UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 31, 2019January 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 No. 001-39110
ONTO INNOVATION INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 94-2276314 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification Number) |
16 Jonspin Road, Wilmington, MA 01887
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (978) 253-6200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class | Trading Symbol | Name of Exchange on Which Registered |
Common Stock, $0.001 par value per share
| ONTO | New York Stock Exchange (NYSE) |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant 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 registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 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 whether the registrant 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,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer | ☒ |
| Accelerated filer | ☐ |
Non-accelerated filer | ☐ |
| Smaller reporting company | ☐ |
|
|
| 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 registrant 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 in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the registrant’s voting Common Stock held by non-affiliates of the registrant was approximately $811,997,653$3,504,224,185 based on the closing price of the Common Stock on the Nasdaq Global Select MarketNew York Stock Exchange on June 28, 2019.25, 2021.
The number of shares of the registrant’s Common Stock outstanding as of February 6, 20208, 2022 was 50,282,160.49,359,739.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K incorporate by reference information from the definitive proxy statement for the registrant’s annual meeting of stockholders scheduled to be held on May 12, 2020.10, 2022.
TABLE OF CONTENTS
Explanatory Note
On October 25, 2019, Onto Innovation Inc. (the “Company” or “Onto Innovation,” formerly known as Nanometrics Incorporated (“Nanometrics”)) consummated its previously announced merger (the “Merger”) with Rudolph Technologies, Inc. (“Rudolph”). Onto Innovation accounts for the Merger as a reverse acquisition using the acquisition method of accounting in accordance with generally accepted accounting principles, with Rudolph being treated as the acquiring entity for accounting purposes. Because Rudolph is treated as the accounting acquirer in the Merger, the financial statements filed with this annual report on Form 10-K include the financial results of Rudolph for all periods presented and the financial results of the former Nanometrics for the periods on or after October 26, 2019. As used in this report, unless the context suggests otherwise, the terms “we,” “us” or “our” refer to (i) Rudolph and its consolidated subsidiaries for periods through October 25, 2019 and (ii) Onto Innovation and its consolidated subsidiaries for periods on or after October 26, 2019. The terms the “Company” and “Onto Innovation” refer to the combined company following the consummation of the Merger.
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K (this “Form 10-K”), or incorporated by reference in this Form 10-K, of Onto Innovation are forward-looking statements, including those concerning our business momentum and future growth, acceptance of our products and services, our abilityInc. (referred to deliver both products and services consistent with our customers’ demands and expectations and to strengthen our market position, our expectations of the semiconductor market outlook, future revenue, gross profits, research and development and engineering expenses, selling, general and administrative expenses, product introductions, technology development, manufacturing practices, cash requirements, our dependence on certain significant customers and anticipated trends and developments in and management plans for our business and the markets in which we operate, our anticipated revenue as a result of acquisitions, and our ability to be successful in managing our cost structure and cash expenditures and results of litigation. The statements contained in this Annual ReportForm 10-K, together with its consolidated subsidiaries, unless otherwise specified or suggested by the context, as the “Company,” “Onto Innovation,” “we,” “our” or “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 that are not purely historical are forward-looking statements within the meaning ofand are subject to safe harbors created under Section 27A of the Securities Act of 1933, andas amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as, but not limited to, “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “plan,” “should,” “may,” “could,” “will,” “would,” “forecast,” “project” and words or phrases of similar meaning, as they relate to our management or us.
The forward-lookingForward-looking statements contained herein reflect our current expectations, assumptions and projections with respect to future events and are subject to certain risks, uncertainties and assumptions.assumptions, such as those identified in Part I, Item 1A. “Risk Factors” and elsewhere in this Form 10-K. Actual results may differ materially and adversely from those included in such forward-looking statements for a number of reasons including, but not limited to, the following: variations in the level of orders which can be affected by general economic conditions; seasonality and growth rates in the semiconductor manufacturing industry and in the markets served by our customers; the global economic and political climates; difficulties or delays in product functionality or performance; the delivery performance of sole source vendors; the timing of future product releases; failure to respond adequately to either changes in technology or customer preferences; changes in pricing by us or our competitors; our ability to manage growth; changes in management; risk of nonpayment of accounts receivable; changes in budgeted costs; our ability to leverage our resources to improve our position in our core markets, to weather difficult economic environments, to open new market opportunities and to target high-margin markets; the strength/weakness of the back-end and/or front-end semiconductor market segments; the imposition of tariffs or trade restrictions and costs, burdens and restrictions associated with other governmental actions; the ability to successfully integrate the businesses of Rudolph and Nanometrics promptly and effectively and to achieve the anticipated synergies and value-creation contemplated by the Merger within the expected time frame; unanticipated difficulties or expenditures relating to the Merger and integration of the Rudolph and Nanometrics businesses; the response of business partners and retention as a result of the Merger; the diversion of management time in connection with the integration; the effect of litigation related to the Merger; and the “Risk Factors” set forth in Item 1A. You should carefully review the cautionary statements and “Risk Factors” contained in this Annual Report on Form 10-K. You should also review any additional disclosures and cautionary statements and “Risk Factors” we include from time to time in our quarterly reports on Form 10-Q, current reports on Form 8-K and other filings we make with the Securities and Exchange Commission (the “SEC”). The forward-lookingstatements. Forward-looking statements reflect our position as of the date of this 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
Item 1. | Business. |
General
Onto Innovation is the new entity resulting from the completion on October 25, 2019 of the Merger between Nanometrics and Rudolph, two long-time leaders in the semiconductor equipment industry that began operations in 1975 and 1940, respectively. Onto Innovation has been publicly traded since October 2019 (NYSE: ONTO).
Onto Innovation is a worldwide leader in the design, development, manufacture and support of process control tools that perform macro defect inspectionsmacro-defect inspection and 2D/3D optical metrology, lithography systems, and process control analytical software used by bare silicon wafer manufacturers, semiconductor wafer fabricators, and advanced packaging device manufacturers. Our products are also used for process control in a number of other high technology industries including: silicon wafer substrates;markets, including manufacturing of light emitting diodediodes (“LED”);, vertical-cavity surface-emitting laserlasers (“VCSEL”);, micro-electromechanical systemsystems (“MEMS”);, CMOS image sensorsensors (“CIS”);, compound semiconductor (SiC and GaN) power device;devices, RF filter;filters and modules, data storage;storage, and certain industrial and scientific applications. We have a combined installed base of over 9,000 systems in the majority of advanced semiconductor device production factories worldwide.
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 deviceadvanced packaging of chips and test facilities, (oror “back-end” manufacturing), respectivelymanufacturing, 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 primary area of focus isare products that provide critical yield-enhancing and actionable information, which is used by microelectronic device manufacturers to drive down scrap costs and to decrease the time to market of their next-generation devices. All Onto InnovationOur systems feature sophisticated software and production-worthy automation. In addition, our advanced process control software portfolio includes powerful solutions for standalone tools, groups of tools, factory-wide, and enterprise-wide suites to enhance productivity and achieve significant cost savings. Onto Innovation’sOur systems are backed by worldwide customer service and applications support.
Nanometrics and Rudolph 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 consummated their previously announced Merger pursuant toTechnologies, Inc. (“Rudolph”). We accounted for the agreement and plan of merger, dated as of June 23, 2019 (the “Merger Agreement”), by and among Nanometrics, Rudolph and PV Equipment Inc. As a result of the Merger, Rudolph became a direct wholly-owned subsidiary of Nanometrics, which was renamed “Onto Innovation Inc.” At the effective time of the Merger, each issued and outstanding share of common stock of Rudolph, par value $0.001 per share (“Rudolph Common Stock”) (other than shares owned by Rudolph or Nanometrics), was automatically converted into the right to receive 0.8042 (the “Exchange Ratio”) shares of Onto Innovation common stock, par value $0.001 per share (“Onto Innovation Common Stock”), and cash in lieu of any fractional shares of Onto Innovation Common Stock any former holder of Rudolph Common Stock would otherwise be entitled to receive. Immediately following the effective time of the Merger, each of Nanometrics’ and Rudolph’s stockholders owned approximately 50% of the combined company, Onto Innovation. Pursuant to the Merger Agreement, Onto Innovation accounts for the Merger as a reverse acquisition using the acquisition method of accounting in accordance with generally accepted accounting principles with(“GAAP”). GAAP requires that either Nanometrics or Rudolph being treatedis designated as the acquiring entityacquirer 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 market. The purchase consideration consisted of $24.0 million in cash paid at closing and an earnout subject to achievement of certain revenue targets earned for fiscal year 2021 and fiscal year 2022. As of January 1, 2022, $2.3 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. 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. 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.
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 as well asand advanced analytical software for semiconductor manufacturing andas 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 (3D NAND(NAND, 3D-NAND, and DRAM), analog devices (e.g., Wi-Fi and 5G radio integrated circuits, power devices), MEMS sensor devices (accelerometers, pressure sensors, and 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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Current Trendssemiconductors 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 Nodes.refer refers to leading edgeleading-edge integrated circuits in whichwhere 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’customers' desire for higher overall chip performance without 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 scale NAND memory, a new 3D stacking architecture has been implemented at several customers with as many as 128 devicemore than 150 storage cell layers for devices 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 such as the Atlas III+® product line that is capable of measuring these advanced nodes as certain features shrink to 7nm, 5nm and 3nm.
To shrink features, new methods, including multiple patterning lithography and extreme ultra-violet (“EUV”) lithography, have been developed. The EUV process is driving significantly higher requirements for the silicon wafers that are entering the EUV chamber. Small, particles on the backside of the wafer measuring a few micrometers (microns) can distort the images being projected onto the top side. OurThe 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 manufacturers.processes. The top side of these wafers used for the EUV process is covered with an epitaxial layer, which must also be scanned for any impurities contained in the silicon.impurities. This compositional analysis is measured using Onto Innovation’sour Element® system using Fourier Transform Infrared (“FTIR”) systems.algorithms.
Advanced PackagingPackaging. refers to a variety of technologies that enable the miniaturization of electronic products, such as portable consumer devices, including smartphones, watches, and tablets. In electronics manufacturing,Historically, integrated circuit packaging isrefers 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 provides external connectionscan be soldered to a printed circuit board and also prevents physical damage and corrosion to the chip and corrosion.chip. Advanced Packaging refers loosely to the multi-layer conductors and otherchip structures (other than wires) that often connectinterconnect multiple die, feed them with electric power and create signal paths to and from the PC board, dissipate their heat, and protect them from damage. Today, the drive to pack more functions into a small space and reduce their power requirements demands that chip packages do much more than ever before to combine multiple chips and functions into a single molded package.
One example of the technology used in Advanced Packaging is the 3D integration of semiconductors and other devices. Thesemiconductors. This technology involves stacking individual diechips 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.
Fan-out wafer levelHeterogeneous 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, fan-out wafer levelheterogeneous 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, eliminates the need for a ceramic or laminated substrate, 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, fan-out wafer levelheterogeneous integrated packages provide the functionality needed in high-end mobile and wearable products. We believe
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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 growth ofpotential uses seem endless. As a result, these added functions in mobile products are driving semiconductor advanced packaging has increased demandand 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 products such as the Dragonfly G2 System that is capable of inspecting two-dimensional (2D) features to find flaws/defects and detect unwanted residual residue as well as measuring and reporting vertical attributes of 3D pillars and bumps.solutions.
Panel Manufacturing. TheOne 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 costCost of ownershipOwnership (“CoO”) and increase productivity are transitioning from round 300mm wafers to large rectangular panels, which can be as large as 600mm x 600mm. This larger size and shape enables companies manufacturing large area packages to efficiently increase the number of devices being
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processed at each step as they are no longer limited to operating within the constraints of a round wafer. By responding to market opportunities and addressing the stringent demands of customers’ technical roadmaps, we believe that Onto Innovation is optimally positioned to capitalize on the emerging market of high-volume panel manufacturing. For example, the JetStep® S X500 lithography system, having emerged from the flat panel display market, is designed forreadily capable of processing RDLs on both glass and organic laminate panels in the semiconductor Advanced Packagingadvanced packaging market. The Firefly™S Series,Firefly® series, designed for high resolution inspection, can provide metrologydefect detection and location information to the JetStep SX500 tool for each die, which greatly improves lithography throughput using Onto Innovation’sour exclusive StepFAST™ process. The FireflyIt also delivers a combination of defect detectionclassification and substrate flexibilityprocess throughput in a single platform, reducingsoftware platform. It reduces capital investment requirements and providingprovides a reliable pathway to transition from wafer to panel-based processes.
Technology
We believe that our expertise in our core technologies of optics and software and our combined investment in research and development will enable us to rapidly develop new technologies and products as we have demonstrated over the past two years of operation in order 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 products and solutions. Unique features have been designed into our lithography systems to meet our customers’ changing process requirements. Our metrology and inspection technologies provide process control for the majority of advanced node wafers processed today in a semiconductor wafer fab. In front-end processes, optical critical dimension (“OCD”)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 finalback-end manufacturing (back-end) 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 all of the gathered data gathered into useful knowledge for our customers to make yield-enhancing decisions, which lower their scrap cost of goods sold (“COGS”)and environmental impact and improve their margins.
Onto Innovation’s Products
Metrology
Automated Metrology Systems.Systems. Our automated systems primarily consist of fully automated metrology systems that are employed in semiconductor production environments. The Atlas®Atlas family of products represents our line of high-performance metrology systems providing OCD and thin film metrology and wafer stress metrology for transistor and interconnect metrology applications. The thin film and OCD technology in the Atlas is supported by our 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. Additionally, the S3000SX™ System is used for ultra-thin transparent films metrology in advanced semiconductor fabrication applications for advanced nodes.
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.
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Integrated Metrology Systems. Systems. Our integrated metrology (“IM”) systems are installed directly onto wafer processing equipment to provide near real-time measurements for improved process control and maximum throughput. Our IM systems are sold directly to end user customers. The IMPULSE® family of products includes the latest technology for OCD, and thin film metrology, and have been successfully qualified on numerous independent Wafer Fabrication Equipment Suppliers’ platforms. Our NanoCD suite of software solutions including NanoDiffract and SpectraProbe, is sold in conjunction with our IMPULSE systems.
Opaque Film Metrology. The MetaPULSE® systems allow customers to simultaneously measure the thickness and other properties of metal or non-metallic opaque film layers in a non-destructive manner without physically contacting product wafers. PULSE Technology is used in copper or aluminum interconnect processes, as well as various layers in 3D NAND chips and thick advanced packaging interconnect applications. PULSE technology is expanding into new process
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applications such as RF filters and modules, driven by the need for on-product metrology as feature sizes decrease and pattern densities increase.
Inspection & Yield Management
Silicon Wafer All-surface Inspection/Characterization. CharacterizationAll-surface. “All-surface” refers to inspection of the wafer frontside, edge, and backside as well as thewafer’s locator notchnotch. 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. The AWXEdge bead removal and NovusEdge tools utilize optical scattering and imaging technologyedge exclusion metrology involve a topside surface measurement required exclusively in the lithography process, primarily to inspect these surfaces. Adetermine if wafers have been properly aligned for the edge exclusion region. The primary reason for all-surface wafer backside inspection is to detect and contain anydetermine 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 frontsidefrontside. .
