| |||||||||
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| |||
Revenue |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
Cost of revenue |
|
| 45.6 | % |
|
| 50.0 | % |
|
| 55.9 | % |
Gross profit |
|
| 54.4 | % |
|
| 50.0 | % |
|
| 44.1 | % |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
| 12.2 | % |
|
| 15.2 | % |
|
| 15.8 | % |
Sales and marketing |
|
| 7.3 | % |
|
| 8.6 | % |
|
| 9.2 | % |
General and administrative |
|
| 8.6 | % |
|
| 11.7 | % |
|
| 17.4 | % |
Amortization |
|
| 6.5 | % |
|
| 9.7 | % |
|
| 3.4 | % |
Total operating expenses |
|
| 34.6 | % |
|
| 45.2 | % |
|
| 45.8 | % |
Operating income (loss) |
|
| 19.8 | % |
|
| 4.8 | % |
|
| (1.7 | )% |
Interest income, net |
|
| 0.1 | % |
|
| 0.5 | % |
|
| 1.2 | % |
Other income (expense), net |
|
| (0.2 | )% |
|
| (0.5 | )% |
|
| 0.3 | % |
Income (loss) before provision (benefit) for income taxes |
|
| 19.7 | % |
|
| 4.8 | % |
|
| (0.2 | )% |
Provision (benefit) for income taxes |
|
| 1.7 | % |
|
| (0.7 | )% |
|
| (0.8 | )% |
Net income |
|
| 18.0 | % |
|
| 5.5 | % |
|
| 0.6 | % |
Results of Operations for 2021, 2020 and 2019
Revenue. Our revenue is derived from the sale of our systems and software, spare parts, and services. Our revenue was $788.9 million, $556.5 million and $305.9 million for the years ended January 1, 2022, December 26, 2020 and December 31, 2019, respectively. This represents an increase of 41.8% from 2020 to 2021 and an increase of 81.9% from 2019 to 2020.
The following table lists, for the periods indicated, the different sources of our revenue in dollars (thousands) and as percentages of our total revenue:
|
| Year Ended |
| |||||||||||||||||||||
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| |||||||||||||||
Systems and software |
| $ | 669,114 |
|
|
| 85 | % |
| $ | 450,459 |
|
|
| 80 | % |
| $ | 255,723 |
|
|
| 84 | % |
Parts |
|
| 72,753 |
|
|
| 9 | % |
|
| 65,444 |
|
|
| 12 | % |
|
| 34,892 |
|
|
| 11 | % |
Services |
|
| 47,032 |
|
|
| 6 | % |
|
| 40,593 |
|
|
| 8 | % |
|
| 15,281 |
|
|
| 5 | % |
Total revenue |
| $ | 788,899 |
|
|
| 100 | % |
| $ | 556,496 |
|
|
| 100 | % |
| $ | 305,896 |
|
|
| 100 | % |
Total systems and software revenue increased $218.7 million for the year ended January 1, 2022, as compared to the year ended December 26, 2020, primarily due to an increase in overall demand for our products from semiconductor industry customers, particularly in specialty devices and advanced packaging and advanced nodes applications, and the inclusion of $22.3 million of revenue from the Inspectrology acquisition. The year-over-year change in systems revenue was primarily due to an increase in units shipped in our metrology and inspection product lines. Parts and services revenue is generated from part sales, maintenance service contracts, and system upgrades, as well as time and material billable service calls. During fiscal 2021, the increase in parts and services revenue was primarily due to increased spending by our customers on system upgrades and repairs of existing systems.
Total systems and software revenue increased $194.7 million for the year ended December 26, 2020, as compared to the year ended December 31, 2019, primarily due to the inclusion of $178.6 million of revenue from legacy Nanometrics for the
34
period and increased investment from our foundry and logic customers. Parts and services revenue is generated from part sales, maintenance service contracts, system upgrades, as well as time and material billable service calls. During fiscal 2020, parts and services revenue increased primarily due to inclusion of $54.3 million of parts and service revenue from legacy Nanometrics for 2020.
The following table sets forth, for the periods indicated, our revenue by geographic region as percentages of our revenue.
|
| Year Ended |
| |||||||||
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| |||
Revenue |
| $ | 788,899 |
|
| $ | 556,496 |
|
| $ | 305,896 |
|
Taiwan |
|
| 25 | % |
|
| 22 | % |
|
| 22 | % |
South Korea |
|
| 20 | % |
|
| 16 | % |
|
| 14 | % |
China |
|
| 19 | % |
|
| 22 | % |
|
| 26 | % |
United States |
|
| 16 | % |
|
| 15 | % |
|
| 15 | % |
Europe |
|
| 8 | % |
|
| 9 | % |
|
| 8 | % |
Japan |
|
| 8 | % |
|
| 11 | % |
|
| 10 | % |
Southeast Asia |
|
| 4 | % |
|
| 5 | % |
|
| 5 | % |
Total revenue |
|
| 100 | % |
|
| 100 | % |
|
| 100 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
The overall Asia region continues to account for a majority of our revenues as a substantial amount of the worldwide capacity investments for semiconductor manufacturing continue to occur in this region and we expect that trend to continue.
Gross Profit. Our gross profit has been and will likely continue to be affected by a variety of factors, including manufacturing efficiencies, provision for excess and obsolete inventory, pricing by competitors or suppliers, new product introductions, production volume, inventory step-up from purchase accounting, customization and reconfiguration of systems, international and domestic sales mix, system and software product mix, and parts and services margins. Our gross profit was $429.1 million, $278.5 million and $135.0 million for the years ended January 1, 2022, December 26, 2020, and December 31, 2019, respectively. Our gross profit represented 54.4%, 50.0% and 44.1% for the years ended January 1, 2022, December 26, 2020, and December 31, 2019, respectively. The increase in gross profit as a percentage of revenue from 2020 to 2021 was primarily due to higher factory utilization associated with stronger sales levels in the 2021 fiscal period, inventory reserve charges for a discontinued product line and the sale of inventory written-up to fair value upon the 2019 Merger in the 2020 fiscal period. This increase in gross profit was partially offset by supply chain cost increases in the 2021 fiscal period. The increase in gross profit as a percentage of revenue from 2019 to 2020 was primarily due to a favorable impact from higher revenue volume of products and services from the 2019 Merger with inclusion of legacy Nanometrics results for the full fiscal year, partially offset by additional charges for excess and obsolete inventory in the 2020 fiscal period. During the fourth quarter of the year ended December 26, 2020, we recognized a write-down of inventory in the amount of $8.1 million for our JetStep X300 product line to net realizable value based on future demand and market conditions.
Operating Expenses.
Our operating expenses consist of:
• | Research and Development. We believe that it is critical to continue to make substantial investments in research and development to ensure the availability of innovative technology that meets the current and projected requirements of our customers’ most advanced designs. We have maintained, and intend to continue, our commitment to investing in research and development in order to continue to offer new products and technologies. Accordingly, we devote a significant portion of our technical, management and financial resources to research and development programs. Research and development expenditures consist primarily of salaries and related expenses of employees engaged in research, design and development activities. They also include consulting fees, the cost of related supplies and legal costs to defend our intellectual property. Our |
| • | Sales and Marketing. Sales and marketing expenses are primarily comprised of salaries and related costs for sales and marketing personnel, as well as commissions and other non-personnel related expenses. Our |
35
marketing expenses were $57.2 million, $48.1 million and $28.3 million in fiscal years 2021, 2020 and 2019, respectively. The year-over-year dollar increase from 2020 through 2021 was primarily due to increased personnel costs, including variable compensation plan costs. The year-over-year dollar increase from 2019 through 2020 was primarily due to the 2019 Merger where sales and marketing expenses for legacy Nanometrics was included |
| • | General and Administrative. General and administrative expenses are primarily comprised of salaries and related costs for general administrative personnel, as well as other non-personnel related expenses. Our general and administrative expenses were $68.0 million, $65.3 million and $53.0 million in fiscal years 2021, 2020 and 2019, respectively. The year-over-year dollar increase from 2020 through 2021 was primarily due to increased personnel costs, including variable compensation plan costs. The year-over-year dollar increases from 2019 through 2020 were primarily due to the 2019 Merger where general and administrative expenses for legacy Nanometrics was included for the full 2020 fiscal year and in 2019 included from October 25, 2019 to December 31, 2019. |
• | Amortization of Identifiable Intangible Assets. Amortization of identifiable intangible assets, primarily purchased technology, was $51.4 million, $53.7 million and $10.4 million in fiscal years 2021, 2020 and 2019, respectively. The year-over-year dollar decrease from 2020 through 2021 was primarily due to certain intangible assets becoming fully amortized, partially offset by amortization for newly acquired intangible assets in 2021. The year-over-year dollar increase from 2019 through 2020 was primarily due to amortization of additional purchased intangible assets recorded as a result of the 2019 Merger where such amortization expense was included for the full 2020 fiscal year and in 2019 included from October 25, 2019 to December 31, 2019. |
Interest income, net. In fiscal years 2021, 2020 and 2019, net interest income was $1.2 million, $2.9 million and $3.7 million, respectively. The decrease in net interest income from 2020 to 2021 was due to lower interest rates during the 2021 period. The decrease in net interest income from 2019 to 2020 was due to lower interest rates during the 2020 period.
Income taxes. The following table provides details of income tax (dollars in millions):
|
| Year Ended |
| |||||||||
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| |||
Income (loss) before provision (benefit) for income taxes |
| $ | 155.7 |
|
| $ | 26.9 |
|
| $ | (0.6 | ) |
Provision (benefit) for income taxes |
| $ | 13.3 |
|
| $ | (4.2 | ) |
| $ | (2.5 | ) |
Effective tax rate |
|
| 8.6 | % |
|
| (15.5 | )% |
|
| (419.9 | )% |
The income tax provision differs from the federal statutory income tax rate of 21% for 2021 primarily due to a benefit related to the Foreign Derived Intangible Income Deduction (“FDII”) of $11.1 million, excess benefits related to stock compensation of $3.8 million, tax benefits for research and development credits of $3.6 million, tax benefit from foreign income being taxed at lower rates of $3.8 million, and a one-time benefit of $2.0 million from a reduction to recorded tax reserve related to a lapse of statute of limitations. These benefits were partially offset by the inclusion of U.S. tax on foreign source income of $1.7 million.
The income tax provision differs from the federal statutory income tax rate of 21% for 2020 primarily due to a benefit related to the FDII of $4.3 million, tax benefits for research and development credits of $4.9 million, and a one-time benefit related to the closure of an IRS audit for tax years 2016 through 2018 of $2.9 million. These benefits were partially offset by the inclusion of Global Intangible Low-Taxed Income (“GILTI”) of $2.0 million.
The income tax provision differs from the federal statutory income tax rate of 21% for 2019 primarily due to a benefit related to the FDII of $2.3 million and tax benefits for research and development credits of $2.1 million, partially offset by non-deductible transaction costs of $1.1 million and Section 162(m) limitation on the deductibility of executive compensation of $0.8 million.
Our future effective income tax rate depends on various factors, such as future impacts of the Tax Act, possible further tax legislation, the geographic composition of our pre-tax income, the amount of our pre-tax income as business activities fluctuate, non-deductible expenses incurred in connection with acquisitions and research and development credits as a percentage of aggregate pre-tax income.
On March 27, 2020, the “Coronavirus Aid, Relief and Economic Security Act” (the “CARES Act”) was enacted. The CARES Act includes provisions relating to refundable payroll tax credits, deferral of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company filed a
36
claim for a refund of prior years’ income taxes paid under the provisions of the CARES Act which resulted in a tax benefit of $1.9 million as the 2019 net operating loss was carried back to a year with higher tax rates.
Unanticipated changes in our tax provisions or exposure to additional tax liabilities could affect our profitability and cash flow. We are subject to income and other taxes in the United States and foreign jurisdictions. Changes in applicable U.S. (federal, state and local) or foreign tax laws and regulations, or their interpretation and application, including the possibility of retroactive effect, have affected and could continue to affect our tax expense and profitability as, for example, they did in 2017 upon passage of the Tax Cuts and Jobs Act. In addition, the final determination of any state or federal tax audits or related litigation, in particular with regard to the sustainment of our positions on research credits and timing of revenue recognition under IRC Section 451(b), could be materially different from our historical income tax provisions and accruals.
Beginning in 2022, the TCJA eliminates the existing option to deduct research and development expenditures and requires taxpayers to amortize them over five years pursuant to IRC Section 174. Although Congress is considering legislation that would defer the amortization requirement to later years, we have no assurance that the provision will be repealed or otherwise modified. If the requirement is not modified, it will reduce our cash flows beginning in 2022. Changes in our tax provisions or an increase in our tax liabilities, whether due to changes in applicable laws and regulations, the interpretation or application thereof, or a final determination of tax audits or litigation or agreements, could have a material adverse effect on our financial position, results of operations and/or cash flows.
Liquidity and Capital Resources
At January 1, 2022, we had $511.3 million of cash, cash equivalents and marketable securities and $793.6 million in working capital. At December 26, 2020, we had $373.7 million of cash, cash equivalents and marketable securities and $611.6 million in working capital.
Net cash and cash equivalents provided by operating activities for the years ended January 1, 2022, December 26, 2020 and December 31, 2019 totaled $175.3 million, $106.0 million and $18.1 million, respectively.
• | Cash provided by operating activities increased in fiscal 2021 compared to fiscal 2020 primarily due to higher net |
• | Cash provided by operating activities increased in fiscal 2020 compared to fiscal 2019 primarily due to higher net income, adjusted to exclude the effect of non-cash charges, of $81.3 million, an increase in accrued and other liabilities of $24.5 million, a decrease in prepaid expenses and other assets of $16.5 million and an increase in accounts payable of $23.5 million, partially offset by an increase in inventories of $33.1 million, an increase in accounts receivable of $16.1 million and a decrease in income taxes of $8.8 million. |
Net cash and cash equivalents used in investing activities for the years ended January 1, 2022 and December 26, 2020 was $141.8 million and $48.6 million, respectively. For the year ended December 31, 2019, investing activities provided net cash and cash equivalents of $4.1 million.
• | During the year ended January 1, 2022, net cash used in investing activities included |
• | During the year ended December 26, 2020, net cash used in investing activities included purchases of marketable securities, net of proceeds from sales of marketable securities of $47.6 million and purchases of property, plant and equipment of $3.8 million, partially offset by cash received from convertible note receivable of $2.8 million. |
• | During the year ended December 31, 2019, net cash provided by investing activities included cash acquired in the 2019 Merger of $43.9 million, partially offset by purchases of marketable securities, net of proceeds from marketable securities of $33.0 million and purchases of property, plant and equipment of $6.8 million. |
Net cash provided by financing activities was $2.7 million for the year ended January 1, 2022. For the years ended December 26, 2020 and December 31, 2019 financing activities used $53.7 million and $4.2, respectively.
• | During the year ended January 1, 2022, financing activities provided cash from shares issued through share-based compensation plans of $10.1 million, partially offset by cash used to pay taxes related to shares withheld for share based compensation plans of $7.4 million. |
• | During the year ended December 26, 2020, financing activities used cash to primarily purchase shares of our common stock under the share repurchase authorization of $52.0 million. |
37
|
| Fiscal Year Ended |
| ||||||||||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
|
| 2014 |
| ||||||||||||||||
|
| (in thousands) |
| ||||||||||||||||||||||||||||
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Cash, cash equivalents and marketable securities |
| $ | 151,792 |
|
| $ | 117,029 |
|
| $ | 129,961 |
|
| $ | 83,085 |
|
| $ | 83,962 |
| |||||||||||
Working capital |
| $ | 211,108 |
|
| $ | 196,019 |
|
| $ | 174,353 |
|
| $ | 132,903 |
|
| $ | 119,797 |
| |||||||||||
Total assets |
| $ | 375,630 |
|
| $ | 309,699 |
|
| $ | 287,830 |
|
| $ | 235,540 |
|
| $ | 223,236 |
| |||||||||||
Long-term liabilities |
| $ | 3,005 |
|
| $ | 3,221 |
|
| $ | 2,030 |
|
| $ | 3,001 |
|
| $ | 5,497 |
| |||||||||||
Total stockholders’ equity |
| $ | 312,852 |
|
| $ | 262,383 |
|
| $ | 243,774 |
|
| $ | 187,328 |
|
| $ | 179,537 |
|
• | During the year ended December 31, 2019, financing activities used cash to primarily pay taxes related to shares withheld for share based compensation plans of $2.5 million and pay contingent consideration for acquired business of $1.8 million. |
From time to time, we evaluate whether to acquire new or complementary businesses, products and/or technologies. We may fund all of or a portion of the price of these investments or acquisitions in cash, stock, or a combination of cash and stock. In the first quarter of 2021, the Company acquired Inspectrology, LLC for $24.0 million in cash and an earnout subject to the achievement of certain revenue targets earned for fiscal 2021 through 2022. The earnout achieved for fiscal 2021 was $2.3 million and is anticipated to be paid in the first half of fiscal 2022. There is potential earnout for up to an additional payment of $5.0 million depending on fiscal 2022 results.
In November 2020, the Onto Innovation Board of Directors approved a new share repurchase authorization, which allows the Company to repurchase up to $100 million worth of shares of its common stock. Repurchases may be made through both public market and private transactions from time to time with shares purchased being subsequently retired. At January 1, 2022, there was $100 million available for future share repurchases.
For further information regarding our share repurchases, see Note 17 in the accompanying Notes to the Consolidated Financial Statements included in this Form 10-K.
We have a credit agreement with a bank that provides for a line of credit that is secured by the marketable securities we have with the bank. We are permitted to borrow up to 70% of the value of eligible securities held at the time the line of credit is accessed. As of January 1, 2022, the available line of credit was approximately $131.4 million with an available interest rate of 1.8%. The credit agreement is available to us until such time that either party terminates the arrangement at its discretion. To date, we have not utilized the line of credit.
Our future capital requirements will depend on many factors, including the timing and amount of our revenue and our investment decisions, which will affect our ability to generate additional cash. In addition, although the ultimate impact of the COVID-19 pandemic on our future results remains uncertain, we believe our business model and our current cash reserves leave us well-positioned to manage our business through this crisis as it continues to unfold. We expect that our existing cash, cash equivalents, marketable securities and availability under our line of credit will be sufficient to meet our anticipated cash requirements for working capital, capital expenditures and other cash needs for the next 12 months following the filing of this Form 10-K. Thereafter, if cash generated from operations and financing activities is insufficient to satisfy our working capital requirements, we may seek additional funding through bank borrowings, sales of securities or other means. Market conditions due to the COVID-19 pandemic or other factors may have an impact on our ability to access such additional funding. Our borrowing capacity under our existing line of credit is tied to the value of eligible securities held at the time of borrowing, which may be negatively impacted by market conditions due to COVID-19 and government responses thereto or other factors. In addition, a reduction in or volatility with respect to our stock price or a general market downturn could materially impact our ability to sell securities on favorable terms or at all. There can be no assurance that we will be able to raise any such capital on terms acceptable to us or at all.
Contractual Obligations
The following table summarizes our significant contractual obligations at January 1, 2022, and the effect such obligations are expected to have on our liquidity and cash flows in future periods. We are currently unable to provide a reasonably reliable estimate of the amount or periods when cash settlement of this liability may occur (dollars in thousands).
|
| Payments due by period |
| |||||||||||||||||
|
| Total |
|
| Less than 1 year |
|
| 1-3 years |
|
| 3-5 years |
|
| More than 5 years |
| |||||
Operating lease obligations |
| $ | 21,104 |
|
| $ | 5,029 |
|
| $ | 7,515 |
|
| $ | 5,261 |
|
| $ | 3,299 |
|
Purchase obligations (1) |
|
| 373,638 |
|
|
| 345,334 |
|
|
| 28,304 |
|
|
| — |
|
|
| — |
|
Total |
| $ | 394,742 |
|
| $ | 350,363 |
|
| $ | 35,819 |
|
| $ | 5,261 |
|
| $ | 3,299 |
|
OverviewCritical Accounting Policies and Estimates
You should read the followingManagement’s discussion and analysis of our financial condition and results of operations together with “Selectedare based upon our Consolidated Financial Data” and our consolidated financial statements and related notes appearing elsewhereStatements included in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those presented under “Risk Factors” in Item 1A and elsewhere in this Annual Report on Form 10-K. Please see “Cautionary Information Regarding Forward-Looking Statements” at the beginning of this Form 10-K, for additional information you should consider regarding forward-looking statements.
We are an innovatorwhich have been prepared in the field of optical metrology systems, optical inspection systems and advanced analytics for semiconductor manufacturing and other industries. Our systems and solutions are designed to precisely monitor optical critical dimensions, film thickness, and other parameters that are necessary to control the manufacturing process, identify defects, and detect manufacturing equipment anomalies that can affect production yields and device performance.
Principal factors that impact our revenue growth include capital expenditures by manufacturers of semiconductors to increase capacity and to enable their development of new technologies, and our ability to improve market share. The increasing complexity of the manufacturing processes for semiconductors is an important factor in the demand for our innovative metrology systems. Our strategy is to continue to innovate organically as well as to evaluate strategic acquisitions to address business challenges and opportunities.
In November of 2018 we acquired 4D Technology Corporation (“4D”), based in Tucson Arizona. The 4D business unit offers a line of interferometry systems for the measurement and inspection of high precision surfaces. 4D’s solutions are used primarily in the manufacture of advanced aerospace and industrial systems as well as for scientific research and semiconductor applications.
We derive our revenues primarily from product sales but also from customer service and system upgrades for the installed base of our products. In 2018, we derived 85% of our total net revenues from product sales and 15% of our total net revenues from services.
Important Themes and Significant Trends
The semiconductor equipment industry is characterized by new manufacturing processes (node) coming to market every two to three years. At every new node, in the semiconductor industry our customers drive the need for metrology as a major component of device manufacturing. These trends include:
Proliferation of Optical Critical Dimension Metrology across Fabrication Processes. Device dimensions must be carefully controlled during each step of processing. These patterned structures are measured at many subsequent production steps including Chemical Mechanical Polishing, Etch, and Thin Film processing, all driving broader OCD adoption. Our proprietary OCD systems can provide the critical process control of these circuit dimensions that is necessary for successful manufacturing of these state-of-the-art devices. Nanometrics OCD technology is broadly adopted across 3D-NAND, DRAM, and logic semiconductor manufacturing processes.
Proliferation of 3D Transistor Architectures. Our end customers continue to improve device density and performance by scaling front-end-of-line transistor architectures. Many of these designs, including FinFET transistors, have buried features and high aspect ratio stacked features that enable improved performance and density. The advanced designs require additional process control to manage the complex shapes and materials properties, driving additional applications of our systems.
Proliferation of High-Density 3D-NAND. Our end customers have migrated to multi (many) layered high aspect ratio 3D-NAND devices. Many stacks of NAND cells are formed in parallel. This 3D-NAND architecture enables cost effective density scaling, removing the burden of density from lithography to deposition and etch processes. These devices require additional process control of deposition stacks, planarization processes, and critical high aspect ratio etch processes. Nanometrics thin films and OCD technologies are adopted across the 3D-NAND process including the periphery CMOS processing, NAND cell formation, and Interconnect of the devices.
Adoption of New Types of Thin Film Materials. The need for ever increasing device circuit speed coupledaccordance with lower power consumption has pushed semiconductor device manufacturers to new materials and processing methods with single atom/sub nanometer control over these processes.
|
Critical Accounting Policies
The preparation of our financial statements conforms to accounting principles generally accepted in the United StatesStates. We review the accounting policies we use in reporting our financial results on a regular basis. The preparation of America, whichthese financial statements requires managementus to make estimates and judgments in applying our accounting policies that have an important impact on our affect the
38
reported amounts of assets, liabilities, revenue and expenses and related disclosures at the datedisclosure of our financial statements.contingent assets and liabilities. On an ongoing basis, management evaluates itswe evaluate our estimates, including those related to revenue bad debts, inventory valuations,recognition, accounts receivable, inventories, business acquisitions, intangible assets, share-based payments, income taxes and warranty obligations, impairment and income taxes. Management bases itsobligations. We base our estimates and judgments on historical experience and on various other factorsassumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying valuesvalue of assets and liabilities that are not readily apparent from other sources. Actual resultsResults may differ from management’s estimates.these estimates due to actual outcomes being different from those on which we based our assumptions. These estimates and judgments are regularly reviewed by management on an ongoing basis at the end of each quarter prior to the public release of our financial results. We believe that the application of the following critical accounting policies requiresaffect our more significant judgments and estimates onused in the part of management. For a summary of allpreparation of our accounting policies, including those discussed below, see Note 1 to our consolidated financial statements.Consolidated Financial Statements.
Revenue Recognition - We recognize revenueRecognition.Revenue is recognized when control of a goodthe promised goods or service hasservices are transferred to a customer. Theour customers in an amount of revenue recognizedthat reflects the amount whichconsideration we expect to be entitled to receive in exchange for those goods or services. We account for a contract when it has approval and commitment from both parties, the transferrights of the goods or services in a contract with a customer. Revenue excludes amounts collected on behalf of third parties including taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue producing transaction. Shipping and handling costs associated with outbound freight both before and after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenues. We record revenue on a gross basis, rather than net, as we act as the principal in all of our contractual arrangements and not as an agent.
Accordingly, we follow a 5-Step process to evaluate our contracts with customers to determine the amount and timing of revenue recognition. This determination includes certain estimates and areas in which judgment is needed during each step of the process.
We first identify whether a legally enforceable contract with a customer exists. We evaluate the following criteria in our evaluation and if all criteria are not met, a contract does not exist and any revenue that otherwise would be recorded because a good or service had been transferred to a customer is deferred until such time that a contract exists: (1) both parties have approved the contract and are committed to perform, (2) we can identify each party’s rights regarding the goods or services to be transferred, (3) we can identify the payment terms for the goods or services to be delivered, (4)are identified, the contract has commercial substance and (5) itcollectability of consideration is probable that we will collect substantially allprobable.
We account for shipping and handling activities as the fulfillment of the considerationa promise to which we will be entitled in exchange for thetransfer goods or services that will be transferred to the customer. Historically, we have not experienced customer payment defaults that would lead us to conclude that we do not have a contractand therefore record these activities under the new standard.
Once the contract has been identified, we evaluate the promises in the contract to identify performance obligations. We apply judgement in evaluating whether the performance obligationscaption “Cost of revenue.” Sales tax and any other taxes collected concurrent with revenue producing activities are distinct;excluded from revenue. Incidental items that is, have stand-alone value to the customer. Many of the contracts include more than one performance obligation – for example the delivery of a system generally includes the promise to install the system in the customer’s facility. Additionally, a contract could include the purchase of multiple systems or the purchase of a system and an upgrade. Promises in contracts which do not result in the transfer of a good or service are not performance obligations, as well as those promises that are administrative in nature, or are immaterial in the context of the contract. Our determination of the number ofcontract are recognized as expense.
Contracts with customers may include multiple performance obligations in a contract requires judgement and could impact the amount and timing of revenue recognition.
Once the performance obligations in the contract have been identified, we estimate the transaction price of the contract. The estimate includes amounts that are fixed as well as those that can vary based on contractual terms (e.g., performance bonuses/penalties, amounts payable to customers, rebates, prompt payment discounts, etc.) These variable consideration items are rare as most of our contracts include only fixed amounts. It is expected that estimates of variable consideration will be immaterial for us and would occur if customers did not meet their contractual purchase commitments and we would be entitled to recover additional contract consideration.
Once the transaction price of the contract has been identified,obligations. For such arrangements, we allocate the transaction price to the identified performance obligations. This is done on a relative selling price basis using standalone selling prices (“SSP”). For most performance obligations, we do not have observable SSP’s as they are not regularly sold on a standalone basis however if a performance obligation does have an observable SSP it is used for allocation purposes. Without observable SSP’s, we estimate the SSP using a methodology which maximizes the use of observable inputs – namely a cost-plus gross margin approach. Our determination of the SSP requires judgment and could impact the amount and timing of revenue recognition.
Lastly, we record the amount allocated to each performance obligation as revenue when control of that good or service has transferred to the customer. We first evaluate whether a good or service is transferred over time, and if it is not, then it is recorded at a point in time. For service contracts, we record revenue based on its measurement of progress, andrelative standalone selling price. We generally determine standalone selling prices based on the best methodprices charged to determine thiscustomers or the expected cost-plus margin.
Revenue from systems is the percentagerecognized when we transfer control of the stand-ready obligation that is completedproduct to date as this best reflects the valueour customer. To indicate transfer of the service transferred to the customer. The timing of satisfaction of the performance obligation to payment is dependent upon the negotiated payment terms but generally occurs within 30 to 60 days. We evaluate the following indicators to determine the point in time at which control, transfers to the customer and may apply judgment in this evaluation based onwe must have a present right to payment, legal title physical possession, riskmust have passed to the customer and the customer must have the significant risks and rewards of ownership and customer acceptance. Typically, for new product introductions, we defer revenue recognition until formal customer acceptance is received from the customer. Additionally,ownership. We generally transfer control for system shipmentssales when the customer or the customer’s agent picks up the system at our facility. We provide an assurance warranty on our systems for a period of twelve to Japan, revenue is deferred because typical contractual terms indicate that payment is not due, and title does not transfer until customer acceptance occurs.
We warrant our productsfourteen months against defects in manufacturing. In those instances,material and workmanship. We provide for the estimated cost of product warranties at the time revenue is recognized.
Depending on the terms of the systems arrangement, we may also defer the recognition of a portion of the consideration expected to be received because we have to satisfy a future obligation (e.g., installation and extended warranties). We use an observable price to determine the standalone selling price for separate performance obligations or a cost-plus margin approach when one is not available.
Revenue from software licenses is recognized upfront at the point in which extended warranty services are separately quotedtime when the software is made available to the customer. Software licenses provide the customer or ifwith limited rights to use the warranty includes services beyond just an assurance thatsoftware. Revenue from licensing support and maintenance is recognized as the support and maintenance are provided, which is over the contract period.
Revenue from parts is recognized when we transfer control of the product, will work as intended, anwhich typically occurs when we ship the product from our facilities to the customer.
Revenue from services primarily consists of service contracts, which provide additional performance obligationmaintenance coverage beyond our assurance warranty on our products, service labor, consulting and training. Revenue from service contracts is created, and the associated revenue is deferred and recognized as service revenue ratably over the term of the extended warranty period. The portion of service contractscontract. Revenue from service labor, consulting and extended warranty services agreements that are uncompleted at the end of any reporting period are included in deferred revenue.
Frequently, we deliver products and various services in a single transaction. Our deliverables consist of tools, installation, upgrades, billable services, spare parts, and service contracts. Our typical multi-element arrangements include a sale of one or multiple tools that include installation and standard warranty. Other arrangements consist of a sale of tools bundled with service elements or delivery of different types of services. Our tools, upgrades, and spare parts are generally delivered to customers within a period of up to six months from order date. Installation is usually performed soon after delivery of the tool. We defer the estimated portion of revenue associated with installation based on relative selling price and that revenuetraining is recognized upon completionas services are performed.
We record contract liabilities when the customer has been billed in advance of the installation and receipt of final acceptance.
Whencompleting our performance obligationsobligations. These amounts are not transferred to a customer at the end of a reporting period, the amount allocated to those performance obligations isrecorded as deferred until control of these performance obligations is transferred to the customer. When we determine that performance obligations cannot be accounted for as separate units of accounting, we account for the entire arrangement as a single unit of accounting and we defer revenue until all elements are delivered and all revenue recognition requirements are met. The amount of revenue recognized in the twelve months ended December 29, 2018 that was included in the contract liability balance as of the beginning of the year was $5.2 million. The impact of Topic 606 adoption on our financial statements is summarized in the Notes to the Consolidated Financial Statements and is incorporated herein by reference.Balance Sheets.
Business combinations - combinations. We account for business combinations under the acquisition method of accounting, which requires us to recognize separately from goodwill the assets acquired, and the liabilities assumed at their acquisition date fair values. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in our consolidated statements of operations. Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date including our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies, and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based, in part, on historical experience and information obtained from the
39
management of the acquired companies and are inherently uncertain. Critical estimatesEstimates in valuing certain acquired intangible assets under the income approach include growth in future expected cash flows from product sales, customer contracts and acquired technologies, technology obsolescence rates, expected costs to develop in-process research and development, or IPR&D, into commercially viable products, estimated cash flows from the projects when completed and discount rates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Allowance for Doubtful Accounts – We maintain allowances forExcess and Obsolete Inventory. Inventories are stated at the lower of cost or net realizable value. Net realizable value is the estimated losses resulting from the inability of our customers to make their required payments. We establish credit limits through a process of reviewing the financial history and stability of our customers. Where appropriate and available, we obtain credit rating reports and financial statements of customers when determining or modifying their credit limits. We regularly evaluate the collectability of our trade receivable balances based on a combination of factors such as the length of time the receivables are past due, customary payment practicesselling prices in the respective geographiesordinary course of business, less predictable costs of completion, disposal and our historical collection experience with customers. We believe that our allowance for doubtful accounts adequately reflects our risk associated with our receivables. If the financial condition of a customer were to deteriorate, resulting in their inability to make payments, we would assess the necessity of recording additional allowances. This would result in additional general and administrative expenses being recorded for the period in which such determination was made
Inventories – Inventories are valued at standard costs, which approximates actual cost calculatedtransportation. Cost is generally determined on a first-in, first-out basis, not in excess of net realizable value. We apply judgment in determining standard rates forand includes material, burden, direct labor and manufacturing overhead usedcosts. We review and set standard costs as needed, but at a minimum, on an annual basis, at current manufacturing costs in valuingorder to approximate actual costs. We maintain reserves for our excess and obsolete inventory equal to the difference between the cost of inventory and periodically review such rates to ensure that the rates result in an inventory valuation not in excess of net realizable value. We have established inventory reserves when conditions exist that suggest that our inventory may be in excess of anticipated demand or is obsoleteestimated market value based upon our assumptions about future product lifecycles, product demand for our products and market conditions. Once a reserve has been established, it is maintained until the part to which it relates is sold or is otherwise disposed of. Therefore, a sale of reserved inventory has a higher gross profit margin. We regularly evaluate our ability to realize the value of our inventory based on a combination of factors including the following: historical usage rates, forecasted sales of usage, product end-of-life dates, estimated current and future market values and new product introductions. Inventory includes evaluation tools placed at customer sites. For demonstration inventory, we also consider the age of the inventory and potential cost to refurbish the inventory prior to sale. We amortize demonstration inventory over its useful life and the amortization expense is included in total inventory write down on our statements of cash flows. When recorded, our reserves are intended to reduce the carrying value of our inventory to its net realizable value. If actual product lifecycles, product demand for our products deteriorates, orand market conditions are less favorable than those that we project,originally projected by management, additional reservesinventory write-downs may be required, which would adversely affect gross margin and net income.
Product Warranties – We sell the majority of our products with a standard twelve-month repair or replacement warranty from the date of acceptance or shipment date. We provide an accrual for estimated future warranty costs based upon the historical relationship of warranty costs to the cost of products sold. The estimated future warranty obligations related to product sales are reported in the period in which the related revenue is recognized. The estimated future warranty obligations are affected by the warranty periods, sales volumes, product failure rates, material usage and labor and replacement costs incurred in correcting a product failure. If actual product failure rates, material usage, labor or replacement costs differ from our estimates, revisions to the estimated warranty obligations would be required. For new product introductions where limited or no historical information exists, we may use warranty information from other previous product introductions to guide us in estimating our warranty accrual. The warranty accrual represents the best estimate of the amount necessary to settle future and existing claims on products sold as of the balance sheet date. We periodically assess the adequacy of our recorded warranty reserve and adjust the amounts in accordance with changes in these factors.
Goodwill and Indefinite Lived Intangible Assets - Assets. Goodwill is tested for impairment during the fourth quarter, or whenever events or circumstances indicate that its carrying value may not be recoverable. Goodwill impairment is tested at the reporting unit level, which is defined as an operating segment or one level below the operating segment. The Company has one operating segment. Goodwill is reviewed for impairment using either a qualitative assessment or a quantitative goodwill impairment test. If the Company chooses to perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. When the Company performs the quantitative goodwill impairment test, it compares fair value to carrying value, which includes goodwill. If fair value exceeds carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss.
Intangible assets with finiteindefinite lives, including in-process research and development (“IPR&D”), are amortized over their useful livestested for impairment if impairment indicators arise and, are subjectat a minimum, annually. However, the Company is permitted to first assess qualitative factors to determine if a quantitative impairment test is necessary. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that an indefinite-lived intangible asset’s fair value is less than its carrying amount. Otherwise, no further impairment testing is required. The indefinite-lived intangible asset impairment test consists of a one-step analysis that compares the fair value of the intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment assessment, as well asloss is recognized in an evaluationamount equal to that excess. We consider many factors in evaluating whether the value of intangible assets with indefinite lives may not be recoverable, including, but not limited to estimates of future cash flows, the appropriatenessdiscount rate, terminal growth rates, general economic conditions, our outlook and market performance of their estimated useful lives,our industry and recent and forecasted financial performance.
There was no impairment of goodwill or IPR&D for the years presented.
Long-Lived Assets and Finite-Lived Acquired Intangible Assets. We periodically review long-lived assets, other than goodwill, for impairment whenever changes in events or changes in circumstances indicate that the carrying amount(s)amount of an asset may not be recoverable. Assumptions and estimates used in the determination of impairment losses, such as future cash flows and disposition costs, may affect the carrying value of long-lived assets and the impairment of such long-lived assets, if any, could have a material effect on our consolidated financial statements. During the annualyear ended December 31, 2019, we recognized a $0.5 million impairment test performedloss on intangiblelong-lived assets. No such indicators were noted in 2021 or 2020.
Accounting for Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our current tax exposure together with our temporary differences resulting from differing treatment of items for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Management judgment is required in determining our provision for income taxes and any valuation allowance recorded against our deferred tax assets. The need for a valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred taxes will determinebe recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust the business ownervaluation allowance, which could materially impact our financial position and results of operations. At January 1, 2022 and December 26, 2020, we had recorded valuation allowances of $10.9 million and $14.2 million on certain of our deferred tax assets to reflect the deferred tax assets at the net amount that is more likely than not to be realized. We evaluated the realizability of the deferred tax assets based on positive earnings as to whetherwell as the underlying technology is being utilized or have potential for further utilization. Ifprojected earnings in future years and believe it is deemedmore likely than not that the asset has no future benefit to the company, and it is fully amortized for both book andsubstantial majority of our deferred tax purposes, then itasset will be written off. Goodwillrealized in the future years. We will continue to monitor the realizability of the deferred tax assets and indefinite lived assets are not amortized but tested annuallyevaluate the valuation allowance.
40
We recognize liabilities for impairment.uncertain tax positions based on a two-step process. The goodwill impairment assessment involves three tests, Step 0, Step 1 and Step 2. The Step 0 test involves performing an initial qualitative assessmentfirst step requires us to determine if the weight of available evidence indicates that the tax position has met the threshold for recognition; therefore, we must evaluate whether it is more likely than not that the asset is impaired and thus whether it is necessaryposition will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to proceed to Step 1 and calculatemeasure the fair valuetax benefit of the reporting unit.tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50% likely of being realized when effectively settled. This measurement step is inherently difficult and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We may proceed directlyreevaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues, and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an additional charge to the Step 1 test without performingtax provision in the Step 0 test.period.
Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If additional taxes are assessed as a result of an audit or litigation, it could have a material effect on our income tax provision and net income in the period or periods for which that determination is made.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
Interest Rate and Credit Market Risk
We are exposed to changes in interest rates and market liquidity including our investments in certain available-for-sale securities. Our available-for-sale securities consist of fixed and variable rate income investments, such as municipal notes, municipal bonds and corporate bonds. We continually monitor our exposure to changes in interest rates, market liquidity and credit ratings of issuers for our available-for-sale securities. It is possible that we are at risk if interest rates, market liquidity or credit ratings of issuers change in an unfavorable direction. The Step 1 test involves measuring the recoverabilitymagnitude of goodwill at the reporting unit level by comparing the reporting unit's carrying amount, including goodwill, to the fair valueany gain or loss will be a function of the reporting unit.
We perform a Step 0 assessmentdifference between the fixed or variable rate of the goodwill duringfinancial instrument and the fourth quarter of each fiscal year, or whenever events or circumstances occur which indicate that an impairment may have occurred. As part of this assessment, we consider the trading value of our stock, industry trends,market rate, and our sales forecastfinancial condition and products plans to determine if it is more likely than not that the fair value is higher than the carrying valueresults of operations could be materially affected. Based on a sensitivity analysis performed on our reporting unit. If, after assessing the qualitative factors, we determine that it is not likely that the fair valuefinancial investments held as of January 1, 2022, a reporting unit is less than its carrying value, then performing the two-step impairment test is unnecessary. However, if we conclude otherwise, then we are required to perform the Step 1hypothetical increase of the two-step goodwill impairment test. The Step 1 test requires100 basis points in interest rates would result in a comparisondecrease of $2.2 million in the fair value of our reporting unit to its net book value. If the fair value of the reporting unit is greater than its net book value, then no impairment is deemed to have occurred. If the fair value is less, then the Step 2 must be performed to determine the amount, if any, of actual impairment.
The process of evaluating the potential impairment of goodwill is highly subjectiveavailable-for-sale debt securities and requires significant judgment. In estimating the fair value of goodwill at the reporting unit level, we make estimates and judgments about future revenues and cash flows for the reporting unit. To determine the fair value, our review process includes the income method and is based on a discounted future cash flow approach that uses estimates including the following for the reporting unit: estimated revenue, market segment growth rates and market share assumptions; estimated costs; and appropriate discount rates based on the reporting unit's weighted average cost of capital. Our estimates of market segment growth, our market segment share and costs are based on historical data, various internal estimates and certain external sources, and are based on assumptions that are consistent with the plans and estimates we are using to manage the underlying businesses. Our business consists of both established and emerging technologies and our forecasts for emerging technologies are based upon internal estimates and external sources rather than historical information. We also consider our market capitalization on the dates of our impairment tests in determining the fair value of the respective businesses. As
part of this assessment, we consider the trading value of our stock and our implied value, as compared to our net assets, as well as the valuation of our acquired businesses. If the carrying amount of the reporting unit exceeds its fair value as determined by these assessments, goodwill is considered impaired, and the Step 2 test is performed to measure the amount of impairment loss. As part of the Step 2 test to determine the amount of goodwill impairment, if any, we allocate the fair value of the reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amount assigned to its assets and liabilities is the implied fair value of goodwill. When impairment is deemed to have occurred, we will recognize an impairment charge to reduce the carrying amount of our goodwill to its implied fair value.
Income Tax Assets and Liabilities – We account for income taxes such that deferred tax assets and liabilities must be recognized using enacted tax rates for the effect of temporary differences between the book and tax accounting for assets and liabilities. Also, deferred tax assets are reduced by a valuation allowance to the extent that management cannot conclude that it is more likely than not that a portion of the deferred tax asset will be realized in the future. We evaluate the deferred tax assets on a continuous basis throughout the year to determine whether or not a valuation allowance is appropriate. Factors used in this determination include future expected income and the underlying asset or liability which generated the temporary tax difference. The income tax provision is primarily impacted by federal statutory rates, state and foreign income taxes and changes in the valuation allowance.
Recent Accounting Pronouncements
See Note 2 of our consolidated financial statements for a description of recent accounting pronouncements, including the respective dates of adoption and effects on our results of operations and financial condition.
Results of Operations
Our net revenues comprised the following (in thousands, except percentages):
|
| Fiscal Year |
|
|
|
|
|
|
|
|
| |||||
|
| 2018 |
|
| 2017 |
|
| Change |
| |||||||
Total product revenue |
| $ | 275,286 |
|
| $ | 214,877 |
|
| $ | 60,409 |
|
|
| 28.1 | % |
Service |
|
| 49,237 |
|
|
| 43,744 |
|
|
| 5,493 |
|
|
| 12.6 | % |
Total net revenues |
| $ | 324,523 |
|
| $ | 258,621 |
|
| $ | 65,902 |
|
|
| 25.5 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year |
|
|
|
|
|
|
|
|
| |||||
|
| 2017 |
|
| 2016 |
|
| Change |
| |||||||
Total product revenue |
| $ | 214,877 |
|
| $ | 185,066 |
|
| $ | 29,811 |
|
|
| 16.1 | % |
Service |
|
| 43,744 |
|
|
| 36,063 |
|
|
| 7,681 |
|
|
| 21.3 | % |
Total net revenues |
| $ | 258,621 |
|
| $ | 221,129 |
|
| $ | 37,492 |
|
|
| 17.0 | % |
In 2018, total net revenues increased by $65.9 million from 2017. In 2018, the increase in product revenues was approximately $60.4 million or 28.1% primarily due to significant increases in customer spending in memory, 3-D NAND, DRAM and also driven by new product adoptions by our customers. Service revenue increased by $5.5 million or 12.6% in 2018 principally due to an increase in sales of spare parts and service contracts as a result our increasing installed base, and a modest increase in sales of refurbishment systems.
In 2017, total net revenues increased by $37.5 million from 2016. Customer spending trends for 3D-NAND, DRAM and Foundry primarily contributed to such year over year revenue growth. The increase of $29.8 million or 16.1% in product revenues was fueled by the increase in new product adoption and gains in market share. Service revenue increased by $7.7 million in 2017 principally due to an increase in sales of spare parts and service contracts because of our increasing installed base.
With a significant portion of the world's semiconductor manufacturing capacity located in Asia, a substantial portion of our revenues continue to be generated in that region. Significant fab expansions and customers moving into next generation technologies mainly in China and Japan contributed to the higher revenues in 2017 and 2018.
Our gross margin breakdown was as follows:
|
| Fiscal Year |
| |||||||||
|
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
Products |
|
| 58.9 | % |
|
| 52.9 | % |
|
| 53.1 | % |
Service |
|
| 44.5 | % |
|
| 52.4 | % |
|
| 44.1 | % |
The calculation of product gross margin includes cost of products including related upgrades and amortization of intangibles. The gross margin on product revenue increased six percentage points from 52.9% in 2017 to 58.9% in 2018. The increase was due to a favorable product and customer mix, upgrade margins and lower warranty costs for our more established product lines. Inventory adjustments related to additional E&O reserves and the amortization of step up inventory valuation for 4D, negatively impacted product gross margins by 0.5 percent in 2018. The gross margin on our services business decreased to 44.5% in 2018 from 52.4% in 2017, reflecting a decrease of 7.9 percentage points. The decrease was due to lower labor utilization and higher fulfilment costs for service contracts resulting from a higher rate of field maintenance requests.
The gross margin on product revenue remained relatively flat in 2017 compared to 2016. However, the gross margin of our services business improved to 52.4% in 2017 from 44.1% in 2016, reflecting an increase of 8.3 percentage points. The increase in gross margin was due to increases in margin of service parts, a more favorable product mix and higher utilization of our service personnel.
Operating expenses
Our operating expenses comprise the following categories (in thousands, except percentages):
|
| Fiscal Year |
|
|
|
|
|
|
|
|
| |||||
|
| 2018 |
|
| 2017 |
|
| Change |
| |||||||
Research and development |
| $ | 48,188 |
|
| $ | 36,716 |
|
| $ | 11,472 |
|
|
| 31.2 | % |
Selling |
|
| 37,528 |
|
|
| 30,839 |
|
|
| 6,689 |
|
|
| 21.7 | % |
General and administrative |
|
| 31,795 |
|
|
| 26,340 |
|
|
| 5,455 |
|
|
| 20.7 | % |
Amortization of intangible assets |
|
| 96 |
|
|
| - |
|
|
| 96 |
|
|
| NA |
|
Total operating expenses |
| $ | 117,607 |
|
| $ | 93,895 |
|
| $ | 23,712 |
|
|
| 25.3 | % |
|
| Fiscal Year |
|
|
|
|
|
|
|
|
| |||||
|
| 2017 |
|
| 2016 |
|
| Change |
| |||||||
Research and development |
| $ | 36,716 |
|
| $ | 31,443 |
|
| $ | 5,273 |
|
|
| 16.8 | % |
Selling |
|
| 30,839 |
|
|
| 30,181 |
|
|
| 658 |
|
|
| 2.2 | % |
General and administrative |
|
| 26,340 |
|
|
| 23,381 |
|
|
| 2,959 |
|
|
| 12.7 | % |
Amortization of intangible assets |
|
| - |
|
|
| 24 |
|
|
| (24 | ) |
|
| NA |
|
Total operating expenses |
| $ | 93,895 |
|
| $ | 85,029 |
|
| $ | 8,866 |
|
|
| 10.4 | % |
Investments in research and development personnel and associated projects are part of our strategy to ensure our products remain competitive and meet customer’s needs. In 2018, research and development costs increased by $11.5 million or 31.2% compared to 2017 primarily due to additional headcount, higher variable compensation costs, consulting fees, new product development costs, incremental process improvement for customers and such costs associated with 4D since their acquisition date. We continue to invest in development of several new products to retain our competitive position and meet the advanced technology needs for our customers as they continue to improve the performance of their semiconductor devices.
In 2017, research and development costs increased by $5.3 million or 16.8% compared to 2016 primarily due to additional headcount and higher material spending in program related expenses to support our research and development efforts.
Selling expenses increased by $6.7 million or 21.7% in 2018 compared to 2017 primarily due to additional headcount, higher variable compensation costs, higher sales commission expenses, and such costs associated with 4D since their acquisition date. Higher
revenues of 25% resulted in higher sales commissions, and we also opened several new sales and service offices in Asia to better serve the needs of customer fab expansions at these locations.
Selling expenses increased slightly by $0.7 million or 2.2% in 2017 compared to 2016. The slight increase was due to higher variable compensation, commission expense, and sales related costs, which was consistent with higher revenues in 2017 compared to 2016.
General and administrative
General and administrative expenses increased by $5.5 million or 20.7% in 2018 compared to 2017. The increase was primarily due to executive transition and search costs, higher variable compensation costs, higher professional service fees, and such costs associated with 4D since their acquisition date. Our revenues and profitability exceeded the growth of the wafer fab equipment market and company targets resulting in higher compensation costs, and additional professional service fees for business development and acquisition activities during 2018. Acquisition costs of $0.9 million were incurred in 2018 primarily for accounting and legal services.
General and administrative expenses increased by $3.0 million or 12.7% in 2017 compared to 2016. The increase was primarily due to higher variable compensation costs, recruiting costs associated with our CEO search and higher professional services fees.
Amortization of intangible assets
Amortization of $96,000 was recorded in 2018, representing one month of amortization of certain intangible assets acquired as a result of the 4D acquisition. We recorded no amortization of intangible assets in operating expenses in fiscal 2017 as prior intangible assets were fully amortized in 2016.
Other income (expense), net
Our other income (expense), net, consisted of the following items (in thousands, except percentages):
|
| Fiscal Year |
|
|
|
|
| |||||
|
| 2018 |
|
| 2017 |
|
| Change |
| |||
Interest income |
| $ | 10 |
|
| $ | 8 |
|
| $ | 2 |
|
Interest expense |
|
| (331 | ) |
|
| (92 | ) |
|
| (239 | ) |
Interest income (expense), net |
| $ | (321 | ) |
| $ | (84 | ) |
| $ | (237 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains on investments |
|
| 1,379 |
|
|
| 1,311 |
|
|
| 68 |
|
Other gains (losses), net |
|
| (21 | ) |
|
| (735 | ) |
|
| 714 |
|
Other income (loss), net |
| $ | 1,358 |
|
| $ | 576 |
|
| $ | 782 |
|
Total other income (expense), net |
| $ | 1,037 |
|
| $ | 492 |
|
| $ | 545 |
|
|
| Fiscal Year |
|
|
|
|
| |||||
|
| 2017 |
|
| 2016 |
|
| Change |
| |||
Interest income |
| $ | 8 |
|
| $ | 35 |
|
| $ | (27 | ) |
Interest expense |
|
| (92 | ) |
|
| (285 | ) |
|
| 193 |
|
Interest income (expense), net |
| $ | (84 | ) |
| $ | (250 | ) |
| $ | 166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains on investments |
|
| 1,311 |
|
|
| 520 |
|
|
| 791 |
|
Other gains, net |
|
| (735 | ) |
|
| (230 | ) |
|
| (505 | ) |
Other income (loss), net |
|
| 576 |
|
|
| 290 |
|
|
| 286 |
|
Total other income (expense), net |
| $ | 492 |
|
| $ | 40 |
|
| $ | 452 |
|
Total other income, net increased by $0.5 million in 2018 compared to 2017. The increase was primarily due to gain of $0.8 million on the sale of an asset, partially offset by unfavorable net revaluation of intercompany balances based on foreign currency fluctuations relative to the U.S. dollar, netted against hedging gains and losses and interest expense on factored receivables.
Total other income, net increased by $0.5 million in 2017 compared to 2016, primarily due to higher net realized investment gains, which is in line with the higher cash and cash equivalents balance in 2017, partially offset by unfavorable net revaluation of intercompany balances based on foreign currency fluctuations relative to the U.S. dollar, netted against hedging gains and losses.
Provision for (benefit from) income taxes
We recorded an income tax provision of $9.9 million in 2018, an income tax provision of $13.1 million in 2017, and an income tax benefit of $14.9 million in 2016. The decrease in the provision for 2018 from 2017 was primarily related to the lower statutory federal tax rates enacted by the Tax Cuts and Jobs Act of 2017. The increase in the provision for 2017 from 2016 was primarily related to the decreased benefit of our U.S. deferred tax assets from the Tax Cuts and Jobs Act of 2017 and increased profitability for the year ended 2017, offset by the release of a valuation allowance against a significant portion of our U.S. deferred tax assets for the year ended 2016.
Our provision for income taxes for 2018 of $9.9 million reflects an effective tax rate of 14.6%. This rate differs from the federal statutory rate of 21% primarily due to foreign income taxed at lower rates, tax credits generated in the current year, and tax benefits associated with the settlement of equity options/awards, offset by an increase in valuation allowances for our California and Switzerland deferred tax assets.
Our provision for income taxes for 2017 of $13.1 million reflects an effective tax rate of 30.2%. This rate differed from the then Federal statutory rate of 35.0% primarily due to foreign income taxed at lower rates, and tax credits generated in the current year, tax benefits associated with the settlement of equity options/awards, and a one-time benefit related to an entity classification change, offset by an additional provision for the tax effects of the Tax Cuts and Job Act of 2017.
Our benefit for income taxes for 2016 of $14.9 million reflects an effective tax rate of negative 51.1%. This rate differs from the then Federal statutory rate of 35.0% primarily due to the release of a valuation allowance against a significant portion of our U.S. deferred tax assets which represented a $23.9 million benefit, as well as foreign income taxed at lower rates, and tax credits generated in the current year, offset by equity compensation expenses for which no current tax deduction is available.
We maintain valuation allowances when it is likely that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in our income tax provision in the period of change. In determining whether a valuation allowance is warranted, we take into account such factors as prior earnings history, expected future earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of a deferred tax asset, carry-back and carry-forward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. We currently maintain a valuation allowance against our deferred tax assets in California and Switzerland.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allowed us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As of December 29, 2018, we had finalized all provisional amounts related to the Tax Act. Finalizing provisional adjustments related to the Tax Act did not have a material impact on our consolidated financial statements asposition, results of December 29, 2018. We expect further guidance may be forthcoming from the Financial Accounting Standards Board and the Securities and Exchange Commission, as well as regulations, interpretations and rulings from federal and state tax agencies, which could result in additional impacts.
The 2017 Tax Act creates a new requirement that global intangible low-taxed income (“GILTI”) earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFCs’ U.S. shareholder. Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”)operations or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). Our selection of an accounting policy for 2018 with respect to the GILTI tax rules was to treat GILTI tax as a current period expense under the period cost method.
Liquidity and Capital Resources
Our principal sources of liquidity are cash and cash equivalents, marketable securities and cash flow generated from our operations. Our liquidity is affected by many factors, including those that relate to our specific operations and those that relate to the uncertainties of global and regional economies and the sectors of the semiconductor industry which we operate in. Although our cash requirements will fluctuate based on the timing and extent of these factors, we believe our existing cash, cash equivalents andflows.
marketable securities, combined with cash currently projected to be generated from our operations, will be sufficient to meet our liquidity needs through at least the next twelve months.
The following table presents selected financial information and statistics as of and for the years ended December 29, 2018, December 30, 2017 and December 31, 2016 (in millions):
|
| December 29, 2018 |
|
| December 30, 2017 |
|
| December 31, 2016 |
| |||
Cash, cash equivalents and marketable securities |
| $ | 151.8 |
|
| $ | 117.0 |
|
| $ | 130.0 |
|
Working capital |
| $ | 211.1 |
|
| $ | 196.0 |
|
| $ | 174.4 |
|
Cash provided by operating activities |
| $ | 103.3 |
|
| $ | 20.6 |
|
| $ | 45.7 |
|
Cash used in investing activities |
| $ | (4.3 | ) |
| $ | (6.7 | ) |
| $ | (42.1 | ) |
Cash provided by (used in) financing activities |
| $ | (22.8 | ) |
| $ | (25.6 | ) |
| $ | 5.3 |
|
During 2018, the $103.3 million cash provided by operating activities was a result of $57.6 million of net income plus $24.2 million net effect of non-cash adjustments to net income, plus $21.5 million net change in operating assets and liabilities. The change in operating assets and liabilities is generally driven by the timing of our customer payments for accounts receivable and timing of our vendor payments for accounts payable, and additional inventory purchases related to the build of newer products. We expect that cash provided by operating activities may fluctuate due to several factors, including variations in our operating results, accounts receivable collections performance, inventory and supply chain management, vendor payment initiatives, tax benefits or charges from stock-based compensation, and the timing and amount of compensation and other payments. The $82.7 million increase in cash provided from operating activities in 2018 compared to 2017 was primarily due to an increase in net income of $27.4 million and an increase in cash from changes in assets and liabilities of $55.3 million. The increase in net income of $27.4 million was a result of a 25% increase in sales with a 4% increase in gross margins in 2018 compared to 2017, that was partially offset by additional investments in operating expenses especially in the development of new products. An increase in cash from working capital changes of $56.3 million was primarily driven by significant improvement in days sales outstanding, relative improvement in inventory levels and inventory turns relative to the growth in volume, and favorable payment terms with our suppliers. Net cash used in investing activities of $4.3 million during 2018 consisted primarily of cash used to acquire 4D of $37.2 million and certain assets, property, plant and equipment of $7.5 million, which was partially offset by cash provided from net sales and maturities of marketable securities of $41.5 million. We sold a condominium, used to house travelling employees, for $0.9 million. Cash used in investing activities was relatively unchanged in 2018 from 2017. Cash used in financing activities of $22.8 million during 2018 consisted primarily of $23.0 million of common stock repurchases and $3.6 million of cash paid for taxes on net issuance of stock awards, partially offset by proceeds from issuance of common stock from the employee stock purchase program and the exercise of stock options of $3.8 million. Cash used in financing activities were relatively unchanged in 2018 from 2017.
During 2017, the $20.6 million cash provided by operating activities was a result of $30.2 million of net income plus $25.3 million net effect of non-cash adjustments to net income, offset by $34.5 million net change in operating assets and liabilities. The change in operating assets and liabilities is generally driven by the timing of our customer payments for account receivable and timing of our vendor payments for accounts payable. The $25.1 million decrease in cash from operating activities in fiscal 2017 compared to fiscal 2016 was primarily due to higher inventory levels at the end of the fiscal year and higher accounts receivable balance as a result of the record high revenue level in the fourth quarter of the 2017 fiscal year. Cash used in investing activities of $6.7 million during 2017, consisted primarily of cash used to acquire certain assets and property, plant and equipment of $7.2 million, as sales and maturities of marketable securities were almost entirely offset by purchases of marketable securities. Cash used in financing activities of $25.6 million during 2017 consisted primarily of $27.0 million of common stock repurchases and $4.2 million of cash paid for taxes on net issuance of stock awards, partially offset by proceeds from issuance of common stock from the employee stock purchase program and the exercise of stock options of $5.6 million.
During 2016, cash provided by operating activities was a result of $44.0 million of net income plus the net effect of non-cash adjustments to net income and net change in operating assets and liabilities. The increase in cash from operating activities in fiscal 2016 compared to fiscal 2015 was primarily due to improved working capital, higher revenue levels and higher net income. Cash used in investing activities of $42.1 million during 2016, consisted primarily of $82.9 million net purchases of marketable securities and cash used to acquire $4.0 million of property, plant and equipment, partially offset by cash provided by maturities of marketable securities of $38.8 million and cash received from sales of marketable securities of $6.0 million. Cash provided by financing activities of $5.3 million during 2016 consisted primarily of $8.4 million in proceeds from issuance of common stock from the employee stock purchase program and the exercise of stock options, partially offset by cash paid for taxes on net issuance of stock awards of $1.8 million, $1.0 million of excess tax benefit from equity awards and royalty payments to Zygo of $0.3 million.
We have evaluated and will continue to evaluate the acquisitions of products, technologies or businesses that are complementary to our business. These activities may result in product and business investments, which may affect our cash position and working capital balances. Some of these activities might require significant cash outlays.
We earn a portion of our operating income outside the United States, which is deemed to be indefinitely reinvested in foreign jurisdictions. As a result, $29.2 million of our cash is held by foreign subsidiaries, a portion of which, would have to be repatriated to the United States. We believe our existing balances of cash, cash equivalents and marketable securities will be sufficient to satisfy our working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with our existing operations over the next twelve months.
Should we require more capital in the United States than is generated by our domestic operations, for example to fund significant discretionary activities such as business acquisitions and share repurchases, we could elect to repatriate future earnings from foreign jurisdictions or raise capital in the United States through debt or equity issuances. These alternatives could result in higher effective tax rates, increased interest expense, or dilution of our earnings.
Repurchases of Common Stock
On November 15, 2017 our Board of Directors authorized the repurchase of up to $50.0 million of our common stock. This plan is referred to as the Stock Repurchase Plan.
During the three months ended March 31, 2018, the Stock Repurchase Plan was completed, after we repurchased 896,187 shares at an average purchase price of $25.65 per share for a total of $23.0 million, for a total repurchase against the approved plan of $50.0 million. Accordingly, we did not repurchase any shares throughout the remainder of 2018.
Shares repurchased and retired in the fourth quarter of fiscal year 2017 and in the three months ended March 31, 2018 under the Stock Repurchase Plan, with the associated cost of repurchase and amount available for repurchase are as follows (in thousands, except number of shares and weighted average price per share):
|
| 2018 |
|
| 2017 |
| ||
Number of shares of common stock repurchased |
|
| 896,187 |
|
|
| 1,065,848 |
|
Weighted average price per share |
| $ | 25.65 |
|
| $ | 25.33 |
|
Total cost of repurchase |
| $ | 22,987 |
|
| $ | 26,999 |
|
Amount available for repurchase at end of period |
| $ | — |
|
| $ | 23,001 |
|
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements or obligations as of December 29, 2018 and December 30, 2017.
Contractual Obligations
The following table summarizes our contractual cash obligations as of December 29, 2018, and the effect of such obligations.
|
|
|
|
| Payments due by period |
| ||||||||||||||
|
| Total |
|
| Less than 1 year |
|
| 1-3 years |
|
| 4-5 years |
|
| More than 5 years |
| |||||
Purchase commitments - inventory (1) |
| $ | 42,807 |
|
| $ | 40,838 |
|
| $ | 1,969 |
|
| $ | — |
|
| $ | — |
|
Other long-term liabilities |
|
| 219 |
|
|
| 1 |
|
|
| 32 |
|
|
| 13 |
|
|
| 173 |
|
Operating lease obligations |
|
| 8,360 |
|
|
| 3,002 |
|
|
| 2,942 |
|
|
| 1,720 |
|
|
| 696 |
|
Total |
| $ | 51,386 |
|
| $ | 43,841 |
|
| $ | 4,943 |
|
| $ | 1,733 |
|
| $ | 869 |
|
|
|
Excluded from the contractual obligation table above are $4.6 million of future payments related to uncertain tax positions because we cannot reliably estimate the timing of the settlements with the respective tax authorities.
Foreign Currency Risk
A substantial partportion of our business consists of sales made to customers outside the United States: 91%, 87%,systems and 86% of sales in 2018, 2017, and 2016, respectively. 25%, 22%, and 18% of netsoftware revenues in 2018, 2017, and 2016, respectively, wereare denominated in currencies other than the U.S. dollar. Additionally, portions of our costs of net revenues and our operating expenses are incurred bydollars. However, our international operations and denominated in local currencies.
Our exposureare exposed to foreign currency exchange rate fluctuations arises in partarising from U.S. dollar denominated intercompany balances in which costs are charged between our U.S. headquarters and that of our foreign subsidiaries. On our consolidated balance sheet these intercompany balances are eliminated and thus no consolidated balances are associated with these intercompany balances; however, sinceowned entities. Since each foreign entity'sentity’s functional currency is generally denominated in its respective local currency, there is exposure to foreign exchange risk onwhen the foreign entity’s intercompany balance is remeasured at a consolidated basis. Intercompany balances are denominated primarilyreporting date, resulting in U.S. dollars and, to a lesser extent, other local currencies.transaction gains or losses. The net intercompany balance, exposed to foreign currency risk, at December 29, 2018as of January 1, 2022 was approximately $7.3$46.8 million. A hypothetical change of 10% in the relative value of the USU.S. dollar versus local functional currencies could result in an increase or decrease of approximately $730,000$0.5 million in transaction gains or losses which would be included in our statement of operations. The net intercompany balance, exposed to foreign currency risk, at December 30, 2017, was approximately $0.8 million. A hypothetical change of 10% in the relative value of the US dollar versus local functional currencies could result in an increase or decrease of approximately $75,000 in transaction gains or losses which would be included in our statement of operations. The increase in exposure to foreign currencies was mainly due to increased business in Japan and higher cross charges from Taiwan and Korea for services performed.
To manage the level of exposure to the risk of foreign currency exchange rate fluctuations, welosses / (gains).
We enter into foreign currency forward exchange contracts to protect againstminimize the short-term impact of exchange rate fluctuations on certain foreign currency exchange risks associated with existingdenominated monetary assets and liabilities. Aliabilities, primarily cash and intercompany receivables and payables. In addition, we hedge certain anticipated foreign currency forward exchange contract acts as a hedge by increasingcash flows, primarily on revenues denominated in value when underlying assets decrease in value or underlying liabilities increase in value due to changes in foreign exchange rates. Conversely, a foreign currency forward exchange contract decreases in value when underlying assets increase in value or underlying liabilities decrease in value due to changes in foreign exchange rates.Japanese yen. These forward contracts are not designated as accounting hedges, so the unrealized gains and losses are recognizedchange in other income, net, in advance of the actual foreign currency cash flows with the fair value of thesethe forward exchange contracts is recognized under the caption “Other income (expense), net” in the Consolidated Statements of Operations for each reporting period. As of January 1, 2022, and December 26, 2020, we had seven and eight outstanding forward contracts, being recorded as accrued liabilities or other current assets.
respectively, with a total notional contract value of $32.3 million and $37.6 million, respectively. We do not use forward contractsderivative financial instruments for trading or speculative purposes.
Item 8. | Financial Statements and Supplementary Data. |
The consolidated financial statements and related information required by this Item are set forth on the pages indicated in Item 15(a) of this Form 10-K.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
41
Item 9A. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in SEC rules and forms. These controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, we have recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is required to apply judgment in evaluating its controls and procedures.
We performed an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to assess the effectiveness of the design and operation of our disclosure controls and procedures under the Exchange Act as of January 1, 2022. Based on that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures were effective as of January 1, 2022 at the reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
Our forward contractsmanagement is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally have maturitiesaccepted in the United States of 30 days or less. We enter into foreign currency forward exchange contracts based on estimated future assetAmerica. Under the supervision and liability exposures,with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our hedging program dependsinternal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (“COSO”). Based on our abilityevaluation, our management concluded that our internal control over financial reporting was effective as of January 1, 2022.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to estimate these future assetperiods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may be circumvented or deteriorate.