Epitaxial Thickness and Composition. Our materials characterization products include systems that are used to monitor the physical, optical, electrical and material characteristics of discrete electronic industry, opto-electronic, HB-LED (high brightness LEDs), solar PV (solar photovoltaics), compound semiconductor, strained silicon and silicon-on-insulator (“SOI”) devices, including composition, crystal structure, layer thickness, dopant concentration, contamination and electron mobility. Our
We have a broad portfolio of products for materials characterization includesincluding photoluminescence mapping in the RPM Blue and Vertex, and Fourier Transform Infrared (“FTIR”) spectroscopyspectroscope in the QS Family (QS1200, QS2200, QS4300)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™F30™, NSX®, and the latest Dragonfly G2® 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. Our TrueADC software performsTo 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 enabling yield improvementsystem, 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 facilities with consistent results. 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. Discover Yield and other tools in the Discover suite enable enterprise-wide analysis. This analysis may determine where a process variation or deviation has occurred, allowing process engineers to make corrections or enhancements to increase yields. Defect data analysis is performed to identify, analyze and locate the source of defects and other manufacturing process excursions. Using either a single wafer map or a composite map created from multiple wafer maps, this analysis enables identification of defect patterns and distribution. When combined with inspection data from strategically placed inspection points -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, Nanometrics 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, automotive and powertrain systems, and unique research and scientific instrumentation that requires the unique high-speed results of the 4D systems.
Lithography
Advanced Packaging Lithography. Lithography. Our lithography steppers from the JetStep product family, use projection optics to expose circuit patterns from a mask or reticle onto a substrate to expose images with optimal fidelity. 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 JetStep systemssubstrate 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 principallyto enable the creation of features. In order for package level interconnect and bump layer patterning.equipment to effectively function in this environment, it must overcome these challenges. Our JetStep®systems have been specifically designed forto meet these layer applications.challenges head on. The new JetStep W Series is designed for wafers and other round substrates while the JetStep S SeriesX500 System is designed for rectangular substrates (panels). Both systems boast a large printable field to maximize, which when combined with user-selectable wavelength options, maximizes throughput while not limiting resolution.resolution when needed. High-fidelity optics are able to image the fine features required while at the same time managing theachieving superior depth of field to minimize non-flatness that is typical for advanced packaging applications.
Flat Panel Display Lithography. In additionOn-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 semiconductor device applications with the JetStep S and W products, the JetStep G Series is engineered to address the needs of the flat panel display market. The JetStep G is principally used in Gen 4 and Gen 5 panels for displays used in high resolution, smaller form factor devices, such as smart phones and smart watches.
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Enterprise Software Solutionsmeet advanced packaging challenges.
Process Control Software. We provide a wide range of advanced process control solutions, allwhich are designed to improve factory profitability, including run-to-run control, fault detection, classification and tool automation. OurWe are a leading provider of process control software in the semiconductor industry. Advanced Process Control solutions are sold under the Discover™ brand and include Discover Enterprise, Discover Run-to-Run and other solutions. Discoverprocess control (“APC”) employs software canto automatically detect or predict tool failure (fault detection) as well as calculate recipe settings for a process that will drive the yielded output to meet and exceed the target, despite variations in the incoming material and minor instabilities within the process equipment. These processProcess control software solutions enableenables 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. Our Discover Yield, Discover Enterprise, and Discover Patterns software enables fab wide and enterprise wide (multiple factory) yield management based onThe data analyticsnecessary to generate productivity information comes from a broad range of sources. These datamany different sources includethroughout the wafer fabfab: inspection and metrology systems, tool sensors, tool recipes, electrical tests and the fab environment. The Discover platform utilizes machine learning, advanced analytics,As the complexity and othercost of manufacturing processes increase, the value of faster, better analysis and visualization to enablesupport critical manufacturing decisions grows. As a result, customers are demanding robust yield management systems that can analyze large, complex data sets quickly and excursion prevention,effectively. Our fully integrated YMS is designed to analyze data from disparate sources and multiple sites to maximize productivity across the entire semiconductor manufacturing value chain.
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Customers
Over 150200 microelectronic device manufacturers have purchased Onto Innovation tools andor software for installation at multiple sites.in 2021. We support a diverse customer base in terms of both geographic location and type of device manufactured. Our customers are located in over 20 countries.
In 2019, sales to Taiwan Semiconductor Manufacturing Co. Ltd. and SK Hynix Inc. accounted for 13.4% and 13.1%, respectively, of our revenue. In 2018, sales to SK Hynix Inc. accounted for 12.2% of our revenue. No individual end user customer accounted for more than 10% of our revenue in 2017. We do not have purchase contracts with any of The following chart identifies our customers that obligate them to continue to purchase our products.represented 10% or more of total revenue for each of the last three years:
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Taiwan Semiconductor Manufacturing Co. Ltd. |
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Samsung Semiconductor |
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* The customer accounted for more than 10% of total revenue during the period. | ||||||
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Sales, Customer Service and Application 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 Europe, and work with selected dealers and sales representatives on a more limited basis in various 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.As of December 31, 2019, we employed 647 sales and marketing, service and applications support personnel.
We believe that customer service and technical support for our systems are crucial factors that distinguish us from our competitors and are essential to building and maintaining close, long-term relationships with our customers. We generally provide a warranty for our products which rangethat ranges from twelve to fourteen months to cover defects in material and 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 European locations.
Competition
We offer various products for various semiconductor manufacturing process steps, and several of our products extend across the same process flow. However, for process control of each of these process steps, we have multiple established and potential competitors, some of which may have greater financial, research, engineering, manufacturing and marketing resources than we have. We may also face future competition from new market entrants from other overseas and domestic sources. We expect our competitors to continue to improve the design and performance of their current products and processes, and to introduce new products and processes with improved price and performance characteristics. In order to remain competitive, we believe that we will require significant financial resources to offer a broad range of products, and to maintain customer service and support centers worldwide, and to invest in product research and development.
In every market in which we participate, the global semiconductor equipment industry is intensely competitive, and driven by rapid technological adoption cycles. Our ability to compete effectively depends upon our ability to continuously 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”) for thin film and critical dimension OCD metrology. Our principal competitor for advanced packaging inspection is Camtek Ltd. (“Camtek”). While the advanced packaging lithography market is served by various competitors, our primary competitors are Ushio, Inc. (“Ushio”) and Canon, Inc. (“Canon”). The primary competitor for 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 systems, served by numerous competitors, of which no single competitor or group of competitors has established a majority position.
We believe that our competitive position in each of our markets is based on the ability of our products and services to address customer requirements related to numerous competitive factors. Competitive selections are based on many factors
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involving technological innovation, productivity, total cost of ownership of the system, including impact on end of line yield, price, product performance and throughput capability, quality, reliability and customer support.
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 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, if 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 a number of 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. As of December 31, 2019, we employed 184 manufacturing personnel.
Research and Development
We continue to invest in research and development 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.
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The 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 success. Accordingly, we devote a significant portion of our technical, management and financial resources to research and development programs. As of December 31, 2019, we employed 376 engineering personnel in research and development.
Intellectual Property
We believe that our success will depend to a great degree upon innovation, technological expertise and our ability to adapt our products to new technology. As a result, we have a policy of seeking patents on inventions governing new products or technologies as part of our ongoing research, development, and manufacturing activities. As of December 31, 2019,January 1, 2022, we have been granted, or hold exclusive licenses to 484436 U.S. and foreign patents. The patents we own, jointly own or exclusively license have expiration dates ranging from 20202022 to 2038.2040. We also have 8580 pending regular and provisionalpatent applications in the U.S.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 patentspatent 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 proprietary rights,intellectual property, or they may prove to be unenforceable. To protect our proprietary rights,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 granted thereunder will provide us with a competitive advantage or (iii) that we will be able to fully protect our technology.intellectual property. Additionally, others may obtain patents or trademarks and assert them against us. From time to time, we receive communications from third parties asserting that our systems, software and/or methods may contain design features that such third parties claim may infringe upon their proprietaryintellectual property rights.
The laws of some foreign countries doFrom 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 protect our proprietary rightsbe able to pursue the same degree as dolawsuit due to the laws of the United States, and many U.S. companies have encountered substantial infringement problemsapplicable country or (iii) there may be a subsequent
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unfavorable change in protecting their proprietary rights against infringement in such countries, some of which are countries in which we have sold and continuethe laws that limit our ability to sell products.pursue the lawsuit. There is a risk that our means of protecting our proprietary rightsintellectual property may not be adequate. For example, our competitors may independently develop similar technology or duplicate our products. If we fail to adequately protect our intellectual property, it would be easier for our competitors to sell competing products.
CompetitionHuman Capital and Talent
We offer various products for various semiconductor manufacturing process steps,As of January 1, 2022, we had approximately 1,411 staff globally, 367 in research and severaldevelopment, 270 in operations, 131 in administration and 643 in sales, applications and service support. A large percentage of our products extend across the same process flow. However, for process controlemployees have technical backgrounds and undergraduate and/or advanced degrees. Many of eachour employees have specialized skills and experience that are of these process steps, we have multiple established and potential competitors, some of which may have greater financial, research, engineering, manufacturing and marketing resources than we have. We may also face future competition from new market entrants from other overseas and domestic sources. We expectvalue to our competitors to continue to improve the design and performance of their currentbusiness, products and processes, and to introduce new products and processes with improved price and performance characteristics. In order to remain competitive, we believe that weservices. Our future success will require significant financial resources to offer a broad range of products, and to maintain customer service and support centers worldwide, and to investdepend, in product research and development.
In every market in which we participate, the global semiconductor equipment industry is intensely competitive, and driven by rapid technological adoption cycles. Our ability to effectively compete dependslarge part, upon our ability to continually improveattract, motivate and retain our products, applicationshighly skilled, technical, operational and services,managerial team members, who are in great demand in our industry and our ability to develop new products, applications and services that meet constantly evolving customer requirements.business communities.
In automated systems for the semiconductor industry, our principal competitors are KLA Corporation (“KLA”) and Nova Measuring Instruments Ltd. (“Nova”) for thin film and critical dimension OCD metrology. Our principal competitor for advanced packaging inspection is Camtek Ltd. (“Camtek”). While the advanced packaging lithography market is served by various competitors, our primary competitors are Veeco Instruments, Inc. (“Veeco Instruments”) and, to a lesser extent, Nikon Corporation (“Nikon”). Our primary competitor for integrated metrology systems for the semiconductor industry is Nova. The opto-electronics, discrete device and industrial and scientific markets are addressed primarily by our material characterization and 4D business unit systems, served by numerous competitors, of which no single competitor or group of competitors has established a majority position.
We believe that our competitive position in eachApproximately 62% of our markets is based onemployees are located in the ability of our productsUnited States, 35% in Asia Pacific and services to address customer requirements related to numerous competitive factors. Competitive selections are based on many factors
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involving technological innovation, productivity, total cost of ownership of the system, including impact on end of line yield, price, product performance and throughput capability, quality, reliability and customer support.
Backlog
We schedule production of our systems based upon order backlog and informal customer forecasts. We use the term “backlog” to refer to only those orders to which the customer has been assigned a purchase order number and for which delivery is anticipated within 12 months. Because shipment dates may be changed and customers may cancel or delay orders with little or no penalty, our backlog as of any particular date may not be a reliable indicator of actual sales for any succeeding period. At December 31, 2019, we had a backlog of approximately $71.7 million compared with a backlog of approximately $62.7 million at December 31, 2018.
Employees
At December 31, 2019, we employed a total of 1,340 persons worldwide with sales, applications and service support3% in key geographic areas aligned with our customer locations.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 the risk factor, “We are subject to various environmental laws and regulations that could impose substantial costs upon us and may harm our business, operating results and financial condition.” in Item 1A.
Available Information
Our Internet website address is http://www.ontoinnovation.com. The information on our website is not incorporated into this Annual Report.Form 10-K. Our Annual ReportsReport on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K (and any amendments to those reports) are made available free of charge, on or through our Internet website, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. All filings we make with the SEC are also available free of charge via EDGAR through the SEC’s website at http://www.sec.gov. In addition, the historic reports and materials that were filed by Nanometrics and Rudolph with the SEC are available at our investor relations website at https://investors.ontoinnovation.com. These filings may also be obtained through the SEC’s website. Documents that are not available through the SEC’s website may also be obtained by submitting an online request to the SEC at http://www.sec.gov.
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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.
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Item 1A. | Risk Factors. |
The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occurs, our business, financial condition or results of operations could be materially adversely affected.
Summary Risk Factors
Below is a summary the principal factors and uncertainties that make investing in our company risky. You should read this summary together with the more detailed description of each risk factor contained further below.
Risks Related to Our Business
Our operating results have varied and will likely continue to vary significantly from quarter to quarter in the future, causing volatility in our stock price.
Our quarterly operating results have varied in the past and will likely continue to vary significantly from quarter to quarter in the future, causing volatility in our stock price. Some of the factors that may influence our operating results and subject our stock to extreme price and volume fluctuations include:Covid-19 Pandemic
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In light of these factors and the cyclical nature of the semiconductor industry, we expect to continue to experience significant fluctuations in quarterly and annual operating results. Moreover, many of our expenses are fixed in the short-term which, together with the need for continued investment in research and development, marketing and customer support, limits our ability to reduce expenses quickly. As a result, declines in net sales could harm our business and the price of our common stock could substantially decline.
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 five percent of our revenue typically account for, in the aggregate, a considerable amount of our revenue. We operate in the highly concentrated, capital-intensive semiconductor device manufacturing industry. Historically, a 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.
Our customers may be unable to pay us for our products and services.
Our customers include some companies that may, from time to time, encounter financial difficulties. If a customer’s financial difficulties become severe, the customer may be unwilling or unable to pay our invoices in the ordinary course of business, which could adversely affect collections of both our accounts receivable balance and unbilled services. The bankruptcy of a customer with a substantial account balance owed to us could have a material adverse effect on our financial condition and results of operations. In addition, if a customer declares bankruptcy after paying us certain invoices, a court may determine that we are not properly entitled to that payment and may require repayment of some or all of the amount we received, which could adversely affect our financial condition and results of operations.
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 Markets and 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 Acquisitions
• | 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 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. |
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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 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.
The effects of the public health crisis caused by the COVID-19 pandemic and the measures being taken to limit the spread of COVID-19 are uncertain and difficult to predict, but pose the following risks to our business, 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 incremental 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 increased costs resulting from our efforts to mitigate the impact and spread of COVID-19 through the changes in our operations which we have enacted at certain of our locations around the world in an effort to protect our employees’ health and well-being (including the implementation of work-from-home policies, social-distancing measures, modified work schedules and shifts, the suspension of employee travel, and limits on the number of employees attending in-person meetings and the number of people 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 constrained by lingering effects of COVID-19 on our suppliers, third-party service providers, and/or customers. These effects, alone or taken together, could have a material adverse effect on our business, results of operations, legal exposure, or financial condition. The duration of the COVID-19 pandemic, resurgences, the severity of newly identified strains of the virus and the efficacy of vaccines and treatments with respect to new strains cannot be determined. Additional sustained or prolonged outbreaks of virus variants, delays in rollout of any needed boosters or modifications to vaccines to address variants, or continued widespread hesitancy to utilize vaccines could exacerbate the adverse impact of such measures.
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.
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. Deteriorations 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 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 accurately 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 components 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 pass cost increases through to our customers fully (or at all), and if supply chain delays and shortages delay delivery of our products, our customers may seek to purchase from our competitors. Any such occurrence may have a material adverse impact on our gross margins and business, financial position, results of operations and cash flows.
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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.
Variations in the length of our sales cycles could cause our revenue 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 time to evaluate our inspection and/or film metrology systems and many people are involved in the evaluation process. We expend significant resources educating and providing information to
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our prospective customers regarding the uses and benefits of our systems in the semiconductor fabrication process. The length of time it takes for us to make a sale depends upon many factors, including, but not limited to:
| • | the efforts of our sales force; |
| • | the complexity of the customer’s fabrication processes; |
| • | the internal technical capabilities and sophistication of the customer; |
| • | the customer’s budgetary constraints; and |
| • | 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 when we recognize revenue from that customer and receive payment, if ever, varies 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 twenty-four months. Sometimes our sales cycles can be much longer, particularly with customers in Asia. During these cycles, we commit substantial resources to our sales efforts in advance of receiving any revenue, and we may never receive any revenue from a customer despite our sales efforts. If we do make a sale, our customers often purchase only one of our systems, the performance of which they then evaluate for a lengthy period before purchasing any more of our systems. The number of additional products a customer purchases, if any, depends on many factors, including the customer’s capacity requirements. The period between a customer’s initial purchase and any subsequent purchases can vary from three months to a year or longer, 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'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'customers’ requirements, we may have excess inventory, which could lead to obsolete inventory and unexpected costs. Conversely, if we underestimate our customers'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 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'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.
Most ofOur earnings could be negatively affected, and our revenue has been derived from customers outside of the United States, subjecting us to operational, financial and political risks, such as unexpected changes in regulatory requirements, tariffs, political and economic instability, outbreaks of hostilities, natural disasters, climate change and difficulties in managing foreign sales representatives and foreign branch operations, as well as risks associated with foreign currency fluctuations.
Due to the significant level of our international sales,inventory levels could materially increase, if we are subjectunable to a number of material risks, including:
Compliance with foreign laws. Our business is subjectpredict our inventory needs in an accurate and timely manner and adjust our orders for parts and subcomponents in the event that our needs increase or decrease materially due to risks inherentunexpected increases or decreases in doing business internationally, including compliance with, inconsistencies among, and unexpected changes in, a wide variety of foreign laws and regulatory environments with which we are not familiar, including, among other issues, with respect to employees, protection of our intellectual property, and a wide variety of operational regulations and trade and export controls under domestic, foreign, and international law.
Unexpected changes in regulatory requirements including tariffs and other market barriers. The semiconductor device industry is a high-visibility industry in many of the European and Asian countries in which we selldemand for our products. Because the governments of these countries have provided extensive financial support toAny material increase in our semiconductor device manufacturing customers in these countries, we believe that our customers could be disproportionately affected by any trade embargoes, excise taxes, tariffs or other restrictions imposed by their governments on trade with United States companies such as ourselves, particularly with respect to the ongoing trade negotiations between the United States and China. As of January
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2020, trade delegations from the United States and China reached partial agreement over tariffs on certain products, but if the United States and China do not continue negotiations and reach agreement on a trade policy, tariffs imposed by China may result in lower sales to customers in China as the costs of our products become more expensive to such customers. In addition, tariffs imposed by the United States will increase the cost of raw materials that we import from China. Any restrictions of these typesinventories could result in a reduction in our sales to customers in these countries. In addition, given the relatively fluid regulatory environment in China, there could be additional tax or other regulatory changes in the future. Such actions in the future, as well as other changes in Chinese laws and regulations, including actions in furtherance of China’s stated policy of reducing its dependence on foreign semiconductor manufacturers, could increase the cost of doing business in China, foster the emergence of Chinese-based competitors, decrease the demand for our customers’ products in China, or reduce the supply of critical materials for our customers’ products, which could have a materialan adverse effect on our business and results of operations.
Political and economic instability. We are subjectfinancial position, while any material decrease in our ability 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 U.S., these events mayprocure needed inventories could result in reducedan inability to supply customer demand for our products. There is considerable political instability in Taiwan related to its disputes with China and in South Korea related to its disputes with North Korea. In addition, several Asian countries, particularly Japan, have experienced significant economic instability. An outbreak of hostilities or other political upheaval in China, Taiwan or South Korea, or an economic downturn in Japan or other countries, would likely harm the operations ofproducts, thus adversely affecting 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 and climate change. 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 2019-Novel Coronavirus (2019-nCoV) as described below, 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.
Our financial and operating performance may be adversely affected by epidemics. Our business and financial and operating performance could be materially and adversely affected by the outbreak of epidemics including but not limited to 2019-Novel Coronavirus (2019-nCoV). As a result of the ongoing Novel Coronavirus, the operations of our customers in China and Taiwan are expected to experience a slowdown or temporary suspension in production. Our business could be materially and adversely affected in the event that the slowdown or suspension continues for a long period of time. During such epidemic outbreak, China and Taiwan may adopt certain hygiene measures, including quarantining visitors from places where any of the contagious diseases were rampant. Those restrictive measures may adversely affect and slow down economic development during that period. Any prolonged restrictive measures in order to control the contagious disease or other adverse public health developments in China and Taiwan may have a material adverse effect on our business, financial condition and results of operations.
Difficulties in staffing and managing foreign branch operations. During periods of tension between the governments of the United States and certain other countries, it is often difficult for United States companies such as us to staff and manage operations in such countries. Language and other cultural differences may also inhibit our sales and marketing efforts and create internal communication problems among our U.S. and foreign research and development teams, increasing the difficulty of managing multiple remote locations performing various development, quality assurance, and yield ramp analysis projects.
Currency fluctuations as compared to the U.S. Dollar. A substantial portion of our international sales are denominated in U.S. dollars. As a result, if the dollar rises in value in relation to foreign currencies, our systems will become more expensive to customers outside the United States and less competitive with systems produced by competitors outside the United States. These conditions could negatively impact our international sales. Foreign sales also expose us to collection risk in the event it becomes more expensive for our foreign customers to convert their local currencies into U.S. dollars. Additionally, in the event a larger portion of our revenue becomes denominated in foreign currencies, we would be subject to a potentially significant exchange rate risk.
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FCPA and Other Anti-Corruption Laws. We are subject to the Foreign Corrupt Practices Act of 1977 ("FCPA"), and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. Also, similar worldwide anti-bribery laws, such as the U.K. Bribery Act and Chinese anti-corruption laws, generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Some of our distribution partners are located in parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. The policies and procedures we have implemented to discourage these practices by our employees, our existing safeguards and any 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, 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.revenue.
If we deliver systems with defects, our credibility will be harmed, and 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 may be required to expend significant capital 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 our systems.systems provided that we also include a cap on our liability in the related sales agreements. Our product liability insurance policy currently provides $2.0 million ofboth aggregate coverage withas well as an overall umbrella limit of $14.0 million.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 could suffer.
We must attract and retain experienced senior executives and other key personnel with knowledge of semiconductor device manufacturing and inspection, metrology or lithography equipment and related software to help support our future growth, and competition for such personnel in our industry is high.
Our success depends, to a significant degree, upon the continued contributions of our key executive management, engineering, sales and marketing, customer support, finance and manufacturing personnel. The loss of any of these key personnel through resignations, retirement or other circumstances, each of whom would be extremely difficult to replace, could harm our business and operating results. 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 support our future growth, we will need to attract and retain additional qualified employees. Competition for such personnel in our industry is intense, and we may not be successful in attracting and retaining qualified employees.
The expansion of high technology companies worldwide and growth in the demand for semiconductors following the onset of the COVID-19 pandemic have increased demand and competition for qualified personnel. Competition for engineering and other technical personnel in some of the markets in which we operate is especially intense due to continued increases in the number of technology companies worldwide. In order to attract and retain executives and other key employees, we must provide a competitive compensation package, including cash and stock-based compensation. If the anticipated value of our 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 motivate executives and key employees could be weakened.
Any prolonged disruption in the operations of our manufacturing facilities could have a material adverse effect on our revenue.
We produce the majority of our systems in our manufacturing facilities located in Milpitas, California and Bloomington, Minnesota. We use contract manufacturers in China, Japan and the United States. Our manufacturing processes are highly complex and require sophisticated and costly equipment and a specially designed facility. As a result, any prolonged disruption in the operations of our manufacturing facilities 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.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.
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 quickly to new or emerging technologies or market developments by devoting greater resources to the development, promotion and sale of products, which could impair sales of our products. Moreover, there has been merger and acquisition activity among our competitors and potential competitors. These transactions by our competitors and potential competitors may provide them with a competitive advantage over us by enabling them to rapidly expand their product offerings and service capabilities to meet a broader range of customer needs. Many of our customers and potential 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, but we may fail in a
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timely manner to complete the development or introduction of these additional product enhancements successfully, or these product enhancements may not achieve market acceptance or be competitive.
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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 research and development costs.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 areis subject to a wide variety of challenges during the development cycle, including start-up bugs, design defects, and other matters that could delay introduction of these systems. In addition, sinceSince our customers are not obligated by long-term contracts to purchase our systems, our anticipated product orders may not materialize, or orders that are placed may be canceled. As a result, ifIf 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.
Our integrated metrology systems are integrated with systems sold independently by Wafer Fabrication Equipment Suppliers, and a decrease in sales by these suppliers, or the development of competing systems by these suppliers, could harm our business.
We believe that sales of integrated metrology systems will continue to be an important source of our net revenues. Sales of our integrated metrology systems depend upon the ability of a small number of Wafer Fabrication Equipment Suppliers to sell semiconductor manufacturing equipment products that are compatible with our metrology systems as components. If these suppliers, such as Applied Materials, Inc., Ebara Corporation, Lam Research Corporation and Tokyo Electron, are unable to sell such products, if they choose to focus their attention on products that do not integrate our systems, or if they choose to develop competing systems, our business could suffer.
If our relationships with our large customers deteriorate, our product development activities could be adversely affected.
The success of our product development efforts depends on our ability to anticipate market trends and the price, performance and functionality requirements of semiconductor device manufacturers. In order to anticipate these trends and ensure that critical development projects proceed in a coordinated manner, we must continue to collaborate closely with our largest customers. Our relationships with these and other customers provide us with access to valuable information regarding trends in the semiconductor device industry, which enables us to better plan our product development activities. If our current relationships with our large customers are impaired, or if we are unable to develop similar collaborative relationships with important customers in the future, our product development activities could be adversely affected.
Risks Related to Intellectual Property and Data Security
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We may fail to adequately protect our intellectual property and, therefore, lose our competitive advantage.
Our future success and competitive position depend in part upon our ability to obtain and maintain proprietary technology for our principal product families, and we rely, in part, on patent, 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 transparent and opaque thin film 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 secretsecrets for protection forof 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 proprietaryintellectual 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 any patents issued to or licensed by usour intellectual property rights or to determine the noninfringement, scope or validity of a third party’s patent or other proprietaryintellectual 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 proprietaryintellectual 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 proprietaryintellectual 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 proprietaryintellectual 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 importantan intellectual property rightsdispute could hinder our ability to sell our products or systems or to make the sale of theseour products or systems more expensive.expensive, which could lead to reduced revenue or lower margins, respectively.
Our effortsIf 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.
As part of our business, we store our data and certain data about our customers, vendors and employees in our information technology system. If there is a breach as a result of third-party action, employee error, malfeasance, break-ins or otherwise, of our security measures designed to protect this information and prevent data loss and other security breaches, and someone obtains unauthorized access to our intellectual property may be less effective in certain foreign countries where intellectual property rights are not as well protected as in the United States.
The lawscustomers’, vendors’ or employees’ data, we could face loss of some foreign countries, including China, Japan, South Korea and Taiwan, where we do business, do not protect our proprietary rights to as great an extent as do the laws of the United States, and many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement abroad. For example, Taiwan is not a signatory of the Patent Cooperation Treaty, which is designed to specify rules and methods for defending intellectual property internationally. The publication of a patent in Taiwan prior to the filing of a patent in Taiwan would invalidate the ability of a company to obtain a patent in Taiwan. Similarly, in contrast to the United States where the contents of patents remain confidential during the patent application process, in Taiwan, the contents of a patent are published upon filing, which provides competitors an advance view of the contents of a patent application prior to the establishment of patent rights. Similarly, China’s protection of intellectual property rights historically has been less stringent and robust compared to other countries such as the United States, and consequently intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Monitoring and preventing unauthorized use are also difficult and the measures we take to protect our intellectual property rights may not be adequate. Accordingly, infringement of ourregulatory
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intellectual property rights posesinvestigations 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 serious riskvulnerability was reported for the widely used Java logging library, Apache Log4j 2. We have reviewed the use of doingthis 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. In 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, our ability to anticipate these techniques or to implement adequate preventative measures is reduced. In addition, third parties have made attempts to fraudulently induce employees or users to disclose information to gain access to our data or our customers’ data. As a result of any of these events, our or our customers’ and vendors’ information could be accessed or disclosed improperly. In addition, cybersecurity incidents affecting our customers could result in China. Consequently, theresubstantial 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”) is a riskregulation in European Union (“EU”) law on data protection and privacy for the individuals within the EU and the European Economic Area (“EEA”). It also addresses the export of personal data outside the EU and EEA areas. We are also subject to the California Consumer Privacy Act (“CCPA”). Moreover, a new privacy law, the California Privacy Rights Act (“CPRA”), was approved by California voters in November 2020. The CPRA will significantly modify the CCPA when it becomes effective in 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. 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 evolving 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 may be unablemodify or cease existing business practices. A failure by us, our suppliers, or other parties with whom we do business to adequately protectcomply 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 result in proceedings against us by governmental entities or others, which could have a material adverse effect on our proprietary rights in certain foreign countries. If this occurs, it would be easier for our competitorsbusiness, results of operations, and financial condition.
Risks Related to develop and sell competing products in these countries.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 face 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 Veeco Instruments.PDF Solutions. We compete to a lesser extent with Nikon. Each of our products also competes with products that use different metrology, inspection or lithography techniques. Some of our competitors have greater financial, engineering, manufacturing and marketing resources, broader product offerings and service capabilities and larger installed customer bases than we do. As a result, these competitors may be able to respond more quickly to new or emerging technologies or market developments by devoting greater resources to the development, promotion and sale of products, which, in turn, could impair sales of our products. Further, there may be significant merger and acquisition activity among our
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competitors and potential competitors, which, in turn, may provide them with a competitive advantage over us by enabling them to rapidly expand their product offerings and service capabilities to meet a broader range of customer needs.
Many of our customers and potential customers in the semiconductor device manufacturing industry are large companies that require global support and service for their semiconductor capital equipment. We believe that our global support and service infrastructure is sufficient to meet the needs of our customers and potential customers. However, some of our competitors have more extensive infrastructures than we do, which could place us at a disadvantage when competing for the business of global semiconductor device manufacturers. Many of our competitors are investing heavily in the development of new systems that will compete directly with our systems. We have, from time to time, selectively reduced prices on our systems in order to protect our market share, and competitive pressures may necessitate further price reductions. We expect our competitors in each product area to continue to improve the design and performance of their products and to introduce new products with competitive prices and performance characteristics. These product introductions would likely require us to decrease the prices of our systems and increase the level of discounts that we grant our customers. Price reductions or lost sales as a result of these competitive pressures would reduce our total revenue and could adversely impact our financial results.
Because of the high cost of switching equipment vendors in our markets, it is sometimes difficult for us to win new customers from our competitors even if our systems are superior to theirs.
We believe that once a semiconductor device manufacturer has selected one vendor’s capital equipment for a production-line application, the manufacturer generally relies upon that capital equipment and, to the extent possible, subsequent generations of the same vendor’s equipment for the life of the application. Once a vendor’s equipment has been installed in a production line application, a semiconductor device manufacturer must often make substantial technical modifications and may experience production-line downtime in order to switch to another vendor’s equipment. Accordingly, unless our systems offer performance or cost advantages that outweigh a customer’s expense of switching to our systems, it will be difficult for us to achieve significant sales to that manufacturer once it has selected another vendor’s capital equipment for an application.