Attestation Report of the Registered Public Accounting Firm
Our consolidated financial statements as of and liability exposures. Recognized gains and lossesfor the year ended January 1, 2022 have been audited by Ernst & Young LLP, our independent registered public accounting firm, in accordance with respectthe standards of the Public Company Accounting Oversight Board (United States). Ernst & Young LLP has also audited our internal control over financial reporting as of January 1, 2022, as stated in its attestation report included elsewhere in this Form 10-K.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our fiscal quarter ended January 1, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our current hedging activities will ultimately depend on how accurately weinternal controls over financial reporting due to the fact that most of our employees responsible for financial reporting are able to matchworking remotely during the amount of foreign currency forward exchange contracts with actual underlying assetCOVID-19 pandemic. We are continually monitoring and liability exposures. The notional amountassessing the impact of the hedgesCOVID-19 pandemic on our internal controls to minimize the impact to their design and operating effectiveness.
Item 9B. | Other Information. |
None.
Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspection. |
Not applicable.
42
PART III
Certain information required by Part III is omitted from this Form 10-K because we entered into was $47.7 million asexpect to file a definitive proxy statement within one hundred twenty (120) days after the end of December 29,2018our fiscal year pursuant to Regulation 14A (the “Proxy Statement”) for our Annual Meeting of Stockholders currently scheduled for May 10, 2022, and $44.3 million as of December 30, 2017. The amounts are set forththe information included in Note 4, of the Notes to the Consolidated Financial Statements, which informationProxy Statement is incorporated herein by reference.
On June 23, 2016, the U.K. held a referendum in which British citizens approved an exit from the European Union (EU), commonly referred to as “Brexit.” As a result of the referendum, there has been volatility in exchange rates versus the U.S. dollar which may continue as the U.K. negotiates its exit from the EU. The British pound is the functional currency for an insignificant percentage of our sales. In addition, for any contracts that are not denominated in the same currency as the functional currency (for example, contracts denominated in British pounds where the functional currency is the U.S. dollar), we enter into foreign currency forward contracts to hedge our risk related to foreign currency exchange rate fluctuations. As a result, we currently do not expect the U.K.’s exit from the EU to have a material impact on our financial position, results of operations or liquidity.
For 2018, 2017 and 2016, foreign currency transactions resulted in losses of $1.1 million, $0.6 million, and $0.4 million, respectively.
We actively monitor our foreign currency risks, but there is no guarantee that our foreign currency hedging activities will substantially offset the impact of fluctuations in currency exchange rates on our results of operations, cash flows and financial position. See “Note 4, Fair Value Measurement and Disclosures” in the Notes to Consolidated Financial Statements for more information regarding our derivatives and hedging activities.
Interest Rate Risk
Our exposure to market risk resulting from changes in interest rates relates primarily to our investment portfolio. At December 29, 2018, and December 30, 2017, we held $40.8 million and $82.1 million, respectively, in marketable securities. The fair value of our marketable securities could be adversely impacted due to a rise in interest rates. A hypothetical immediate and consistent increase
in interest rates by 100 basis points from levels as of December 29, 2018, the fair value of our marketable securities would have declined by $0.2 million. Securities with longer maturities are subject to a greater interest rate risk than those with shorter maturities and as of December 29, 2018 and December 30, 2017, the average duration of our portfolio was less than nine months. We do not hold securities for trading purposes.
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|
The information required by this Item 8with respect to directors and executive officers is included under the headings “Proposal One: Election of Form 10-K is presented hereDirectors,” “Named Executive Officers (NEOs)” and “Corporate Governance Principles and Practices” in the following order:Proxy Statement, which is incorporated herein by reference. Information regarding compliance with Section 16 of the Exchange Act is incorporated by reference to the information under the heading “Delinquent Section 16(a) Reports” in the Proxy Statement.
Code of Business Conduct and Ethics. We have adopted a code of business conduct and ethics that applies to our principal executive officer, principal financial officer and controller. This code of business conduct and ethics is posted on our internet website address at http://investors.ontoinnovation.com. We will post on our website any amendment to or waiver from a provision of our code of business conduct and ethics as may be required, and within the time period specified, by applicable SEC rules.
Item 11. | Executive Compensation. |
The information required by this Item is included under the headings “Executive Officer Compensation,” “Compensation of Directors,” “Compensation Committee Report on Executive Officer Compensation,” “Stock Ownership/Retention Guidelines for Directors” and “Compensation Committee Interlocks and Insider Participation” in the Proxy Statement, which is incorporated herein by reference.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information required by this Item is included under the headings “Security Ownership of Certain Beneficial Owners” and “Equity Compensation Plan Information” in the Proxy Statement, which is incorporated herein by reference.
Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
The information required by this Item is included under the headings “Related Persons Transactions Policy” and “Board Independence” in the Proxy Statement, which is incorporated herein by reference.
Item 14. | Principal Accountant Fees and Services. |
The information required by this Item is included under the heading “Proposal 3: Ratification of Appointment of Independent Registered Public Accounting Firm” in the Proxy Statement, which is incorporated herein by reference.
43
PART IV
Item 15. | Exhibits and Financial Statement Schedule. |
(a) | The following documents are filed as part of this Form 10-K: |
1. | Financial Statements |
The consolidated financial statements and consolidated financial statement information required by this Item are included on pages F-1 through F-10 of this report. The Reports of Independent Registered Public Accounting Firm appear on pages F-2 through F-4 of this report.
2. | Financial Statement Schedule |
See Index to financial statements on page F-1 of this report.
3. | Exhibits |
Exhibits are as set forth in the “Exhibit Index”, provided below. Where so indicated, exhibits, which were previously filed, are incorporated by reference.
Exhibit No. | Exhibit Description | Form | File Number | Date of First Filing | Exhibit No./Appendix Reference |
Amended and Restated Certificate of Incorporation of Onto Innovation Inc. | |||||
Nanometrics Incorporated Amended and Restated 2005 Equity Incentive Plan | |||||
44
Exhibit No. | Exhibit Description | Form | File Number | Date of First Filing | Exhibit No./Appendix Reference |
Form of Employee Stock Option Agreement for usage under the Onto Innovation Inc. 2020 Stock Plan | |||||
Form of Director Stock Option Agreement for usage under the Onto Innovation Inc. 2020 Stock Plan | |||||
45
Exhibit No. | Exhibit Description | Form | File Number | Date of First Filing | Exhibit No./Appendix Reference |
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. | |||||
101.INS | Inline XBRL Instance Document |
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| |
101.SCH | Inline XBRL Taxonomy Extension Schema Document |
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101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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| |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 | Cover Page Interactive Data File (formatted in inline XBRL and contained in Exhibit 101) |
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* | Management contract, compensatory plan or arrangement. |
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+ | Filed herewith. |
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46
ONTO INNOVATION INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
| Page |
Consolidated Financial Statements: |
|
|
|
| |
| |
| |
Consolidated Balance Sheets as of January 1, 2022 and December 26, 2020 | F-7 |
F-8 | |
| |
Notes to the Consolidated Financial Statements |
|
| |
|
|
|
|
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors and Stockholders of Nanometrics IncorporatedOnto Innovation Inc.
OpinionsOpinion on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Nanometrics Incorporated and its subsidiariesOnto Innovation Inc. (the “Company”)Company) as of December 29, 2018January 1, 2022 and December 30, 2017, and26, 2020, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 29, 2018, includingJanuary 1, 2022, and the related notes and financial statement schedule of valuation and qualifying accounts for each of the three yearslisted in the period ended December 29, 2018 appearing underIndex at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 29, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 29, 2018at January 1, 2022 and December 30, 2017,26, 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2018January 1, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 1, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 25, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles generally acceptedused and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in the United States of America. Also inany way our opinion on the consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosureto which it relates.
Excess Inventory Reserve
Description of the Matter | As described in Notes 1 and 8 to the consolidated financial statements, the Company records inventory net of a reserve for excess and obsolete inventory resulting in net inventories of $243.1 million as of January 1, 2022. The valuation of certain of the Company's inventory is subject to risks associated with supply and demand. As described in Note 2 to the consolidated financial statements, the Company maintains reserves for excess and obsolete inventory equal to the difference between the cost of inventory and its estimated net realizable value based upon assumptions about historical and future demand for the Company’s products and market conditions Auditing management’s estimate of the excess and obsolete inventory reserve was subjective and required significant judgment as the excess and obsolete inventory reserve is sensitive to changes in the Company’s operations and assumptions used to estimate the reserve including management’s assumptions with regards to product life-cycles, product demand and market conditions, which includes historical usage, expected future usage, on-hand quantities of individual materials, and anticipated engineering design changes or advancements. |
F-2
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s excess and obsolete inventory reserve process, including those over the validity and reasonableness of the data and assumptions used in estimating the excess and obsolete inventory reserve. To test the adequacy of the Company’s excess and obsolete inventory reserve, we performed audit procedures that included, among others, assessing methodologies and assumptions used, testing the completeness and accuracy of the underlying data used by management in its analysis including the usage of historical materials, considering potential product obsolescence, observing physical inventory on-hand and inspecting historical gross margins to assess whether any items are being sold at a loss or lower margins that may need to be included in the reserve. We assessed the historical accuracy of management’s estimated excess and obsolete inventory reserve and performed sensitivity analyses to evaluate changes in the estimate that result from changes in the Company’s significant assumptions. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2008.
Iselin, New Jersey
February 25, 2022
F-3
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Onto Innovation Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Onto Innovation Inc.’s internal control over financial reporting as of January 1, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Onto Innovation Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 29, 2018,January 1, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.COSO criteria.
ChangeWe also have audited, in accordance with the standards of the Public Company Accounting Principle
As discussed in Note 2 toOversight Board (United States) (PCAOB), the consolidated financial statements,balance sheets of the Company changedas of January 1, 2022 and December 26, 2020, the mannerrelated consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in which it accounts for revenues from contracts with customersthe period ended January 1, 2022, and the related notes and financial statement schedule listed in 2018.the Index at Item 15(a) and our report dated February 25, 2022 expressed an unqualified opinion thereon.
Basis for OpinionsOpinion
The Company'sCompany’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report of Management on Internal Control overOver Financial Reporting appearing under Item 9A.. Our responsibility is to express opinionsan opinion on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits.audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also includedrisk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provideaudit provides a reasonable basis for our opinions.opinion.
As described in the Report of Management on Internal Control over Financial Reporting, management has excluded 4D Technology, Inc. (“4D”) from its assessment of internal control over financial reporting as of December 29, 2018, because it was acquired by the Company in a purchase business combination during 2018. We have also excluded 4D from our audit of internal control over financial reporting. 4D is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 3% and less than 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 29, 2018.
Definition and Limitations of Internal Control overOver Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i)(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii)(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii)(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers Ernst & Young LLP
San Jose, California
Iselin, New Jersey
February 25, 20192022
We have served as the Company’s auditor since 2010.
F-4
NANOMETRICS INCORPORATEDONTO INNOVATION INC.
(In thousands except share and per share amounts)
|
| As of |
| |||||
|
| December 29, 2018 |
|
| December 30, 2017 |
| ||
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 110,951 |
|
| $ | 34,899 |
|
Marketable securities |
|
| 40,841 |
|
|
| 82,130 |
|
Accounts receivable, net of allowances of $170 and $126, respectively |
|
| 50,854 |
|
|
| 62,457 |
|
Inventories |
|
| 61,915 |
|
|
| 52,860 |
|
Inventories-delivered systems |
|
| 180 |
|
|
| 1,534 |
|
Prepaid expenses and other |
|
| 6,140 |
|
|
| 6,234 |
|
Total current assets |
|
| 270,881 |
|
|
| 240,114 |
|
Property, plant and equipment, net |
|
| 47,900 |
|
|
| 44,810 |
|
Goodwill |
|
| 26,372 |
|
|
| 10,232 |
|
Intangible assets, net |
|
| 27,326 |
|
|
| 2,206 |
|
Deferred income tax assets |
|
| 2,569 |
|
|
| 11,924 |
|
Other assets |
|
| 582 |
|
|
| 413 |
|
Total assets |
| $ | 375,630 |
|
| $ | 309,699 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 16,540 |
|
| $ | 13,857 |
|
Accrued payroll and related expenses |
|
| 21,658 |
|
|
| 12,901 |
|
Deferred revenue |
|
| 8,990 |
|
|
| 7,408 |
|
Other current liabilities |
|
| 9,421 |
|
|
| 7,249 |
|
Income taxes payable |
|
| 3,164 |
|
|
| 2,680 |
|
Total current liabilities |
|
| 59,773 |
|
|
| 44,095 |
|
Deferred revenue |
|
| 1,753 |
|
|
| 1,661 |
|
Income taxes payable |
|
| 871 |
|
|
| 860 |
|
Deferred tax liability |
|
| 162 |
|
|
| 179 |
|
Other long-term liabilities |
|
| 219 |
|
|
| 521 |
|
Total liabilities |
|
| 62,778 |
|
|
| 47,316 |
|
Commitments and contingencies (Note 10) |
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 3,000,000 shares authorized; no shares issued or outstanding |
|
| — |
|
|
| — |
|
Common stock, $0.001 par value, 47,000,000 shares authorized: 24,372,193 and 24,628,722, respectively, issued and outstanding |
|
| 24 |
|
|
| 26 |
|
Additional paid-in capital |
|
| 247,983 |
|
|
| 255,368 |
|
Retained Earnings |
|
| 67,402 |
|
|
| 9,113 |
|
Accumulated other comprehensive income |
|
| (2,557 | ) |
|
| (2,124 | ) |
Total stockholders’ equity |
|
| 312,852 |
|
|
| 262,383 |
|
Total liabilities and stockholders’ equity |
| $ | 375,630 |
|
| $ | 309,699 |
|
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)data)
|
| Fiscal Years Ended |
| |||||||||
|
| December 29, 2018 |
|
| December 30, 2017 |
|
| December 31, 2016 |
| |||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
| $ | 275,286 |
|
| $ | 214,877 |
|
| $ | 185,066 |
|
Service |
|
| 49,237 |
|
|
| 43,744 |
|
|
| 36,063 |
|
Total net revenues |
|
| 324,523 |
|
|
| 258,621 |
|
|
| 221,129 |
|
Costs of net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products |
|
| 112,834 |
|
|
| 100,910 |
|
|
| 85,391 |
|
Cost of service |
|
| 27,311 |
|
|
| 20,804 |
|
|
| 20,160 |
|
Amortization of intangible assets |
|
| 284 |
|
|
| 206 |
|
|
| 1,454 |
|
Total costs of net revenues |
|
| 140,429 |
|
|
| 121,920 |
|
|
| 107,005 |
|
Gross profit |
|
| 184,094 |
|
|
| 136,701 |
|
|
| 114,124 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
| 48,188 |
|
|
| 36,716 |
|
|
| 31,443 |
|
Selling |
|
| 37,528 |
|
|
| 30,839 |
|
|
| 30,181 |
|
General and administrative |
|
| 31,795 |
|
|
| 26,340 |
|
|
| 23,381 |
|
Amortization of intangible assets |
|
| 96 |
|
|
| — |
|
|
| 24 |
|
Total operating expenses |
|
| 117,607 |
|
|
| 93,895 |
|
|
| 85,029 |
|
Income from operations |
|
| 66,487 |
|
|
| 42,806 |
|
|
| 29,095 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
| 10 |
|
|
| 8 |
|
|
| 35 |
|
Interest expense |
|
| (331 | ) |
|
| (92 | ) |
|
| (285 | ) |
Other income, net |
|
| 1,358 |
|
|
| 576 |
|
|
| 290 |
|
Total other income, net |
|
| 1,037 |
|
|
| 492 |
|
|
| 40 |
|
Income before income taxes |
|
| 67,524 |
|
|
| 43,298 |
|
|
| 29,135 |
|
Provision for (benefit from) income taxes |
|
| 9,876 |
|
|
| 13,096 |
|
|
| (14,900 | ) |
Net income |
| $ | 57,648 |
|
| $ | 30,202 |
|
| $ | 44,035 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 2.39 |
|
| $ | 1.19 |
|
| $ | 1.79 |
|
Diluted |
| $ | 2.34 |
|
| $ | 1.17 |
|
| $ | 1.75 |
|
Weighted average shares used in per share calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 24,120 |
|
|
| 25,334 |
|
|
| 24,655 |
|
Diluted |
|
| 24,600 |
|
|
| 25,919 |
|
|
| 25,153 |
|
|
| Year Ended |
| |||||||||
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| |||
Revenue |
| $ | 788,899 |
|
| $ | 556,496 |
|
| $ | 305,896 |
|
Cost of revenue |
|
| 359,813 |
|
|
| 278,043 |
|
|
| 170,868 |
|
Gross profit |
|
| 429,086 |
|
|
| 278,453 |
|
|
| 135,028 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
| 96,118 |
|
|
| 84,584 |
|
|
| 48,358 |
|
Sales and marketing |
|
| 57,235 |
|
|
| 48,136 |
|
|
| 28,251 |
|
General and administrative |
|
| 67,960 |
|
|
| 65,310 |
|
|
| 53,017 |
|
Amortization |
|
| 51,366 |
|
|
| 53,746 |
|
|
| 10,445 |
|
Total operating expenses |
|
| 272,679 |
|
|
| 251,776 |
|
|
| 140,071 |
|
Operating income (loss) |
|
| 156,407 |
|
|
| 26,677 |
|
|
| (5,043 | ) |
Interest income, net |
|
| 1,163 |
|
|
| 2,899 |
|
|
| 3,666 |
|
Other income (expense), net |
|
| (1,888 | ) |
|
| (2,708 | ) |
|
| 780 |
|
Income (loss) before provision (benefit) for income taxes |
|
| 155,682 |
|
|
| 26,868 |
|
|
| (597 | ) |
Provision (benefit) for income taxes |
|
| 13,333 |
|
|
| (4,157 | ) |
|
| (2,507 | ) |
Net income |
| $ | 142,349 |
|
| $ | 31,025 |
|
| $ | 1,910 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 2.89 |
|
| $ | 0.63 |
|
| $ | 0.06 |
|
Diluted |
| $ | 2.86 |
|
| $ | 0.63 |
|
| $ | 0.06 |
|
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 49,242 |
|
|
| 49,136 |
|
|
| 29,729 |
|
Diluted |
|
| 49,728 |
|
|
| 49,475 |
|
|
| 30,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial StatementsThe accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of ContentsNANOMETRICS INCORPORATED
ONTO INNOVATION INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
| Fiscal Year Ended |
| |||||||||
|
| December 29, 2018 |
|
| December 30, 2017 |
|
| December 31, 2016 |
| |||
Net income (loss) |
| $ | 57,648 |
|
| $ | 30,202 |
|
| $ | 44,035 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Change in foreign currency translation adjustment |
|
| (482 | ) |
|
| 4,170 |
|
|
| (869 | ) |
Employee benefit plan adjustment |
|
| (259 | ) |
|
| (160 | ) |
|
| (17 | ) |
Net change on unrealized gains (losses) on available-for-sale investments |
|
| 308 |
|
|
| (88 | ) |
|
| 42 |
|
Other comprehensive income (loss): |
|
| (433 | ) |
|
| 3,922 |
|
|
| (844 | ) |
Comprehensive income (loss) |
| $ | 57,215 |
|
| $ | 34,124 |
|
| $ | 43,191 |
|
|
| Year Ended |
| |||||||||
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| |||
Net income |
| $ | 142,349 |
|
| $ | 31,025 |
|
| $ | 1,910 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on available-for-sale marketable securities |
|
| (537 | ) |
|
| 123 |
|
|
| (44 | ) |
Change in currency translation adjustments |
|
| (2,715 | ) |
|
| 5,043 |
|
|
| 709 |
|
Total other comprehensive income (loss), net of tax |
|
| (3,252 | ) |
|
| 5,166 |
|
|
| 665 |
|
Total comprehensive income |
| $ | 139,097 |
|
| $ | 36,191 |
|
| $ | 2,575 |
|
See Notes to Consolidated Financial StatementsThe accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of ContentsNANOMETRICS INCORPORATED
ONTO INNOVATION INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYBALANCE SHEETS
(In thousands, except per share amounts)data)
|
| Common Stock |
|
| Additional Paid-In |
|
| Retained Earnings / (Accumulated |
|
| Accumulated Other Comprehensive |
|
| Total Stockholders’ |
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit) |
|
| Income |
|
| Equity |
| ||||||
Balance as of December 26, 2015 |
|
| 24,224,286 |
|
| $ | 24 |
|
| $ | 258,715 |
|
| $ | (66,209 | ) |
| $ | (5,202 | ) |
| $ | 187,328 |
|
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 44,035 |
|
|
|
|
|
|
| 44,035 |
|
Employee benefit plan adjustment |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (17 | ) |
|
| (17 | ) |
Foreign currency translation adjustments |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (869 | ) |
|
| (869 | ) |
Unrealized gain on investments, net of tax |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 42 |
|
|
| 42 |
|
Issuance of common stock under stock-based compensation plans |
|
| 846,603 |
|
|
| 1 |
|
|
| 6,624 |
|
|
| - |
|
|
| - |
|
|
| 6,625 |
|
Stock-based compensation expense |
|
| - |
|
|
| - |
|
|
| 7,666 |
|
|
| - |
|
|
| - |
|
|
| 7,666 |
|
Excess tax benefit related to stock options |
|
| - |
|
|
| - |
|
|
| (1,036 | ) |
|
| - |
|
|
| - |
|
|
| (1,036 | ) |
Balance as of December 31, 2016 |
|
| 25,070,889 |
|
|
| 25 |
|
|
| 271,969 |
|
|
| (22,174 | ) |
|
| (6,046 | ) |
|
| 243,774 |
|
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 30,202 |
|
|
| - |
|
|
| 30,202 |
|
Adjustment due to adoption of ASU 2016-09 Improvements to Employee Share-Based Payment Accounting |
|
| - |
|
|
| - |
|
|
| 139 |
|
|
| 1,085 |
|
|
| - |
|
|
| 1,224 |
|
Employee benefit plan adjustment |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (160 | ) |
|
| (160 | ) |
Foreign currency translation adjustments |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4,170 |
|
|
| 4,170 |
|
Unrealized gain/(loss) on investments, net of tax |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (88 | ) |
|
| (88 | ) |
Issuance of common stock under stock-based compensation plans |
|
| 623,681 |
|
|
| 1 |
|
|
| 1,440 |
|
|
| - |
|
|
| - |
|
|
| 1,441 |
|
Stock-based compensation expense |
|
| - |
|
|
| - |
|
|
| 8,819 |
|
|
| - |
|
|
| - |
|
|
| 8,819 |
|
Repurchases and retirement of common stock under share repurchase plans |
|
| (1,065,848 | ) |
|
| - |
|
|
| (26,999 | ) |
|
| - |
|
|
| - |
|
|
| (26,999 | ) |
Balance as of December 30, 2017 |
|
| 24,628,722 |
|
|
| 26 |
|
|
| 255,368 |
|
|
| 9,113 |
|
|
| (2,124 | ) |
|
| 262,383 |
|
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 57,648 |
|
|
| - |
|
|
| 57,648 |
|
Adjustment due to adoption of ASU 2014-09 Revenue from Contracts with Customers, net of tax |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 725 |
|
|
| - |
|
|
| 725 |
|
Employee benefit plan adjustment |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (259 | ) |
|
| (259 | ) |
Foreign currency translation adjustments |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (482 | ) |
|
| (482 | ) |
Unrealized gain/(loss) on investments, net of tax |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 308 |
|
|
| 308 |
|
Restructuring of foreign subsidiaries |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (84 | ) |
|
| - |
|
|
| (84 | ) |
Issuance of common stock under stock-based compensation plans |
|
| 514,541 |
|
|
| - |
|
|
| 218 |
|
|
| - |
|
|
| - |
|
|
| 218 |
|
Stock-based compensation expense |
|
| - |
|
|
| - |
|
|
| 11,382 |
|
|
| - |
|
|
| - |
|
|
| 11,382 |
|
Stock issued to acquire 4D Technology |
|
| 125,117 |
|
|
| - |
|
|
| 4,000 |
|
|
| - |
|
|
| - |
|
|
| 4,000 |
|
Repurchases and retirement of common stock under share repurchase plans |
|
| (896,187 | ) |
|
| (2 | ) |
|
| (22,985 | ) |
|
| - |
|
|
| - |
|
|
| (22,987 | ) |
Balance as of December 29, 2018 |
|
| 24,372,193 |
|
| $ | 24 |
|
| $ | 247,983 |
|
| $ | 67,402 |
|
| $ | (2,557 | ) |
| $ | 312,852 |
|
|
| January 1, 2022 |
|
| December 26, 2020 |
| ||
ASSETS |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 169,602 |
|
| $ | 136,720 |
|
Marketable securities |
|
| 341,741 |
|
|
| 237,002 |
|
Accounts receivable, less allowance of $1,303 at January 1, 2022 and $784 at December 26, 2020 |
|
| 177,205 |
|
|
| 149,251 |
|
Inventories |
|
| 243,108 |
|
|
| 191,217 |
|
Prepaid expenses and other current assets |
|
| 16,433 |
|
|
| 17,471 |
|
Total current assets |
|
| 948,089 |
|
|
| 731,661 |
|
Property, plant and equipment, net |
|
| 82,094 |
|
|
| 87,950 |
|
Goodwill |
|
| 315,811 |
|
|
| 306,632 |
|
Identifiable intangible assets, net |
|
| 277,281 |
|
|
| 318,357 |
|
Deferred income taxes |
|
| 4,822 |
|
|
| 2,235 |
|
Other assets |
|
| 21,716 |
|
|
| 21,337 |
|
Total assets |
| $ | 1,649,813 |
|
| $ | 1,468,172 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 53,345 |
|
| $ | 40,183 |
|
Accrued liabilities |
|
| 43,042 |
|
|
| 37,075 |
|
Deferred revenue |
|
| 29,979 |
|
|
| 14,334 |
|
Other current liabilities |
|
| 28,160 |
|
|
| 28,499 |
|
Total current liabilities |
|
| 154,526 |
|
|
| 120,091 |
|
Deferred and other tax liabilities |
|
| 40,281 |
|
|
| 55,623 |
|
Other non-current liabilities |
|
| 28,951 |
|
|
| 27,712 |
|
Total liabilities |
|
| 223,758 |
|
|
| 203,426 |
|
Commitments and contingencies (Note 9) |
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 3,000 shares authorized, 0 shares issued and outstanding |
|
| — |
|
|
| — |
|
Common stock, $0.001 par value, 97,000 shares authorized, 49,300 and 48,758 issued and outstanding at January 1, 2022 and December 26, 2020, respectively. |
|
| 49 |
|
|
| 49 |
|
Additional paid-in capital |
|
| 1,256,179 |
|
|
| 1,233,967 |
|
Accumulated other comprehensive income |
|
| 1,316 |
|
|
| 4,568 |
|
Accumulated earnings |
|
| 168,511 |
|
|
| 26,162 |
|
Total stockholders’ equity |
|
| 1,426,055 |
|
|
| 1,264,746 |
|
Total liabilities and stockholders’ equity |
| $ | 1,649,813 |
|
| $ | 1,468,172 |
|
See Notes to Consolidated Financial StatementsThe accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of ContentsNANOMETRICS INCORPORATED
ONTO INNOVATION INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| Fiscal Years Ended |
| |||||||||
|
| December 29, 2018 |
|
| December 30, 2017 |
|
| December 31, 2016 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 57,648 |
|
| $ | 30,202 |
|
| $ | 44,035 |
|
Reconciliation of net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 6,846 |
|
|
| 6,920 |
|
|
| 8,295 |
|
Stock-based compensation |
|
| 11,382 |
|
|
| 8,819 |
|
|
| 7,666 |
|
Excess tax benefit from equity awards |
|
| 1 |
|
|
| — |
|
|
| 1,036 |
|
(Gain) loss on disposal of fixed assets |
|
| (759 | ) |
|
| 631 |
|
|
| 478 |
|
Inventory write-down |
|
| 3,012 |
|
|
| 2,020 |
|
|
| 2,110 |
|
Deferred income taxes |
|
| 3,732 |
|
|
| 6,858 |
|
|
| (16,783 | ) |
Changes in fair value of contingent payments to Zygo Corporation |
|
| — |
|
|
| — |
|
|
| (1,175 | ) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 15,156 |
|
|
| (19,523 | ) |
|
| (2,707 | ) |
Inventories |
|
| (8,962 | ) |
|
| (18,037 | ) |
|
| 4,526 |
|
Inventories-delivered systems |
|
| 1,354 |
|
|
| 923 |
|
|
| 399 |
|
Prepaid expenses and other |
|
| (407 | ) |
|
| (230 | ) |
|
| 905 |
|
Accounts payable, accrued and other liabilities |
|
| 11,438 |
|
|
| 1,049 |
|
|
| 2,462 |
|
Deferred revenue |
|
| 2,399 |
|
|
| (915 | ) |
|
| (3,634 | ) |
Income taxes payable |
|
| 496 |
|
|
| 1,886 |
|
|
| (1,928 | ) |
Net cash provided by operating activities |
|
| 103,336 |
|
|
| 20,603 |
|
|
| 45,685 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payment for acquisition of certain assets |
|
| (2,000 | ) |
|
| (2,000 | ) |
|
| — |
|
Payments to acquire 4D Technology, net of cash acquired |
|
| (37,163 | ) |
|
| — |
|
|
| — |
|
Sales of marketable securities |
|
| 56,279 |
|
|
| 53,030 |
|
|
| 5,955 |
|
Maturities of marketable securities |
|
| 38,700 |
|
|
| 77,250 |
|
|
| 38,775 |
|
Purchases of marketable securities |
|
| (53,523 | ) |
|
| (129,766 | ) |
|
| (82,864 | ) |
Purchases of property, plant and equipment |
|
| (7,486 | ) |
|
| (5,204 | ) |
|
| (3,999 | ) |
Proceeds from sale of property, plant and equipment |
|
| 942 |
|
|
| — |
|
|
| — |
|
Net cash used in investing activities |
|
| (4,251 | ) |
|
| (6,690 | ) |
|
| (42,133 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments to Zygo Corporation related to acquisition |
|
| — |
|
|
| — |
|
|
| (315 | ) |
Proceeds from sale of shares under employee stock option plans and purchase plan |
|
| 3,826 |
|
|
| 5,576 |
|
|
| 8,447 |
|
Excess tax benefit from equity awards |
|
| — |
|
|
| — |
|
|
| (1,036 | ) |
Taxes paid on net issuance of stock awards |
|
| (3,609 | ) |
|
| (4,135 | ) |
|
| (1,822 | ) |
Repurchases of common stock under share repurchase plans |
|
| (22,987 | ) |
|
| (26,999 | ) |
|
| — |
|
Net cash provided by (used in) financing activities |
|
| (22,770 | ) |
|
| (25,558 | ) |
|
| 5,274 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
| (263 | ) |
|
| (518 | ) |
|
| 82 |
|
Net increase (decrease) in cash and cash equivalents |
|
| 76,052 |
|
|
| (12,163 | ) |
|
| 8,908 |
|
Cash and cash equivalents, beginning of period |
|
| 34,899 |
|
|
| 47,062 |
|
|
| 38,154 |
|
Cash and cash equivalents, end of period |
| $ | 110,951 |
|
| $ | 34,899 |
|
| $ | 47,062 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes, net |
| $ | 5,561 |
|
| $ | 3,040 |
|
| $ | 3,767 |
|
Supplemental disclosure of non-cash investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Transfers between inventory and property, plant and equipment, net |
| $ | 1,147 |
|
| $ | 2,451 |
|
| $ | 2,345 |
|
Unpaid property, plant and equipment at year end |
| $ | 531 |
|
| $ | 957 |
|
| $ | 683 |
|
|
| Year Ended |
| |||||||||
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 142,350 |
|
| $ | 31,025 |
|
| $ | 1,910 |
|
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
| 14,435 |
|
|
| 13,832 |
|
|
| 5,965 |
|
Amortization of intangibles |
|
| 51,366 |
|
|
| 53,746 |
|
|
| 10,445 |
|
Share-based compensation |
|
| 19,542 |
|
|
| 17,662 |
|
|
| 10,585 |
|
Acquired inventory step-up amortization |
|
| 393 |
|
|
| 10,678 |
|
|
| 15,370 |
|
Provision for inventory valuation |
|
| 8,175 |
|
|
| 14,703 |
|
|
| 10,841 |
|
Deferred income taxes |
|
| (12,618 | ) |
|
| (11,631 | ) |
|
| (4,116 | ) |
Other, net |
|
| 2,267 |
|
|
| 4,711 |
|
|
| 2,459 |
|
Change in operating assets and liabilities net of assets acquired and liabilities assumed in merger and acquisition: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (27,829 | ) |
|
| (25,816 | ) |
|
| (9,721 | ) |
Income taxes |
|
| 1,307 |
|
|
| (1,196 | ) |
|
| 7,648 |
|
Inventories |
|
| (57,175 | ) |
|
| (42,409 | ) |
|
| (9,338 | ) |
Prepaid expenses and other assets |
|
| (768 | ) |
|
| 11,409 |
|
|
| (5,079 | ) |
Accounts payable |
|
| 12,142 |
|
|
| 11,403 |
|
|
| (12,138 | ) |
Accrued and other liabilities |
|
| 21,694 |
|
|
| 17,867 |
|
|
| (6,685 | ) |
Net cash and cash equivalents provided by operating activities |
|
| 175,281 |
|
|
| 105,984 |
|
|
| 18,146 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities |
|
| (361,022 | ) |
|
| (313,027 | ) |
|
| (127,462 | ) |
Proceeds from maturities and sales of marketable securities |
|
| 255,063 |
|
|
| 265,409 |
|
|
| 94,486 |
|
Purchases of property, plant and equipment |
|
| (12,039 | ) |
|
| (3,829 | ) |
|
| (6,802 | ) |
Purchase of business, net of cash acquired |
|
| (23,795 | ) |
|
| — |
|
|
| — |
|
Cash acquired from merger |
|
| — |
|
|
| — |
|
|
| 43,882 |
|
Cash received from convertible note receivable |
|
| — |
|
|
| 2,848 |
|
|
| — |
|
Net cash and cash equivalents provided by (used in) investing activities |
|
| (141,793 | ) |
|
| (48,599 | ) |
|
| 4,104 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of common stock |
|
| — |
|
|
| (52,000 | ) |
|
| (744 | ) |
Tax payments related to shares withheld for share-based compensation plans |
|
| (7,403 | ) |
|
| (4,052 | ) |
|
| (2,540 | ) |
Payment of contingent consideration for acquired business |
|
| — |
|
|
| (569 | ) |
|
| (1,758 | ) |
Issuance of shares through share-based compensation plans |
|
| 10,073 |
|
|
| 2,919 |
|
|
| 844 |
|
Net cash and cash equivalents provided by (used in) financing activities |
|
| 2,670 |
|
|
| (53,702 | ) |
|
| (4,198 | ) |
Effect of exchange rate changes on cash and cash equivalents |
|
| (3,276 | ) |
|
| 2,364 |
|
|
| 233 |
|
Net increase in cash and cash equivalents |
|
| 32,882 |
|
|
| 6,047 |
|
|
| 18,285 |
|
Cash and cash equivalents at beginning of year |
|
| 136,720 |
|
|
| 130,673 |
|
|
| 112,388 |
|
Cash and cash equivalents at end of year |
| $ | 169,602 |
|
| $ | 136,720 |
|
| $ | 130,673 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid (received), net |
| $ | 23,766 |
|
| $ | 6,415 |
|
| $ | (3,848 | ) |
See Notes to Consolidated Financial StatementsThe accompanying notes are an integral part of these consolidated financial statements.
F-8
Table of ContentsNANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. NatureONTO INNOVATION INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the years ended January 1, 2022,
December 26, 2020 and December 31, 2019
(In thousands)
|
| Common Stock |
|
| Additional Paid-in |
|
| Accumulated Other Comprehensive |
|
| Accumulated Earnings / |
|
|
|
|
| ||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Income / (Loss) |
|
| (Deficit) |
|
| Total |
| ||||||
Balance at December 31, 2018 |
|
| 24,855 |
|
| $ | 31 |
|
| $ | 369,893 |
|
| $ | (1,263 | ) |
| $ | (6,773 | ) |
| $ | 361,888 |
|
Effect of merger |
|
| 25,060 |
|
|
| 19 |
|
|
| 890,112 |
|
|
| — |
|
|
| — |
|
|
| 890,131 |
|
Issuance of shares through share-based compensation plans, net |
|
| 377 |
|
|
| — |
|
|
| 2,131 |
|
|
| — |
|
|
| — |
|
|
| 2,131 |
|
Repurchase of common stock |
|
| (30 | ) |
|
| — |
|
|
| (744 | ) |
|
| — |
|
|
| — |
|
|
| (744 | ) |
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,910 |
|
|
| 1,910 |
|
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 10,585 |
|
|
| — |
|
|
| — |
|
|
| 10,585 |
|
Share-based compensation plan withholdings |
|
| (78 | ) |
|
| — |
|
|
| (2,540 | ) |
|
| — |
|
|
| — |
|
|
| (2,540 | ) |
Currency translation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 709 |
|
|
| — |
|
|
| 709 |
|
Unrealized loss on investments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (44 | ) |
|
| — |
|
|
| (44 | ) |
Balance at December 31, 2019 |
|
| 50,184 |
|
|
| 50 |
|
|
| 1,269,437 |
|
|
| (598 | ) |
|
| (4,863 | ) |
|
| 1,264,026 |
|
Issuance of shares through share-based compensation plans, net |
|
| 668 |
|
|
| 1 |
|
|
| 2,918 |
|
|
| — |
|
|
| — |
|
|
| 2,919 |
|
Repurchase of common stock |
|
| (1,882 | ) |
|
| (2 | ) |
|
| (51,998 | ) |
|
| — |
|
|
| — |
|
|
| (52,000 | ) |
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 31,025 |
|
|
| 31,025 |
|
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 17,662 |
|
|
| — |
|
|
| — |
|
|
| 17,662 |
|
Share-based compensation plan withholdings |
|
| (118 | ) |
|
| — |
|
|
| (4,052 | ) |
|
| — |
|
|
| — |
|
|
| (4,052 | ) |
Other |
|
| (94 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Currency translation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,043 |
|
|
| — |
|
|
| 5,043 |
|
Unrealized gain on investments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 123 |
|
|
| — |
|
|
| 123 |
|
Balance at December 26, 2020 |
|
| 48,758 |
|
|
| 49 |
|
|
| 1,233,967 |
|
|
| 4,568 |
|
|
| 26,162 |
|
|
| 1,264,746 |
|
Issuance of shares through share-based compensation plans, net |
|
| 650 |
|
|
| — |
|
|
| 10,072 |
|
|
| — |
|
|
| — |
|
|
| 10,072 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 142,349 |
|
|
| 142,349 |
|
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 19,542 |
|
|
| — |
|
|
| — |
|
|
| 19,542 |
|
Share-based compensation plan withholdings |
|
| (108 | ) |
|
| — |
|
|
| (7,402 | ) |
|
| — |
|
|
| — |
|
|
| (7,402 | ) |
Currency translation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,715 | ) |
|
| — |
|
|
| (2,715 | ) |
Unrealized loss on investments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (537 | ) |
|
| — |
|
|
| (537 | ) |
Balance at January 1, 2022 |
|
| 49,300 |
|
| $ | 49 |
|
| $ | 1,256,179 |
|
| $ | 1,316 |
|
| $ | 168,511 |
|
| $ | 1,426,055 |
|
The accompanying notes are an integral part of Business, Basisthese consolidated financial statements
F-9
Table of Presentation and Significant Accounting PoliciesContents
Description of Business – Nanometrics Incorporated
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
1. | Organization and Nature of Operations: |
Onto Innovation Inc. (“Nanometrics”Onto Innovation” or the “Company”) is a worldwide leader in the design, development, manufacture and its wholly-owned subsidiaries provide advanced, high-performancesupport of process control tools that perform macro-defect inspection and metrology, lithography systems, and inspection systemsprocess control analytical software used primarilyby semiconductor and advanced packaging device manufacturers. The Company delivers comprehensive solutions throughout the semiconductor fabrication process with our families of proprietary products that provide critical yield-enhancing information, enabling microelectronic device manufacturers to drive down costs and time to market of their devices. The Company provides process and yield management solutions used in the fabrication of semiconductorsboth wafer processing facilities, often referred to as “front-end” manufacturing, and other solid-state devicesin device packaging and test facilities, commonly referred to as well as industrial and scientific applications. Nanometrics' metrology systems precisely measure a wide range of film types deposited on substrates during manufacturing to control manufacturing processes and increase production yields in the fabrication of integrated circuits.“back-end” manufacturing. The Company’s OCD technologyadvanced process control software portfolio includes powerful solutions for standalone tools, groups of tools, or factory-wide suites to enhance productivity and achieve significant cost savings. Onto Innovation’s systems are backed by worldwide customer service and applications support. The Company has branch sales and service offices or subsidiaries in Korea, Japan, China, Taiwan, Singapore and in several countries in Europe. The Company operates in a single reportable segment and is a patented critical dimension measurement technology that is used to precisely determine the dimensions on the semiconductorprovider of process characterization equipment and software for wafer that directly control the resulting performance of the integrated circuit devices. The thin film metrology systems use a broad spectrum of wavelengths, high-sensitivity optics, proprietary software,fabs and patented technology to measure the thickness and uniformity of films deposited on silicon and other substrates as well as their chemical composition. The overlay metrology systems are used to measure the overlay accuracy of successive layers of semiconductor patterns on wafers in the photolithography process. Nanometrics' inspection systems are used to find defects on patterned and unpatterned wafers at nearly every stage of the semiconductor production flow. The corporate headquarters of Nanometrics is in Milpitas, California.advanced packaging facilities.
2. | Summary of Significant Accounting Policies: |
Basis of Presentation – Consolidation. The consolidated financial statements include Nanometrics Incorporatedreflect the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.eliminated.
Fiscal Year – TheYear. In the first quarter of 2020, the Company utilizeschanged its fiscal year end from December 31 to a 52/5352-53 week fiscal year ending on the last Saturday closest to December 31. The Company made the fiscal year change on a prospective basis and has not adjusted operating results for prior periods. The fiscal year of 2021 began on December 27, 2020 and ended January 1, 2022. The fiscal year of 2020 began on January 1, 2020 and ended December 26, 2020. Financial statements for 2019 continue to be presented on the basis of our previous calendar year end.
Revenue Recognition. Revenue is recognized when control of the calendar year. Forpromised goods or services are transferred to the fiscal years ended December 29, 2018, December 30, 2017,Company’s customers in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those goods or services. The Company accounts for a contract when it has approval and December 31, 2016,commitment from both parties, the period presented consistedrights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
The Company has elected to account for shipping and handling activities as the fulfillment of a 52-weekpromise to transfer goods to the customer and therefore records these activities under the caption “Cost of revenue.” Sales tax and any other taxes collected concurrent with revenue producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. These accounting policy elections are consistent with the manner in which the Company has historically recorded these items.
Contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on the prices charged to customers or the expected cost-plus margin.
Systems and Software Revenue
Revenue from systems is recognized when the Company transfers control of the product to the customer. To indicate transfer of control, the Company must have a present right to payment, legal title must have passed to the customer and the customer must have the significant risks and rewards of ownership. The Company generally transfers control for system sales when the customer or the customer’s agent picks up the system at the Company’s facility. The Company provides an assurance warranty on its systems for a period of twelve to fourteen months against defects in material and workmanship. The Company provides for the estimated cost of product warranties at the time revenue is recognized.
Depending on the terms of the systems arrangement, the Company may also defer the recognition of a portion of the consideration expected to be received because the Company has to satisfy a future obligation (e.g., installation and extended warranties). The Company uses an observable price to determine the standalone selling price for separate performance obligations or a cost-plus margin approach when one is not available.
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Revenue from software licenses provides the customer with a right to use the software as it exists when made available to the customer. Revenue from software licenses is recognized upfront at the point in time when the software is made available to the customer. Revenue from licensing support and maintenance is recognized as the support and maintenance are provided, which is over the contract period.
Parts Revenue
Revenue from parts is recognized when the Company transfers control of the product, which typically occurs when the Company ships the product from its facilities to the customer.
Services Revenue
Revenue from services primarily consists of service contracts, which provide additional maintenance coverage beyond the Company’s assurance warranty on its products, service labor, consulting and training. Revenue from service contracts is recognized ratably over the term of the service contract. Revenue from service labor, consulting and training is recognized as services are performed. Revenue from installation services is recognized at a point in time when installation is complete.
Practical Expedients
The Company generally expenses sales commissions when incurred because the amortization period is one year 52-weekor less. These costs are recorded within selling, general and administrative expenses.
The Company does not adjust the amount of consideration for the effects of a significant financing component as the payment terms are one year or less.
The Company does not disclose the value of remaining performance obligations for contracts with an original expected length of one year or less and 53-weekcontracts for which the Company recognizes revenue in the amount to which it has the right to invoice.
For additional information on the Company’s revenue recognition, see Note 10 of Notes to the Consolidated Financial Statements.
BusinessCombinations. The Company accounts for business combinations under the acquisition method of accounting, which requires us to recognize separately from goodwill the assets acquired, and the liabilities assumed at their acquisition date fair values. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, the Company’s estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year respectively.from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in its consolidated statements of operations. Accounting for business combinations requires the Company’s management to make significant estimates and assumptions, especially at the acquisition date including its estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies, and contingent consideration, where applicable. Although the Company believes the assumptions and estimates it has made in the past have been reasonable and appropriate, they are based, in part, on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Estimates in valuing certain acquired intangible assets under the income approach include growth in future expected cash flows from product sales, acquired technologies, technology obsolescence rates, estimated cash flows from the projects when completed and discount rates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
For additional information on the Company’s business combinations, see Note 3 of Notes to the Consolidated Financial Statements.
Use of Estimates – Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities atas of the date of the financial statements and the reported amounts of revenuesrevenue and expenses during the reportedreporting period. Significant estimates made by management include the allowance for credit losses, excess and obsolete inventory, fair value of assets acquired and liabilities assumed in a business combination, recoverability and useful lives of property, plant and equipment and identifiable intangible assets, recoverability of goodwill,
F-11
recoverability of deferred tax assets, liabilities for product warranty, contingencies, including litigation reserves and share-based payments and liabilities for tax uncertainties. Actual results could differ materially from those estimates. Estimates
These estimates and assumptions are used for, but not limitedbased on historical experience and on various other factors which the Company believes to revenue recognition,be reasonable under the provision for doubtful accounts, the provision for excess, obsolete, or slow-moving inventories, valuation of intangible and long-lived assets, warranty accruals, income taxes, valuation of stock-based compensation, and contingencies.
Foreign Currency Translation – The assets and liabilities of foreign subsidiaries are translated from their respective local functional currencies at exchange rates in effect at the balance sheet date and income and expense accounts are translated at average exchange rates during the reporting period. Resulting translation adjustments are reflected in “Accumulated other comprehensive income,” a component of stockholders’ equity. Foreign currency transaction gains and losses, as well as remeasurement of assets and liabilities denominated in a currency other than the functional currency are reflected in “Other income (expense)” in the consolidated statements of operations in the period incurred, and consist of losses of $1.1 million, $0.6 million, and $0.4 million for the years ended December 29, 2018, December 30, 2017, and December 31, 2016, respectively.
Revenue Recognition –circumstances. The Company derives revenue from the sale of process control metrology and inspection systems and related upgrades (“product revenue”) as well as spare part sales, billable service and service contracts (together “service revenue”). Upgrades are system software and hardware performance upgrades that extend the features and functionality of a product. Upgrades are included in product revenue, which consists of sales of complete, advanced process control metrology and inspection systems (the “system(s)”). Nanometrics’ systems consist of hardware and software components that function togethermay engage third-party valuation specialists to deliver the essential functionality of the system. Arrangements for sales of systems and upgrades often include defined customer-specified acceptance criteria.
The Company recognizes revenue when control of a good or service has transferred to a customer. The amount of revenue recognized reflects the amount which Nanometrics expects to be entitled to in exchange for the transfer of the goods or services in a contractassist with a customer. Revenue excludes amounts collected on behalf of third parties including taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue producing transaction. Shipping and handling costs associated with outbound freight both before and after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenues. Nanometrics records revenue on a gross basis, rather than net, as it acts as the principal in all its contractual arrangements and not as an agent.
Nanometrics follows a 5-Step process to evaluate its contracts with customers to determine the amount and timing of revenue recognition.
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NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Nanometrics first identifies whether a legally enforceable contract with a customer exists. A legally enforceable contract creates enforceable rights and obligations on both parties. Nanometrics evaluates the following criteria in its evaluation and if all criteria are not met, a contract does not exist and any revenue that otherwise would be recorded because a good or service had been transferred to a customer is deferred until such time that a contract exists: (1) both Nanometrics and the customer have approved the contract and are committed to perform, (2) Nanometrics can identify each party’s rights regarding the goods or services to be transferred, (3) Nanometrics can identify the payment terms for the goods or services to be delivered, (4) the contract has commercial substance, and (5) it is probable that Nanometrics will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. Historically, the Company has not experienced Customer payment defaults that would lead it to conclude that it does not have a contract under the new standard. Nanometrics evidences all its contracts in writing and the identification of the contract may include (1) reference to a master agreement that governs for multiple years, (2) a Volume Purchase Agreement that generally governs for 12 months and is negotiated with the larger customers to establish pricing for a committed volume of business, or (3) purchase orders which often govern the purchase of a single system or service item.
Once the contract has been identified, Nanometrics evaluates the promises in the contract to identify performance obligations. Many of the contracts include more than one performance obligation – for example the delivery of a system generally includes the promise to install the system in the customer’s facility. Additionally, a contract could include the purchase of multiple systems or the purchase of a system and an upgrade. Promises in contracts which do not result in the transfer of a good or service are not performance obligations, as well as those promises that are administrative in nature, or are immaterial in the context of the contract. Generally, Nanometrics performance obligations can be categorized as (1) systems – including refurbished systems, (2) installation obligations, (3) hardware upgrades, (4) non-operating system software options / upgrades, (5) spare parts, (6) service contracts, (7) billable services and (8) other miscellaneous service items.
Once the performance obligations in the contract have been identified, Nanometrics estimates the transaction price of the contract. The estimate includes amounts that are fixed as well as those that can vary based on contractual terms (e.g., performance bonuses/penalties, amounts payable to customers, rebates, prompt payment discounts, etc.) These variable consideration items are rare as most Nanometrics contracts include only fixed amounts. It is expected that estimates of variable consideration will be immaterial for Nanometrics and would occur if customers did not meet their contractual purchase commitments and Nanometrics is entitled to recover additional contract consideration.
Once the transaction price of the contract has been identified, Nanometrics allocates the transaction price to the identified performance obligations. This is done on a relative selling price basis using standalone selling prices (“SSP”). For most performance obligations, Nanometrics does not have observable SSP’s as they are not regularly sold on a standalone basis however if a performance obligation does have an observable SSP it is used for allocation purposes (e.g. spares parts are sold using a standard price list and often sold separately). Without observable SSP’s, Nanometrics estimates the SSP using a methodology which maximizes the use of observable inputs – namely a cost-plus gross margin approach.
Lastly, Nanometrics records the amount allocated to each performance obligation as revenue when control of that good or service has transferred to the customer. Nanometrics first evaluates whether a good or service is transferred over time, and if it is not, then it is recorded at a point in time. For service contracts, Nanometrics records revenue based on its measurement of progress, and the best method to determine this is the percentage of the stand-ready obligation that is completed to date as this best reflects the value of the service transferred to the customer. All other items at Nanometrics are recorded at a point in time other than the service contracts with customers. The timing of satisfaction of the performance obligation to payment is dependent upon the negotiated payment terms but generally occurs within 30 to 60 days. Nanometrics evaluates the following indicators to determine the point in time at which control transfers to the Customer, and may apply judgment in this evaluation: (1) whether Nanometrics has a present right to payment, (2) whether the customer has legal title, (3) whether the customer has physical possession, (4) whether the customer has significant risks and rewards of ownership, and (5) whether customer acceptance is a formality (i.e., whether customer acceptance of the tool is reasonably assured). Typically, for new product introductions, Nanometrics defers revenue recognition until formal customer acceptance is received from the customer. In almost all other situations, there is little, or no significant judgment applied by Nanometrics in determining if control of a good or service has transferred to a customer. Additionally, for system shipments to Japan, revenue is deferred because typical contractual terms indicate that payment is not due, and title does not transfer until customer acceptance occurs.
The Company warrants its products against defects in manufacturing. Upon recognition of product revenue, this assurance-type warranty is recorded as a liability for anticipated warranty costs. On occasion, customers request a warranty period longer than the Company's standard warranty. In those instances, in which extended warranty services are separately quoted to the customer or if the warranty includes services beyond just an assurance that the product will work as intended, an additional performance obligation is created, and the associated revenue is deferred and recognized as service revenue ratably over the term of the extended warranty period. The portion of service contracts and extended warranty services agreements that are uncompleted at the end of any reporting period are included in deferred revenue.
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NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Frequently, the Company delivers products and various services in a single transaction. The Company's deliverables consist of tools, installation, upgrades, billable services, spare parts, and service contracts. The Company's typical multi-element arrangements include a sale of one or multiple tools that include installation and standard warranty. Other arrangements consist of a sale of tools bundled with service elements or delivery of different types of services. The Company's tools, upgrades, and spare parts are generally delivered to customers within a period of up to six months from order date. Installation is usually performed soon after delivery of the tool. The portion of revenue associated with installation is deferred based on relative selling price and that revenue is recognized upon completion of the installation and receipt of final acceptance. Billable services are billed on a time and materials basis and performed as requested by customers. Under service contract arrangements, services are provided as needed over the fixed arrangement term, with terms normally up to twelve months. The Company does not grant its customers a general right of return or any refund terms and may impose a penalty on orders cancelled prior to the scheduled shipment date. Consideration received from customers for cancelled orders is rare as orders are typically not cancelled once placed.
When performance obligations are not transferred to a customer at the end of a reporting period, the amount allocated to those performance obligations is deferred until control of these performance obligations is transferred to the customer. If performance obligations cannot be accounted for as separate units of accounting, the entire arrangement is accounted for as a single unit of accounting and revenue is deferred until all elements are delivered and all revenue recognition requirements are met. These liabilities arising from contracts with customers are reported as Deferred Revenue in the consolidated balance sheet. The amount of revenue recognized in the twelve months ended December 29, 2018 that was included in the contract liability balance as of the beginning of the year was $5.2 million. Generally, all contracts have expected durations of one year or less. Accordingly, Nanometrics applies the practical expedient allowed for in U.S. GAAP and does not disclose information about remaining performance obligations that have original expected durations of one year or less.
Nanometrics incurs costs related to the acquisitionvaluation of its contractfinancial instruments, assets and stock awards associated with customers invarious contractual arrangements. Such estimates often require the formselection of sales commissions. Sales commissions are paid to the internal direct sales team as well as to third-party representatives,appropriate valuation methodologies and distributors. Contractual agreements, with each ofsignificant judgment. Actual results could differ from these parties, outline commissions structuresestimates under different assumptions or circumstances and rates tosuch differences could be paid. Generally, the contracts are all individual procurement decisions by the customers and are not for significant periods of time, nor do they include renewal provisions. As such, most of the contracts have an economic life of significantly less than a year, although some volume purchase agreements might extend beyond 12 months (the capitalization and amortization of commission costs for contracts that extend beyond one year is immaterial for Nanometrics). Accordingly, the Company expenses these contract acquisition costs in accordance with the practical expedient outlined in U.S. GAAP when the underlying contract asset is less than one year.
Nanometrics does not incur any costs to fulfill the contracts with customers that is not already reported in compliance with another applicable standard (for example, inventory or plant, property and equipment). Given the nature of the systems, the Company does not have costs which are separately identifiable to just a particular contract (for example, dedicated labs).
Nanometrics records accounts receivable when revenue has been recorded and the amount due from the customer is reasonably assured and unconditionally due. In certain situations, Nanometrics may record revenue because goods or services have been transferred to the customer, but the amount is not unconditionally due. In these situations, a contract asset is reflected in the consolidated balance sheet (Unbilled A/R). This amount is subsequently reported as accounts receivable when the condition that made the amount conditional is resolved (for example, when the final installation obligation is completed, and Nanometrics has recorded revenue for the delivery of the system in an amount larger than what has been invoiced). The balance of contract assets included in Accounts Receivable upon adoption of ASC 606 at December 30, 2017 and at December 29, 2018 was $4.3 million and $2.2 million respectively. The decrease was primarily driven by changes in customer mix and timing of customer acceptance.
The following tables summarize the impacts of Topic 606 adoption on the Company’s financial statements for the twelve months ended December 29, 2018 (in thousands, except per share data):
| Twelve Months Ended December 29, 2018 |
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| As Reported |
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| Balances Without Adoption of ASC 606 |
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| Effect of Change Higher/(Lower) |
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Net Revenue | $ | 324,523 |
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| $ | 320,968 |
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| $ | 3,555 |
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Net Income | $ | 57,648 |
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| $ | 55,413 |
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| $ | 2,235 |
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Net income per share: |
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Basic | $ | 2.39 |
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| $ | 2.30 |
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| $ | 0.09 |
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Diluted | $ | 2.34 |
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| $ | 2.25 |
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| $ | 0.09 |
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NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
material.
Cash and Cash EquivalentsEquivalents. Cash and Marketable Securities – The Company considers allcash equivalents include cash and highly liquid investmentsdebt instruments with original maturities of three months or less when purchased,purchased.
MarketableSecurities. The Company determined that all of its investment securities are to be cash equivalents. Marketableclassified as available-for-sale. Available-for-sale debt securities are classified as “available-for-sale” and are reportedcarried at fair value, with the unrealized gains and losses reported in stockholders'stockholders’ equity as a component ofunder the caption “Accumulated other comprehensive income. The cost ofloss.” Realized gains and losses and, interest and dividends on available-for-sale securities sold is based on the specific identification method. The Company classifies its investmentsare included in interest income and other, net. Available-for-sale securities are classified as current based on the natureassets regardless of the investment and their availabilitymaturity date if they are available for use in current operations. The Company reviews its investment portfolio quarterlyto identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, credit quality and the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. When a decline in fair value is determined to be other-than-temporary, unrealized losses on available-for-sale securities are charged against earnings. The specific identification method is used to determine if any securities may be other-than-temporarily impaired due to increased credit risk, changes in industry or sector of a certain instrument or ratings downgrades.
Fair Value of Financial Instruments – Financial instruments include cash and cash equivalents, accounts receivable and accounts payable. Cash equivalents are stated at fair market value based on quoted market prices. The carrying values of accounts receivable and accounts payable approximate their fair values because of the short-term maturity of these financial instruments.
Derivatives – The Company enters into foreign currency forward exchange contracts to protect against currency exchange risks associated with existing assets and liabilities. A foreign currency forward exchange contract acts as a hedge by increasing in value when underlying assets decrease in value or underlying liabilities increase in value due to changes in foreign exchange rates. Conversely, a foreign currency forward exchange contract decreases in value when underlying assets increase in value or underlying liabilities decrease in value due to changes in foreign exchange rates. These forward contracts are not designated as accounting hedges, so the unrealized gains and losses are recognized in other income, net, in advanceon marketable securities.
For additional information on the Company’s marketable securities, see Note 5 of Notes to the actual foreign currency cash flows with the fair value of these forward contracts being recorded as accrued liabilities or other current assets. The Company does not use forward contracts for trading purposes.Consolidated Financial Statements.
Allowancefor Doubtful Accounts – Credit Losses. The Company maintains allowancesan allowance for estimatedcredit losses resulting from the inability of its customers to make required payments. Credit limits are established through a process of reviewing the financial history and stability of its customers. Where appropriate and available, the Company obtains credit rating reports and financial statements of customers when determining or modifying their credit limits. The Company regularly evaluates the collectability of its trade receivable balancesthat is estimated based on a combination of factors such as the lengthincluding write-off history, aging analysis, forecast of time the receivables are past due, customary payment practices in the respective geographiesfuture economic conditions and historical collection experience with customers.any specific known troubled accounts. The Company believes that itsthe allowance is adequate to cover expected losses on trade receivables. Provisions for doubtful accounts adequately reflectsexpected credit losses are classified as selling, general and administrative expense in the risk associated with its receivables.Consolidated Statements of Operations. If the financial conditionscondition of a customerthe Company’s customers were to deteriorate, resulting in an impairment of their inabilityability to make payments, the Company may need to record additional allowances which would result in additional general and administrative expenses being recorded for the period in which such determination was made.may be required.
Inventories – . Inventories are valuedstated at standardthe lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less predictable costs which approximates actual cost calculatedof completion, disposal and transportation. Cost is generally determined on a first-in, first-out basis, not in excess of net realizable value.and includes material, labor and manufacturing overhead costs. The Company applies judgmentreviews and sets standard costs as needed, but at a minimum, on an annual basis, at current manufacturing costs in determining standard rates for material burden, direct labor and overhead used in valuing inventory, and periodically reviews such ratesorder to ensure that the rates result in an inventory valuation not in excess of net realizable value. approximate actual costs.
The Company is exposed to a number of economicevaluates inventories for excess quantities and industry factors that could result in portions of inventory becoming either obsolete or in excess of anticipated usage, or saleable only for amounts that are less than their carrying amounts. These factors include, but are not limited to, technological changes in the market, the Company’s ability to meet changing customer requirements, competitive pressures in products and prices, and the availability of key components from suppliers.obsolescence. The Company has establishedestablishes inventory reserves when conditions exist that suggest that inventory may be in excess of anticipated demand or is obsolete based upon assumptions about historical and future demand for the Company’s products and market conditions. In addition, inventories are evaluated for potential obsolescence due to the effect of known and anticipated engineering design changes. Once a reserve has been established, it is maintained until the partitem to which it relates is soldscrapped or is otherwise disposed of.sold. The Company regularly evaluates its ability to realize the value of inventory based on a combination of factors including the following: historical usage rates, forecasted sales, of usage, product end-of-life dates, estimated current and future market values and new product introductions. For demonstration inventory, the Company also considers the age of the inventory and potential cost to refurbish the inventory prior to sale. Demonstration inventory is amortized over its useful life and the amortization expense is included in total inventory write down on the statements of cash flows. When recorded, reserves are intended to reduce the carrying value of the Company’s inventory to its net realizable value. If actual demand for the Company’s products deteriorates, or market conditions are less favorable than those that the Company projects, additional reserves may be required.
Inventories – delivered systems – The Company reflects the cost of systems that were invoiced upon shipment but deferred for revenue recognition purposes separate from its inventory held for sale as “Inventories – delivered systems.”
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NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Property, Plant and Equipment – Equipment.Property, plant and equipment are stated at cost. Depreciation and amortization is computed using the straight–line method over the following estimated useful lives of the assets:
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Business combinations - We account for business combinations under the acquisition method of accounting, which requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in our consolidated statements of operations. Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date including our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies, and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based, in part, on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain acquired intangible assets under the income approach include growth in future expected cash flows from product sales, customer contracts and acquired technologies, technology obsolescence rates, expected costs to develop in-process research and development, or IPR&D, into commercially viable products, estimated cash flows from the projects when completed and discount rates. Specific events and circumstances may occur thus affecting the accuracy or validity of such assumptions, estimates or actual results.
Goodwill and Intangible Assets – Goodwill is initially recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Intangible assets with finite lives are amortized over their respective useful lives on a straight-line basis and are also evaluated annually for impairment or whenever events or circumstances occur which indicate that those assets might be impaired. Goodwill and indefinite lived assets are not amortized but tested annually for impairment. The Company’s impairment review process is completed during the fourth quarter of each year or whenever events, or circumstances occur which indicate that an impairment may have occurred. The Company assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, after assessing the qualitative factors, the Company determines that it is not likely that the fair value of a reporting unit is less than its carrying value, then performing the two-step impairment test is unnecessary. However, if the Company concludes otherwise, then it is required to perform the first step of the two-step goodwill impairment test. The first step requires a comparison of the fair value of Nanometrics’ reporting unit to its net book value. If the fair value of the reporting unit is greater than its carrying value, then no impairment is deemed to have occurred. If the fair value is less, then the second step must be performed to determine the amount, if any, of actual impairment. Amortization of intangible assets with finite lives is computed using the straight-line method over the following estimated useful lives of the assets:assets, which are five to twenty-two years for buildings, three to ten years for machinery and equipment, three to ten years for furniture and fixtures, three years for computer equipment, and three to seven years for software. Leasehold improvements are amortized using the straight-line method over the lesser of the lease term or the estimated useful life of the related asset. Repairs and maintenance costs are expensed as incurred and major renewals and betterments are capitalized.
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Long-Lived Assets – The Company evaluates its long-lived and Finite-Lived Acquired Intangible Assets. Long-lived assets, such as property, plant, and equipment, and identifiable acquired intangible assets with finite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When the sumRecoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future net cash flows expected to result frombe generated by the useasset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset, which is generally based on discounted cash flows. For the year ended December 31, 2019, there was an impairment to an item in property, plant and equipment of $507, which was recorded in general and administrative expenses in the Consolidated Statements of Operations. There were 0 impairments of long-lived assets for the years ended January 1, 2022 and December 26, 2020.
Goodwill and Indefinite Lived Intangible Assets.Goodwill and indefinite lived intangible assets are tested for impairment on an annual basis or when an event or changes in circumstances indicate that its eventual dispositioncarrying value may not be recoverable. Goodwill impairment is tested at the reporting unit level, which is defined as an operating segment or one level below the operating segment. The Company has 1 operating segment. NaN goodwill impairment occurred in fiscal years 2021, 2020, or 2019. Goodwill is reviewed for impairment using either a qualitative assessment or a quantitative goodwill impairment test. If the Company chooses to perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. When the Company performs the quantitative goodwill impairment test, it compares fair value to carrying value, which includes goodwill. If fair value exceeds carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss.
Intangible assets with indefinite lives, including in-process research and development (“IPR&D”), are tested for impairment if impairment indicators arise and, at a minimum, annually. However, the Company is permitted to first assess qualitative factors to determine if a quantitative impairment test is necessary. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that an indefinite-lived intangible asset’s fair value is less than its carrying amount,amount. Otherwise, no further impairment may exist. To determine the amounttesting is required. The indefinite-lived intangible asset impairment test consists of impairment, the Companya one-step analysis that compares the fair value of the intangible asset towith its carrying value.amount. If the carrying valueamount of thean intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. We consider many factors in evaluating whether the difference is recognized. Seevalue of intangible assets with indefinite lives may not be recoverable, including, but not limited to estimates of future cash flows, the discount rate, terminal growth rates, general economic conditions, our outlook and market performance of our industry and recent and forecasted financial performance.
There was 0 impairment of goodwill or IPR&D for the years ended January 1, 2022, December 26, 2020 and December 31, 2019.
For additional information on the Company’s goodwill and purchased intangible assets, see Note 8, "Goodwill6 of Notes to the Consolidated Financial Statements.
Concentration of Credit Risk. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of accounts receivable, cash and Intangible Assets" for further details.cash equivalents and marketable securities.
Income Tax Assets and Liabilities – The Company maintains cash and cash equivalents and marketable securities with higher credit quality issuers and monitors the amount of credit exposure to any one issuer. The Company's investment policy provides guidelines and limits regarding credit quality, investment concentration, investment type, and maturity that the Company believes will provide liquidity while reducing risk of loss of capital. Investments are of a short-term nature and include investments in commercial paper, corporate debt securities, asset-backed securities, U.S. Treasury, U.S. Government, and U.S. Agency debt.