Risks Related to Our International Operations
We must attractare subject to compliance with foreign laws and retain experienced senior executivesregulations, 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.
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 key personnelmarket barriers have impacted and may continue to impact our competitiveness with knowledgenon-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 inspection, metrologyChina.
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 lithography equipmentfor “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 on 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 help supportthe 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 growth, and competition for such personnel inU.S. government sanctions or threats of sanctions may respond by developing their own solutions to replace our industryproducts 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 high.
Our success depends,delayed or we are unable to a significant degree, upon the continued contributionsreturn or dispose of our key executive management, engineering, salesinventory 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 marketing, customer support, financefoundational technologies” warrant new or additional controls, which could subject additional U.S.-origin products and manufacturing personnel. The loss ofservices to more stringent export restrictions. It is possible that these modified regulations, and any offuture regulations, could reduce demand for our products. In particular, these key personnel through resignations, retirementrestrictive measures may reduce overall global demand for our customers’ products or for other circumstances, each of whom would be extremely difficult to replace, could harmproducts produced or manufactured in the United States or based on U.S. technology, in turn reducing demand for our business and operating results. Although we have employment and noncompetition agreements with key members of our senior management team, these individuals or other key employees may still leave us,products, which could have a material adverse effect on our business. We do not have key person life insurance on anybusiness, financial condition and results of operations. Additionally, given the continued tensions between the United States and Russia there is potential for new stricter export controls for Russia, which could affect our sales both into Russia and into secondary markets selling to Russia. International trade disputes could result in increases in tariffs and other trade restrictions and protectionist measures that could adversely impact our operations and reduce the competitiveness of our executives. products 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 supportsemiconductor 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 international sales. Foreign sales also expose us to collection risk in the event it becomes more expensive for our foreign customers to convert their local currencies into U.S. dollars. Additionally, in the event a larger portion of our revenue becomes denominated in foreign currencies, we would be subject to a potentially significant exchange rate risk, and any failure to sufficiently hedge or otherwise manage these risks could materially and adversely affect our financial 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 growth,improvements may prove to be ineffective, and our employees, consultants, sales agents or distributors may engage in conduct for which we will need to attract and retain additional qualified employees. Competition for such personnelmight be held responsible. Violations of the FCPA or international anti-corruption laws may result in our industry is intense,severe criminal or civil sanctions, and we may not be successfulsubject 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 attractingwhich we invest or that we acquire. We cannot assure you that our internal control policies and retaining qualified employees.procedures will protect us from reckless or negligent acts committed by our employees, distributors, partners, consultants or agents.
In orderRisks Related to attractTax Laws, Financial Markets and retain executivesthe 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 key employees,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 Company must provide a competitive compensation package, including cash(1) applicable tax laws; (2) composition of earnings in countries with differing tax rates; or (3) recoverability of our deferred tax assets and stock-based compensation.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 anticipated valuerequirement 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 Company’s stock-basedfinal 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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incentive awards doesbusiness 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 materialize so that they cease to be viewed as valuable, ifmaterially different from the Company’s profits decrease, or if the Company’s total compensation package is not viewed as competitive, the Company’s ability to attract, retain and motivate executives and key employees could be weakened.
We obtain some of the components and subassemblies includedtreatment reflected in our systems from ahistorical 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 group of suppliers,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 partialfinancial services industry may negatively impact our business, results of operations, financial condition or complete loss of one of these suppliers could cause production delays and a substantial loss of revenue.
We obtain some of the components and subassemblies included in our systems from a limited group of suppliers and do not have long-term contracts with many of our suppliers. Our dependence on limited source suppliers of componentsliquidity, and our lack of long-term contracts with many of our suppliersfactoring arrangements may expose us to several risks, including a potential inability to obtain an adequate supplyadditional risks.
In the past, global credit markets and the financial services industry have experienced periods of components, price increases, late deliveriesturmoil and poor component quality. Disruption or terminationupheaval characterized by the tightening of the supplycredit markets, the weakening of these components could delay shipmentsthe global economy and an unprecedented level of our systems, damage our customer relationshipsintervention from the United States and reduce our sales. From time to timeother governments. Adverse economic conditions, such as sustained periods of economic uncertainty or a crisis in the past, we have experienced temporary difficulties in receiving shipments from our suppliers. The lead-time required for shipments of some of our components can be as long as six months. In addition, the lead time required to qualify new suppliers for lasers and certain optics could be as long as a year, and the lead time required to qualify new suppliers of other components could be as long as nine months. If we are unable to accurately predict our component needs, or if our component supply is disrupted, wefinancial markets 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 components or subassemblies could seriously harm our results of operations and cash flows.
Any prolonged disruption in the operations of our manufacturing facilities could have a material adverse effect on our revenue.
We produce the majority of our systems in our manufacturing facilities located in Milpitas, Californialiquidity 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 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 harmfinancial condition if our ability to satisfyobtain 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 customer order deadlines. If we cannot timely delivercustomers’ ability to finance the purchase of systems from us or our systems,suppliers’ ability to provide us with product, either of which may negatively impact our business and results fromof 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 cash flowsinternational 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 materiallyrequired 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 adversely affected.
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 outsource selectunintentionally 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, activitiesand distributing our products in a responsible and environmentally friendly manner, and any failure on our part to third-party service providers, which decreasesdo so may cause reputational harm for the Company.
Customer and investor focus on our control over the performance of these functionsenvironmental, social and governance responsibility practices and policies, and related regulatory requirements, may result in lower qualitymake our supply chain more complex, and functionality of our products.
Weany failure to comply with customer or investor guidelines or applicable laws and regulations 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 managerelationship with customers and investors or our outsourcing strategy or if third party service providers do not perform as anticipated, we may experience operational difficulties, increased costs, manufacturing interruptions or inefficienciesreputation and results of operations.
There is an increasing focus on corporate environmental, social and governance (“ESG”) responsibility in the operationsemiconductor 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 anyand manufacturing. If we are unable to comply, or allare unable to cause our suppliers or contract manufacturers to comply, with such policies or provisions or meet the requirements of which could delay our delivery of products to our customers and materially and adversely affect our business, financial condition, and results of operations.
If our network security measures are breached and unauthorized access is obtained toinvestors, a customer's data, to our data, or to our information technology systems, wecustomer may incur significant legal and financial exposure and liabilities.
As part of our business, we store our data and certain data about our customers, vendors and employees in our information technology system. While we have 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 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.
Cyber-attacks and other malicious internet-based activities continue to increase. Because 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 unable to anticipate these techniques or to implement adequate preventative measures. In addition, third parties may attempt to fraudulently induce employees or users to disclose information to gain access to our data or our customers’ data. If any of these events occur, our or our customers’ and vendors’ information could be accessed or disclosedstop purchasing products
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improperly. Anyfrom us 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 subjectan investor may sell their shares, and may take legal action against us, to third-party lawsuits, regulatory fines or other action or liability, which could adversely affectharm our operating results.
The General Data Protection Regulation (GDPR) is a regulation in European Union (EU) law on data protection and privacy for all individuals within the EU and the European Economic Area (EEA). It also addresses the export of personal data outside the EU and EEA areas. We need to put in appropriate technical and organizational measures to implement these data protection principles. The GDPR requirements have been reviewed and are in the process of being implemented. We may also be subject to other data privacy laws in the United States and the other countries in which we operate.
Failure to adjust our orders for parts and subcomponents in an accurate and timely manner in response to changing market conditions or customer acceptance of our products could adversely affect our financial positionreputation, revenue and results of operations.
Our earnings could be negatively affectedRisks Related to Growth and our inventory levels could materially increase if we are unable to predict our inventory needs in an accurate and timely manner and adjust our orders for parts and subcomponents in the event that our needs increase or decrease materially due to unexpected increases or decreases in demand for our products. Any material increase in our inventories could result in an adverse effect on our financial position, while any material decrease in our ability to procure needed inventories could result in an inability to supply customer demand for our products, thus adversely affecting our revenue.Acquisitions
Our ability to fulfill our backlog may have an effect on our long-term ability to procure contracts and fulfill current contracts.
Our ability to fulfill our backlog may be limited by our ability to devote sufficient financial and human capital resources and may be limited by available material supplies. If we do not fulfill our backlog in a timely manner, we may experience delays in product delivery, which would postpone receipt of revenue from those delayed deliveries. Additionally, if we are consistently unable to fulfill our backlog, this may be a disincentive to customers to award large contracts to us in the future until they are comfortable that we can effectively manage our backlog.
If we do not manage our supply chain effectively, our operating results may be adversely affected.
We need to continually evaluate our global supply chains and assess opportunities to reduce costs. We must also enhance quality, speed and flexibility to meet changing demand for our products and product mix and uncertain market conditions. Our success also depends in part on refining our cost structure and supply chains so that we have flexibility and can maintain and improve profitability. Although the current tariff environment has not had a material adverse effect on our costs to date, further deterioration in the tariff environment, or changes in suppliers, may cause our costs to increase, which if we are not able to offset by charging higher sales prices, will cause a decline in our margins. To improve our margins on a product, we will need to establish high volume supply agreements with our vendors. We cannot be certain that we will be able to timely negotiate vendor supply agreements on improved terms and conditions, or at all. Failure to achieve the desired level of cost reductions could adversely affect our financial results. Despite our efforts to control costs and increase efficiency in our facilities, changes in demand could still cause us to realize lower operating margins and profitability.
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We may choose to acquire new and complementary businesses, products or technologies instead of developing them ourselves, and we may be unable to complete these acquisitions or may not be able to successfully integrate an acquired business in a 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 process of identifying, analyzing and negotiating possible acquisition transactions, and, from time to time, acquiring one or more businesses, and we expect to continue to do so in the future. We may choose to acquire new and complementary businesses, products, technologies and/or services instead of developing them ourselves. We may, however, face competition for acquisition targets from larger and more established companies with greater financial resources, making it more difficult for us to complete acquisitions. We cannot provide any assurance that we will be successful in consummating future acquisitions on favorable terms or that we will realize the benefits that we anticipate from one or more acquisitions that we consummate. Integrating any business, product, technology or service into our 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, 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 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. In addition, we are subject to regular examination of our
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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 a period of unprecedented 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 obtain 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 and results of operations. In addition, we enter into factoring arrangements with certain financial institutions to sell a certain portion of our trade receivables. If we were to stop entering into these factoring arrangements, our operating results, financial condition and cash flows could be adversely impacted by delays or failure to collect the trade receivables. However, by entering into these arrangements, we are exposed to additional risks. If any of these financial institutions experiences financial difficulties or is otherwise unable to honor the terms of our factoring arrangements, we may experience material financial losses due to the failure of such arrangements, which could have an adverse impact upon our operating results, financial condition and cash flows.
We are subject to various environmental laws and regulations that could impose substantial costs upon us and may harm our business, operating results and financial condition.
Some of our operations use substances regulated under various federal, state, local, and international laws governing the environment, including those relating to the storage, use, discharge, disposal, labeling, and human exposure to hazardous and toxic materials. We could incur costs, fines and civil or criminal sanctions, third-party property damage or personal injury claims, or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental laws. Liability under environmental laws can be joint and several and without regard to comparative fault. Compliance with current or future environmental laws and regulations could restrict our ability to expand our facilities or require us to acquire additional expensive equipment, modify our manufacturing processes, or incur other significant expenses. We may unintentionally violate environmental laws or regulations in the future as a result of human error, equipment failure or other causes.
Risks Related to Our Recently Completed Merger
Combining the businesses of Rudolph and Nanometrics may be more difficult, costly or time-consuming than expected and we may fail to realize the anticipated benefits of the Merger, which may adversely affect our business results and negatively affect the value of our common stock.
The success of the Merger depends on, among other things, our ability to combine the businesses of Rudolph and Nanometrics in a manner that realizes cost savings and facilitates growth opportunities.
In addition, we must achieve the anticipated growth and cost savings without adversely affecting current revenues and investments in future growth. If we are not able to successfully achieve these objectives, the anticipated benefits of the Merger may not be realized fully, or at all, or may take longer to realize than expected.
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An inability to realize the full extent of the anticipated benefits of the Merger, as well as any delays encountered in the integration process, could have an adverse effect upon our revenues, level of expenses and operating results, which may adversely affect the value of our common stock.
In addition, the integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized. Actual growth and cost savings, if achieved, may be lower than what we expect and may take longer to achieve than anticipated. If we are not able to adequately address integration challenges, we may be unable to realize the anticipated benefits of the integration of Rudolph and Nanometrics.
The failure to successfully integrate the businesses and operations of Rudolph and Nanometrics in the expected time frame may adversely affect our future results.
Prior to completion of the Merger, Rudolph and Nanometrics operated independently. There can be no assurances that their businesses can be integrated successfully. It is possible that the integration process could result in the loss of key Rudolph employees or key Nanometrics employees, the loss of customers, the disruption of our ongoing businesses, inconsistencies in standards, controls, procedures and policies, unexpected integration issues, higher than expected integration costs or an overall post-completion integration process that takes longer than originally anticipated. Specifically, the following issues, among others, must be addressed in integrating the operations of Rudolph and Nanometrics in order to realize the anticipated benefits of the Merger so we perform as expected:
•combining the companies’ operations and corporate functions;
•combining the businesses of Rudolph and Nanometrics and meeting our capital requirements, in a manner that permits us to achieve any cost savings or revenue synergies anticipated to result from the Merger, the failure of which would result in the anticipated benefits of the Merger not being realized in the time frame currently anticipated or at all;
•integrating personnel from the two companies;
•integrating and unifying the offerings and services available to customers;
•harmonizing the companies’ operating practices, employee development and compensation programs, internal controls and other policies, procedures and processes;
•maintaining existing agreements with customers, distributors, providers and vendors and avoiding delays in entering into new agreements with prospective customers, distributors, providers and vendors;
•addressing possible differences in business backgrounds, corporate cultures and management philosophies;
•consolidating the companies’ administrative and information technology infrastructure;
•coordinating distribution and marketing efforts; and
•coordinating geographically dispersed organizations.
In addition, at times the attention of certain members of management and resources may be focused on the integration of the businesses of the two companies and diverted from day-to-day business operations or other opportunities that may have been beneficial, which may disrupt our business.
We may not be able to retain customers or suppliers, or customers or suppliers may seek to modify contractual obligations with us, which could have an adverse effect on our business and operations. Third parties may terminate or alter existing contracts or relationships with Rudolph or Nanometrics.
As a result of the Merger, we may experience impacts on relationships with customers and suppliers that may harm our business and results of operations. Certain customers, licensors, business partners or suppliers may seek to terminate or modify contractual obligations whether or not contractual rights were triggered as a result of the Merger. There can be no guarantee that customers and suppliers of Rudolph or Nanometrics will remain with or continue to have a relationship with us or do so on the same or similar contractual terms to those they had with Rudolph or Nanometrics prior to the Merger. If any customers or suppliers seek to terminate or modify contractual obligations or discontinue the relationship with us, then our business and results of operations may be harmed. Furthermore, we do not have long-term arrangements with many of our significant suppliers. If our suppliers were to seek to terminate or modify an arrangement with us, then we may be unable to procure necessary supplies from other suppliers in a timely and efficient manner and on acceptable terms, or at all. Any of the aforementioned disruptions could limit our ability to achieve the anticipated benefits of the Merger.
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We may be exposed to increased litigation due to the Merger, which could have an adverse effect on our business and operations.
We may be exposed to increased litigation from stockholders, customers, suppliers, consumers and other third parties due to the combination of Rudolph’s business and Nanometrics’ business. Such litigation may have an adverse impact on our business and results of operations or may cause disruptions to our operations.
We may be unable to retain former Rudolph and Nanometrics personnel successfully.
The success of the Merger will depend in part on our ability to retain the talents and dedication of the professionals previously separately employed by Rudolph and Nanometrics. It is possible that these employees may decide not to remain with us. If key employees terminate their employment, or if an insufficient number of employees are retained to maintain effective operations, our business activities may be adversely affected and management’s attention may be diverted from successfully integrating Rudolph and Nanometrics to hiring suitable replacements, all of which may cause our business to suffer. In addition, we may not be able to locate suitable replacements for any key employees that leave the Company or offer employment to potential replacements on reasonable terms.
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 years,history, the industry has experienced significant downturns, generally in connection with declines in economic conditions.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.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.
In addition, demand for our products is highly inelastic which means we have little ability to control product revenues created by customer demand for more capacity. The market for our products is characterized by constant and rapid technological change, price erosion, product obsolescence, evolving standards, short product life cycles and significant volatility in supply and demand. Due to the inelastic nature of demand in the semiconductor industry, we may need to take actions to reduce costs in the future, which could reduce our ability to significantly invest in research and development at levels we believe are necessary. If we are unable to effectively align our cost structure with prevailing market conditions, our business, financial condition and results of operations may be materially and adversely affected.
We may also experience supplier or 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
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dependent on the development of cost-effective packaging with high fine pitch RDLs, ultimately migrating to multi-die, large, form-factor packages. There can be no assurance that manufacturers will undertake these actions at the rate we expect.
Risks Related to our StockGeneral 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 |
| • | advance notice requirements for stockholder proposals and director nominations by stockholders; |
| • |
|
| the authority of our |
| • |
|
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We are also entitled to avail ourselves of the protections of Section 203 of the Delaware General Corporation Law, which could inhibit changes in control of the Company.
Our stock price is volatile.
The market price of our common stock has fluctuated widely. Consequently, the current market price of our common stock may not be indicative of future market prices, and we may be unable to sustain or increase the value of an investment in our 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 stock 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 like ours. Any such market fluctuations in the future could adversely affect the market price of our common stock.
Item 1B. | Unresolved Staff Comments. |
There are various risks related to the legal and regulatory environments in which we perform our operations and conduct our business that may expose us to risk.None.
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. 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.
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None.
Item 2. | Properties. |
Our principal executive office building is located at 16 Jonspin Road in Wilmington, Massachusetts. We own our Milpitas and Richardson facilities and lease facilities for corporate, engineering, manufacturing, sales and service-related purposes in the United States and sixseven 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 |
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Milpitas, California |
|
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| 134,000 |
|
Budd Lake, New Jersey |
|
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| 49,000 | |
Bloomington, Minnesota | Engineering, Manufacturing, Service and Administration | 98,600 |
| |||
Bend, Oregon |
| Engineering and Service |
|
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| |
|
|
|
| |||
Hillsboro, Oregon |
| Engineering and Service |
|
|
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|
Richardson, Texas |
| Engineering |
|
| 21,000 |
|
Snoqualmie, Washington |
| Engineering and Service |
|
|
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|
Tucson, Arizona |
| Engineering, Manufacturing and Service |
|
|
| |
Sudbury, Massachusetts | Engineering, Manufacturing and Service | 10,000 |
| |||
Taiwan |
| Sales and Service |
|
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|
China |
| Sales, Service and Engineering |
|
|
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|
South Korea |
| Sales and Service |
|
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Japan |
| Sales and Service |
|
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|
Singapore |
| Sales and Service |
|
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|
|
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 adequate to meet our current requirements and that suitable additional or substitute space is available on commercially reasonable terms if needed.
Item 3. | Legal Proceedings. |
The information set forth under Note 10,9, “Commitments and Contingencies” to the Consolidated Financial Statements is incorporated herein by reference.
Item 4. | Mine Safety Disclosures. |
None.
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PART II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
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” 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 the Nasdaq Composite Index and the industry specific index, PHLX Semiconductor Index, for the period commencing on December 31, 20142016 and ending on December 31, 2019.2021. Historical data for Onto Innovation in the line graph for the period commencing on December 31, 20142016 and ending on October 25, 2019 reflects the cumulative return to the stockholders of Nanometrics.
The information contained in the performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference into such filing.
The graph assumes that $100 was invested on December 31, 20142016 in the Company’s common stock and in each index. No cash dividends have been declared or paid on the Company’s common stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.
Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2022.
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| 12/18 |
|
| 12/19 |
|
| 12/20 |
|
| 12/21 |
| ||||||||||||
Onto Innovation Inc. |
|
| 100.00 |
|
|
| 90.01 |
|
|
| 148.99 |
|
|
| 148.16 |
|
|
| 162.49 |
|
|
| 217.24 |
|
|
| 100.0 |
|
|
| 99.4 |
|
|
| 109.1 |
|
|
| 145.8 |
|
|
| 189.7 |
|
|
| 404.0 |
|
NYSE Composite |
|
| 100.00 |
|
|
| 95.91 |
|
|
| 107.36 |
|
|
| 127.46 |
|
|
| 116.06 |
|
|
| 145.66 |
|
|
| 100.0 |
|
|
| 118.7 |
|
|
| 108.1 |
|
|
| 135.7 |
|
|
| 145.2 |
|
|
| 175.2 |
|
NASDAQ Composite |
|
| 100.00 |
|
|
| 106.96 |
|
|
| 116.45 |
|
|
| 150.96 |
|
|
| 146.67 |
|
|
| 200.49 |
| ||||||||||||||||||||||||
PHLX Semiconductor |
|
| 100.00 |
|
|
| 98.41 |
|
|
| 137.10 |
|
|
| 192.69 |
|
|
| 181.04 |
|
|
| 295.57 |
|
|
| 100.0 |
|
|
| 140.5 |
|
|
| 132.1 |
|
|
| 215.6 |
|
|
| 331.3 |
|
|
| 473.2 |
|
26
As of February 3, 2020, there were 153 stockholders of record of our common stock and approximately 16,358 beneficial stockholders.
We have never declared or paid a cash dividend on our common stock.stock and we currently do not intend to. The declaration of any future dividends by us is within the discretion of our Board 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.
FollowingIn November 2020, the Merger, we assumed theOnto Innovation Board of Directors approved a new share repurchase authorization, approved on March 14, 2019, by the former Nanometrics Board of Directors. This share repurchase authorizationwhich allows us to purchaserepurchase up to $80.0$100 million worth of shares of our common stock. Under the terms of this share repurchase authorization, sharesRepurchases may be repurchasedmade through open both public
30
market or privately negotiated transactions. No shares have been repurchased under this repurchase authorization as of December 31, 2019.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 1817 in the accompanying Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
In addition to our share repurchase program, we withhold common stock shares associated with net share settlements to cover tax withholding obligations upon the vesting of restricted stock unit awards and stock option exercises under the Company’s equity incentive program. During the three and twelve months ended December 31, 2019,January 1, 2022, we withheld 517 thousand and 78108 thousand shares through net share settlements, respectively. For the three and twelve month periods ended December 31, 2019,January 1, 2022, net share settlements cost $1.8$0.6 million and $2.5$7.4 million, respectively. Please refer to Note 1211 of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding our equity incentive plan.
The following table provides details of common stock purchased during the three month period ended December 31, 2019January 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 |
| ||||
October 1, 2019 to October 31, 2019 |
|
| 42 |
|
| $ | 35.56 |
|
|
| — |
|
| $ | 80,000 |
|
November 1, 2019 to November 30, 2019 |
|
| 7 |
|
| $ | 33.44 |
|
|
| — |
|
| $ | 80,000 |
|
December 1, 2019 to December 31, 2019 |
|
| 2 |
|
| $ | 33.54 |
|
|
| — |
|
| $ | 80,000 |
|
Three Months Ended December 31, 2019 |
|
| 51 |
|
|
|
|
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Includes shares withheld through net share settlements. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Item 6. |
|
The following selected financial data should be read in conjunction with our Consolidated Financial Statements and the related Notes thereto appearing elsewhere in this Annual Report on Form 10-K, and
31
Item 7. “Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.” The Merger has been accounted for as a reverse acquisition under which Rudolph was considered the accounting acquirer. As such, the selected financial data below comprises the operating results of Rudolph and its consolidated subsidiaries for periods through October 25, 2019 and Onto Innovation and its consolidated subsidiaries for periods on or after October 26, 2019. The balance sheet data as of December 31, 2019 and 2018 and the statement of operations data for the years ended December 31, 2019, 2018 and 2017 set forth below were derived from our audited Consolidated Financial Statements included elsewhere in this Form 10-K. The balance sheet data as of December 31, 2017, 2016 and 2015, and the statement of operations data for the years ended December 31, 2016 and 2015 were derived from our audited consolidated financial statements not included herein.
|
| Year Ended December 31, |
| |||||||||||||||||
|
| 2019 (1) |
|
| 2018 (2) |
|
| 2017 (2) |
|
| 2016 (2) |
|
| 2015 (2) |
| |||||
|
| (In thousands, except per share data) |
| |||||||||||||||||
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 305,896 |
|
| $ | 273,784 |
|
| $ | 255,098 |
|
| $ | 232,780 |
|
| $ | 221,690 |
|
Cost of revenue |
|
| 170,868 |
|
|
| 125,505 |
|
|
| 120,503 |
|
|
| 109,229 |
|
|
| 102,284 |
|
Gross profit |
|
| 135,028 |
|
|
| 148,279 |
|
|
| 134,595 |
|
|
| 123,551 |
|
|
| 119,406 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
| 48,358 |
|
|
| 39,953 |
|
|
| 37,694 |
|
|
| 35,797 |
|
|
| 32,689 |
|
Sales and marketing |
|
| 28,251 |
|
|
| 22,010 |
|
|
| 20,795 |
|
|
| 18,816 |
|
|
| 17,047 |
|
General and administrative |
|
| 53,017 |
|
|
| 33,698 |
|
|
| 27,878 |
|
|
| 28,913 |
|
|
| 34,732 |
|
Amortization |
|
| 10,445 |
|
|
| 1,534 |
|
|
| 1,940 |
|
|
| 2,320 |
|
|
| 2,145 |
|
Patent litigation income |
|
| — |
|
|
| — |
|
|
| (13,000 | ) |
|
| (14,643 | ) |
|
| — |
|
Total operating expenses |
|
| 140,071 |
|
|
| 97,195 |
|
|
| 75,307 |
|
|
| 71,203 |
|
|
| 86,613 |
|
Operating income (loss) |
|
| (5,043 | ) |
|
| 51,084 |
|
|
| 59,288 |
|
|
| 52,348 |
|
|
| 32,793 |
|
Interest income (expense), net |
|
| 3,666 |
|
|
| 2,206 |
|
|
| 971 |
|
|
| (2,834 | ) |
|
| (5,688 | ) |
Other income (expense), net |
|
| 780 |
|
|
| 56 |
|
|
| (457 | ) |
|
| 354 |
|
|
| (293 | ) |
Income (loss) before provision (benefit) for income taxes |
|
| (597 | ) |
|
| 53,346 |
|
|
| 59,802 |
|
|
| 49,868 |
|
|
| 26,812 |
|
Provision (benefit) for income taxes |
|
| (2,507 | ) |
|
| 8,250 |
|
|
| 26,893 |
|
|
| 12,916 |
|
|
| 8,856 |
|
Net income |
| $ | 1,910 |
|
| $ | 45,096 |
|
| $ | 32,909 |
|
| $ | 36,952 |
|
| $ | 17,956 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.06 |
|
| $ | 1.77 |
|
| $ | 1.30 |
|
| $ | 1.48 |
|
| $ | 0.71 |
|
Diluted |
| $ | 0.06 |
|
| $ | 1.74 |
|
| $ | 1.27 |
|
| $ | 1.45 |
|
| $ | 0.69 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 29,729 |
|
|
| 25,470 |
|
|
| 25,325 |
|
|
| 25,033 |
|
|
| 25,258 |
|
Diluted |
|
| 30,007 |
|
|
| 25,895 |
|
|
| 25,865 |
|
|
| 25,566 |
|
|
| 25,868 |
|
|
| December 31, |
| |||||||||||||||||
|
| 2019 (1) |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||||
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 130,673 |
|
| $ | 112,388 |
|
| $ | 67,770 |
|
| $ | 37,859 |
|
| $ | 44,554 |
|
Marketable securities |
|
| 189,563 |
|
|
| 62,684 |
|
|
| 109,589 |
|
|
| 87,872 |
|
|
| 116,924 |
|
Working capital |
|
| 555,921 |
|
|
| 305,916 |
|
|
| 279,775 |
|
|
| 226,668 |
|
|
| 197,266 |
|
Total assets |
|
| 1,448,580 |
|
|
| 418,040 |
|
|
| 385,922 |
|
|
| 338,699 |
|
|
| 379,563 |
|
Convertible senior notes |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 57,846 |
|
Accumulated deficit |
|
| (4,863 | ) |
|
| (6,773 | ) |
|
| (51,869 | ) |
|
| (84,706 | ) |
|
| (121,658 | ) |
Total stockholders’ equity |
|
| 1,264,026 |
|
|
| 361,888 |
|
|
| 333,154 |
|
|
| 293,735 |
|
|
| 270,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Selected financial data includes the operating results of the former Nanometrics subsequent to the closing of the Merger on October 25, 2019.
(2) Statement of Operations data reflects a reclassification within the categories of operating expenses. Applications engineering expenses were reclassified from Research and development to Sales and marketing. Sales and marketing expenses were disaggregated from General and administrative expenses.Executive Summary
28
|
|
Overview
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, orcommonly referred to as “back-end” manufacturing, through a portfolio of standalone systems for macro-defect inspection, lithography, probe card test and analysis, and transparent and opaque thin film measurements. All of our systems feature sophisticated software and production-worthy automation. In addition, ourmanufacturing. 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 systems are backed by worldwide customer service and applications support.
Our businessprincipal market is affected by the annual spending patterns of our customers on semiconductor capital equipment. The amount thatSemiconductors 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 devotewho manufacture many types of integrated circuits for a multitude of applications, each having unique manufacturing challenges. This includes integrated circuits to capitalenable 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 depends onby semiconductor manufacturers, driven by the growing importance of semiconductor technology across a numberbroadening range of factors, including general worldwide economic conditions as well as other economic drivers such as personal computers,industries, from mobile devices data centers, artificial intelligenceto cloud computing and automotive sales. Current forecasts by industry analystshigh-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 semiconductor device manufacturing industry project capital equipment spendingyear and we continued to increase approximately 5%our production output levels. Revenues in the four quarters of 2021 increased sequentially as customers transitioned to 8% for 2020 as comparedadvanced nodes and increased advanced packaging volumes. While we have seen improvements in our own operations, we experienced higher costs of goods sold related to 2019. Our revenuefreight and profitability tendlogistics costs during the year. Risks and uncertainties related to follow the trends of certain segments withinCOVID-19 pandemic and the semiconductor market.
Historically, a significant portion of our revenue in each quarter and year has been derived from sales to relatively few customers,supply chain remain and we expect this trenduncertainty especially in the supply chain to continue. For the years ended December 31, 2019, 2018 and 2017, aggregate salescontinue to customers that individually representedbe a factor through at least fivethe 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 information for the periods indicated below (in thousands, except per share and percent data):
| 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 fiscal 2020, primarily due to an increase in sales to foundry and memory customers for both advanced nodes and specialty devices and advanced packaging applications. |
• | 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 revenue accountedworkforce 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 42.7%, 18.3%,COVID-19 and 27.2%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 revenue, respectively.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.