The Company’s accounts receivable result primarily from the sale of semiconductor equipment, related accessories and replacement parts. The Company’s customer base is highly concentrated and historically, a relatively small number of customers have accounted for income taxes such that deferred tax assets and liabilities must be recognized using enacted tax rates for the effect of temporary differences between the book and tax accounting for assets and
49
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
liabilities. Also, deferred tax assets are reduced by a valuation allowance to the extent that management cannot conclude that it is more likely than not that asignificant portion of the deferred tax asset will be realized in the future.its revenues. Write-offs of uncollectible accounts have historically not been material. The Company evaluatesactively monitors its customers' financial strength to reduce the deferred tax assets on a continuous basis throughout the year to determine whether or not a valuation allowance is appropriate. Factors used in this determination include future expected income and the underlying asset or liability which generated the temporary tax difference. The income tax provision is primarily impacted by federal statutory rates, state and foreign income taxes and changes in the valuation allowance.risk of loss.
Product Warranties – Warranties. The Company sells most ofgenerally provides a warranty on its products withfor a twelve-month repair or replacement warranty from the dateperiod of acceptance, which generally represents the date of shipment.twelve to fourteen months against defects in material and workmanship. The Company provides an accrual for estimated future warranty costs based upon the historical relationship of warranty costs to theestimated cost of products sold. The estimated future warranty obligations related to product sales are reported inwarranties at the period in which the relatedtime revenue is recognized. The estimated future warranty obligations are affected by the warranty periods, sales volumes, product failure rates, material usage and labor and replacement costs incurred in correcting a product failure. If actual product failure rates, material usage, labor or replacement costs differ from the Company’s estimates, revisions to the estimated warranty obligations would be required. For new product introductions where limited or no historical information exists, the Company may use warranty information from other previous product introductions to guide it in estimating the warranty accrual. The warranty accrual represents the best estimate of the amount necessary to settle future and existing
F-13
claims on products sold as of the balance sheet date. The Company periodically assesses the adequacy of its recorded warranty reserve and adjusts the amounts in accordance with changes in these factors.
Defined Employee Benefit Plans – Income Taxes. The Company maintains a defined benefit pension plan in Taiwanaccounts for which current service costs are charged to operations as they accrue based on services rendered by employees duringincome taxes using the year. Pension benefit obligations are determined by using management’s actuarial assumptions, including discount rates, assumed asset rates of return, compensation increases and employee turnover rates.
Net Income Per Share - Basic net income per share excludes dilution and is computed by dividing net income by the number of weighted average common shares outstandingliability approach for the period. Diluted net income per share reflects the potential dilution from outstanding dilutive stock options (using the treasury stock method), restricted stock units subject to vesting and shares issuable under the employee stock purchase plan. In applying the treasury stock method 0.5 million, 0.6 million and 0.5 million stock option shares for fiscal year 2018, 2017 and 2016, respectively, were included in the calculation of diluted shares.
Certain Significant Risks and Uncertainties – Financial instruments that potentially subject us to a concentration of credit risk consist of cash, cash equivalents, marketable securities, and accounts receivable. The Company's cash and cash equivalents are primarily invested in deposit accounts and money market accounts with large financial institutions. At times, these deposits and securities may exceed federally insured limits; however, the Company has not experienced any losses on such accounts. The Company invests its cash not required for use in operations in high credit quality securities based on the Company's investment policy. The Company's investment policy provides guidelines and limits regarding credit quality, investment concentration, investment type, and maturity that the Company believes will provide liquidity while reducing risk of loss of capital. Investments are of a short-term nature and include investments in commercial paper, corporate debt securities, asset-backed securities, U.S. Treasury, U.S. Government, and U.S. Agency debt.
The Company sells its products primarily to end users in the United States, Asia and Europe and, generally, does not require its customers to provide collateral or other security to support accounts receivable. Management performs ongoing credit evaluations of its customers’ financial condition and maintains an allowance for estimated potential bad debt losses. The Company’s customer base is highly concentrated and historically, a relatively small number of customers have accounted for a significant portion of its revenues. Aggregate revenue from the Company's top five largest customers in 2018, 2017 and 2016 consisted of 70%, 73% and 73%, respectively, of its total net revenues. The Company participates in a dynamic high technology industry and believes that changes in any of the following areas could have a material adverse effect on its future financial position, results of operations or cash flows: advances and trends in new technologies and industry standards; competitive pressures in the form of new products or price reductions on current products; changes in product mix; changes in the overall demand for products offered; changes in third-party manufacturers; changes in key suppliers; changes in certain strategic relationships or customer relationships; litigation or claims against the Company based on intellectual property, patent, product, regulatory or other factors; fluctuations in foreign currency exchange rates; risk associated with changes in domestic and international economic and/or political regulations; availability of necessary components or sub-assemblies; disruption of manufacturing facilities; and its ability to attract and retain employees necessary to support its growth.
50
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Certain components and sub-assemblies used in the Company’s products are purchased from a sole supplier or a limited group of suppliers. The Company currently purchases its spectroscopic ellipsometer and robotics used in its advanced measurement systems from a sole supplier or a limited group of suppliers located in the United States. Any shortage or interruption in the supply of any of the components or sub-assemblies used in its products or its inability to procure these components or sub-assemblies from alternate sources on acceptable terms could have a material adverse effect on its business, financial condition and results of operations.
Note 2. Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In October 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standard updatedeferred taxes which requires the recognition of deferred tax assets and liabilities for the incomeexpected future tax consequences of an intra-entity transferevents that have been recognized in the Company’s consolidated financial statements or tax returns. A valuation allowance is recorded to reduce a deferred tax asset to that portion which more likely than not will be realized.
For additional information on the Company’s income taxes, see Note 13 of an asset,Notes to the Consolidated Financial Statements.
Translation of Foreign Currencies.The Company’s international branches and subsidiaries primarily generate and expend cash in their local functional currency. Accordingly, all balance sheet accounts of these local functional currency branches and subsidiaries are translated into U.S. dollars at the fiscal period-end exchange rate, and income and expense accounts are translated into U.S. dollars using average rates in effect for the period. The resulting translation adjustments are recorded as cumulative translation adjustments and are recorded directly as a separate component of stockholders’ equity under the caption, “Accumulated other than inventory, when the transfer occurs.comprehensive loss.” The Company adopted this standardhad accumulated exchange losses resulting from the translation of foreign operation financial statements of $1,764 and $4,479 as of January 1, 2022 and December 26, 2020, respectively.
Share-based Compensation. The Company measures the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. Compensation expense is recognized using the straight-line attribution method to recognize share-based compensation over the service period of the award, with adjustments recorded for forfeitures as they occur.
For additional information on the Company’s share-based compensation plans, see Note 11 of Notes to the Consolidated Financial Statements.
Research and Development Costs. Expenditures for research and development are expensed as incurred.
Derivative Instruments and Hedging Activities. The Company’s policy is to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated business exposures. The Company has a policy that allows for the use of derivative financial instruments to hedge foreign currency exchange rate fluctuations on forecasted revenue and net monetary assets or liabilities denominated in various foreign currencies. The Company carries derivative financial instruments (derivatives) on the balance sheet at their fair values, in either prepaid expenses and other current assets or other current liabilities in the first quarterConsolidated Balance Sheets. The Company does not use derivatives for trading or speculative purposes. The Company does not believe that it is exposed to more than a nominal amount of 2018credit risk in its foreign currency hedges, as counterparties are large, global and well-capitalized financial institutions. The Company’s exposures are in liquid currencies (Japanese yen, euros, Korean won, Taiwanese dollars, Chinese renminbi, British pound sterling, Singapore dollars and Israeli shekel), so there is minimal risk that appropriate derivatives to maintain the Company’s hedging program would not be available in the future.
To hedge foreign currency risks, the Company uses foreign currency exchange forward contracts, where possible and prudent. These hedge contracts are valued using standard valuation formulas with assumptions about future foreign currency exchange rates derived from existing exchange rates, interest rates, and other market factors.
The dollar equivalent of the U.S. dollar forward contracts and related fair values as of January 1, 2022 and December 26, 2020 were as follows:
|
| January 1, |
|
| December 26, |
| ||
|
| 2022 |
|
| 2020 |
| ||
Notional amount |
| $ | 32,293 |
|
| $ | 37,580 |
|
Fair value of liability |
|
| 26 |
|
|
| 36 |
|
During the year ended January 1, 2022, the Company recognized a modified retrospective approach.loss of $1,650 on maturities of forward contracts. During the years ended December 26, 2020 and December 31, 2019, the Company recognized gains of $510 and $343 on maturities of forward contracts, respectively. The adoption didaggregate notional amounts of matured contracts were $420,460, $373,749 and $58,522 for 2021, 2020 and 2019, respectively.
Contingencies and Litigation. The Company is subject to the possibility of losses from various contingencies, including certain legal proceedings, lawsuits and other claims. The Company accrues for a loss contingency when it concludes that the likelihood of a loss is probable and the amount of the loss can be reasonably estimated. If the Company concludes that loss
F-14
contingencies that could be material to any one of its financial statements are not haveprobable, but are reasonably possible, or are probable, but cannot be estimated, then the Company discloses the nature of the loss contingencies, together with an estimate of the range of possible loss or a material impact onstatement that such loss is not reasonably estimable. The Company expenses as incurred the financial statements.costs of defending legal claims against the Company. The Company does not recognize gain contingencies until realized. See Note 9 of the Notes to the Consolidated Financial Statements, “Commitments and Contingencies” for a detailed description.
In August 2016,Recent Accounting Pronouncements.
Recently Adopted
Effective December 27, 2020, the FASB issued anCompany adopted Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This standard simplified the accounting standard which addresses eight specific cash flow classification issues. This update is effective for public companiesincome taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted, includingintraperiod tax allocation, the methodology for calculating income taxes in an interim period.period and the recognition of deferred tax liabilities for outside basis differences. The standard is to be applied through a retrospective transition method to each period presented. If it is impracticable to apply retrospectively for somenew guidance also simplified aspects of the issues,accounting for franchise taxes and enacted changes in tax laws or rates and clarified the amendmentsaccounting for those issues would be applied prospectively astransactions that resulted in a step-up in the tax basis of the earliest date practicable.goodwill and allocating consolidated income taxes to separate financial statements of entities not subject to income tax. The adoption of this guidanceASU No. 2019-12 did not have a significant impact on the Company’s consolidated statement of cash flows.
In May 2014, the FASB issued an accounting standard update which requires an entity to recognize the amount of revenue to which it expects to be entitled to for transferring promised goods or services to customers. The Company applied Topic 606 using the modified retrospective method by recognizing the cumulative effect of initially applying Topic 606 as an adjustment that increased the opening balance of equity at December 31, 2017 by $0.9 million, which resulted from a decrease of $1.6 million to the opening balance of current deferred revenue, partially offset by a decrease of $0.7 million to the opening balance of inventories – delivered systems. This modified retrospective method was chosen due to the Company’s inability to review all necessary contract information to adopt the standard using the full retrospective method. Both methods are allowed per U.S. GAAP. Therefore, the comparative information has not been adjusted and continues to be reported under Topic 605.
Recently Issued Accounting Standards
In August 2018, the FASB issued an accounting standard update to provide additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The amendments in this update should be applied retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the effect of this update on its consolidated financial condition and results of operations.
In August 2018, the FASB issued an accounting standard update which improves the effectiveness of fair value measurement disclosures in the notes to the financial statements. The update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Certain amendments within the update should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. Entities are permitted to early adopt any removed or modified disclosures upon issuance of this update and delay adoption of the additional disclosures until their effective date. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated results of operations or consolidated statement of cash flows.
51
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In June 2018, the FASB issued an accounting standard update which simplifies the accounting for nonemployee share-based payment transactions. The accounting for share-based payments to nonemployees and employees will be substantially aligned because of this update. The standard is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated results of operations or consolidated statement of cash flows.
In January 2017, the Financial Accounting Standards Board (the "FASB") issued an accounting standard update which simplifies the subsequent measurement of goodwill and removes step 2 from the goodwill impairment test. Instead, an entity should record an impairment charge based on excess of a reporting unit’s carrying amount over its fair value. The standard is effective for public companies for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial condition and results of operations.
In June 2016, the FASB issued an accounting standard which requires measurement and timely recognition of expected credit losses for financial assets. The update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The standard is to be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the effect of this update on its consolidated financial condition and results of operations.
In February 2016, the FASB issued an accounting standard update which requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). For lessees, leases will continue to be classified as either operating or financing in the income statement. The standard is effective for public companies for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company generally does not finance purchases of equipment or other capital assets but does lease some equipment and facilities. The Company established a cross-functional implementation team to evaluate and identify the impact of this update on its financial position, results of operations, and cash flows. The Company has determined that it will elect all practical expedients permitted within the new standard which will allow it
Recently Issued
Recently issued accounting guidance not discussed above is not applicable or did not have, or is not expected to not reassess whether any expired or existing contracts are or contain leases, not reassess the lease classification for any expired or existing lease, apply hindsight in determining the lease term, chose to treat separate lease components and nonlease components associated with the lease component ashave, a single lease component, and to not reassess the initial direct costs for any existing lease. Also, the Company expects to make an accounting policy election to not recognize a lease liability or right-to-use asset for leases with a term of twelve months or less and recognize such lease payments in its Consolidated Statement of Operations as incurred. Additionally, the Company has determined that it will adopt the optional transition practical expedient thus allowing it to initially apply the new standard at the adoption date, which for the Company will be December 30, 2018. The Company anticipates recording lease liabilities and assets between $10.5 million and $12.5 million on its Consolidated Balance Sheet with no material impact to its Consolidated Statementsthe Company.
3. | Business Combination: |
Inspectrology, LLC
During the first quarter of Operations. The Company does not anticipate any material impact to its cash flow, although the new standard does require that lease payments now be reported as a financing activity on its Consolidated Statement of Cash Flows instead of as an operating activity.
Note 3. Acquisition
On November 15, 2018,2021, the Company acquired 4D Technology CorporationInspectrology, LLC (“4D”Inspectrology”), a supplier of high-performance interferometric measurement inspection systems. Pursuantoverlay metrology for controlling lithography and etch processes in the compound semiconductor market for $24,015 in cash and an earnout subject to achievement of certain revenue targets earned for fiscal year 2021 and fiscal year 2022. As of January 1, 2022, $2,287 of the earnout has been achieved and was recorded in operating expenses. There is potential earnout for up to an additional payment of $5,000 based on fiscal 2022 results. Certain payments, including the earnout, are subject to the Stock Purchase Agreement (“SPA”) entered into between 4D, each of 4D’s stockholders andprincipals remaining with the Company the Company acquired all the outstanding stockfor a period of 4D for total consideration of (a) cash of $38.7 million ($37.2 million net of cash acquired); (b) 125,117 shares of the Company’s common stock, par value $0.001 per share, valued at approximately $4 million, subjectone to adjustment based on the amount of cash, working capital, indebtedness, and transaction expenses of 4D (collectively, the “Purchase Price”).three years.
4D’s Dynamic Interferometry® solutions are used in a variety of industries to provide accurate shape and surface measurement data, which provides feedback to customers of optical quality, machine finish, and surface defectivity, to improve manufacturing yield and performance. The addition of 4D’s technology will add unique technology to the Company’s portfolio, expanding its served markets with new applications in the scientific research, aerospace, industrial and optics manufacturing markets.
52
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes the preliminary fair value of assets acquired and liabilities assumed at the date of acquisition:
Cash and cash equivalents | $ | 220 |
|
Account receivables |
| 4,071 |
|
Inventories |
| 2,587 |
|
Prepaid expenses and other current assets |
| 104 |
|
Property, plant and equipment |
| 86 |
|
Identifiable intangible assets |
| 10,290 |
|
Total assets acquired |
| 17,358 |
|
Accounts payable |
| (1,048 | ) |
Payroll and related expenses |
| (512 | ) |
Deferred revenue |
| (386 | ) |
Other current liabilities |
| (576 | ) |
Net assets acquired |
| 14,836 |
|
Goodwill |
| 9,179 |
|
Total purchase consideration | $ | 24,015 |
|
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Onto Innovation
On October 25, 2019, the Company became Onto Innovation Inc. upon the effectiveness of the merger (the “2019 Merger”) between Nanometrics Incorporated (“Nanometrics”) and Rudolph Technologies, Inc. (“Rudolph”). The Company accounted for the 2019 Merger as a reverse acquisition using the acquisition method of accounting in accordance with generally accepted accounting principles (“GAAP”). GAAP requires that either Nanometrics or Rudolph is designated as the acquirer for accounting and financial reporting purposes (“Accounting Acquirer”). Based on the evidence available, Rudolph was designated as the Accounting Acquirer while Nanometrics was the acquirer for legal purposes. Therefore, Rudolph’s historical results of operations replaced Nanometrics’ historical results of operations for all periods prior to the 2019 Merger.
The aggregate purchase price of $890,131 consisted of 25,060 shares of common stock valued at $884,801 and the fair value of assumed Nanometrics equity awards of $5,330. Total transaction costs incurred by the Company were $9,907 during the year ended December 31, 2019 and are included in general and administrative expense in the Consolidated Statements of Operations.
During the quarter ended December 26, 2020, the Company finalized its fair value determination of the assets acquired and the liabilities assumed. The following table summarizes the final allocation of the total purchase consideration to the initial estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):merger date.
Cash and cash equivalents | $43,882 |
Marketable securities | 94,389 |
Account receivables | 49,917 |
Inventories | 98,478 |
Prepaid expenses and other current assets | 6,659 |
Property, plant and equipment | 77,451 |
Operating lease right-of-use assets | 9,658 |
Identifiable intangible assets | 374,900 |
Deferred income taxes | 2,191 |
Other assets | 850 |
Total assets acquired | 758,375 |
Accounts payable | (23,361) |
Payroll and related expenses | (20,290) |
Deferred revenue | (5,931) |
Other current liabilities | (10,679) |
Income taxes payable | (2,007) |
Other non-current liabilities | (90,113) |
Net assets acquired | 605,994 |
Goodwill | 284,137 |
Total purchase consideration | $890,131 |
The allocation of the intangible assets subject to amortization is as follows:
| November 15, 2018 |
| |
Cash and cash equivalents | $ | 1,414 |
|
Accounts receivable, net |
| 4,156 |
|
Inventories |
| 4,563 |
|
Prepaid and other current assets |
| 104 |
|
Property and equipment |
| 145 |
|
Accounts payable |
| (702 | ) |
Accrued liabilities |
| (760 | ) |
Deferred revenue |
| (197 | ) |
Deferred tax liabilities |
| (5,408 | ) |
Total assets acquired/liabilities assumed |
| 3,315 |
|
Developed technology |
| 15,500 |
|
In-process research and development |
| 1,400 |
|
Customer relationships |
| 4,600 |
|
Order backlog |
| 500 |
|
Trade name |
| 1,500 |
|
Total identified intangible assets |
| 23,500 |
|
Total identifiable net assets |
| 26,815 |
|
Goodwill |
| 15,762 |
|
Total purchase consideration | $ | 42,577 |
|
| Estimated |
| Weighted Average |
| Fair Value |
| Useful Life (years) |
Developed technology | $260,500 |
| 6.6 |
In-process research and development | 46,600 |
| indefinite |
Customer relationships | 53,000 |
| 13.1 |
Backlog | 6,700 |
| 1.1 |
Trademarks and trade names | 8,100 |
| 7.5 |
Total intangible assets | $374,900 |
|
|
The fair valueAcquired intangible assets reported above are being amortized using the straight-line method over their estimated useful lives, which approximates the pattern of accounts receivable, net, consisted of gross contractual accounts receivable reduced by approximately $161 thousand for receivables nothow the economic life is expected to be collected asused. This includes amounts allocated to customer relationships because of anticipated high customer retention rates that are common in the acquisition date. The inventory acquired consisted primarily of work in process, for which fair value was measured based on determining its net realizable value as such value represents an exit price in an orderly transaction between market participants. Factors that required a significant amount of judgment in determining the net realizable value for the inventory included determining estimated selling prices, cost to complete, costs to dispose, operating profit, and discount rates, among others.
Goodwill represents the excess of the consideration transferred over the preliminary estimated fair values of the assets acquired and liabilities assumed and is primarily attributable to intangible assets which are not separately recognizable, such as an assembled workforce, and anticipated synergies such as certain costs savings, operating efficiencies, and other strategic benefits projected to be achieved as a result of the 4D acquisition. Goodwill is not deductible for tax purposes.
semiconductor capital equipment industry.
Developed technology relates to 4D’sNanometrics’ product family and was valued using the multi-period excess earnings method under the income approach. This method reflects the present value of the projected cash flows that are expected to be
F-16
generated by the developed technology less charges representing the contribution of other assets to those cash flows. The average estimated useful life of developed technologies was determined to be 96.6 years and was based on the technology cycle related to each developed technology, as well as the cash flows over the respective forecast period.
The fair value of the in-process research and development (“IPRD”) was determined using the multi-period excess earnings method under the income approach. Such method reflects the present value of the projected cash flows that are expected to be generated by the IPRD, less costs to complete the development and charges representing the contribution of other assets to those cash flows.
The Company has determined that the estimated useful life of the acquired in-process research and development is currently indeterminate; thus, it has been categorized as indefinite and will be reviewed annually for impairment, along with the Company’s other long-lived assets with indefinite lives, unless its estimated useful life is known.
Customer relationships represent the fair value of future projected revenue that will be derived from sales of products to new and existing customers and was valued using the incremental cash flow method.distributor method under the income approach. This method reflects the present value of projected revenuesdistributor margins to be derived from suchsales to existing customers less charges representing the contribution of other assets to those cash flows. The estimated useful life of the customer relationships was determined to be 913.1 years and was based on historical customer turnover rates.
Order backlog represents the fair value of future projected revenue that will be derived from outstanding orders from customers that have not yet been shipped and was valued using the incremental cash flowmulti-period excess earnings method under the income approach, which reflects the present value of such outstanding orders less charges representing the contribution of other assets to those cash flows. The estimated useful life of the order backlog was determined to be less than one year1.1 years and was based on historical order fulfilment rates.
53
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Trade name relatesTrademarks and trade names relate to the “4D Technology”“Nanometrics” trademarks and trade namenames and waswere fair valued by applying the relief-from-royalty method under the income approach. This method is based on the application of a royalty rate to forecasted revenue under the trademarks and trade name.names. The estimated useful life of the tradenametrademarks and trade names was determined to be 157.5 years and was based on the expected life of the trademarks and trade namenames and the cash flows anticipated over the forecast period.
Factors that required a significant amount
4. | Fair Value Measurements: |
Fair Value of judgment in determining the fair value for the acquired intangible assets included estimating future cash flows, revenue and gross margin assumptions, technology lives, future operating expenses, and discount rates, among others.Financial Instruments
Finite-lived intangible assets totaled $22.1 million and have a weighted average estimated useful life of 9.25 years. The Company has determined thatevaluated the estimated useful lifefair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates fair value because of the acquired in-process research and development is currently indeterminant; thus, it has been categorized as indefinite and will be reviewed annually for impairment, along with the Company’s other long-lived assets with indefinite lives, unless its estimated useful life is known.short-term maturity of these instruments.
Fair Value Hierarchy
The Company believes the amounts of purchased intangible assets recorded above represent the fair values of and approximate the amountsapplies a market participant would paythree-level valuation hierarchy for such assets as of the 4D acquisition date.
The results of operations of 4D are reported in the Company’s consolidated financial statements from the date of acquisition and include $2.1 million of total net sales and $0.4 million of operating loss for the year ended December 29, 2018.
The following unaudited pro forma financial information presents the combined results of operations as if the 4D acquisition had occurred at the beginning of fiscal year 2017 and is presented for informational purposes only. These results may not necessarily reflect the actual results of operations that would have been achieved, nor are they necessarily reflective of future results of operations (in thousands, except per share data).
| (Unaudited) |
| ||||
| Years Ended |
| ||||
| December 29, 2018 |
| December 30, 2017 |
| ||
Pro forma net revenue | $ | 338,919 |
| $ | 271,966 |
|
Pro forma net income |
| 57,672 |
|
| 29,302 |
|
Pro forma net income per share - basic | $ | 2.39 |
| $ | 1.16 |
|
Pro forma net income per share - diluted |
| 2.34 |
|
| 1.13 |
|
The pro forma results include adjustments for depreciation and amortization, income taxes, and the incremental shares issued in connection with the acquisition. For the years ended December 29, 2018 and December 30, 2017, the pro forma results also include material nonrecurring adjustments of $3.5 million and $1.7 million, respectively, in net revenue and net income, related to sales to the Company and costs associated with those sales. The Company incurred $0.9 million of acquisition-related costs that were expensed as incurred during fiscal 2018.
Note 4. Fair Value Measurements and Disclosures
The Company determines the fair values of its financial instruments based on the fair value hierarchy established in FASB Accounting Standards Codification ("ASC") 820, Fair Value Measurement, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. The fair valuemeasurements. This hierarchy prioritizes the inputs into the following three levels that may be used to measure fair value:
broad levels. Level 1 — Quoted inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 — Inputs other than Level 1 that inputs are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
54
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
asset or liability. Level 3 — Unobservable inputs are unobservable inputs based on management’s assumptions used to measure assets and liabilities at fair value. A financial asset’s or liability’s fair value measurement classification within the hierarchy is determined based on the lowest level input that are supported by little or no market activity and areis significant to the fair value measurement.
F-17
The following tables provide the assets and liabilities carried at fair value measured on a recurring basis at January 1, 2022 and December 26, 2020:
|
| Fair Value Measurements Using |
| |||||||||||||
|
| Carrying Value |
|
| Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
| ||||
January 1, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal notes and bonds |
| $ | 170,980 |
|
| $ | 0 |
|
| $ | 170,980 |
|
| $ | 0 |
|
Asset-backed securities |
|
| 2,009 |
|
|
| 0 |
|
|
| 2,009 |
|
|
| 0 |
|
Certificates of deposit |
|
| 33,192 |
|
|
| 0 |
|
|
| 33,192 |
|
|
| 0 |
|
Commercial paper |
|
| 73,113 |
|
|
| 0 |
|
|
| 73,113 |
|
|
| 0 |
|
Corporate bonds |
|
| 62,447 |
|
|
| 0 |
|
|
| 62,447 |
|
|
| 0 |
|
Total assets |
| $ | 341,741 |
|
| $ | 0 |
|
| $ | 341,741 |
|
| $ | 0 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
| $ | 26 |
|
| $ | 0 |
|
| $ | 26 |
|
| $ | 0 |
|
Total liabilities |
| $ | 26 |
|
| $ | 0 |
|
| $ | 26 |
|
| $ | 0 |
|
|
| Fair Value Measurements Using |
| |||||||||||||
|
| Carrying Value |
|
| Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
| ||||
December 26, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal notes and bonds |
| $ | 124,640 |
|
| $ | 0 |
|
| $ | 124,640 |
|
| $ | 0 |
|
Asset-backed securities |
|
| 11,708 |
|
|
| 0 |
|
|
| 11,708 |
|
|
| 0 |
|
Certificates of deposit |
|
| 36,373 |
|
|
| 0 |
|
|
| 36,373 |
|
|
| 0 |
|
Commercial paper |
|
| 32,699 |
|
|
| 0 |
|
|
| 32,699 |
|
|
| 0 |
|
Corporate bonds |
|
| 31,582 |
|
|
| 0 |
|
|
| 31,582 |
|
|
| 0 |
|
Total assets |
| $ | 237,002 |
|
| $ | 0 |
|
| $ | 237,002 |
|
| $ | 0 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
| $ | 36 |
|
| $ | 0 |
|
| $ | 36 |
|
| $ | 0 |
|
Total liabilities |
| $ | 36 |
|
| $ | 0 |
|
| $ | 36 |
|
| $ | 0 |
|
Available-for-sale debt securities classified as Level 2 are valued using observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. The foreign currency forward contracts are primarily measured based on the foreign currency spot and forward
F-18
rates quoted by the banks or foreign currency dealers. Investment prices are obtained from third party pricing providers, which model prices utilizing the above observable inputs, for each asset class.
Level 3 liabilities consisted of contingent consideration related to an acquisition for which the Company uses a discounted cash flow model to value these liabilities. Such unobservable inputs include an estimated discount rateThe Level 3 assumptions used in the Company's discounted present value analysiscash flow model for the contingent consideration included projected revenue, timing of future cash flows which reflects the Company's estimateand estimates of debt with similar terms in the current credit markets. As there is currently minimal activity in such markets, the actual rate could be materially different.discount rates.
Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard assumes that the transaction to sell the asset or transfer the liability occurs in the principal or most advantageous market See Note 5 for the asset or liability and establishes thatadditional discussion regarding the fair value of an asset or liability shall be determined based on the assumptions that market participants would use in pricing the asset or liability.
The following tables present the Company’s assets and liabilities measured at estimated fair value on a recurring basis, excluding accrued interest components, categorized in accordance with the fair value hierarchy (in thousands), as of the following dates:
|
| December 29, 2018 |
|
| December 30, 2017 |
| ||||||||||||||||||||||||||
|
| Fair Value Measurements Using Input Types |
|
|
|
|
|
| Fair Value Measurements Using Input Types |
|
|
|
|
| ||||||||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
| $ | 113 |
|
| $ | — |
|
| $ | — |
|
| $ | 113 |
|
| $ | 256 |
|
| $ | — |
|
| $ | — |
|
| $ | 256 |
|
Commercial paper |
|
| — |
|
|
| 1,993 |
|
|
| — |
|
|
| 1,993 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total cash equivalents |
|
| 113 |
|
|
| 1,993 |
|
|
| — |
|
|
| 2,106 |
|
|
| 256 |
|
|
| — |
|
|
| — |
|
|
| 256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency debt securities |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,495 |
|
|
| — |
|
|
| 1,495 |
|
Certificate of deposits |
|
| — |
|
|
| 9,497 |
|
|
| — |
|
|
| 9,497 |
|
|
| — |
|
|
| 14,497 |
|
|
| — |
|
|
| 14,497 |
|
Commercial paper |
|
| — |
|
|
| 7,932 |
|
|
| — |
|
|
| 7,932 |
|
|
| — |
|
|
| 7,949 |
|
|
| — |
|
|
| 7,949 |
|
Corporate debt securities |
|
| — |
|
|
| 15,730 |
|
|
| — |
|
|
| 15,730 |
|
|
| — |
|
|
| 47,968 |
|
|
| — |
|
|
| 47,968 |
|
Asset backed securities |
|
| — |
|
|
| 7,682 |
|
|
| — |
|
|
| 7,682 |
|
|
| — |
|
|
| 10,221 |
|
|
| — |
|
|
| 10,221 |
|
Total marketable securities |
|
| — |
|
|
| 40,841 |
|
|
| — |
|
|
| 40,841 |
|
|
| — |
|
|
| 82,130 |
|
|
| — |
|
|
| 82,130 |
|
Total(1) |
| $ | 113 |
|
| $ | 42,834 |
|
| $ | — |
|
| $ | 42,947 |
|
| $ | 256 |
|
| $ | 82,130 |
|
| $ | — |
|
| $ | 82,386 |
|
marketable securities.
|
|
The fair values of theAt January 1, 2022 and December 26, 2020, marketable securities that are classifiedcategorized as Level 1 in the table above were derived from quoted market prices for identical assets or liabilities in active markets that the Company can access. follows:
|
| Amortized Cost |
|
| Gross Unrealized Holding Gains |
|
| Gross Unrealized Holding Losses |
|
| Fair Value |
| ||||
January 1, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal notes and bonds |
| $ | 171,203 |
|
| $ | 38 |
|
| $ | 261 |
|
| $ | 170,980 |
|
Asset-backed securities |
|
| 2,009 |
|
|
| 0 |
|
|
| 0 |
|
|
| 2,009 |
|
Certificates of deposit |
|
| 33,200 |
|
|
| 2 |
|
|
| 10 |
|
|
| 33,192 |
|
Commercial paper |
|
| 73,152 |
|
|
| 2 |
|
|
| 41 |
|
|
| 73,113 |
|
Corporate bonds |
|
| 62,634 |
|
|
| 29 |
|
|
| 216 |
|
|
| 62,447 |
|
Total marketable securities |
| $ | 342,198 |
|
| $ | 71 |
|
| $ | 528 |
|
| $ | 341,741 |
|
December 26, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal notes and bonds |
| $ | 124,387 |
|
| $ | 257 |
|
| $ | 4 |
|
| $ | 124,640 |
|
Asset-backed securities |
|
| 11,679 |
|
|
| 29 |
|
|
| 0 |
|
|
| 11,708 |
|
Certificates of deposit |
|
| 36,349 |
|
|
| 24 |
|
|
| 0 |
|
|
| 36,373 |
|
Commercial paper |
|
| 32,690 |
|
|
| 12 |
|
|
| 3 |
|
|
| 32,699 |
|
Corporate bonds |
|
| 31,544 |
|
|
| 50 |
|
|
| 12 |
|
|
| 31,582 |
|
Total marketable securities |
| $ | 236,649 |
|
| $ | 372 |
|
| $ | 19 |
|
| $ | 237,002 |
|
The amortized cost and estimated fair value of marketable securities that are classified as Level 2 inby the table above were derived from non-binding market consensus prices that were corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques with all significant inputs derived from or corroborated by observable market data. There were no transfers of instruments between Level 1, Level 2 and Level 3 duringmaturity date listed on the financial periods presented.
Derivatives
The Company uses foreign currency forward contracts to mitigate variability in gains and losses generated from the re-measurement of certain monetary assets and liabilities denominated in foreign currencies. These derivatives are carried at fair value with changes recorded in other income, net in the consolidated statements of operations. Changes in the fair value of these derivatives are largely offset by re-measurementsecurity, regardless of the underlying assetsConsolidated Balance Sheet classification, is as follows at January 1, 2022 and liabilities. The derivatives have maturities of approximately 30 days.December 26, 2020:
|
| January 1, 2022 |
|
| December 26, 2020 |
| ||||||||||
|
| Amortized Cost |
|
| Fair Value |
|
| Amortized Cost |
|
| Fair Value |
| ||||
Due within one year |
| $ | 219,353 |
|
| $ | 219,211 |
|
| $ | 170,099 |
|
| $ | 170,321 |
|
Due after one through five years |
|
| 122,845 |
|
|
| 122,530 |
|
|
| 66,550 |
|
|
| 66,681 |
|
Due after five through ten years |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Due after ten years |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Total marketable securities |
| $ | 342,198 |
|
| $ | 341,741 |
|
| $ | 236,649 |
|
| $ | 237,002 |
|
The settlement resultF-19
55
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes the Company’s outstanding derivative instruments on aestimated fair value and gross basis:unrealized holding losses of marketable securities, aggregated by investment instrument and period of time in an unrealized loss position, at January 1, 2022 and December 26, 2020.
|
| December 29, 2018 |
|
| December 30, 2017 |
| ||||||||||||||||||
|
| Notional Amount |
|
| Fair Value |
|
| Notional Amount |
|
| Fair Value |
| ||||||||||||
|
| (in millions) |
|
| Asset |
|
| Liability |
|
| (in millions) |
|
| Asset |
|
| Liability |
| ||||||
Undesignated Hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward Foreign Currency Contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase |
| $ | 25.9 |
|
|
| — |
|
|
| — |
|
| $ | 27.5 |
|
|
| — |
|
| $ | 0.1 |
|
Sell |
| $ | 21.8 |
|
|
| — |
|
| $ | 0.2 |
|
| $ | 16.8 |
|
| $ | 0.1 |
|
|
| — |
|
|
| In Unrealized Loss Position For Less Than 12 Months |
|
| In Unrealized Loss Position For Greater Than 12 Months |
| ||||||||||
|
| Fair Value |
|
| Gross Unrealized Losses |
|
| Fair Value |
|
| Gross Unrealized Losses |
| ||||
January 1, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal notes and bonds |
| $ | 113,790 |
|
| $ | 262 |
|
| $ | 0 |
|
| $ | 0 |
|
Certificates of deposit |
|
| 16,300 |
|
|
| 10 |
|
|
| 0 |
|
|
| 0 |
|
Commercial paper |
|
| 58,681 |
|
|
| 40 |
|
|
| 0 |
|
|
| 0 |
|
Corporate bonds |
|
| 53,661 |
|
|
| 150 |
|
|
| 2,587 |
|
|
| 66 |
|
Total marketable securities |
| $ | 242,432 |
|
| $ | 462 |
|
| $ | 2,587 |
|
| $ | 66 |
|
December 26, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal notes and bonds |
| $ | 8,641 |
|
| $ | 4 |
|
| $ | 0 |
|
| $ | 0 |
|
Commercial paper |
|
| 8,862 |
|
|
| 3 |
|
|
| 0 |
|
|
| 0 |
|
Corporate bonds |
|
| 14,947 |
|
|
| 12 |
|
|
| 0 |
|
|
| 0 |
|
Total marketable securities |
| $ | 32,450 |
|
| $ | 19 |
|
| $ | 0 |
|
| $ | 0 |
|
See Note 4 for additional discussion regarding the fair value of the Company’s marketable securities.
6. | Goodwill and Purchased Intangible Assets: |
Goodwill and purchased intangible assets with indefinite useful lives are not amortized but are reviewed for impairment annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The process of evaluating the potential impairment of goodwill and intangible assets requires significant judgment. The Company regularly monitors current business conditions and considers other factors including, but not limited to, adverse industry or economic trends, restructuring actions and lower projections of profitability that may impact future operating results. The Company performed its annual assessment in the fourth quarter of fiscal 2021 and concluded that 0 impairment charge was required.
Goodwill
The changes in the carrying amount of goodwill are as follows:
Balance at December 31, 2019 |
| $ | 307,148 |
|
Goodwill adjustments (Note 3) |
|
| (516 | ) |
Balance at December 26, 2020 |
|
| 306,632 |
|
Goodwill from Inspectrology acquisition (Note 3) |
|
| 9,179 |
|
Balance at January 1, 2022 |
| $ | 315,811 |
|
|
|
|
|
|
Note 5. Cash and Investments
The following table presents cash, cash equivalents, and available-for-sale investments
F-20
Purchased Intangible Assets
Purchased intangible assets as of the following dates (in thousands):January 1, 2022 and December 26, 2020 are as follows:
|
| December 29, 2018 |
| |||||||||||||
|
| Amortized Cost |
|
| Gross Unrealized Gains |
|
| Gross Unrealized Losses |
|
| Estimated Fair Market Value |
| ||||
Cash |
| $ | 108,845 |
|
| $ | — |
|
| $ | — |
|
| $ | 108,845 |
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
| 113 |
|
|
| — |
|
|
| — |
|
|
| 113 |
|
Commercial paper |
|
| 1,993 |
|
|
| — |
|
|
| — |
|
|
| 1,993 |
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposits |
|
| 9,500 |
|
|
| — |
|
|
| (3 | ) |
|
| 9,497 |
|
Commercial paper |
|
| 7,933 |
|
|
| — |
|
|
| (1 | ) |
|
| 7,932 |
|
Corporate debt securities |
|
| 15,788 |
|
|
| — |
|
|
| (58 | ) |
|
| 15,730 |
|
Asset-backed securities |
|
| 7,706 |
|
|
| — |
|
|
| (24 | ) |
|
| 7,682 |
|
Total cash, cash equivalents, and marketable securities |
| $ | 151,878 |
|
| $ | — |
|
| $ | (86 | ) |
| $ | 151,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 30, 2017 |
| |||||||||||||
|
| Amortized Cost |
|
| Gross Unrealized Gains |
|
| Gross Unrealized Losses |
|
| Estimated Fair Market Value |
| ||||
Cash |
| $ | 34,643 |
|
| $ | — |
|
| $ | — |
|
| $ | 34,643 |
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
| 256 |
|
|
| — |
|
|
| — |
|
|
| 256 |
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency securities |
|
| 1,500 |
|
|
| — |
|
|
| (5 | ) |
|
| 1,495 |
|
Certificates of deposits |
|
| 14,498 |
|
|
| — |
|
|
| (1 | ) |
|
| 14,497 |
|
Commercial paper |
|
| 7,952 |
|
|
| — |
|
|
| (3 | ) |
|
| 7,949 |
|
Corporate debt securities |
|
| 48,073 |
|
|
| — |
|
|
| (105 | ) |
|
| 47,968 |
|
Asset-backed securities |
|
| 10,240 |
|
|
| — |
|
|
| (19 | ) |
|
| 10,221 |
|
Total cash, cash equivalents, and marketable securities |
| $ | 117,162 |
|
| $ | — |
|
| $ | (133 | ) |
| $ | 117,029 |
|
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net |
| |||
January 1, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
Finite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology |
| $ | 377,997 |
|
| $ | 155,976 |
|
| $ | 222,021 |
|
Customer and distributor relationships |
|
| 73,321 |
|
|
| 25,608 |
|
|
| 47,713 |
|
Trademarks and trade names |
|
| 14,171 |
|
|
| 6,624 |
|
|
| 7,547 |
|
Total identifiable intangible assets |
| $ | 465,489 |
|
| $ | 188,208 |
|
| $ | 277,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
Finite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology |
| $ | 326,877 |
|
| $ | 110,851 |
|
| $ | 216,026 |
|
Customer and distributor relationships |
|
| 69,261 |
|
|
| 20,654 |
|
|
| 48,607 |
|
Trademarks and trade names |
|
| 12,461 |
|
|
| 5,337 |
|
|
| 7,124 |
|
Total finite-lived intangible assets |
|
| 408,599 |
|
|
| 136,842 |
|
|
| 271,757 |
|
In-process research and development |
|
| 46,600 |
|
|
| — |
|
|
| 46,600 |
|
Total identifiable intangible assets |
| $ | 455,199 |
|
| $ | 136,842 |
|
| $ | 318,357 |
|
Available-for-sale marketable securities, readily convertibleIntangible asset amortization expense amounted to cash, with maturity dates of 90 days or less are classified as cash equivalents, while those with maturity dates greater than 90 days are classified as marketable securities within short-term assets. All marketable securities as of$51,366, $53,746 and $10,445 for the years ended January 1, 2022, December 29, 201826, 2020 and December 30, 2017, were available-for-sale31, 2019, respectively. Assuming no change in the gross carrying value of identifiable intangible assets and reportedestimated lives, estimated amortization expenses are $55,273 for 2022, $54,798 for 2023, $49,113 for 2024, $32,563 for 2025, and $31,370 for 2026.
7. | Leasing Arrangements: |
The Company determines if an arrangement is a lease at fair valueits inception. Operating lease arrangements are comprised primarily of real estate and equipment agreements for which the right-of-use assets are included in “Other assets” and the corresponding lease liabilities, depending on their maturity, are included in “Other current liabilities” or “Other non-current liabilities” in the Consolidated Balance Sheets.
Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The lease term includes options to extend the lease when it is reasonably certain that the option will be exercised. Lease agreements frequently require the Company to pay real estate taxes, insurance and maintenance costs. Leases with a term of one year or quoted market prices asless are not recorded on the Consolidated Balance Sheets and lease expense for these leases is recognized on a straight-line basis over the lease term.
The Company uses its estimated incremental borrowing rate in determining the present value of lease payments considering the term of the balance sheet date. Gross realized gainslease, which is derived from information available at the lease commencement date, giving consideration to publicly available data for instruments with similar characteristics. The Company accounts for the lease and losses on sale of securitiesnon-lease components as a single lease component.
Lease costs for operating leases were $5,964 and $6,756 for the years ended January 1, 2022 and December 26, 2020, respectively. Operating lease costs are recorded in other income, net, ingenerally recognized over the Company’s statement of operations. Net realized gainslease term. The Company elected the practical expedient to not provide comparable presentation for fiscal 2018, 2017, and 2016 was $1.4 million, $1.3 million and $0.5 million, respectively.periods prior to adoption.
56
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
F-21
Unrealized gains or losses, netTable of tax effect, are recorded in accumulated other comprehensive income (loss) within stockholders' equity. Both the gross unrealized gains and gross unrealized losses for the fiscal years ended December 29, 2018, and December 30, 2017 were insignificant and no marketable securities had other than temporary impairment. All marketable securities as of December 29, 2018 and December 30, 2017, had effective maturity dates of less than three years.Contents
Note 6. Accounts ReceivableDetails of the Company’s operating leases are as follows:
|
| Year Ended |
| |||||
Cash Flow Information |
| January 1, 2022 |
|
| December 26, 2020 |
| ||
Cash paid for operating lease liabilities |
| $ | 6,247 |
|
| $ | 6,700 |
|
Right-of-use assets obtained in exchange for operating lease liabilities |
| $ | 304 |
|
| $ | 725 |
|
|
| January 1, |
|
| December 26, |
| ||
Operating Lease Information |
| 2022 |
|
| 2020 |
| ||
Weighted average remaining lease term |
|
| 5.3 |
|
|
| 6.0 |
|
Weighted average discount rate |
|
| 4.5 | % |
|
| 4.7 | % |
As of January 1, 2022, there was an insignificant amount of commitments for operating leases that have not yet commenced. The reconciliation of the maturities of operating leases to the lease liabilities recorded on the Consolidated Balance Sheet as of January 1, 2022 is as follows:
Fiscal Year |
|
|
|
|
2022 |
| $ | 5,029 |
|
2023 |
|
| 4,058 |
|
2024 |
|
| 3,457 |
|
2025 |
|
| 3,342 |
|
2026 |
|
| 1,919 |
|
Thereafter |
|
| 3,299 |
|
Total undiscounted operating lease payments |
|
| 21,104 |
|
Less: imputed interest |
|
| 2,402 |
|
Present value of operating lease liabilities |
| $ | 18,702 |
|
8. | Balance Sheet Components: |
Inventories
Inventories are comprised of the following:
|
| January 1, |
|
| December 26, |
| ||
|
| 2022 |
|
| 2020 |
| ||
Materials |
| $ | 157,343 |
|
| $ | 124,926 |
|
Work-in-process |
|
| 60,415 |
|
|
| 44,829 |
|
Finished goods |
|
| 25,350 |
|
|
| 21,462 |
|
Total inventories |
| $ | 243,108 |
|
| $ | 191,217 |
|
Property, Plant and Equipment
Property, plant and equipment, net, is comprised of the following:
|
| January 1, |
|
| December 26, |
| ||
|
| 2022 |
|
| 2020 |
| ||
Land and building |
| $ | 48,297 |
|
| $ | 47,544 |
|
Machinery and equipment |
|
| 50,226 |
|
|
| 52,833 |
|
Furniture and fixtures |
|
| 2,534 |
|
|
| 4,013 |
|
Computer equipment and software |
|
| 13,856 |
|
|
| 15,549 |
|
Leasehold improvements |
|
| 13,710 |
|
|
| 12,927 |
|
|
|
| 128,623 |
|
|
| 132,866 |
|
Accumulated depreciation |
|
| (46,529 | ) |
|
| (44,916 | ) |
Total property, plant and equipment, net |
| $ | 82,094 |
|
| $ | 87,950 |
|
F-22
Depreciation expense amounted to $14,435, $13,832 and $5,965 for the years ended January 1, 2022, December 26, 2020 and December 31, 2019, respectively.
Other assets
Other assets is comprised of the following:
|
| January 1, |
|
| December 26, |
| ||
|
| 2022 |
|
| 2020 |
| ||
Operating lease right-of-use assets |
| $ | 17,488 |
|
| $ | 19,669 |
|
Other |
|
| 4,228 |
|
|
| 1,668 |
|
Total other assets |
| $ | 21,716 |
|
| $ | 21,337 |
|
Accrued liabilities
Accrued liabilities is comprised of the following:
|
| January 1, |
|
| December 26, |
| ||
|
| 2022 |
|
| 2020 |
| ||
Payroll and related expenses |
| $ | 32,581 |
|
| $ | 30,270 |
|
Warranty |
|
| 9,093 |
|
|
| 6,062 |
|
Other |
|
| 1,368 |
|
|
| 743 |
|
Total accrued liabilities |
| $ | 43,042 |
|
| $ | 37,075 |
|
|
|
|
|
|
|
|
|
|
Other current liabilities
Other current liabilities is comprised of the following:
|
| January 1, |
|
| December 26, |
| ||
|
| 2022 |
|
| 2020 |
| ||
Customer deposits |
| $ | 9,459 |
|
| $ | 15,177 |
|
Current operating lease obligations |
|
| 3,968 |
|
|
| 4,470 |
|
Income tax payable |
|
| 6,315 |
|
|
| 4,109 |
|
Accrued professional fees |
|
| 912 |
|
|
| 1,184 |
|
Other |
|
| 7,506 |
|
|
| 3,559 |
|
Total other current liabilities |
| $ | 28,160 |
|
| $ | 28,499 |
|
Other non-current liabilities
Other non-current liabilities is comprised of the following:
|
| January 1, |
|
| December 26, |
| ||
|
| 2022 |
|
| 2020 |
| ||
Non-current operating lease obligations |
| $ | 13,754 |
|
| $ | 16,455 |
|
Unrecognized tax benefits (including interest) |
|
| 7,861 |
|
|
| 3,812 |
|
Deferred revenue |
|
| 1,693 |
|
|
| 1,292 |
|
Other |
|
| 5,643 |
|
|
| 6,153 |
|
Total non-current liabilities |
| $ | 28,951 |
|
| $ | 27,712 |
|
9. | Commitments and Contingencies: |
Factoring
The Company maintains arrangements under which eligible accounts receivable in Japan are sold without recourse to unrelated third-party financial institutions. These receivables were not included in the consolidated balance sheets as the criteria for sale treatment had been met. After a transfer of financial assets, an entity stops recognizing the financial assets when control has been surrendered. The agreement met the criteria of a true sale of these assets since the acquiring party retained the title to these receivables and had assumed the risk that the receivables will be collectible. The Company pays administrative fees as well as interest ranging from 0.62% to 1.48% based on the anticipated length of time between the date the sale is consummated, and the expected collection date of the receivables sold. The Company sold $64.3 million and $18.6 million$20,384 of receivables during fiscal yearsthe year ended December 29, 2018 and December 30, 2017, respectively.January 1, 2022. There were no material gains or losses on the sale of such receivables. There were no0 amounts due from such third-party financial institutions at December 29, 2018 and December 30, 2017.January 1, 2022.
F-23
Note 7. Financial Statement Components
The following tables provide details of selected financial statement components as of the following dates (in thousands):
|
| At |
| |||||
|
| December 29, 2018 |
|
| December 30, 2017 |
| ||
Inventories: |
|
|
|
|
|
|
|
|
Raw materials and sub-assemblies |
| $ | 31,434 |
|
| $ | 32,187 |
|
Work in process |
|
| 22,383 |
|
|
| 13,498 |
|
Finished goods |
|
| 8,098 |
|
|
| 7,175 |
|
Inventories |
|
| 61,915 |
|
|
| 52,860 |
|
Inventories-delivered systems |
|
| 180 |
|
|
| 1,534 |
|
Total inventories |
| $ | 62,095 |
|
| $ | 54,394 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net:(1) |
|
|
|
|
|
|
|
|
Land |
| $ | 15,571 |
|
| $ | 15,573 |
|
Building and improvements |
|
| 21,354 |
|
|
| 20,880 |
|
Machinery and equipment |
|
| 39,898 |
|
|
| 36,380 |
|
Furniture and fixtures |
|
| 2,551 |
|
|
| 2,420 |
|
Software |
|
| 10,116 |
|
|
| 9,558 |
|
Capital in progress |
|
| 6,027 |
|
|
| 4,418 |
|
Total property, plant and equipment, gross |
|
| 95,517 |
|
|
| 89,229 |
|
Accumulated depreciation and amortization |
|
| (47,617 | ) |
|
| (44,419 | ) |
Total property, plant and equipment, net |
| $ | 47,900 |
|
| $ | 44,810 |
|
(1) Total depreciation and amortization expense for the years ended December 29, 2018, December 30, 2017 and December 31, 2016 was $6.5 million, $6.7 million, and $6.8 million, respectively. |
| |||||||
|
|
|
|
|
|
|
|
|
Other Current Liabilities: |
|
|
|
|
|
|
|
|
Accrued warranty |
| $ | 4,379 |
|
| $ | 4,863 |
|
Accrued taxes |
|
| 1,738 |
|
|
| 813 |
|
Customer deposits |
|
| 293 |
|
|
| — |
|
Accrued professional services |
|
| 448 |
|
|
| 534 |
|
Third party commissions |
|
| 1,382 |
|
|
| 76 |
|
Other |
|
| 1,181 |
|
|
| 963 |
|
Total other current liabilities |
| $ | 9,421 |
|
| $ | 7,249 |
|
57
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Components of Accumulated Other Comprehensive Income (Loss)
|
| Years Ended |
| |||||||||||||
|
| Foreign Currency Translations |
|
| Defined Benefit Pension Plans |
|
| Unrealized Income (Loss) on Investment |
|
| Accumulated Other Comprehensive Income |
| ||||
Balance as of December 31, 2016 |
| $ | (5,817 | ) |
| $ | (227 | ) |
| $ | (2 | ) |
| $ | (6,046 | ) |
Current period change |
|
| 4,170 |
|
|
| (160 | ) |
|
| (88 | ) |
|
| 3,922 |
|
Balance as of December 30, 2017 |
|
| (1,647 | ) |
|
| (387 | ) |
|
| (90 | ) |
|
| (2,124 | ) |
Current period change |
|
| (482 | ) |
|
| (259 | ) |
|
| 308 |
|
|
| (433 | ) |
Balance as of December 30, 2018 |
| $ | (2,129 | ) |
| $ | (646 | ) |
| $ | 218 |
|
| $ | (2,557 | ) |
The items above, except for unrealized income (loss) on investment, did not impact the Company’s income tax provision. The amounts reclassified from each component of accumulated other comprehensive income into income statement line items were insignificant.
Note 8. Goodwill and Intangible Assets
The following table summarizes the activity in the Company’s goodwill during the years ended December 29, 2018 and December 30, 2017, respectively (in thousands):
|
| Amounts |
| |
Balance as of December 31, 2016 |
| $ | 8,940 |
|
Foreign currency movements |
|
| 1,292 |
|
Balance as of December 30, 2017 |
|
| 10,232 |
|
Foreign currency movements |
|
| 378 |
|
4D acquisition |
|
| 15,762 |
|
Balance as of December 29, 2018 |
| $ | 26,372 |
|
There were no business acquisitions made by the Company during fiscal years 2017 and 2016.
Impairment - Goodwill and Long-lived Assets
The Company’s impairment review process is completed during the fourth quarter of each year, or whenever events or circumstances occur that indicate that an impairment may have occurred. The goodwill impairment assessment involves three tests, Step 0, Step 1 and Step 2. The Company performs a Step 0 test, which involves an initial qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, after assessing the qualitative factors, the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then performing the two-step impairment test is necessary. Otherwise, no further testing is necessary.Intellectual property Indemnification Obligations
The Company completed its annual goodwill impairment assessment duringhas entered into agreements with customers that include limited intellectual property indemnification obligations that are customary in the fourth quarter of 2018 by first performing a Step 0 qualitative assessment. As part of this assessment,industry. These guarantees generally require the Company consideredto compensate the trading valueother party for certain damages and costs incurred as a result of third-party intellectual property claims arising from these transactions. The nature of the Company's stock,intellectual property indemnification obligations prevents the industry trends, and the Company's sales forecast and products plans. The Company concluded that it was more likely than not that the fair value was more than the carrying valuesfrom making a reasonable estimate of the Company's reporting unit and therefore did not proceedmaximum potential amount it could be required to the Step 1 goodwill impairment test.
The process of evaluating the potential impairment of long-lived assets is highly subjective and requires significant judgment. In estimating the fair value of these assets,pay to its customers. Historically, the Company has not made estimatesany indemnification payments under such agreements and judgments about future revenues and cash flows. The Company’s forecasts were based on assumptions that are consistent0 amount has been accrued in the accompanying consolidated financial statements with the plans and estimates the Company is usingrespect to manage its business. Changes in these estimates could change the Company’s conclusion regarding impairment of the long-lived assets and potentially result in future impairment charges for all or a portion of their balance at December 29, 2018. The Company did not record any impairment charges related to goodwill in fiscal year 2018.indemnification guarantees.
Warranty Reserves
The Company assesses if there have been triggersgenerally provides a warranty on its products for a period of 12 to 14 months against defects in material and workmanship. The Company estimates the costs that may require it to evaluatebe incurred during the reasonableness of the remaining estimated useful lives of its intangible assets. No such triggers were identified during fiscal year 2018.
58
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Intangible assets are recorded at cost, less accumulated amortization. The Company recorded $23.5 million of intangible assets in conjunction with its acquisition of 4D in 2018 (See Note 3 – Acquisition). Intangible assets as of December 29, 2018warranty period and December 30, 2017 consisted of the following (in thousands):
|
| December 29, 2018 |
| |||||||||
|
| Adjusted cost |
|
| Accumulated amortization |
|
| Net carrying amount |
| |||
Developed technology |
| $ | 35,954 |
|
| $ | (16,532 | ) |
| $ | 19,422 |
|
Customer relationships |
|
| 6,531 |
|
|
| (1,519 | ) |
|
| 5,012 |
|
In-Process research and development |
|
| 1,400 |
|
|
| — |
|
|
| 1,400 |
|
Trade name |
|
| 1,500 |
|
|
| (8 | ) |
|
| 1,492 |
|
Total |
| $ | 45,385 |
|
| $ | (18,059 | ) |
| $ | 27,326 |
|
|
| December 30, 2017 |
| |||||||||
|
| Adjusted cost |
|
| Accumulated amortization |
|
| Net carrying amount |
| |||
Developed technology |
| $ | 18,887 |
|
| $ | (16,681 | ) |
| $ | 2,206 |
|
Customer relationships |
|
| 9,438 |
|
|
| (9,438 | ) |
|
| — |
|
Brand names |
|
| 1,927 |
|
|
| (1,927 | ) |
|
| — |
|
Patented technology |
|
| 2,252 |
|
|
| (2,252 | ) |
|
| — |
|
Trade name |
|
| 80 |
|
|
| (80 | ) |
|
| — |
|
Total |
| $ | 32,584 |
|
| $ | (30,378 | ) |
| $ | 2,206 |
|
The amortization of finite-lived intangibles is computed using the straight-line method. Estimated lives of finite-lived intangibles range from two to fifteen years. Total amortization expense for the fiscal years ended December 29, 2018, December 30, 2017 and December 31, 2016, was $0.4 million, $0.2 million and $1.5 million, respectively.
There were no impairment charges related to intangible assets recorded during either the year ended December 29, 2018 or December 30, 2017. During 2018, the Company retired $16.1million of intangible assets that had been fully amortized for both book and tax purposes that were deemed to have no future utility to the Company.
The estimated future amortization expense of finite intangible assets as of December 29, 2018, is as follows (in thousands):
Fiscal Years |
| Amounts |
| |
2019 |
|
| 2,997 |
|
2020 |
|
| 2,905 |
|
2021 |
|
| 2,905 |
|
2022 |
|
| 2,905 |
|
2023 |
|
| 2,905 |
|
Thereafter |
|
| 11,309 |
|
Total future amortization expense |
|
| 25,926 |
|
In-Process research and development of $1.4 million acquiredrecords a liability in the 4D acquisition has been omitted fromamount of such costs at the above table as its estimated useful life is indeterminant at December 29, 2018. It will be tested for impairment, along with Goodwill, until its estimated useful life becomes finite.
Note 9. Warranties
Product Warranty – The Company sells the majority of its products with a 12 months repair or replacement warranty from the date of acceptance or shipment date. The Company provides an accrual for estimated future warranty costs based upon the historical relationship of warranty costs to the cost of products sold. The estimated future warranty obligations related to product sales are recorded in the period in which the relatedtime revenue is recognized. The estimated future warranty obligations are affected by the warranty periods, sales volumes, product failure rates, material usage, and labor and replacement costs incurred in correcting a product failure. If actual product failure rates, material usage, labor or replacement costs were to differ from the Company’s estimates, revisions to the estimated warranty obligations would be required. For new product introductions where limited or noestimate is based primarily on historical information exists, the Company may use warranty information from other previous product introductions to guide it in estimating its
59
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
warranty accrual. The warranty accrual represents the best estimate of the amount necessary to settle future and existing claims on products sold as of the balance sheet date.experience. The Company periodically assesses the adequacy of its reportedrecorded warranty reserveliabilities and adjusts suchthe amounts in accordanceas necessary. Settlements of warranty reserves are generally associated with changes in these factors.sales that occurred during the 12 to 14 months prior to the year-end and warranty accruals are related to sales during the same year.
Components of the warranty accrual, which were includedChanges in the accompanying consolidated balance sheets with other current liabilities, were as follows (in thousands):
|
| Years Ended |
| |||||
|
| December 29, 2018 |
|
| December 30, 2017 |
| ||
Balance as of beginning of period |
| $ | 4,863 |
|
| $ | 3,838 |
|
Accruals for warranties issued during period |
|
| 4,914 |
|
|
| 5,247 |
|
Settlements during the period |
|
| (5,871 | ) |
|
| (4,222 | ) |
Addition of 4-D Warranty reserves |
|
| 473 |
|
|
| - |
|
Balance as of end of period |
| $ | 4,379 |
|
| $ | 4,863 |
|
Note 10. Commitments and Contingencies
Intellectual Property Indemnification Obligations – The Company will, from time to time, in the normal course of business, agree to indemnify certain customers, vendors or others against third party claims that Nanometrics’ products, when used for their intended purpose(s), or the Company’s intellectual property, infringe the intellectual property rights of such third parties or other claims made against parties with whom it enters into contractual relationships. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. Historically, the Company has not made payments under these obligations and believes that the estimated fair value of these agreements is immaterial. Accordingly, no liabilities have been recorded for these obligations in the accompanying consolidated balance sheets as of December 29, 2018 and December 30, 2017.
Contractual Obligations – The Company maintains certain open inventory purchase agreements with its suppliers to ensure a smooth and continuous supply availability for key components. The Company’s liability under these purchase commitments is generally restricted to a forecasted time-horizon as mutually agreed upon between the parties. This forecasted time-horizon can vary among different suppliers. The Company estimates its open inventory purchase commitment as of December 29, 2018 was approximately $42.8 million. Actual expenditures will vary based upon the volume of the transactions and length of contractual service provided. In addition, the amounts paid under these arrangements may be less in the event that the arrangements are renegotiated or cancelled.
The Company leases facilities and certain equipment under non-cancelable operating leases. Rent expense, which is recorded on a straight-line basis over the term of the respective lease, for 2018, 2017 and 2016 was approximately $2.1 million, $1.8 million and $1.8 million, respectively. Future minimum lease payments under its operating leaseswarranty reserves are as follows (in thousands):
follows:
|
| Operating Leases |
| |
2019 |
|
| 3,002 |
|
2020 |
|
| 1,891 |
|
2021 |
|
| 1,051 |
|
2022 |
|
| 970 |
|
2023 |
|
| 750 |
|
Thereafter |
|
| 696 |
|
Total |
| $ | 8,360 |
|
|
| Year Ended |
| |||||
|
| January 1, 2022 |
|
| December 26, 2020 |
| ||
Balance, beginning of the period |
| $ | 6,485 |
|
| $ | 6,348 |
|
Accruals |
|
| 11,892 |
|
|
| 7,707 |
|
Warranty liability assumed from Inspectrology acquisition (Note 3) |
|
| 407 |
|
|
| — |
|
Usage |
|
| (9,102 | ) |
|
| (7,570 | ) |
Balance, end of the period |
| $ | 9,682 |
|
| $ | 6,485 |
|
Legal Proceedings – Matters
From time to time, the Company is subject to various legal proceedings orand claims arising in the ordinary course of business. The following reflects an overview of the material developments with regard to the Company’s pending material legal proceedings.
60
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Optical Solutions Inc. v. Nanometrics Incorporated (Case No. 18-cv-00417-BLF): On August 2, 2017, the CompanyNanometrics was named as defendant in a complaint filed in New Hampshire Superior Court (“Complaint”(the “Complaint”). The Complaint, brought by Optical Solutions, Inc. (“OSI”), alleges claims arising from a purported exclusive purchase contract between OSI and the CompanyNanometrics pertaining to certain product.products. The relief sought is the award of damages in an amount to be proven at trial, attorney’s fees and cost as well as other relief the court deems just and proper. On September 18, 2017, the CompanyNanometrics removed the action to the United States District Court for the District of New Hampshire.Hampshire (the “District of New Hampshire”). On September 25, 2017, the CompanyNanometrics moved to transfer the Complaint to the United States District Court for the Northern District of California.California (the “Northern District of California”). On December 20, 2017, the CompanyNanometrics filed its complaint against OSI in the California Superior Court for the County of Santa Clara alleging claims arising from OSI’s breach of certain purchase orders. The Company’srelief sought is the award of damages in an amount to be proven at trial including pre- and post-judgment interest, punitive damages, restitution for benefits unjustly received by OSI, attorney’s fees and cost as well as other relief the court deems just and proper. Nanometrics’ complaint was later removed by OSI to the Northern District of California. On May 29, 2018, the District CourtDistrict of New Hampshire issued an order granting the Company’sNanometrics’ motion to transfer OSI’sthe Complaint to the Northern District of California and denying the Company’sNanometrics’ motion to dismiss the Complaint without prejudice. On June 14, 2018, OSI’sthe Complaint was consolidated with the Company’sNanometrics’ complaint against OSI. On August 9, 2018, OSI filed an Amended Complaint. On September 19, 2018, the CompanyNanometrics filed a motion to dismiss OSI’s Amended Complaint for failure to state a claim. The Company’sNanometrics’ motion to dismiss is set to bewas heard on February 28, 2019. Trial has beenOn March 5, 2019, the Northern District of California granted Nanometrics’ motion to dismiss with leave to amend. OSI filed a Second Amended Complaint on March 29, 2019. Nanometrics filed a motion to dismiss OSI’s Second Amended Complaint on May 31, 2019. In October 2019, Nanometrics was renamed Onto Innovation Inc. as a result of the Merger. Thereafter, the Company’s second motion to dismiss was heard on November 14, 2019. On November 26, 2019, the Northern District of California granted the Company’s motion to dismiss with leave to amend. OSI filed a Third Amended Complaint on January 21, 2020. On March 2, 2020, the Company filed a motion to dismiss OSI’s Third Amended Complaint and a hearing on the motion was held on June 11, 2020. On June 23, 2020, the Northern District of California granted the Company’s motion to dismiss with prejudice with regard to two claims asserted by OSI and dismissed two other claims asserted by OSI with leave to amend. Thereafter, on July 7, 2020, OSI filed a Fourth Amended Complaint. On August 14, 2020, the Company filed a motion to dismiss with regard to one of the two remaining claims. On December 1, 2020, the Northern District of California denied this final motion to dismiss and as a result the Company filed its
F-24
Answer in this matter on December 22, 2020. This matter is currently in discovery. The Northern District of California granted a joint stipulation that discovery cutoff is November 1, 2022 and the trial date is set for May 16, 2022.December 4, 2023. At this time, the loss contingency in this matter is remote and the Company does not anticipate the outcome of the matter to have a material impact on its financial position, results of operations, or cash flows.
Open and Committed Purchase Orders
As of January 1, 2022, the Company has open and committed purchase orders of $373,638, of which $345,334 is for less than one year.
Line of Credit
The Company has a credit agreement with a bank that provides for a line of credit which is secured by the marketable securities the Company has with the bank. The Company is permitted to borrow up to 70% of the value of eligible securities held at the time the line of credit is accessed. The available line of credit as of January 1, 2022 was approximately $131,402 with an available interest rate of 1.8%. The credit agreement is available to the Company until such time that either party terminates the arrangement at their discretion. The Company has not utilized the line of credit to date.
10. | Revenue |
The following table represents a disaggregation of revenue by timing of revenue:
|
| Year Ended |
| |||||
|
| January 1, 2022 |
|
| December 26, 2020 |
| ||
Point-in-time |
| $ | 749,276 |
|
| $ | 527,677 |
|
Over-time |
|
| 39,623 |
|
|
| 28,819 |
|
Total revenue |
| $ | 788,899 |
|
| $ | 556,496 |
|
See Note 15 of the Notes to the Consolidated Financial Statements for additional discussion of the Company’s disaggregated revenue in detail.