Merger
On June 23, 2019, RudolphTo 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 Nanometrics, a providerour supply chain is strained in some cases as the availability of advanced process control metrologymaterials, logistics and software analytics, entered intofreight options are challenging in many jurisdictions. Demand for our products was consistent with or exceeded our expectations for the Merger Agreementfourth quarter of fiscal 2021. However, further disruptions to combineour supply chain in an all-stock mergerconnection with the sourcing of equals transaction. The Merger was completed on October 25, 2019. Asmaterials, 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 Merger, Rudolph becameCOVID-19 pandemic, we are continuing to serve our customers while taking appropriate precautionary measures to provide a direct wholly-owned subsidiary of Nanometrics, which was renamed “Onto Innovation Inc.” upon the consummationsafe work environment for our employees and customers.
The extent of the Merger. Shares of common stock of Rudolph (NYSE: RTEC) ceased tradingpandemic’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 New York Stock Exchange as of market close on October 25, 2019. Onto Innovation (NYSE: ONTO) shares began trading on the NYSE on October 28, 2019. At the effective timeduration, scope and severity of the Merger, each issuedpandemic, 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 outstanding sharetravel, the impact on governmental programs and budgets, the development, administration, efficacy and public utilization of Rudolph Common Stock was converted intotreatments and vaccines, and the right to receive 0.8042 sharesresumption of Onto Innovation Common Stock (NYSE: ONTO). Immediately followingwidespread economic activity. Trade tensions between the effective time of the Merger, each of Nanometrics’United States and Rudolph’s stockholders owned approximately 50% of the combined company, Onto Innovation. Pursuant to the Merger Agreement, Onto Innovation accounts for the MergerChina may escalate as a reverse acquisition usingresult of COVID-19 or otherwise and could result in the acquisition methodimposition of accounting in accordance with generally accepted accounting principles, with Rudolph being treated as the acquiring entityadditional tariffs, trade restrictions or policy changes, any of which could increase costs of our product components and pricing of, and consumer demand for, accounting purposes. As such, theour products, which could have a negative effect on our results of operations data below comprise the operating results of Rudolph and its consolidated subsidiaries for periods through October 25, 2019 and Onto Innovation and its consolidated subsidiaries for periods on or after October 26, 2019. See Note 3 to the Consolidated Financial Statements set forth elsewhere in this Annual Report on Form 10-K for additional information regarding the Merger.operations.
2933
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 December 31, |
|
| Year Ended |
| ||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| ||||||
Revenue |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
Cost of revenue |
|
| 55.9 | % |
|
| 45.8 | % |
|
| 47.2 | % |
|
| 45.6 | % |
|
| 50.0 | % |
|
| 55.9 | % |
Gross profit |
|
| 44.1 | % |
|
| 54.2 | % |
|
| 52.8 | % |
|
| 54.4 | % |
|
| 50.0 | % |
|
| 44.1 | % |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
| 15.8 | % |
|
| 14.6 | % |
|
| 14.8 | % |
|
| 12.2 | % |
|
| 15.2 | % |
|
| 15.8 | % |
Sales and marketing |
|
| 9.2 | % |
|
| 8.0 | % |
|
| 8.1 | % |
|
| 7.3 | % |
|
| 8.6 | % |
|
| 9.2 | % |
General and administrative |
|
| 17.4 | % |
|
| 12.3 | % |
|
| 10.9 | % |
|
| 8.6 | % |
|
| 11.7 | % |
|
| 17.4 | % |
Amortization |
|
| 3.4 | % |
|
| 0.6 | % |
|
| 0.8 | % |
|
| 6.5 | % |
|
| 9.7 | % |
|
| 3.4 | % |
Patent litigation income |
|
| — | % |
|
| — | % |
|
| (5.1 | )% | ||||||||||||
Total operating expenses |
|
| 45.8 | % |
|
| 35.5 | % |
|
| 29.5 | % |
|
| 34.6 | % |
|
| 45.2 | % |
|
| 45.8 | % |
Operating income (loss) |
|
| (1.7 | )% |
|
| 18.7 | % |
|
| 23.3 | % |
|
| 19.8 | % |
|
| 4.8 | % |
|
| (1.7 | )% |
Interest income, net |
|
| 1.2 | % |
|
| 0.8 | % |
|
| 0.4 | % |
|
| 0.1 | % |
|
| 0.5 | % |
|
| 1.2 | % |
Other income (expense), net |
|
| 0.3 | % |
|
| — | % |
|
| (0.2 | )% |
|
| (0.2 | )% |
|
| (0.5 | )% |
|
| 0.3 | % |
Income (loss) before provision (benefit) for income taxes |
|
| (0.2 | )% |
|
| 19.5 | % |
|
| 23.5 | % |
|
| 19.7 | % |
|
| 4.8 | % |
|
| (0.2 | )% |
Provision (benefit) for income taxes |
|
| (0.8 | )% |
|
| 3.0 | % |
|
| 10.6 | % |
|
| 1.7 | % |
|
| (0.7 | )% |
|
| (0.8 | )% |
Net income |
|
| 0.6 | % |
|
| 16.5 | % |
|
| 12.9 | % |
|
| 18.0 | % |
|
| 5.5 | % |
|
| 0.6 | % |
Results of Operations for 2019, 20182021, 2020 and 20172019
Revenue.Revenue. Our revenue is derived from the sale of our systems and software, spare parts, and services. Our revenue was $305.9$788.9 million, $273.8$556.5 million and $255.1$305.9 million for the years ended January 1, 2022, December 26, 2020 and December 31, 2019, 2018 and 2017, respectively. This represents an increase of 11.7%41.8% from 20182020 to 20192021 and an increase of 7.3%81.9% from 20172019 to 2018. The increase in revenue from 2018 to 2019 was primarily due to the inclusion of revenue from legacy Nanometrics business for the period from October 25, 2019, the effective date of the Merger, through December 31, 2019. This year-over-year increase in revenue was partially offset by overall spending declines in the semiconductor capital equipment industries. The increase in revenue from 2017 to 2018 was primarily due to an increase in capital spending by front-end memory manufacturers. 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 December 31, |
|
| Year Ended |
| ||||||||||||||||||||||||||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| ||||||||||||||||||||||||||||||
Systems and software |
| $ | 255,723 |
|
|
| 84 | % |
| $ | 234,241 |
|
|
| 86 | % |
| $ | 216,884 |
|
|
| 85 | % |
| $ | 669,114 |
|
|
| 85 | % |
| $ | 450,459 |
|
|
| 80 | % |
| $ | 255,723 |
|
|
| 84 | % |
Parts |
|
| 34,892 |
|
|
| 11 | % |
|
| 28,658 |
|
|
| 10 | % |
|
| 27,143 |
|
|
| 11 | % |
|
| 72,753 |
|
|
| 9 | % |
|
| 65,444 |
|
|
| 12 | % |
|
| 34,892 |
|
|
| 11 | % |
Services |
|
| 15,281 |
|
|
| 5 | % |
|
| 10,885 |
|
|
| 4 | % |
|
| 11,071 |
|
|
| 4 | % |
|
| 47,032 |
|
|
| 6 | % |
|
| 40,593 |
|
|
| 8 | % |
|
| 15,281 |
|
|
| 5 | % |
Total revenue |
| $ | 305,896 |
|
|
| 100 | % |
| $ | 273,784 |
|
|
| 100 | % |
| $ | 255,098 |
|
|
| 100 | % |
| $ | 788,899 |
|
|
| 100 | % |
| $ | 556,496 |
|
|
| 100 | % |
| $ | 305,896 |
|
|
| 100 | % |
Total systems and software revenue increased $21.5$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 31, 201926, 2020, as compared to the year ended December 31, 20182019, primarily due to the inclusion of revenue from legacy Nanometrics for the period from the effective date of the Merger. The year-over-year change in systems revenue was driven by an increase of $29.9 million in process control systems revenue due to inclusion of $56.0$178.6 million of revenue from legacy Nanometrics for the
34
period from the effective date of the Merger. This increase was partially offset by decreased demand for our products in both advanced packaging and front-end systems. Software licensing, support and maintenance revenue decreased $4.0 million, primarily due to a decrease in revenueincreased investment from our process controlfoundry and yield management software. The year-over-year increase in parts and services revenue in absolute dollars from 2018 to 2019 was primarily due to the inclusion of $10.3 million of parts and service revenue from legacy Nanometrics for the period from the effective date of the Merger.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.
Total systems and software revenue increased for the year ended December 31, 2018 as compared to the year ended December 31, 2017 due to increased demand for our products in front-end process control systems. The year-over-year increases in process control systems revenue totaled $12.9 million, primarily due to higher metrology system sales in the 2018 period. Lithography system revenue increased $0.7 million, primarily due to the shipment of a JetStep G system offset by lower shipments of our JetStep W systems in 2018. Licensing revenue from software increased $3.7 million primarily due
30
to an increase in revenue from our process control and yield management software. The year-over-year increase in During fiscal 2020, parts and services revenue in absolute dollars from 2017 to 2018 wasincreased primarily due to increased spendinginclusion 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 customers on repairsrevenue.
|
| 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 existing systems. Partsour revenues as a substantial amount of the worldwide capacity investments for semiconductor manufacturing continue to occur in this region and services revenue is generated from part sales, maintenance service contracts, system upgrades, as well as time and material billable service calls.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 inventory step-up from purchase accounting, 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 $148.3 million and $134.6 million for the years ended January 1, 2022, December 26, 2020, and December 31, 2019, 2018 and 2017, respectively. Our gross profit represented 44.1%54.4%, 54.2%50.0% and 52.8%44.1% for the years ended January 1, 2022, December 26, 2020, and December 31, 2019, 2018 and 2017, respectively. The decrease in gross profit as a percentage of revenue from 2018 to 2019 was primarily due to charges to cost of goods sold including a $15.4 million charge for the sale of inventory written-up to fair value upon the Merger and $7.8 million in additional charges related to excess and obsolete inventory. The increase in gross profit as a percentage of revenue from 20172020 to 20182021 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 changefavorable 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 systemsJetStep X300 product line to net realizable value based on future demand and software product sales mix and the sale of a lithography system that had previously been partially written down.market conditions.
Operating ExpensesExpenses.
Our operating expenses consist of:
| • | Research and Development. |
| • | 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 sales and |
35
marketing expenses were $57.2 million, $48.1 million and $28.3 million |
| • | 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 |
| • | Amortization of Identifiable Intangible Assets. Amortization of identifiable intangible assets, primarily purchased technology, was $51.4 million, $53.7 million and $10.4 million |
31
|
|
Interest income, (expense), net. In 2019, 2018fiscal years 2021, 2020 and 2017,2019, net interest income was $3.7$1.2 million, $2.2$2.9 million and $1.0$3.7 million, respectively. The increasedecrease in net interest income from 20182020 to 20192021 was due to lower interest earned on our marketable securities and additional interest income on a higher marketable securities balance followingrates during the Merger with Nanometrics.2021 period. The increasedecrease in net interest income from 20172019 to 20182020 was due to higherlower interest earned on our marketable securities.rates during the 2020 period.
Income taxes. The following table provides details of income tax (dollars in millions):
|
| Year Ended December 31, |
|
| Year Ended |
| ||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| ||||||
Income before income taxes |
| $ | (0.6 | ) |
| $ | 53.3 |
|
| $ | 59.8 |
| ||||||||||||
Income (loss) before provision (benefit) for income taxes |
| $ | 155.7 |
|
| $ | 26.9 |
|
| $ | (0.6 | ) | ||||||||||||
Provision (benefit) for income taxes |
| $ | (2.5 | ) |
| $ | 8.3 |
|
| $ | 26.9 |
|
| $ | 13.3 |
|
| $ | (4.2 | ) |
| $ | (2.5 | ) |
Effective tax rate |
|
| 419.9 | % |
|
| 15.5 | % |
|
| 45.0 | % |
|
| 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 Foreign Derived Intangible Income Deduction (“FDII”)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.
The income tax provision differs from the federal statutory income tax rate of 21% for 2018 primarily due to Foreign Derived Intangible Income Deduction (“FDII”) from Public law No. 115-97, known as the Tax Cuts and Jobs Act (the “Tax Act”) of $2.2 million, tax benefits for research and development credits of $2.3 million, offset by a Section 162(m) limitation on the deductibility of executive compensation of $0.5 million and additional Accounting Standards Codification (“ASC”) 740-10 tax reserves of $0.6 million.
The income tax provision differs from the federal statutory income tax rate of 21% for 2017 primarily due to new regulations resulting from the Tax Act of $9.5 million, offset by tax benefits for research and development credits of $1.6 million, section 199 manufacturing deduction of $1.6 million and excess tax benefits on vesting of restricted stock of $1.6 million.
The Tax Act, which was enacted and signed into law on December 22, 2017, reduced the U.S. federal corporate tax rate from 35% to 21%, effective January 1, 2018. Also, on December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act. SAB 118 provides a measurement period of up to one year from the enactment date to complete the accounting. Any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined. Based on the information available and current interpretation of the rules, we estimated the impact of the reduction in the corporate tax rate and remeasurement of certain deferred tax assets and liabilities. The provisional amount recorded in the fourth quarter of 2017 related to the remeasurement of our deferred tax balance resulted in additional income tax expense of $8.0 million. During the fourth quarter of 2018, we completed the accounting for such revaluation and recorded an additional $0.8 million in tax expense. The prior year provisional impact and current year finalization of the Tax Act summarized below, which is included as a component of the provision from income taxes is further described in Note 12 in the accompanying Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K (dollars in millions).
|
| Year Ended December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Re-measurement of U.S. deferred tax assets and liabilities |
| $ | — |
|
| $ | — |
|
Transition tax on non-U.S. subsidiaries’ earnings |
|
| — |
|
|
| 0.1 |
|
Foreign tax credits applied against transition tax |
|
| — |
|
|
| — |
|
Valuation allowance for unused foreign tax credits |
|
| 1.0 |
|
|
| 0.7 |
|
Total impact of the Tax Act on the provision for income taxes |
| $ | 1.0 |
|
| $ | 0.8 |
|
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
32
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 December 31, 2019,January 1, 2022, we had $320.2$511.3 million of cash, cash equivalents and marketable securities and $555.9$793.6 million in working capital. At December 31, 2018, our26, 2020, we had $373.7 million of cash, cash equivalents and marketable securities totaled $175.1and $611.6 million whilein working capital amounted to $305.9 million.capital.
Net cash and cash equivalents provided by operating activities for the years ended January 1, 2022, December 26, 2020 and December 31, 2019 2018totaled $175.3 million, $106.0 million and 2017 totaled $18.1 million, $35.1 million and $64.2 million, respectively. During the year ended December 31, 2019, cash provided by operating activities was primarily due to net income, adjusted to exclude the effect of non-cash charges, of $53.5 million, a decrease in income taxes of $7.6 million, which were partially offset by a decrease in accounts payable of $12.1 million, a decrease in accrued and other liabilities of $6.7 million, an increase in inventories of $9.3 million, an increase in accounts receivable of $9.7 million and an increase in prepaid expenses and other assets of $5.1 million.