Contract Liabilities
The Company records a provision for a losscontract liabilities when it believes that it is both probable that a lossthe customer has been incurred and the amount can be reasonably estimated. Based on current information,billed in advance of the Company believes it does not have any probable and reasonably estimable lossescompleting its performance obligations primarily related to anyservice contracts and installation. For contracts that have a duration of one year or less, these amounts are recorded as current legal proceedingsdeferred revenue in the Consolidated Balance Sheets. As of January 1, 2022 and claims. Although it is difficult to predict the outcome of legal proceedings,December 26, 2022, the Company believes that any liability that may ultimately arisecarried a long-term deferred revenue balance of $1,693 and $1,292, respectively, in “other non-current liabilities” on the Consolidated Balance Sheets.
Changes in deferred revenue were as follows:
|
| Year Ended |
| |||||
|
| January 1, 2022 |
|
| December 26, 2020 |
| ||
Balance, beginning of the period |
| $ | 15,627 |
|
| $ | 15,093 |
|
Deferred revenue assumed from Inspectrology acquisition (Note 3) |
|
| 386 |
|
|
| — |
|
Deferral of revenue |
|
| 69,656 |
|
|
| 43,398 |
|
Recognition of deferred revenue |
|
| (53,997 | ) |
|
| (42,864 | ) |
Balance, ending of the period |
| $ | 31,672 |
|
| $ | 15,627 |
|
11. |
Share-Based Compensation Plans
The Company’s share-based compensation plans are intended to attract and retain employees and to provide an incentive for them to assist the Company to achieve long-range performance goals and to enable them to participate in long-term growth of the Company. The Company settles restricted stock unit awards, employee stock purchase option exercises and stock option exercises with newly issued common shares.
F-25
Onto Innovation Inc. 2020 Stock Plan (the “2020 Plan”). The 2020 Plan provides for the grant of 3,744 stock options and other stock awards to employees, directors and consultants at an exercise price equal to the fair market value of the common stock on the date of grant. Options granted under the 2020 Plan typically grade vest over a three-year period and expire ten years from the resolutiondate of these ordinary course matters will notgrant. Restricted stock units granted under the 2020 Plan typically vest over a three-year period for employees and one year for directors; however, other vesting periods are allowable under the 2020 Plan. Restricted stock units (“RSU”) granted to employees have a material adverse effect on the business, financial condition and resultstime based or performance-based vesting. As of operations.
Note 11. Net Income Per Share
The Company presents both basic and diluted net income per share on the face of its consolidated statements of operations. Basic net income per share excludes the effect of potentially dilutive shares and is computed by dividing net income by the weighted-average number ofJanuary 1, 2022, there were 3,376 shares of common stock outstandingavailable for issuance pursuant to future grants under the period. Diluted net income per2020 Plan.
Onto Innovation Inc. 2020 Employee Stock Purchase Plan (the “2020 ESPP”). Under the terms of the 2020 ESPP, eligible employees may have up to 10 % of eligible compensation deducted from their pay and applied to the purchase of shares of Company common stock. The price the employee pays for each share of stock is computed using85 % of the weighted-averagelesser of the fair market value of Company common stock at the beginning or the end of the applicable six-month purchase period. The 2020 ESPP is intended to qualify under Section 423 of the Internal Revenue Code and is a compensatory plan as defined by FASB ASC 718, “Stock Compensation.” Through the Company’s employee stock purchase plans, employees purchased 242, 91 and 72 shares during the twelve months ended January 1, 2022, December 26, 2020 and December 31, 2019, respectively. As of January 1, 2022 and December 26, 2020, there were 1,258 and 1,500, shares available for issuance under the Company’s employee stock purchase plan, respectively.
The following table reflects share-based compensation expense by type of award:
|
| Year Ended |
| |||||||||
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| |||
Share-based compensation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units, including all performance and market based awards |
| $ | 17,174 |
|
| $ | 15,780 |
|
| $ | 10,421 |
|
Stock options and employee stock purchase options |
|
| 2,368 |
|
|
| 1,882 |
|
|
| 164 |
|
Total share-based compensation |
|
| 19,542 |
|
|
| 17,662 |
|
|
| 10,585 |
|
Tax effect on share-based compensation |
|
| 4,255 |
|
|
| 3,849 |
|
|
| 2,283 |
|
Net effect on net income |
| $ | 15,287 |
|
| $ | 13,813 |
|
| $ | 8,302 |
|
Effect on earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (0.31 | ) |
| $ | (0.28 | ) |
| $ | (0.28 | ) |
Diluted |
| $ | (0.31 | ) |
| $ | (0.28 | ) |
| $ | (0.28 | ) |
Restricted Stock Units
During the fiscal years 2021, 2020, and the 2019 calendar year, the Company issued both service-based RSUs and market-based performance RSUs (“PRSUs”). Service-based RSUs typically vest over a period of 3 years or less. Market-based PRSUs generally vest three years from the grant date if certain performance criteria are achieved and require continued employment. Based upon the terms of such awards, the number of shares that can be earned over the performance periods is based on the Company’s Common Stock price performance compared to the market price performance of commona designated benchmark index, ranging from 0% to 200% of target. The designated benchmark index was the Philadelphia Semiconductor Sector Index for market-based PRSUs issued in 2021 and 2020. The designated benchmark was a peer group in 2019. The stock outstandingprice performance or market price performance is measured using the closing price for the 20-trading days prior to the dates the performance period plus the effect to all potentially dilutive common shares outstanding during the period, including contingently issuable sharesbegins and certain stock options, calculated using the treasury stock method. A reconciliation of the share denominator of the basic and diluted net income per share computations is as follows (in thousands):ends.
|
| Years Ended |
| |||||||||
|
| December 29, 2018 |
|
| December 30, 2017 |
|
| December 31, 2016 |
| |||
Weighted average common shares outstanding used in basic net income per share calculation |
|
| 24,120 |
|
|
| 25,334 |
|
|
| 24,655 |
|
Potential dilutive common stock equivalents, using treasury stock method |
|
| 480 |
|
|
| 585 |
|
|
| 498 |
|
Weighted average shares used in diluted net income per share calculation |
|
| 24,600 |
|
|
| 25,919 |
|
|
| 25,153 |
|
F-26
For the year ended December 29, 2018, December 30, 2017, and December 31, 2016, the Company had securities outstanding which could potentially dilute basic earnings per share in the future. For the years ended December 29, 2018, December 30, 2017 and December 31, 2016, the weighted average common share equivalents consistingTable of stock options and restricted stock units included in the calculation of diluted net income per share were 0.5 million, 0.6 million and 0.5 million shares, respectively.Contents
Note 12. Stockholders' EquityThe following table summarizes the Company’s combined service-based RSUs and Stock-Based Compensationmarket-based PRSUs:
|
| Number of Shares |
|
| Weighted Average Grant Date Fair Value |
| ||
Nonvested at December 31, 2018 |
|
| 639 |
|
| $ | 24.26 |
|
Granted |
|
| 271 |
|
| $ | 29.58 |
|
Assumed in Merger |
|
| 598 |
|
| $ | 31.43 |
|
Vested |
|
| (366 | ) |
| $ | 25.69 |
|
Forfeited |
|
| (35 | ) |
| $ | 26.44 |
|
Nonvested at December 31, 2019 |
|
| 1,107 |
|
| $ | 28.89 |
|
Granted |
|
| 498 |
|
| $ | 34.71 |
|
Vested |
|
| (498 | ) |
| $ | 29.46 |
|
Forfeited |
|
| (143 | ) |
| $ | 29.99 |
|
Nonvested at December 26, 2020 |
|
| 964 |
|
| $ | 31.37 |
|
Granted |
|
| 338 |
|
| $ | 69.82 |
|
Vested |
|
| (441 | ) |
| $ | 30.90 |
|
Forfeited |
|
| (96 | ) |
| $ | 42.40 |
|
Nonvested at January 1, 2022 |
|
| 765 |
|
| $ | 48.25 |
|
Stockholders' Equity
PreferredOf the 765 shares outstanding at January 1, 2022, 667 are service-based RSUs and Common Stock
98 are market-based PRSUs. The authorized capitalfair value of the Company’s service-based RSUs was calculated based on the fair market value of the Company’s stock at the date of Nanometrics consistsgrant. The fair value of 47,000,000 sharesthe Company’s market-based PRSUs granted during fiscal years 2021, 2020, and 2019 was calculated using a Monte Carlo simulation model at the date of common stock, parthe grant, resulting in a weighted average grant-date fair value $0.001 per share of $80.04, $47.86, and 3,000,000 shares of preferred stock, par value $0.001 per share.
Repurchases of Common Stock
On November 15, 2017 the Company’s Board of Directors authorized the repurchase of up to $50.0 million of its common stock. This plan is referred to as the Stock Repurchase Plan. The Stock Repurchase Plan was completed in February 2018.
61
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)$21.49, respectively.
Shares repurchased As of January 1, 2022, there was $21,019 of total unrecognized compensation cost related to restricted stock units granted under the plans. That cost is expected to be recognized over a weighted average period of 1.5 years.
Stock Options
The Company did 0t grant any stock options during fiscal years 2021, 2020 and retired in2019. As of January 1, 2022, there were 2 stock options outstanding and exercisable with a weighted average exercise price of $15.20, and aggregate intrinsic value of $191 and a contract term that will expire within one year. The total intrinsic value of the stock options exercised during fiscal years 2021, 2020 and 2019 was $1,365, $420 and $51, respectively.
401(k) Savings Plan
The Company has a 401(k) savings plan that allows employees to contribute up to 100% of their annual compensation to the Plan on a pre-tax or after-tax basis, limited to a maximum annual amount as set periodically by the Internal Revenue Service. The plan provides a 50% match of all employee contributions up to 6 percent of the employee’s salary. Matching contributions to the plan totaled $2,544, $2,315 and $1,317 for the years ended January 1, 2022, December 29, 201826, 2020 and December 30, 2017 under31, 2019, respectively.
12. | Other Income (Expense), Net: |
Other income (expense), net is comprised of the Stock Repurchase Plan, with the associated cost of repurchase and amount available for repurchase were as follows (in thousands, except number of shares and weighted average price per share):following:
|
| Fiscal Year 2018 |
|
| Fiscal Year 2017 |
| ||
Number of shares of common stock repurchased |
|
| 896,187 |
|
|
| 1,065,848 |
|
Weighted average price per share |
| $ | 25.65 |
|
| $ | 25.33 |
|
Total cost of repurchase |
| $ | 22,987 |
|
| $ | 26,999 |
|
Amount available for repurchase at end of period |
|
| — |
|
| $ | 23,001 |
|
| Year Ended |
| |||||||||
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| |||
Foreign currency exchange gains (losses), net | $ | (2,020 | ) |
| $ | (3,070 | ) |
| $ | 676 |
|
Other |
| 132 |
|
|
| 362 |
|
|
| 104 |
|
Total other income (expense), net | $ | (1,888 | ) |
| $ | (2,708 | ) |
| $ | 780 |
|
Stock Option Plans
F-27
13. | Income Taxes: |
The Nanometrics option planscomponents of income tax expense are as follows:
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
|
Employee Stock Purchase Plan
Under the 2003 Employee Stock Purchase Plan (“ESPP”), eligible employees can elect to have salary withholdings of up to 10% of their base compensation to purchase shares of common stock at a price equal to 85% of the lower of the market value of the stock at the beginning or end of each six-month offering period, subject to an annual statutory limitation. As of December 29, 2018, the Company had 443,694 shares remaining for issuance under the ESPP. Shares purchased under the ESPP were 70,214 shares, 122,298 shares and 212,619 shares in 2018, 2017 and 2016 at a weighted average price of $21.46, $21.19 and $14.29, respectively.
Stock-based Compensation
The Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted stock units and employee stock purchases related to the Employee Stock Purchase Plan (collectively “Employee Stock Purchases”) based on estimated fair values. The fair value of share-based payment awards is estimated on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company's consolidated statement of operations.
Valuation and Expense Information
The fair value of stock-based awards to employees is calculated using the Black-Scholes option pricing model, which requires subjective assumptions, including future stock price volatility and expected time to exercise. The expected life was calculated using the simplified method allowed by the SAB 107. The risk-free rates were based on the U.S Treasury rates in effect during the corresponding period. The expected volatility was based on the historical volatility of the Company's stock price. The dividend yield reflects that the Company has not paid any cash dividends since inception and does not intend to pay any cash dividends in the foreseeable future. Forfeitures are recognized upon occurrence. These factors could change in the future, which would affect the stock-based compensation expense in future periods.
62
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The weighted-average fair value of stock-based compensation to employees is based on the single option valuation approach. The estimated fair value of stock-based compensation awards to employees is amortized over the vesting period. The weighted-average fair value calculations are based on the following average assumptions:
|
| Fiscal Year 2018 |
|
| Fiscal Year 2017 |
|
| Fiscal Year 2016 |
| |||
Employee Stock Purchase Plan: |
|
|
|
|
|
|
|
|
|
|
|
|
Expected life |
| 0.5 years |
|
| 0.5 years |
|
| 0.5 years |
| |||
Volatility |
| 52.46% |
|
| 37.2% |
|
| 38.7% |
| |||
Risk free interest rate |
| 2.14% |
|
| 0.91% |
|
| 0.44% |
| |||
Dividends |
| — |
|
| — |
|
| — |
|
Stock Options and Restricted Stock Units (“RSUs”)
Stock Options
No stock options were granted in fiscal years 2018, 2017 and 2016. A summary of activity of stock options is as follows:
|
| Number of Shares Outstanding (Options) |
|
| Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual Term (Years) |
|
| Aggregate Intrinsic Value (in Thousands) |
| ||||
Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016 |
|
| 440,545 |
|
| $ | 15.06 |
|
|
| 2.12 |
|
| $ | 4,405 |
|
Exercised |
|
| (223,364 | ) |
|
| 13.35 |
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited |
|
| (855 | ) |
|
| 16.63 |
|
|
|
|
|
|
|
|
|
Outstanding at December 30, 2017 |
|
| 216,326 |
|
|
| 16.82 |
|
|
| 1.76 |
|
| $ | 1,752 |
|
Exercised |
|
| (132,932 | ) |
|
| 17.46 |
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
Outstanding at December 29, 2018 |
|
| 83,394 |
|
| $ | 15.80 |
|
|
| 1.19 |
|
| $ | 988 |
|
Exercisable at December 29, 2018 |
|
| 83,394 |
|
| $ | 15.80 |
|
|
| 1.19 |
|
| $ | 988 |
|
|
| Year Ended |
| |||||||||
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| |||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
| $ | 21,791 |
|
| $ | 1,466 |
|
| $ | (27 | ) |
State |
|
| 1,007 |
|
|
| 371 |
|
|
| 88 |
|
Foreign |
|
| 3,153 |
|
|
| 5,637 |
|
|
| 1,548 |
|
|
|
| 25,951 |
|
|
| 7,474 |
|
|
| 1,609 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
| (9,475 | ) |
|
| (10,355 | ) |
|
| (4,730 | ) |
State |
|
| (540 | ) |
|
| (1,036 | ) |
|
| 506 |
|
Foreign |
|
| (2,603 | ) |
|
| (240 | ) |
|
| 108 |
|
|
|
| (12,618 | ) |
|
| (11,631 | ) |
|
| (4,116 | ) |
Total income tax expense (benefit) |
| $ | 13,333 |
|
| $ | (4,157 | ) |
| $ | (2,507 | ) |
The aggregate intrinsic value in the above table represents the total pretax intrinsic value, based on the Company’s closing stock price of $27.65 as of December 29, 2018, which would have been received by the option holders had all option holders exercised their options as of that date. The total intrinsic value of options exercised during 2018, 2017 and 2016 was $2.5 million, $3.1 million and $2.7 million, respectively. The fair value of options vested during 2018 was negligible and during 2017 and 2016 was $0.3 million and $0.7 million, respectively.
63
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes ranges of outstanding and exercisable options as of December 29, 2018.
|
| Options Outstanding |
|
| Options Exercisable |
| ||||||||||||||
Exercise Prices |
| Number Outstanding |
|
| Weighted Average Remaining Contractual Life (Years) |
|
| Weighted Average Exercise Price |
|
| Number Exercisable |
|
| Weighted Average Exercise Price |
| |||||
$12.98 - $14.59 |
|
| 1,694 |
|
|
| 1.58 |
|
| $ | 14.03 |
|
|
| 1,694 |
|
| $ | 14.03 |
|
$14.95 - $14.95 |
|
| 1,025 |
|
|
| 1.49 |
|
|
| 14.95 |
|
|
| 1,025 |
|
|
| 14.95 |
|
$15.00 - $15.00 |
|
| 10,000 |
|
|
| 0.62 |
|
|
| 15.00 |
|
|
| 10,000 |
|
|
| 15.00 |
|
$15.61 - $15.61 |
|
| 2,500 |
|
|
| 1.09 |
|
|
| 15.61 |
|
|
| 2,500 |
|
|
| 15.61 |
|
$15.65 - $15.65 |
|
| 3,375 |
|
|
| 1.21 |
|
|
| 15.65 |
|
|
| 3,375 |
|
|
| 15.65 |
|
$15.85 - $15.85 |
|
| 60,000 |
|
|
| 1.20 |
|
|
| 15.85 |
|
|
| 60,000 |
|
|
| 15.85 |
|
$16.00 - $16.00 |
|
| 100 |
|
|
| 1.72 |
|
|
| 16.00 |
|
|
| 100 |
|
|
| 16.00 |
|
$17.33 - $17.33 |
|
| 2,500 |
|
|
| 1.87 |
|
|
| 17.33 |
|
|
| 2,500 |
|
|
| 17.33 |
|
$18.22 - $18.22 |
|
| 1,200 |
|
|
| 2.16 |
|
|
| 18.22 |
|
|
| 1,200 |
|
|
| 18.22 |
|
$18.79 - $18.79 |
|
| 1,000 |
|
|
| 2.24 |
|
|
| 18.79 |
|
|
| 1,000 |
|
|
| 18.79 |
|
|
|
| 83,394 |
|
|
|
|
|
|
|
|
|
|
| 83,394 |
|
|
|
|
|
As of December 29, 2018, the total unrecognized compensation costs related to unvested stock options was negligible.
Restricted Stock Units (“RSUs”)
Each RSU counts against the Company’s “2005 Equity Incentive Plan” at a ratio of one and seven tenths shares for each unit granted but represents an amount equal to the fair value of one shareincome before tax is comprised of the Company’s common stock. following:
|
| Year Ended |
| |||||||||
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| |||
Domestic operations |
| $ | 136,143 |
|
| $ | (120 | ) |
| $ | (7,087 | ) |
Foreign operations |
| $ | 19,539 |
|
| $ | 26,988 |
|
| $ | 6,490 |
|
The Company granted 484,087 and 454,600 RSUs duringprovision for income taxes differs from the amount of income tax determined by applying the applicable U.S. federal income tax rate of 21% for the years ended January 1, 2022, December 29, 201826, 2020 and December 30, 2017, respectively,31, 2019, to key employees with vesting periods up to three years.
A summary of activityincome before provision for RSUs isincome taxes as follows:
Summary of activity for RSUs |
| Number of RSUs |
|
| Weighted Average Fair Value |
| ||
Outstanding RSUs as of December 31, 2016 |
|
| 819,785 |
|
| $ | 16.79 |
|
Granted |
|
| 454,600 |
|
|
| 27.12 |
|
Released |
|
| (387,592 | ) |
|
| 16.81 |
|
Cancelled |
|
| (96,494 | ) |
|
| 19.01 |
|
Outstanding RSUs as of December 30, 2017 |
|
| 790,299 |
|
|
| 22.46 |
|
Granted |
|
| 484,087 |
|
|
| 36.57 |
|
Released |
|
| (362,762 | ) |
|
| 20.79 |
|
Cancelled |
|
| (142,621 | ) |
|
| 26.44 |
|
Outstanding RSUs as of December 29, 2018 |
|
| 769,003 |
|
| $ | 31.39 |
|
As of December 29, 2018, the total unrecognized compensation costs related to RSU's was $12.5 million and is expected to be recognized as an expense over a weighted average remaining amortization period of 1.75 years.
Market-Based Performance Stock Units (“PSUs”)
In addition to granting RSUs that vest on the passage of time only, the Company granted PSUs to certain executives. The PSUs will vest in tranches over one, two, and three years based on the relative performance of the Company’s stock during those periods, compared to the performance of a peer group over the same period. If target stock price performance is achieved, 66.7% of the shares of the Company’s stock subject to the PSUs will vest, and up to a maximum of 100% of the shares subject to the PSUs will vest if the maximum stock price performance is achieved for each tranche. For certain shares granted in fiscal 2018, 62,500 shares are the cumulative maximum number of shares that may vest for all measurement periods.
64
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A summary of activity for PSUs is as follows:
Summary of activity for PSUs |
| Number of PSUs |
|
| Weighted Average Fair Value |
| ||
Outstanding PSUs as of December 31, 2016 |
|
| 107,500 |
|
| $ | 9.94 |
|
Granted |
|
| 122,050 |
|
|
| 20.51 |
|
Released |
|
| (38,500 | ) |
|
| 10.41 |
|
Cancelled |
|
| (61,100 | ) |
|
| 19.41 |
|
Outstanding PSUs as of December 30, 2017 |
|
| 129,950 |
|
|
| 15.60 |
|
Granted |
|
| 63,133 |
|
|
| 24.45 |
|
Released |
|
| (47,929 | ) |
|
| 12.10 |
|
Cancelled |
|
| (32,991 | ) |
|
| 24.52 |
|
Outstanding PSUs as of December 29, 2018 |
|
| 112,163 |
|
| $ | 22.37 |
|
Valuation of PSUs
On the date of grant, the Company estimated the fair value of PSUs using a Monte Carlo simulation model. The assumptions for the valuation of PSUs are summarized as follows:
|
| 2018 Award |
| 2017 Award |
| 2016 Award |
| |
Grant Date Fair Value Per Share |
| $20.73-$25.18 |
| $14.57-$26.75 |
| $ | 8.52 |
|
Weighted-average assumptions/inputs: |
|
|
|
|
|
|
|
|
Expected Dividend |
| — |
| — |
| — |
| |
Range of risk-free interest rates |
| 2.39%-2.63% |
| 1.74%-1.84% |
| 0.92% |
| |
Range of expected volatilities for peer group |
| 22%-66% |
| 22%-66% |
| 22%-93% |
|
The number of RSUs granted during fiscal year 2018 was 484,087, which counted as 822,948 shares against the 2005 Equity Incentive Plan, and the number of PSUs granted during fiscal year 2018 was 63,133, which counted as 107,327 shares against the 2005 Equity Incentive Plan. The number of RSUs cancelled during fiscal year 2018 was 142,621, which counted as 242,456 shares against the 2005 Equity Incentive Plan, and the number of PSUs cancelled during fiscal 2018 was 32,991, which counted as 56,085 shares against the 2005 Equity Incentive Plan.
The number of RSUs granted during fiscal year 2017 was 454,600, which counted as 772,820 shares, and PSUs granted during fiscal year 2017 was 122,050, which counted as 207,485 against the 2005 Equity Incentive Plan. The number of RSUs cancelled during fiscal year 2017 was 96,494, which counted as 164,040 shares, and PSUs cancelled during fiscal year 2017 was 61,100, which counted as 103,870, against the 2005 Equity Incentive Plan. Each RSU represents an amount equal to the fair value of one share of the Company's common stock.
A summary of activity under the Company’s stock option plans including options, RSUs and PSUs during fiscal year 2018, 2017 and 2016 and shares available for grant as of the respective period end dates, is as follows:
|
| Fiscal Year 2018 |
|
| Fiscal Year 2017 |
|
| Fiscal Year 2016 |
| |||
Shares available for grant at beginning of fiscal year |
|
| 1,874,765 |
|
|
| 1,334,581 |
|
|
| 1,916,589 |
|
Additional Shares Authorized |
|
| — |
|
|
| 1,000,000 |
|
|
| — |
|
Options - cancelled |
|
| — |
|
|
| 855 |
|
|
| 176,587 |
|
Options - expired plan shares |
|
| — |
|
|
| — |
|
|
| (116,192 | ) |
RSUs - granted |
|
| (822,948 | ) |
|
| (772,820 | ) |
|
| (810,334 | ) |
RSUs - cancelled |
|
| 242,456 |
|
|
| 164,040 |
|
|
| 92,230 |
|
RSUs - shares issued to satisfy tax withholding obligations |
|
| - |
|
|
| 251,724 |
|
|
| 179,117 |
|
PSUs - granted |
|
| (107,327 | ) |
|
| (207,485 | ) |
|
| (114,750 | ) |
PSUs - cancelled |
|
| 56,085 |
|
|
| 103,870 |
|
|
| 11,334.00 |
|
Shares available for grant at end of fiscal year |
|
| 1,243,031 |
|
|
| 1,874,765 |
|
|
| 1,334,581 |
|
65
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Stock-based Compensation Expense
Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Effective January 1, 2017, because of the adoption of ASU No. 2016-09 “Improvements to Employee Share-Based Payment Accounting”, the Company has elected to account for forfeitures as they occur. Refer to Note 2. Recent Accounting Pronouncements for further discussion on the adoption. As such, for fiscal year ended December 30, 2017, stock-based compensation expense is recognized in the consolidated statement of operations, net of actual forfeitures during the period. Prior to the adoption of ASU No. 2016-09, the Company estimated forfeitures at the time of grant, based on historical forfeiture experience, and revised if necessary in subsequent periods if actual forfeitures differed from estimates. Stock-based compensation expense recognized in the consolidated statement of operations for the year ended December 31, 2016, has been reduced for estimated forfeitures.
Tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options are required to be separately classified in the consolidated statements of cash flows. The Company recognized $1.0 million of excess tax benefits in fiscal year 2016, and immaterial amounts in both fiscal years 2018 and 2017, respectively.
Stock-based compensation expense for all share-based payment awards made to the Company’s employees and directors pursuant to the employee stock option and employee stock purchase plans by function were as follows (in thousands):
|
| Fiscal Year 2018 |
|
| Fiscal Year 2017 |
|
| Fiscal Year 2016 |
| |||
Cost of products |
| $ | 704 |
|
| $ | 842 |
|
| $ | 403 |
|
Cost of service |
|
| 772 |
|
|
| 616 |
|
|
| 509 |
|
Research and development |
|
| 2,450 |
|
|
| 1,720 |
|
|
| 1,408 |
|
Selling |
|
| 2,786 |
|
|
| 2,323 |
|
|
| 2,046 |
|
General and administrative |
|
| 4,670 |
|
|
| 3,318 |
|
|
| 3,300 |
|
Total stock-based compensation expense related to employee stock options and employee stock purchases |
| $ | 11,382 |
|
| $ | 8,819 |
|
| $ | 7,666 |
|
|
| Year Ended |
| |||||||||
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| |||
Federal income tax provision (benefit) at statutory rate |
| $ | 32,693 |
|
| $ | 5,642 |
|
| $ | (125 | ) |
State taxes, net of federal effect |
|
| 1,066 |
|
|
| 126 |
|
|
| 113 |
|
Foreign taxes, net of federal effect |
|
| (3,817 | ) |
|
| 596 |
|
|
| (1,277 | ) |
Foreign Derived Intangible Income ("FDII") Deduction |
|
| (11,061 | ) |
|
| (4,262 | ) |
|
| (2,278 | ) |
Global Intangible Low-Taxes Income ("GILTI") inclusion |
|
| 1,721 |
|
|
| 2,013 |
|
|
| 1,786 |
|
Non-deductible officer's compensation |
|
| 689 |
|
|
| 213 |
|
|
| 826 |
|
Research & development tax credit |
|
| (3,607 | ) |
|
| (4,858 | ) |
|
| (2,126 | ) |
Tax impact of audit and statue closures |
|
| (1,987 | ) |
|
| (2,905 | ) |
|
| — |
|
Impact of the CARES Act |
|
| (732 | ) |
|
| (1,141 | ) |
|
| — |
|
Other |
|
| (1,632 | ) |
|
| 419 |
|
|
| 574 |
|
Provision (benefit) for income taxes |
| $ | 13,333 |
|
| $ | (4,157 | ) |
| $ | (2,507 | ) |
Effective tax rate |
|
| 9 | % |
|
| (16 | )% |
|
| (420 | )% |
Note 13. Defined Benefit Pension PlanF-28
Nanometrics sponsors a statutory government mandated defined benefit pension plan (the “Benefit Plan”) in Taiwan for its local employees. The fair valueTable of plan assets was $0.3 million for fiscal year ended 2018, and $0.3 million for each of fiscal years 2017 and 2016, respectively; and the net funding deficiency of the Benefit Plan was $0.2 million, $0.5 million, and $0.4 million for the fiscal years ended December 29, 2018, December 30, 2017, and December 31, 2016, respectively. Based on the nature and limited extent of the pension plan, we determined this pension plan was not material for separate disclosure.Contents
Note 14. Income Taxes
Income Tax Assets and Liabilities - The Company accounts for income taxes whereby deferredDeferred tax assets and liabilities are recognized using enacted tax rates forcomprised of the effectfollowing:
|
|
|
|
|
|
|
|
|
|
| January 1, 2022 |
|
| December 26, 2020 |
| ||
Deferred tax assets: |
|
|
|
|
|
|
|
|
Reserves and accruals |
| $ | 15,084 |
|
| $ | 13,874 |
|
Deferred revenue |
|
| 4,729 |
|
|
| 1,648 |
|
Share-based compensation |
|
| 3,023 |
|
|
| 2,556 |
|
Tax credit carryforward |
|
| 10,339 |
|
|
| 10,801 |
|
Net operating losses |
|
| 3,254 |
|
|
| 4,849 |
|
Depreciation and amortization |
|
| 368 |
|
|
| 687 |
|
Operating lease liabilities |
|
| 3,575 |
|
|
| 4,261 |
|
Other |
|
| 2,364 |
|
|
| 1,877 |
|
Gross deferred tax assets |
|
| 42,736 |
|
|
| 40,553 |
|
Less: valuation allowance |
|
| (10,948 | ) |
|
| (14,238 | ) |
Total deferred tax assets after valuation allowance |
|
| 31,788 |
|
|
| 26,315 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| (63,554 | ) |
|
| (75,608 | ) |
Operating lease right of use assets |
|
| (3,469 | ) |
|
| (3,960 | ) |
Other |
|
| (224 | ) |
|
| (135 | ) |
Gross deferred tax liabilities |
|
| (67,247 | ) |
|
| (79,703 | ) |
Net deferred tax liabilities |
| $ | (35,459 | ) |
| $ | (53,388 | ) |
At January 1, 2022 and December 26, 2020, the Company had recorded valuation allowances of temporary differences between$10,948 and $14,238, respectively, on a certain portion of the book and tax accounting for assets and liabilities. Also,Company’s deferred tax assets are reduced byto reflect the deferred tax assets at the net amount that is more likely than not to be realized. The Company maintains a valuation allowance toagainst a portion of its federal, California and foreign deferred tax assets of $3,232, $7,547, and $169, respectively.
In assessing the extentrealizability of deferred tax assets, the Company uses a more likely than not standard. If it is determined that management cannot concludeit is more-likely-than-not that deferred tax assets will not be realized, a valuation allowance must be established against the deferred tax assets. The ultimate realization of the assets is dependent on the generation of future taxable income during the periods in which the associated temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income and tax planning strategies when making this assessment. In making the determination that it is more likely than not that a portion of the Company’s deferred tax assetassets will be realized inas of January 1, 2022, the future. The Company evaluatesrelied primarily on the reversal of deferred tax assets on a continuous basis throughoutliabilities as well as projected future taxable income.
At January 1, 2022, the year to determine whether or not a valuation allowance is appropriate. Factors used in this determination include future expected income and the underlying asset or liability which generated the temporaryCompany had tax difference. The income tax provision is primarily impacted by federal statutory rates,effected state and foreign income taxes, and changes in the valuation allowance.
Income (loss) before provision for income taxes consists of the following (in thousands):
|
| Years Ended |
| |||||||||
|
| December 29, 2018 |
|
| December 30, 2017 |
|
| December 31, 2016 |
| |||
Domestic |
| $ | 52,836 |
|
| $ | 34,238 |
|
| $ | 25,372 |
|
Foreign |
|
| 14,688 |
|
|
| 9,060 |
|
|
| 3,763 |
|
Income (loss) before income taxes |
| $ | 67,524 |
|
| $ | 43,298 |
|
| $ | 29,135 |
|
66
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The provision (benefit) for income taxes consists of the following (in thousands):
|
| Years Ended |
| |||||||||
|
| December 29, 2018 |
|
| December 30, 2017 |
|
| December 31, 2016 |
| |||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
| $ | 616 |
|
| $ | 3,250 |
|
| $ | 697 |
|
State |
|
| 142 |
|
|
| 9 |
|
|
| 85 |
|
Foreign |
|
| 5,054 |
|
|
| 2,998 |
|
|
| 2,111 |
|
|
|
| 5,812 |
|
|
| 6,257 |
|
|
| 2,893 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
| 3,875 |
|
|
| 6,314 |
|
|
| (16,641 | ) |
State |
|
| (18 | ) |
|
| 53 |
|
|
| (320 | ) |
Foreign |
|
| 207 |
|
|
| 472 |
|
|
| (832 | ) |
|
|
| 4,064 |
|
|
| 6,839 |
|
|
| (17,793 | ) |
Provision (benefit) for income taxes |
| $ | 9,876 |
|
| $ | 13,096 |
|
| $ | (14,900 | ) |
Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
|
| At |
| |||||
|
| December 29, 2018 |
|
| December 30, 2017 |
| ||
Deferred tax assets: |
|
|
|
|
|
|
|
|
Reserves and accruals |
| $ | 5,704 |
|
| $ | 5,797 |
|
Deferred revenue |
|
| 241 |
|
|
| 240 |
|
Shared-based compensation |
|
| 1,644 |
|
|
| 1,483 |
|
Tax credit carry-forwards |
|
| 6,920 |
|
|
| 9,669 |
|
Net operating losses |
|
| 6,022 |
|
|
| 9,755 |
|
Depreciation & amortization |
|
| (7,528 | ) |
|
| (1,525 | ) |
Other |
|
| 532 |
|
|
| 207 |
|
Total deferred tax assets |
|
| 13,535 |
|
|
| 25,626 |
|
Less: Valuation allowance |
|
| (10,966 | ) |
|
| (13,702 | ) |
Total deferred tax assets net of valuation allowance |
|
| 2,569 |
|
|
| 11,924 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation & amortization |
|
| (13 | ) |
|
| (12 | ) |
Other |
|
| (149 | ) |
|
| (167 | ) |
Total deferred tax liabilities |
|
| (162 | ) |
|
| (179 | ) |
Net deferred tax assets |
| $ | 2,407 |
|
| $ | 11,745 |
|
As of December 29, 2018, the Company had net operating loss carryforwards of $23.5 million$1,732 and $1,522, respectively. The federal, state and foreign net operating loss carryforwards expire on various dates beginning in California, $1.7 million in other states,2022 through 2037.
At January 1, 2022, the Company had foreign tax credit carryforwards and $18.3 million instate research & development credits of $3,232, and $10,672, respectively. The foreign countries, which begintax credit is set to expire in 2018.at various dates beginning at December 31, 2029. The state research & development credits have no expiration dates.
As of December 29, 2018,January 1, 2022, the Company had available carryforward Federal and California R&D tax credits of $5.4 million and $10.2 million, respectively. Federal R&D tax credit carryforwards begin to expire in 2034. State R&D tax credits carryforward indefinitely.
During the years ended December 29, 2018, and December 30, 2017, the change in valuation allowances was ($2.7) million and $1.5 million, respectively. The decrease in the valuation allowance in 2018 was primarily related to a $4.8 million decrease from the dissolution of Nanda Technologies, a Germany based subsidiary. This amount was offset by an increase net benefit of the California deferred tax assets of $0.5 million and a $1.6 million increase from deferred tax assets in the Company’s Switzerland subsidiary. The realization of deferred tax assets is primarily dependent on the Company generating sufficient U.S. and foreign taxable income in future fiscal years. The Company regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all the deferred tax assets will not be realized.
67
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company continues to maintain valuation allowances against its California and Switzerland deferred tax assets as a result of uncertainties regarding the realization of the assets due to cumulative losses and uncertainty of future taxable income. The Company will continue to assess the realizability of the deferred tax assets in each of the applicable jurisdictions and maintain the valuation allowances until sufficient positive evidence exists to support a reversal. In the event the Company determines that the deferred tax assets are realizable, an adjustment to the valuation allowances will be reflected in the tax provision for the period such determination is made.
Differences between income taxes computed by applying the statutory federal income tax rate to income (loss) before income taxes and the provision (benefit) for income taxes consist of the following (in thousands):
|
| Years Ended |
| |||||||||
|
| December 29, 2018 |
|
| December 30, 2017 |
|
| December 31, 2016 |
| |||
Income taxes computed at U.S. statutory rate |
| $ | 14,180 |
|
| $ | 15,153 |
|
| $ | 10,197 |
|
State income taxes |
|
| 379 |
|
|
| 227 |
|
|
| 223 |
|
Foreign tax rate differential |
|
| (2,382 | ) |
|
| 794 |
|
|
| 3,502 |
|
Change in valuation allowance |
|
| 3,037 |
|
|
| 1,490 |
|
|
| (25,738 | ) |
Non-deductible equity compensation |
|
| (1,241 | ) |
|
| (1,803 | ) |
|
| 380 |
|
Tax credits |
|
| (3,876 | ) |
|
| (2,336 | ) |
|
| (3,191 | ) |
Domestic production activities deduction |
|
| - |
|
|
| (608 | ) |
|
| (354 | ) |
Liabilities for uncertain tax positions |
|
| 12 |
|
|
| 18 |
|
|
| 67 |
|
Other, net |
|
| (233 | ) |
|
| 161 |
|
|
| 14 |
|
Provision (benefit) for income taxes |
| $ | 9,876 |
|
| $ | 13,096 |
|
| $ | (14,900 | ) |
As of December 29, 2018, The Company has provided U.SU.S. income taxes on all its foreign earnings. The Company continues to permanently reinvest the cash held offshore to support its working capital needs. Accordingly, no additional foreign withholding taxes that may be required from certain jurisdictions in the event of a cash distribution have been provided thereon.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allowed the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As of December 29, 2018, the Company had finalized all provisional amounts related to the Tax Act. Finalizing provisional adjustments related to the Tax Act did not have a material impact on the Company’s consolidated financial statements as of December 29, 2018. The Company expects further guidance may be forthcoming from the Financial Accounting Standards Board and the Securities and Exchange Commission, as well as regulations, interpretations and rulings from federal and state tax agencies, which could result in additional impacts.
The 2017 Tax Act creates a new requirement that global intangible low-taxed income (“GILTI”) earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFCs’ U.S. shareholder. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The Company’s selection of an accounting policy for 2018 with respect to the GILTI tax rules was to treat GILTI tax as a current period expense under the period cost method.
The Company recognizes tax liabilities for uncertain tax positions and adjusts these liabilities when its judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company's current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.
The accounting for uncertainty in income taxes recognized in an enterprise's financial statements prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return, and the derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition.
68
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)for.
F-29
A reconciliationTable of the beginning and endingContents
The total amount of unrecognized tax benefits isare as follows (in thousands):follows:
|
| At |
| |||||||||
|
| December 29, 2018 |
|
| December 30, 2017 |
|
| December 31, 2016 |
| |||
Unrecognized tax benefits - beginning of the period |
| $ | 7,151 |
|
| $ | 6,477 |
|
| $ | 6,961 |
|
Gross increases-tax positions in prior period |
|
| 132 |
|
|
| 32 |
|
|
| 23 |
|
Gross decreases-tax positions in prior period |
|
| — |
|
|
| — |
|
|
| (1,193 | ) |
Gross increases-current-period tax positions |
|
| 1,000 |
|
|
| 723 |
|
|
| 686 |
|
Lapse of statute of limitations |
|
| (175 | ) |
|
| (81 | ) |
|
| — |
|
Unrecognized tax benefits - end of the period |
| $ | 8,108 |
|
| $ | 7,151 |
|
| $ | 6,477 |
|
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| |||
Balance, beginning of the period |
| $ | 13,486 |
|
| $ | 15,143 |
|
| $ | 5,528 |
|
Gross increases—tax positions in prior period |
|
| 156 |
|
|
| 347 |
|
|
| 9,989 |
|
Gross decreases—tax positions in prior period |
|
| (204 | ) |
|
| — |
|
|
| (932 | ) |
Gross increases—current-period tax positions |
|
| 1,193 |
|
|
| 1,048 |
|
|
| 558 |
|
Closure of audit/statute limitation |
|
| (2,258 | ) |
|
| (3,052 | ) |
|
| — |
|
Balance, end of the period |
| $ | 12,373 |
|
| $ | 13,486 |
|
| $ | 15,143 |
|
The unrecognized tax benefitbenefits at January 1, 2022 and December 29, 2018, was $8.1 million,26, 2020 were $12,373 and $13,486, respectively, of which $4.6 million$7,832 and $8,863, respectively, would impact the effectivebe reflected as an adjustment to income tax rateexpense if recognized. The year over year decrease from 2020 to 2021 is primarily due to expiring tax statutes, offset by additional unrecognized tax benefits related to federal tax exposures. It is reasonably possible that certain amounts of unrecognized tax benefits may reverse in the next 12 months; however, the Company accruesdoes not expect such reversals to have a significant impact on its results of operations or financial position.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in its provision for income taxes. The total amount of penalties and interest were not material as oftax expense. During the years ended January 1, 2022, December 29, 2018, December 30, 2017,26, 2020 and December 31, 2016. The2019, the Company does not expect a material changerecognized approximately $(814), $(193) and $236, respectively, in itsinterest and penalties (benefit) expense associated with uncertain tax positions. As of January 1, 2022 and December 26, 2020, the Company had accrued interest and penalties expense included in the table of unrecognized tax benefits within the next 12 months.of $430 and $1,487, respectively.
The Company is subject to taxationU.S. federal income tax as well as income tax in the U.S.multiple state and various states including California,foreign jurisdictions. The Company is subject to ordinary statute of limitation rules of three and the foreign jurisdictions of Korea, Japan, Taiwan, China, Singapore, Germany, France, United Kingdom, Switzerland,four years for federal and Israel. Duestate returns, respectively. However, due to tax attribute carry-forwards,carryforwards, the Company is subject to examination for tax years 2003 forward for U.S. federal tax purposes.purposes with respect to carryforward amounts. The Company wasis also subject to examination in various states for tax years 2002 forward.forward with respect to carryforward amounts. The Company is subject to examination for tax years 20102011 forward for various foreign jurisdictions. The Company believes that adequate amounts have been reserved for any adjustments that may ultimately result from any future examinations of these years.
In the normal course of business, the Company is subject to tax audits in various jurisdictions, and such jurisdictions may assess additional income taxes or other taxes against it. Although the Company believes its tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from the Company’ s historical income tax provisions and accruals. The results of an audit or litigation could have a material adverse effect on the Company’ s results of operations or cash flows in the period or periods for which that determination is made.
14. | Accumulated Other Comprehensive Income (Loss): |
Comprehensive income includes net income, foreign currency translation adjustments, and net unrealized gains and losses on available-for-sale debt securities. See the Consolidated Statements of Comprehensive Income for the effect of the components of comprehensive income on the Company’s net income.
The components of accumulated other comprehensive income (loss), net of tax, are as follows:
|
| Foreign currency translation adjustments |
|
| Net unrealized gains (losses) on marketable securities |
|
| Accumulated other comprehensive income (loss) |
| |||
Balance at December 31, 2019 |
| $ | (564 | ) |
| $ | (34 | ) |
| $ | (598 | ) |
Net current period other comprehensive income |
|
| 5,043 |
|
|
| 123 |
|
|
| 5,166 |
|
Reclassifications |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Balance at December 26, 2020 |
|
| 4,479 |
|
|
| 89 |
|
|
| 4,568 |
|
Net current period other comprehensive loss |
|
| (2,715 | ) |
|
| (537 | ) |
|
| (3,252 | ) |
Reclassifications |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Balance at January 1, 2022 |
| $ | 1,764 |
|
| $ | (448 | ) |
| $ | 1,316 |
|
Note 15. Segment, Geographic, and Significant Customer InformationF-30
The Company has one operating segment, which is the sale, design, manufacture, marketing and supportTable of thin film and optical critical dimension systems. The Chief Executive Officer has been identified as the Chief Operating Decision Maker (“CODM”) because he has the final authority over resource allocation decisions and performance assessment. The CODM does not receive discrete financial information about individual components of the Company's business. For the years ended December 29, 2018, December 30, 2017, and December 26, 2016, the Company recorded revenue from customers primarily in the United States, Asia and Europe. The following tables summarize total net revenues and long-lived assets (excluding intangible assets) attributed to significant countries (in thousands):Contents
|
| Years Ended |
| |||||||||
|
| December 29, 2018 |
|
| December 30, 2017 |
|
| December 31, 2016 |
| |||
Total net revenues (1): |
|
|
|
|
|
|
|
|
|
|
|
|
South Korea |
| $ | 108,938 |
|
| $ | 94,082 |
|
| $ | 44,735 |
|
China |
|
| 72,305 |
|
|
| 29,826 |
|
|
| 43,460 |
|
Japan |
|
| 64,252 |
|
|
| 41,979 |
|
|
| 26,604 |
|
United States |
|
| 29,415 |
|
|
| 33,983 |
|
|
| 29,887 |
|
Singapore |
|
| 22,167 |
|
|
| 21,810 |
|
|
| 37,096 |
|
Taiwan |
|
| 14,012 |
|
|
| 20,147 |
|
|
| 27,189 |
|
Other |
|
| 13,434 |
|
|
| 16,794 |
|
|
| 12,158 |
|
Total net revenues |
| $ | 324,523 |
|
| $ | 258,621 |
|
| $ | 221,129 |
|
|
|
69
NANOMETRICS INCORPORATEDThe Company is engaged in the design, development, manufacture and support of high-performance control metrology, defect inspection, lithography and data analysis systems used by microelectronics device manufacturers. The Company and its subsidiaries currently operate in a single operating segment: the design, development, manufacture and support of high-performance process control defect inspection and metrology, lithography and process control software systems used by microelectronics device manufacturers. Therefore, the Company has 1 reportable segment. The Company’s chief operating decision maker is the Chief Executive Officer (the “CEO”). The CEO allocates resources and assesses performance of the business and other activities at the reportable segment level.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)The following table lists the different sources of revenue:
|
| Year Ended |
| |||||||||||||||||||||
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| |||||||||||||||
Systems and software |
| $ | 669,114 |
|
|
| 85 | % |
| $ | 450,459 |
|
|
| 80 | % |
| $ | 255,723 |
|
|
| 84 | % |
Parts |
|
| 72,753 |
|
|
| 9 | % |
|
| 65,444 |
|
|
| 12 | % |
|
| 34,892 |
|
|
| 11 | % |
Services |
|
| 47,032 |
|
|
| 6 | % |
|
| 40,593 |
|
|
| 8 | % |
|
| 15,281 |
|
|
| 5 | % |
Total revenue |
| $ | 788,899 |
|
|
| 100 | % |
| $ | 556,496 |
|
|
| 100 | % |
| $ | 305,896 |
|
|
| 100 | % |
The Company’s significant operations outside the United States include sales, service and application offices in Asia and Europe. For geographical revenue reporting, revenue is attributed to the geographic location to which the product is shipped. Revenue by geographic region is as follows:
|
| Years Ended |
|
| Year Ended |
| ||||||||||||||
|
| December 29, 2018 |
|
| December 30, 2017 |
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| |||||
Long-lived tangible assets: |
|
|
|
|
|
|
|
| ||||||||||||
United States |
| $ | 46,325 |
|
| $ | 43,427 |
| ||||||||||||
Revenue from third parties: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Taiwan |
|
| 275 |
|
|
| 510 |
|
| $ | 194,458 |
|
| $ | 120,959 |
|
| $ | 66,601 |
|
South Korea |
|
| 420 |
|
|
| 576 |
|
|
| 160,373 |
|
|
| 90,193 |
|
|
| 43,997 |
|
China |
|
| 151,027 |
|
|
| 125,023 |
|
|
| 80,017 |
| ||||||||
United States |
|
| 123,858 |
|
|
| 81,708 |
|
|
| 46,717 |
| ||||||||
Europe |
|
| 64,943 |
|
|
| 49,697 |
|
|
| 23,023 |
| ||||||||
Japan |
|
| 59 |
|
|
| 60 |
|
|
| 61,186 |
|
|
| 59,295 |
|
|
| 29,816 |
|
Singapore |
|
| 618 |
|
|
| 92 |
| ||||||||||||
All Other |
|
| 203 |
|
|
| 145 |
| ||||||||||||
Total long-lived tangible assets |
| $ | 47,900 |
|
| $ | 44,810 |
| ||||||||||||
Southeast Asia |
|
| 33,054 |
|
|
| 29,621 |
|
|
| 15,725 |
| ||||||||
Total revenue |
| $ | 788,899 |
|
| $ | 556,496 |
|
| $ | 305,896 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
With respect toThe following chart identifies our customers that represented 10% or more of total revenue for each of the last three fiscal years:
|
| 2021 |
|
| 2020 |
|
| 2019 |
|
Taiwan Semiconductor Manufacturing Co. Ltd. |
| 18% |
|
| 14% |
|
| 13% |
|
Samsung Semiconductor |
| 16% |
|
| 15% |
|
| ^ |
|
SK Hynix Inc. |
| ^ |
|
| ^ |
|
| 13% |
|
^ The customer accounted for less than 10% of total revenue during the period. |
|
At January 1, 2022, 1 customer, concentration, Samsung ElectronicsTaiwan Semiconductor Manufacturing Co. Ltd., SK hynix, Toshiba Corporation, and Intel Corporation each accounted for more than 10% of total sales for the year endednet accounts receivable. At December 29, 2018, and26, 2020, 3 customers, Samsung ElectronicsSemiconductor, Taiwan Semiconductor Manufacturing Co. Ltd., and SK hynix, Micron Technology,Hynix Inc., Intel Corporation, and Toshiba Corporation each accounted for more than 10% of total sales fornet accounts receivable.
Substantially all of the year ended December 30, 2017, and Micron Technology, Inc., Intel Corporation, SK hynix, and Taiwan Semiconductor Manufacturing Company Limited each accounted for more than 10%Company’s long-lived assets are located within the United States of total sales for the year ended December 31, 2016.
With respect to accounts receivable concentration, Toshiba Corporation and SK hynix each accounted for more than 10% of total receivables as of December 29, 2018, and Samsung Electronics Co. Ltd., Micron Technology, Inc., and Intel Corporation each accounted for more than 10% of accounts receivable as of December 30, 2017.America.
F-31
SUPPLEMENTAL FINANCIAL INFORMATION
Selected Quarterly Financial Results (Unaudited)
The following table sets forth selected consolidated quarterly resultsTable of operations for the years ended December 29, 2018 and December 30, 2017 (in thousands, except per share amounts):
|
| Quarters Ended |
| |||||||||||||||
|
| December 29, 2018 |
|
| September 29, 2018 |
|
| June 30, 2018 |
|
|
|
| March 31, 2018 |
| ||||
Total net revenues |
| $ | 77,016 |
|
| $ | 76,590 |
|
| $ | 88,604 |
|
|
|
| $ | 82,313 |
|
Gross profit |
| $ | 42,038 |
|
| $ | 43,634 |
|
| $ | 50,891 |
|
|
|
| $ | 47,531 |
|
Income from operations |
| $ | 10,868 |
|
| $ | 14,271 |
|
| $ | 20,784 |
|
|
|
| $ | 20,564 |
|
Net income |
| $ | 12,024 |
|
| $ | 11,568 |
|
| $ | 17,675 |
|
|
|
| $ | 16,381 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.50 |
|
| $ | 0.48 |
|
| $ | 0.74 |
|
|
|
| $ | 0.68 |
|
Diluted |
| $ | 0.49 |
|
| $ | 0.47 |
|
| $ | 0.72 |
|
|
|
| $ | 0.67 |
|
Shares used in per share computations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 24,131 |
|
|
| 24,059 |
|
|
| 23,953 |
|
|
|
|
| 24,063 |
|
Diluted |
|
| 24,481 |
|
|
| 24,466 |
|
|
| 24,442 |
|
|
|
|
| 24,483 |
|
|
| Quarters Ended |
| |||||||||||||
|
| December 30, 2017 |
|
| September 30, 2017 |
|
| July 1, 2017 |
|
| April 1, 2017 |
| ||||
Total net revenues |
| $ | 78,205 |
|
| $ | 56,675 |
|
| $ | 64,427 |
|
| $ | 59,314 |
|
Gross profit |
| $ | 43,973 |
|
| $ | 30,660 |
|
| $ | 33,621 |
|
| $ | 28,447 |
|
Income from operations |
| $ | 19,162 |
|
| $ | 7,484 |
|
| $ | 10,652 |
|
| $ | 5,508 |
|
Net income(1) |
| $ | 10,798 |
|
| $ | 5,764 |
|
| $ | 8,288 |
|
| $ | 5,352 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.43 |
|
| $ | 0.23 |
|
| $ | 0.33 |
|
| $ | 0.21 |
|
Diluted |
| $ | 0.42 |
|
| $ | 0.22 |
|
| $ | 0.32 |
|
| $ | 0.21 |
|
Shares used in per share computations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 25,378 |
|
|
| 25,494 |
|
|
| 25,307 |
|
|
| 25,133 |
|
Diluted |
|
| 25,819 |
|
|
| 25,932 |
|
|
| 25,906 |
|
|
| 25,833 |
|
|
|
| Contents |
None.
|
EvaluationBasic income per share is calculated using the weighted average number of Disclosure Controlsshares of common stock outstanding during the period. Restricted stock units and Procedures
We maintain disclosure controls and procedures thatstock options are designed to ensure that information required to be disclosed in our reports that we file or submit under the Securities Exchange Act of 1934 (“Exchange Act”), as amended, is recorded, processed, summarized and reported within the time periods specifiedincluded in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and our Vice President, Finance (who is our Principal Financial Officer (“PFO”)), as appropriate, to allow timely decisions regarding required disclosure. Our management, with participation by our CEO and PFO, has evaluated the effectivenesscalculation of our disclosure controls and procedures as of December 29, 2018, the end of the period covered by this Annual Report on Form 10-K.
Based on the evaluation of our disclosure controls and procedures, our CEO and PFO have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective as of such date.
Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as amended. Our internal control over financial reporting was designed to provide reasonable, not absolute, assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a materialdiluted earnings per share, except when their effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our CEO and PFO, we assessed the effectiveness of our internal control over financial reporting as of December 29, 2018. In making this assessment, we used the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Based on our assessment, which was conducted based on the COSO criteria, our management, including our CEO and PFO have concluded our internal control over financial reporting was effective, as of December 29, 2018.
We excluded 4D Technology Corporation (“4D”) from our assessment of internal controls over financial reporting as of December 29, 2018 because we acquired 4D in a purchase business combination on November 15, 2018. The total assets and total revenues of 4D represent 3% and less than 1% of the related consolidated financial statement amounts as of and for the year ended December 29, 2018.would be anti-dilutive.
The effectiveness of our internal control over financial reportingCompany’s basic and diluted earnings per share amounts are as of December 29, 2018, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears under Item 8.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the fourth quarter ended December 29, 2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.follows:
None.
The information required by this Item is incorporated by reference to our Proxy Statement for our 2019 Annual Meeting of Stockholders (the “Proxy Statement”) to be filed with the SEC not later than 120 days after the end of our fiscal year ended December 29, 2018, specifically:
Information regarding our directors and any persons nominated to become a director, as well as with respect to some other required board matters, is set forth under Proposal 1 entitled “Election of Directors” and under “Corporate Governance.”
Information regarding our audit committee and our designated “audit committee financial expert” is set forth under the caption “Corporate Governance.”
Information on our code of business conduct and ethics for directors, officers and employees is set forth under the caption “Code of Ethics” under “Corporate Governance.”
Information regarding Section 16(a) beneficial ownership reporting compliance is set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
Information regarding procedures by which stockholders may recommend nominees to our board of directors is set forth under the caption “Nominating and Governance Committee” under “Corporate Governance.”
Information regarding our executive officers is set forth at the end of Item I, Part 1 of this Annual Report on Form 10-K under the caption “Executive Officers of the Registrant."
Information regarding compensation of our named executive officers is set forth under the caption “Executive Compensation” in the Proxy Statement, which information is incorporated herein by reference.
Information regarding compensation of our directors is set forth under the caption "Compensation of Directors" in the Proxy Statement, which information is incorporated herein by reference.
Information regarding compensation committee interlocks is set forth under the caption "Compensation Committee Interlocks and Insider Participation" in the Proxy Statement, which information is incorporated herein by reference.
The Compensation Committee Report is set forth under the caption "Compensation Committee Report" in the Proxy Statement, which report is incorporated herein by reference.
|
|
Information regarding security ownership of certain beneficial owners, directors and executive officers is set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement, which information is incorporated herein by reference.
Equity Compensation Plan Information
The following table gives information about the common stock that may be issued under all our existing equity compensation plans as of December 29, 2018.
Plan category |
| Number of securities to be issued upon exercise of outstanding options, warrants and rights |
|
| Weighted-average exercise price of outstanding options |
|
| Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column) |
| |||
Equity compensation plans approved by security holders (1) |
|
| 83,394 |
|
| $ | 15.80 |
|
|
| 1,411,835 |
|
Equity plans not approved by security holders |
|
| — |
|
|
| — |
|
|
| — |
|
Total |
|
| 83,394 |
|
| $ | 15.80 |
|
|
| 1,411,835 |
|
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| |||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 142,349 |
|
| $ | 31,025 |
|
| $ | 1,910 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share - weighted average shares outstanding |
|
| 49,242 |
|
|
| 49,136 |
|
|
| 29,729 |
|
Effect of potential dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units, employee stock purchase grants and stock options - dilutive shares |
|
| 486 |
|
|
| 339 |
|
|
| 278 |
|
Diluted earnings per share - weighted average shares outstanding |
|
| 49,728 |
|
|
| 49,475 |
|
|
| 30,007 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 2.89 |
|
| $ | 0.63 |
|
| $ | 0.06 |
|
Diluted |
| $ | 2.86 |
|
| $ | 0.63 |
|
| $ | 0.06 |
|
|
|
In November 2020, the Onto Innovation Board of Directors approved a new share repurchase authorization, which allows the Company to repurchase up to $100,000 worth of shares of its common stock. Repurchases may be made through both public market and private transactions from time to time. At January 1, 2022, there was $100,000 available for future share repurchases.
The following table summarizes the Company’s stock repurchases:
|
| Year Ended |
| |||||||||
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| |||
Shares of common stock repurchased |
|
| — |
|
|
| 1,882 |
|
|
| 37 |
|
Cost of stock repurchased |
| $ | — |
|
| $ | 52,000 |
|
| $ | 744 |
|
Average price paid per share |
| $ | — |
|
| $ | 27.62 |
|
| $ | 19.85 |
|
Information regarding certain relationships and related transactions is set forth under the caption "Related Person Transaction Policy" under the caption "Corporate Governance" in the Proxy Statement, which information is incorporated herein by reference.F-32
Information regarding director independence is set forth under the caption “BoardTable of Directors Meetings and Committees” under “Corporate Governance” in the Proxy Statement, which information is incorporated herein by reference.Contents
Information regarding principal auditor fees and services is set forth under the proposal entitled “Ratification of Appointment of Independent Registered Public Accounting Firm” in the Proxy Statement, which information is incorporated herein by reference.ONTO INNOVATION INC. AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Column A |
| Column B |
|
| Column C |
|
| Column D |
|
| Column E |
| ||||||||
Description |
| Balance at Beginning of Period |
|
| Charged to (Recovery of) Costs and Expense |
|
| Charged to Other Accounts (net) |
|
| Deductions |
|
| Balance at End of Period |
| |||||
Fiscal Year 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
| $ | 784 |
|
| $ | 955 |
|
| $ | — |
|
| $ | 436 |
|
| $ | 1,303 |
|
Deferred tax valuation allowance |
|
| 14,238 |
|
|
| (3,290 | ) |
|
| — |
|
|
| — |
|
|
| 10,948 |
|
Fiscal Year 2020: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
| $ | 1,247 |
|
| $ | 327 |
|
| $ | — |
|
| $ | 790 |
|
| $ | 784 |
|
Deferred tax valuation allowance |
|
| 14,160 |
|
|
| 78 |
|
|
| — |
|
|
| — |
|
|
| 14,238 |
|
Allowance for convertible notes receivable |
|
| 2,000 |
|
|
| — |
|
|
| — |
|
|
| 2,000 |
|
|
| — |
|
Fiscal Year 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
| $ | 691 |
|
| $ | 363 |
|
| $ | — |
|
| $ | (193 | ) |
| $ | 1,247 |
|
Deferred tax valuation allowance |
|
| 3,172 |
|
|
| 942 |
|
|
| 10,046 |
|
|
| — |
|
|
| 14,160 |
|
Allowance for convertible notes receivable |
|
| — |
|
|
| 2,000 |
|
|
| — |
|
|
| — |
|
|
| 2,000 |
|
F-33 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. |
|
|
|
|
|
See Index to Consolidated Financial Statements in Item 8 on page 38 of this Annual Report on Form 10-K.
|
|
|
The following consolidated financial statement schedule of Nanometrics Incorporated is filed as part of this Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements:
|
| |
|
Our allowance for doubtful accounts receivable consists of the following (in thousands):
Year Ended |
| Balance at beginning of period |
|
| Additions to Allowance |
|
| Charges Utilized/Write-offs |
|
| Balance at end of period |
| ||||
December 29, 2018 |
| $ | 126 |
|
| $ | 129 |
|
| $ | (85 | ) |
| $ | 170 |
|
December 30, 2017 |
| $ | 73 |
|
| $ | 78 |
|
| $ | (25 | ) |
| $ | 126 |
|
December 31, 2016 |
| $ | 150 |
|
| $ | — |
|
| $ | (77 | ) |
| $ | 73 |
|
Our valuation allowance for deferred tax assets consists of the following (in thousands):
Year Ended |
| Balance at beginning of period |
|
| Additions to Allowance |
|
|
|
| Charges Utilized/Write-offs |
|
| Balance at end of period |
| ||||
December 29, 2018 |
| $ | 13,702 |
|
| $ | 470 |
|
|
|
| $ | (3,206 | ) |
| $ | 10,966 |
|
December 30, 2017 |
| $ | 10,980 |
|
| $ | 2,984 |
|
|
|
| $ | (262 | ) |
| $ | 13,702 |
|
December 31, 2016 |
| $ | 36,786 |
|
| $ | 1,643 |
|
|
|
| $ | (27,449 | ) |
| $ | 10,980 |
|
Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or notes thereto.
|
|
See Exhibit Index under part (b) below.
|
|
Exhibit Description | Form | File Number | Date of First Filing | Exhibit Number/ Appendix Reference | |
3.(i) | Certificate of Incorporation |
|
|
|
|
8-K | 000-13470 | 10/5/2006 | 3.1 | ||
3.(ii) | Bylaws |
|
|
|
|
8-K | 000-13470 | 4/12/2012 | 3.1 | ||
4 | Instruments Defining the Rights of Security Holders, Including Indentures |
|
|
|
|
10-Q | 000-13470 | 11/9/2006 | 4.1 | ||
10 | Material Contracts |
|
|
|
|
| Management Contracts, Compensatory Plans, Contracts or Arrangements |
|
|
|
|
Registrant’s 2000 Employee Stock Option Plan and form of Stock Option Agreement | S-8 | 333-40866 | 7/6/2000 | 4.2 | |
S-8 | 333-40866 | 9/3/2003 | 4.1 | ||
Registrant’s 2000 Director Stock Option Plan and form of Stock Option Agreement | 10-K | 000-13470 | 3/13/2008 | 10.2 | |
10-K | 000-13470 | 3/13/2008 | 10.8 | ||
10.5 | 8-K | 000-13470 | 2/20/2013 | 10.1 | |
8-K | 000-13470 | 3/24/2015 | 99.1 | ||
8-K | 000-13470 | 5/22/2015 | 10.1 | ||
8-K | 000-13470 | 5/22/2015 | 10.4 | ||
10-Q | 000-13470 | 10/30/2015 | 10.1 | ||
Registrant’s Amended and Restated 2003 Employee Stock Purchase Plan | DEF 14A | 000-13470 | 4/4/2016 | App 1 | |
10-Q | 000-13470 | 7/28/2016 | 10.3 | ||
10-K | 000-13470 | 3/3/2017 | 10.22 | ||
Registrant’s Amended and Restated 2005 Equity Incentive Plan | DEF 14A | 000-13470 | 4/4/2017 | App B | |
Nanometrics Incorporated 2017 Executive Performance Bonus Plan | DEF 14A | 000-13470 | 4/4/2017 | App A | |
8-K | 000-13470 | 8/11/2017 | 10.1 | ||
10.16 | Employment Agreement between the Registrant and Pierre-Yves Lesaicherre, dated November 27, 2017 | 10-K | 000-13470 | 2/26/2018 | 10.20 |
10.17 | Separation Agreement between Registrant and S. Mark Borowicz, dated January 8, 2018 | 10-K | 000-13470 | 2/26/2018 | 10.21 |
10.18 | Independent Contractor Agreement between Registrant and S. Mark Borowicz, dated January 8, 2018 | 10-K | 000-13470 | 2/26/2018 | 10.22 |
Retention Bonus Agreement between Registrant and Greg Swyt, dated December 18, 2017 | 10-K | 000-13470 | 2/26/2018 | 10.23 | |
10.20 | Relocation Agreement between Registrant and Rollin Kocher, dated December 16, 2016 | 10-K | 000-13470 | 2/26/2018 | 10.24 |
10.21 | 8-K | 000-13470 | 3/1/2018 | Item 5.02 | |
10.22 | Separation Agreement between Registrant and Jonathan Chou, dated June 25, 2018 | 10-Q | 000-13470 | 8/2/2018 | 10.1 |
10.23 | Retention Bonus Agreement between Registrant and Greg Swyt, dated June 25, 2018 | 8-K | 000-13470 | 11/26/2018 | 10.1 |
| All Other Material Contracts |
|
|
|
|
10.24 | - | - | - | - | |
21 | Subsidiaries |
|
|
|
|
21.1 | - | - | - | - | |
23 | Consents of Experts and Counsel |
|
|
|
|
23.1 | Consent of PricewaterhouseCoopers LLP Independent Registered Public Accounting Firm | - | - | - | - |
31 | Rule 13a-14(a)/15d-14(a) Certifications |
|
|
|
|
31.1 | - | - | - | - | |
31.2 | - | - | - | - | |
32 | Section 1350 Certifications |
|
|
|
|
32.1* | - | - | - | - | |
100.INS | XBRL Instance Document |
|
|
|
|
100.SCH | XBRL Taxonomy Extension Schema Document |
|
|
|
|
100.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
100.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
100.LAB | XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
100.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
Documents previously filed in the table above are incorporated by reference.
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: February 25, 2019
| ||
By: | / | |
|
|
|
| ||
| Date: |
|
Pursuant to the requirements of the Securities Exchange Act of
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Signature |
| Title |
| Date |
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/ |
|
|
| February 25, |
|
| |||
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| ||
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| |||
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| ||
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|
|
/ | Senior Vice President, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | February 25, 2022 | ||
Steven R. Roth | ||||
/s/ Leo Berlinghieri |
| Director |
| February 25, |
|
|
|
|
|
|
|
|
|
|
/ |
| Director |
| February 25, |
Edward J. Brown Jr. |
|
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|
|
|
|
|
|
/ |
| Director |
| February 25, |
|
|
|
|
|
|
|
|
|
|
/ |
| Director |
| February 25, |
Karen M. Rogge | ||||
/s/ Bruce C. Rhine | Director | February 25, 2022 | ||
Bruce C. Rhine | ||||
/s/ Christopher A. Seams | Director | February 25, 2022 | ||
Christopher A. Seams |
|
|
|
|
|
|
|
|
|
/ |
| Director |
| February 25, |
| ||||
|
|
| ||
Christine A. Tsingos |
|
|
|
|
79