• | Cash provided by operating activities increased in fiscal 2021 compared to fiscal 2020 primarily due to higher net income, adjusted to exclude the effect of non-cash charges, of $91.2 million, an increase in accrued and other liabilities of $3.8 million and an increase in income taxes of $2.5 million, partially offset by an increase in inventories of $14.7 million, an increase in prepaid expenses and other assets of $12.2 million and an increase in accounts receivable of $2.0 million. |
• | 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. |
During the year ended December 31, 2018, cash provided by operating activities was primarily due to net income, adjusted to exclude the effect of non-cash charges, of $64.3 million, an increase in accounts payable of $3.5 million, a decrease in income taxes of $1.1 million, a decrease in account receivable of $0.7 million and an increase in accrued and other liabilities of $0.2 million, which were partially offset by an increase in inventories of $31.5 million, and an increase in prepaid expenses and other assets of $3.1 million. The increase in inventories of $31.5 million was primarily due to increased sales projections of our latest products and new product initiatives.
During the year ended December 31, 2017, cash provided by operating activities was primarily due to net income, adjusted to exclude the effect of non-cash charges, of $65.9 million, an increase in accrued and other liabilities of $5.2 million, an increase in accounts payable of $3.2 million and a decrease in account receivable of $0.4 million, which were partially offset by an increase in income taxes of $4.7 million, an increase in inventory of $4.2 million, and an increase in prepaid expenses and other assets of $1.7 million.
Net cash and cash equivalents provided by investing activities for the years ended December 31, 2019 and 2018 was $4.1 million and $33.8 million, respectively. Net cash and cash equivalents used in investing activities for the yearyears ended January 1, 2022 and December 31, 2017 totaled $32.5 million. During26, 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 purchases of marketable securities, net of proceeds from sales of marketable securities of $106.0 million, purchase of business net of cash acquired of $23.8 million, and purchases of property, plant and equipment of $12.0 million. |
• | 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 investingfinancing activities included proceeds from maturities and sales of marketable securities of $94.5was $2.7 million and cash acquired in the Merger of $43.9 million, which were partially offset by purchases of marketable securities of $127.5 million and purchases of property, plant and equipment of $6.8 million. Duringfor the year ended December 31, 2018, net cash provided by investing activities included proceeds from sales of marketable securities of $186.3 million, which was partially offset by purchases of marketable securities of $140.0 million, purchases of property, plant and equipment of $7.5 million and cash advanced on a convertible note receivable of $5.0 million. DuringJanuary 1, 2022. For the yearyears ended December 31, 2017, net cash used in investing activities included purchases of marketable securities of $164.7 million, purchases of property, plant26, 2020 and equipment of $10.2 million, and purchase of intangible assets of $1.0 million, which were partially offset by proceeds from sales of marketable securities of $143.3 million.
Net cash used in financing activities was $4.2 million, $23.9 million and $2.6 million in 2019, 2018 and 2017, respectively. During the year ended December 31, 2019 financing activities used cash to pay taxes related to shares withheld for share based compensation plans of $2.5 million, pay contingent consideration for acquired business of $1.8$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
• | 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.
On May 31, 2018, we entered into a convertible loan agreement with Simax Precision Technologies Limited (“ In the borrower”), which allowed themfirst quarter of 2021, the Company acquired Inspectrology, LLC for $24.0 million in cash and an earnout subject to borrowthe 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 $15.0 million in multiple promissory notes with an interest rateadditional payment of 4.25% per annum payable on a semi-annual basis. We expected to be a supplier of lithography modules to Simax, which is used in the manufacture, sale and service of lithography systems. At December 31, 2019, we had $5.0 million in outstanding convertible notes receivabledepending 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 the borrower.shares purchased being subsequently retired. At January 1, 2022, there was $100 million available for future share repurchases.
33
During the fourth quarter of 2019, we began negotiations with the borrower to endFor further information regarding our relationship as it pertains to this agreement. We determined that it is unlikely that a portion of the convertible note receivable will be collectable, and a reserve in the amount of $2.0 million was recorded during the period ended December 31, 2019. In addition, we ceased recognizing interest income on these convertible notes receivable as of September 30, 2019. Seeshare repurchases, see Note 817 in the accompanying Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further information.
Following the Merger, we assumed the share repurchase authorization approved on March 14, 2019, by the former Nanometrics Board of Directors. This share repurchase authorization allows us to purchase up to $80.0 million worth of shares of our common stock. Under the terms of this share repurchase authorization, shares may be repurchased through open market or privately negotiated transactions. No shares have been repurchased under this repurchase authorization.
For further information regarding our share repurchases, see Note 18 in the accompanying Notes to the Consolidated Financial Statements included in this Annual Report on 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 December 31, 2019,January 1, 2022, the available line of credit was approximately $91.3$131.4 million with an available interest rate of 3.3%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 December 31, 2019,January 1, 2022, and the effect such obligations are expected to have on our liquidity and cash flows in future periods. This table excludes the liability for unrecognized tax benefits that totaled approximately $10.6 million at December 31, 2019. 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 |
|
| Payments due by period |
| ||||||||||||||||||||||||||||||||||
|
| Total |
|
| Less than 1 year |
|
| 1-3 years |
|
| 3-5 years |
|
| More than 5 years |
|
| Total |
|
| Less than 1 year |
|
| 1-3 years |
|
| 3-5 years |
|
| More than 5 years |
| ||||||||||
Operating lease obligations |
| $ | 29,152 |
|
| $ | 5,901 |
|
| $ | 12,116 |
|
| $ | 5,856 |
|
| $ | 5,279 |
|
| $ | 21,104 |
|
| $ | 5,029 |
|
| $ | 7,515 |
|
| $ | 5,261 |
|
| $ | 3,299 |
|
Open and committed purchase orders |
|
| 97,877 |
|
|
| 93,705 |
|
|
| 4,172 |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||
Purchase obligations (1) |
|
| 373,638 |
|
|
| 345,334 |
|
|
| 28,304 |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||
Total |
| $ | 127,029 |
|
| $ | 99,606 |
|
| $ | 16,288 |
|
| $ | 5,856 |
|
| $ | 5,279 |
|
| $ | 394,742 |
|
| $ | 350,363 |
|
| $ | 35,819 |
|
| $ | 5,261 |
|
| $ | 3,299 |
|
| (1) | Represents our agreements to purchase goods and services consisting of outstanding purchase orders for goods and services. |
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements included in this Annual Report on Form 10-K, which have been prepared in accordance with accounting principles generally accepted in the United States. We review the accounting policies we use in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the
38
reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable, inventories, business acquisitions, intangible assets, share-based payments, income taxes and warranty obligations. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. These estimates and judgments are regularly
34
reviewed by management on an ongoing basis at the end of each quarter prior to the public release of our financial results. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.
Revenue Recognition. Effective January 1, 2018, we adopted the requirements of Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).”
Revenue is recognized when control of the promised goods or services are transferred to our customers in an amount that reflects the consideration 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 rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
We account for shipping and handling activities as the fulfillment of a promise to transfer goods to the customer and therefore record 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.
Contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or the expected cost-plus margin.
Revenue from systems is recognized when we transfer control of the product to our customer. To indicate transfer of control, we 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. We generally transfer control for system sales when the customer or the customer’s agent picks up the system at our facility. Payment for the majority of our systems have 80-90% of the invoice amount due within 30 days and the remaining amount due upon completion of installation, recalibration and qualification by the customer. We provide an assurance warranty on our systems for a period of twelve to fourteen months against defects in 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 training 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 time when the software is made available to the customer. Software licenses provide the customer with limited rights to use the software. Revenue from licensing support and maintenance is recognized as the support and maintenance are provided, which is over the contract period. Payment for software licensing, support and maintenance is generally due in 30 days.
Revenue from parts is recognized when we transfer control of the product, which typically occurs when we ship the product from our facilities to the customer. Payment for parts is generally due in 30 days.
Revenue from services primarily consists of service contracts, which provide additional maintenance coverage beyond our assurance warranty on our 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. Payment for services is generally due in 30 days.
We record contract liabilities when the customer has been billed in advance of completing our performance obligations. These amounts are recorded as deferred revenue in the Consolidated Balance Sheets.
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
39
management of the acquired companies and are inherently uncertain. Estimates in valuing certain acquired
35
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.
Excess and Obsolete Inventory. Inventories are stated at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less predictable costs of completion, disposal and transportation. Cost is generally determined on a first-in, first-out basis, and includes material, labor and manufacturing overhead costs. We review and set standard costs as needed, but at a minimum, on an annual basis, at current manufacturing costs in order to approximate actual costs. We maintain reserves for our excess and obsolete inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future product lifecycles, product demand and market conditions. If actual product lifecycles, product demand and market conditions are less favorable than those originally projected by management, additional inventory write-downs may be required.
Goodwill and Indefinite Lived Intangible 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 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. 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 loss is recognized in an amount 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 discount rate, terminal growth rates, general economic conditions, our outlook and market performance of 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 circumstances indicate that the carrying 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 year ended December 31, 2019, we recognized a $0.5 million impairment loss on long-lived assets. No such indicators were noted in 20182021 or 2017.2020.
Accounting for Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our actual 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 be 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 valuation allowance, which could materially impact our financial position and results of operations. At January 1, 2022 and December 31, 2019 and 2018,26, 2020, we had recorded valuation allowances of $14.2$10.9 million and $3.2$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 well as the projected earnings in future years and believe it is more likely than not that the substantial majority of our deferred tax asset will be realized in the future years. We will continue to monitor the realizability of the deferred tax assets and evaluate the valuation allowance.
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We recognize liabilities for uncertain tax positions based on a two-step process. The first 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 position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to measure the tax benefit of the 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 reevaluate 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 tax provision in the 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.
Impact of Recent Accounting Pronouncements
Recently Adopted
Effective January 1, 2019, we adopted ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. The ASU is effective for the fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of ASU No. 2018-07 did not have a material impact on our consolidated financial position, results of operations, and cash flows.
36
Effective January 1, 2019, we adopted ASU No. 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The new guidance allows companies to reclassify stranded tax effects resulting from the Tax Act from accumulated other comprehensive income to retained earnings. The guidance also requires certain new disclosures regardless of a company’s election. The standard is effective for annual periods beginning after December 15, 2018 and for interim periods within those annual periods, with earlier adoption permitted. The adoption of ASU No. 2018-02 did not have a material impact on our consolidated financial position, results of operations, and cash flows.
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This ASU eliminates Step 2 from the goodwill impairment test. Accordingly, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to the excess, limited to the total amount of goodwill allocated to the reporting unit. The ASU is effective for the fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, with earlier adoption permitted. The adoption of ASU No. 2017-04 in 2019 did not have a material impact on our consolidated financial position, results of operations, and cash flows.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” ASU No. 2016-02 requires that lessees recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and lease liability. On January 1, 2019, we adopted ASU No. 2016-02 using the modified retrospective method which applies the provisions of the standard at the effective date without adjusting the comparative periods presented. We also elected the package of practical expedients.
There was not a cumulative-effect adjustment to our beginning retained earnings as a result of adopting ASU No. 2016-02. We recognized additional operating lease assets and obligations of $14.4 million as of January 1, 2019. As a result of the Merger, operating lease assets and obligations of $9.7 million were assumed from the former Nanometrics. We elected to not reassess prior conclusions related to the identification, classification and accounting for initial direct costs for leases that commenced prior to January 1, 2019. For additional disclosure and detail, see Note 7 of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Recently Issued
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating consolidated income taxes to separate financial statements of entities not subject to income tax. ASU No. 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Upon adoption, we must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. We are currently evaluating the impact of this new standard on our consolidated financial position, results of operations, and cash flows.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU is part of the FASB’s larger disclosure framework project intended to improve the effectiveness of financial statement footnote disclosure. ASU No. 2018-13 modifies required fair value disclosures related primarily to level 3 investments. This ASU is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The adoption of ASU No. 2018-13 is not expected to have a material effect on our consolidated financial position, results of operations, and cash flows.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” This ASU amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. The ASU is effective for the fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. The adoption of ASU No. 2017-09 is not expected to have a material effect on our consolidated financial position, results of operations, and cash flows, if any.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which represents a new credit loss standard that will change the impairment model for most financial assets and certain other financial instruments. Specifically, this guidance will require entities to utilize a new “expected loss” model as it relates to trade receivables, notes receivable and other commitments to extend credit held by a reporting entity. In addition, entities will be required to recognize an allowance for estimated credit losses on
37
available-for-sale debt securities, regardless of the length of time that a security has been in an unrealized loss position. This guidance will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods, with early adoption permitted. We expect that the adoption of this guidance will not have a material impact on our consolidated financial position, results of operations, and cash flows.
Recently issued accounting guidance not discussed above is not applicable or did not have, or is not expected to have, a material impact to the Company.
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 magnitude of any gain or loss will be a function of the difference between the fixed or variable rate of the financial instrument and the market rate, and our financial condition and results of operations could be materially affected. Based on a sensitivity analysis performed on our financial investments held as of December 31, 2019, an immediate adverse changeJanuary 1, 2022, a hypothetical increase of 10%100 basis points in interest rates (e.g. 3.00% to 3.30%) would result in a decrease of $0.9$2.2 million in the fair value of our available-for-sale debt securities and would not have a material impact on our consolidated financial position, results of operations or cash flows.
Foreign Currency Risk
A substantial portion of our systems and software salesrevenues are denominated in U.S. dollars with the exception of Japan. As a result, we have relatively little exposure to foreign currency exchange risk with respect to these sales. Substantially all ofdollars. However, our sales in Japaninternational operations are denominated in Japanese yen. From time to time, we may enter into forward exchange contracts to economically hedge a portion, but not all, of the existing and anticipated foreign currency denominated transactions expected to occur within 12 months. The change in fair value of the forward exchange contracts is recognized under the caption “Other (income) expense” in the Consolidated Statements of Operations for each reporting period. As of December 31, 2019 and 2018, we had seventeen and twenty-seven outstanding forward contracts with a total notional contract value of $38.9 million and $6.7 million, respectively. We do not use derivative financial instruments for trading or speculative purposes.
The Company has branch sales and service offices or subsidiaries in Korea, Japan, China, Taiwan, Singapore and in several countries in Europe. Our international subsidiaries and branches operate primarily using local functional currencies. Our exposureexposed to foreign currency exchange rate fluctuations arisearising from U.S. dollar denominated intercompany balances between our U.S. headquarters and that of our foreign owned entities. Our intercompany balances are denominated in U.S. dollars. Since each foreign entity’s functional currency is generally denominated in its local currency, there is exposure to foreign exchange risk when the foreign entity’s intercompany balance is remeasured at a reporting date, resulting in transaction gains or losses. The intercompany balance, exposed to foreign currency risk, as of December 31, 2019January 1, 2022 was approximately $24.1$46.8 million. A hypothetical change of 10% in the relative value of the U.S. dollar versus local functional currencies could result in approximately $3.2$0.5 million in foreign currency exchange losses / (gains) which would be recorded as non-operating expense under the caption “Other income (expense), net” in our Consolidated Statements of Operations. We cannot accurately predict future exchange rates or the overall impact of future exchange rate fluctuations on our business, results of operations and consolidated financial condition..
To manage the level of exposure to the risk of foreign currency exchange rate fluctuations, weWe enter into foreign currency forward exchange contracts to protect against a portionminimize the short-term impact of ourexchange 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 liabilitiesrespectively, with a total notional contract value of $32.3 million and $37.6 million, respectively. We do not use derivative financial instruments for trading or other current assets.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 Annual Report on Form 10-K.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
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Item |
|
None.
| 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 December 31, 2019.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 December 31, 2019January 1, 2022 at the reasonable assurance level.
In accordance with the SEC’s published guidance, because the merger with Nanometrics closed in the fourth quarter of the year ended December 31, 2019, and considering it was a reverse merger with Rudolph as the accounting acquirer, we did not have sufficient time to fully incorporate Nanometrics into our internal control over financial reporting. Therefore, we excluded Nanometrics from the evaluation of disclosure controls and procedures and the effectiveness of our internal control over financial reporting as of December 31, 2019.
Management’s Report on Internal Control Over Financial Reporting
Our management 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 accepted in the United States of America. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal 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 evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2019.
In accordance with the SEC’s published guidance, because the merger with Nanometrics closed in the fourth quarter of the year ended December 31, 2019, management excluded Nanometrics from its evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. Nanometrics constituted 26% of total assets as of December 31, 2019 and 22% of revenue for the year then ended.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 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 be circumvented or deteriorate.
Attestation Report of the Registered Public Accounting Firm
Our consolidated financial statements as of and for the year ended December 31, 2019January 1, 2022 have been audited by Ernst & Young LLP, our independent registered public accounting firm, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Ernst & Young LLP has also audited our internal control over financial reporting as of December 31, 2019,January 1, 2022, as stated in its attestation report included elsewhere in this Annual Report on Form 10-K.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Nanometrics, which is included in the 2019 consolidated financial statements of the Company and constituted 26% of total assets as of December 31, 2019 and 22% of revenue for the year then ended. Our audit of internal control over
39
financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Nanometrics.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’sour internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company’sour fiscal quarter ended December 31, 2019January 1, 2022 that have materially affected, or are reasonably likely to materially affect, itsour internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting due to the fact that most of our employees responsible for financial reporting are working remotely during the COVID-19 pandemic. We are continually monitoring and assessing the impact of the COVID-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.
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PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K because we expect to file a definitive proxy statement within one hundred twenty (120) days after the end of our fiscal year pursuant to Regulation 14A (the “Proxy Statement”) for our Annual Meeting of Stockholders currently scheduled for May 12, 2020,10, 2022, and the information included in the Proxy Statement is incorporated herein by reference.
Item 10. | Directors, Executive Officers and Corporate Governance. |
The information required by this Item with respect to directors and executive officers is included under the headings “Proposal One: Election of Directors,” “Executive Officers”“Named Executive Officers (NEOs)” and “Corporate Governance Principles and Practices” in the 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”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 |
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.
4143
PART IV
Item 15. | Exhibits and Financial Statement Schedule. |
| (a) | The following documents are filed as part of this |
| 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-5F-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 2003 Employee Stock Purchase Plan | |||||
Nanometrics Incorporated Amended and Restated 2005 Equity Incentive Plan | |||||
Nanometrics Incorporated 2017 Executive Performance Bonus Plan | |||||
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 | |||||
4244
Exhibit No. | Exhibit Description | Form | File Number | Date of First Filing | Exhibit No./Appendix Reference |
Form of Employee Stock Option Agreement pursuant to the Rudolph Technologies, Inc. 2018 Stock Plan | |||||
Retention Bonus Agreement between Nanometrics Incorporated and Greg Swyt, dated December 18, 2017. | |||||
Retention Bonus Agreement between Nanometrics and Greg Swyt, dated June 25, 2018. | |||||
Retention Bonus Agreement, dated September 6, 2019, between Nanometrics Incorporated and Greg Swyt. | |||||
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 | |||||
4345
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 |
|
|
|
|
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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|
|
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 |
|
|
| |
101.SCH | Inline XBRL Taxonomy Extension Schema Document |
|
|
| |
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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| |
4446
ONTO INNOVATION INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
| Page |
Consolidated Financial Statements: |
|
Reports of Independent Registered Public Accounting Firm(PCAOB ID Number 42) | F-2 |
| |
| |
Consolidated Balance Sheets as of January 1, 2022 and December |
|
| |
| |
| |
Consolidated Financial Statement Schedule: |
|
|
F-1
Report of Independent Registered Public Accounting Firm
To the ShareholdersStockholders and the Board of Directors of Onto Innovation Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Onto Innovation Inc., formerly Rudolph Technologies, Inc. (the Company), as of January 1, 2022 and December 31, 2019 and 2018,26, 2020, the related consolidated statements of operations, comprehensive income,, shareholders’ stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019,January 1, 2022, and the related notes and financial statement schedule listed in the Index at Item 15(a)(collectively (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 1, 2022 and December 31, 2019 and 2018,26, 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,January 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’sCompany's internal control over financial reporting as of December 31, 2019,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, 20202022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany'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 used 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 MattersMatter
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the financial statements that werewas communicated or required to be communicated to the audit committee and that: (1) relaterelates 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 mattersmatter does not alter in any way our opinion on the consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accountsaccounts or disclosures disclosureto which they relate.it relates.
| Excess Inventory Reserve |
F-2
Description of the Matter | As described in
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. | |
Accounting for Acquisition of Nanometrics Incorporated
Description of the Matter
In October 2019, Rudolph Technologies, Inc. (Rudolph) completed its acquisition of Nanometrics Incorporated (Nanometrics) for net consideration of $890.1 million, including identified intangible assets of $374.9 million, which principally consisted of developed technology, in-process research and development and customer relationships, as disclosed in Note 3 to the consolidated financial statements. The transaction was accounted for as a business combination with Rudolph as the accounting acquirer.
Auditing the fair value of intangible assets was complex due to the sensitivity of the respective fair values to the significant underlying assumptions. The Company engaged a specialist that used an income approach which is based on a discounted cash flow model to measure the intangible assets. The significant assumptions used to estimate the fair value of the intangible assets included discount rates and revenue growth rates. These significant assumptions are forward looking and could be affected by future economic and market conditions. The determination of the accounting acquirer is a subjective determination where management applied judgment in evaluating the relevant criteria to make this determination.
How We Addressed the Matter in Our Audit
We tested the Company’s controls over its accounting for the Nanometrics acquisition. Our tests included controls over the determination of the accounting acquirer and the estimation process supporting the recognition and measurement of the intangible assets, including the significant assumptions used.
To test the estimated fair value of the intangible assets, we performed audit procedures that included, among others, evaluating the Company’s use of the income approach and testing the significant assumptions used in the model, including the completeness and accuracy of the underlying data. We involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates. For example, we compared the significant assumptions to current industry, market and economic trends; to the assumptions used to value similar assets in the marketplace; and to the historical results of the acquired business and to other guidelines used by companies within the same industry. To test the determination of the accounting acquirer, we performed audit procedures that included, among others, inspecting the analysis prepared by the Company on this topic and evaluating the accuracy of the information and the judgments made by management considering historical information, the merger agreement and other relevant information relating to the terms of the merger and the prospective plans of the Company after the merger.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2008.
Iselin, New Jersey
February 25, 20202022
F-3
Report of Independent Registered Public Accounting Firm
To the ShareholdersStockholders and the Board of Directors of Onto Innovation Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Onto Innovation Inc.’s (formerly Rudolph Technologies, Inc.) internal control over financial reporting as of December 31, 2019,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 31, 2019,January 1, 2022, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Nanometrics Incorporated, which is included in the 2019 consolidated financial statements of the Company and constituted 26% of total assets as of December 31, 2019 and 22% of revenue for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Nanometrics Incorporated.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of January 1, 2022 and December 31, 2019 and 2018,26, 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 31, 2019,January 1, 2022, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated February 25, 20202022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible 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 on Internal Control Over Financial Reporting.Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over 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 (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; (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 (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.
F-4
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/ Ernst & Young LLP
Iselin, New Jersey
February 25, 20202022
F-4
ONTO INNOVATION INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
| 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
ONTO INNOVATION INC.
CONSOLIDATED STATEMENTS OF OPERATIONSCOMPREHENSIVE INCOME
(In thousands, except per share data)thousands)
|
| Year Ended December 31 |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Revenue |
| $ | 305,896 |
|
| $ | 273,784 |
|
| $ | 255,098 |
|
Cost of revenue |
|
| 170,868 |
|
|
| 125,505 |
|
|
| 120,503 |
|
Gross profit |
|
| 135,028 |
|
|
| 148,279 |
|
|
| 134,595 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
| 48,358 |
|
|
| 39,953 |
|
|
| 37,694 |
|
Sales and marketing |
|
| 28,251 |
|
|
| 22,010 |
|
|
| 20,795 |
|
General and administrative |
|
| 53,017 |
|
|
| 33,698 |
|
|
| 27,878 |
|
Amortization |
|
| 10,445 |
|
|
| 1,534 |
|
|
| 1,940 |
|
Patent litigation income |
|
| — |
|
|
| — |
|
|
| (13,000 | ) |
Total operating expenses |
|
| 140,071 |
|
|
| 97,195 |
|
|
| 75,307 |
|
Operating income (loss) |
|
| (5,043 | ) |
|
| 51,084 |
|
|
| 59,288 |
|
Interest income, net |
|
| 3,666 |
|
|
| 2,206 |
|
|
| 971 |
|
Other income (expense), net |
|
| 780 |
|
|
| 56 |
|
|
| (457 | ) |
Income (loss) before provision (benefit) for income taxes |
|
| (597 | ) |
|
| 53,346 |
|
|
| 59,802 |
|
Provision (benefit) for income taxes |
|
| (2,507 | ) |
|
| 8,250 |
|
|
| 26,893 |
|
Net income |
| $ | 1,910 |
|
| $ | 45,096 |
|
| $ | 32,909 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.06 |
|
| $ | 1.77 |
|
| $ | 1.30 |
|
Diluted |
| $ | 0.06 |
|
| $ | 1.74 |
|
| $ | 1.27 |
|
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 29,729 |
|
|
| 25,470 |
|
|
| 25,325 |
|
Diluted |
|
| 30,007 |
|
|
| 25,895 |
|
|
| 25,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
ONTO INNOVATION INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEBALANCE SHEETS
(In thousands)thousands, except per share data)
|
| Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Net income |
| $ | 1,910 |
|
| $ | 45,096 |
|
| $ | 32,909 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on investments |
|
| (44 | ) |
|
| 136 |
|
|
| (89 | ) |
Change in currency translation adjustments |
|
| 709 |
|
|
| (194 | ) |
|
| 1,663 |
|
Total comprehensive income |
| $ | 2,575 |
|
| $ | 45,038 |
|
| $ | 34,483 |
|
|
| 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 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
ONTO INNOVATION INC.
CONSOLIDATED BALANCE SHEETSSTATEMENTS OF CASH FLOWS
(In thousands, except per share data)thousands)
|
| December 31, 2019 |
|
| December 31, 2018 |
| ||
ASSETS |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 130,673 |
|
| $ | 112,388 |
|
Marketable securities |
|
| 189,563 |
|
|
| 62,684 |
|
Accounts receivable, less allowance of $1,247 in 2019 and $691 in 2018 |
|
| 123,656 |
|
|
| 64,194 |
|
Inventories |
|
| 176,134 |
|
|
| 96,820 |
|
Prepaid expenses and other current assets |
|
| 21,638 |
|
|
| 14,821 |
|
Total current assets |
|
| 641,664 |
|
|
| 350,907 |
|
Property, plant and equipment, net |
|
| 98,420 |
|
|
| 18,874 |
|
Goodwill |
|
| 307,148 |
|
|
| 22,495 |
|
Identifiable intangible assets, net |
|
| 371,953 |
|
|
| 7,448 |
|
Deferred income taxes |
|
| 1,456 |
|
|
| 12,810 |
|
Other assets |
|
| 27,939 |
|
|
| 5,506 |
|
Total assets |
| $ | 1,448,580 |
|
| $ | 418,040 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 27,738 |
|
| $ | 16,981 |
|
Accrued liabilities |
|
| 26,204 |
|
|
| 13,700 |
|
Deferred revenue |
|
| 12,629 |
|
|
| 6,767 |
|
Other current liabilities |
|
| 19,172 |
|
|
| 7,543 |
|
Total current liabilities |
|
| 85,743 |
|
|
| 44,991 |
|
Deferred and other tax liabilities |
|
| 67,040 |
|
|
| — |
|
Other non-current liabilities |
|
| 31,771 |
|
|
| 11,161 |
|
Total liabilities |
|
| 184,554 |
|
|
| 56,152 |
|
Commitments and contingencies (Note 10) |
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 3,000 and 4,021 shares authorized, 0 shares issued and outstanding at December 31, 2019 and 2018, respectively. |
|
| — |
|
|
| — |
|
Common stock, $0.001 par value, 97,000 and 80,420 shares authorized, 50,184 and 24,855 issued and outstanding at December 31, 2019 and 2018, respectively. |
|
| 50 |
|
|
| 31 |
|
Additional paid-in capital |
|
| 1,269,437 |
|
|
| 369,893 |
|
Accumulated other comprehensive loss |
|
| (598 | ) |
|
| (1,263 | ) |
Accumulated deficit |
|
| (4,863 | ) |
|
| (6,773 | ) |
Total stockholders’ equity |
|
| 1,264,026 |
|
|
| 361,888 |
|
Total liabilities and stockholders’ equity |
| $ | 1,448,580 |
|
| $ | 418,040 |
|
|
| 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 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
F-8
ONTO INNOVATION INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 1,910 |
|
| $ | 45,096 |
|
| $ | 32,909 |
|
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
| 5,965 |
|
|
| 4,848 |
|
|
| 3,990 |
|
Amortization of intangibles |
|
| 10,445 |
|
|
| 1,534 |
|
|
| 1,940 |
|
Share-based compensation |
|
| 10,585 |
|
|
| 6,062 |
|
|
| 5,670 |
|
Acquired inventory step-up amortization |
|
| 15,370 |
|
|
| — |
|
|
| — |
|
Provision for doubtful accounts and inventory valuation |
|
| 11,202 |
|
|
| 3,335 |
|
|
| 3,608 |
|
Deferred income taxes |
|
| (4,116 | ) |
|
| 2,163 |
|
|
| 17,207 |
|
Other, net |
|
| 2,098 |
|
|
| 1,265 |
|
|
| 590 |
|
Change in operating assets and liabilities net of assets acquired and liabilities assumed in merger: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (9,721 | ) |
|
| 706 |
|
|
| 430 |
|
Income taxes |
|
| 7,648 |
|
|
| 1,056 |
|
|
| (4,727 | ) |
Inventories |
|
| (9,338 | ) |
|
| (31,545 | ) |
|
| (4,218 | ) |
Prepaid expenses and other assets |
|
| (5,079 | ) |
|
| (3,101 | ) |
|
| (1,686 | ) |
Accounts payable |
|
| (12,138 | ) |
|
| 3,512 |
|
|
| 3,198 |
|
Accrued and other liabilities |
|
| (6,685 | ) |
|
| 163 |
|
|
| 5,260 |
|
Net cash and cash equivalents provided by operating activities |
|
| 18,146 |
|
|
| 35,094 |
|
|
| 64,171 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities |
|
| (127,462 | ) |
|
| (140,018 | ) |
|
| (164,661 | ) |
Proceeds from sales of marketable securities |
|
| 94,486 |
|
|
| 186,332 |
|
|
| 143,349 |
|
Purchases of property, plant and equipment |
|
| (6,802 | ) |
|
| (7,542 | ) |
|
| (10,210 | ) |
Cash acquired from merger |
|
| 43,882 |
|
|
| — |
|
|
| — |
|
Cash advance on convertible note receivable |
|
| — |
|
|
| (5,000 | ) |
|
| — |
|
Purchase of intangible assets |
|
| — |
|
|
| — |
|
|
| (1,000 | ) |
Net cash and cash equivalents provided by (used in) investing activities |
|
| 4,104 |
|
|
| 33,772 |
|
|
| (32,522 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of stock warrants |
|
| — |
|
|
| — |
|
|
| (1,025 | ) |
Purchases of common stock |
|
| (744 | ) |
|
| (21,069 | ) |
|
| — |
|
Tax payments related to shares withheld for share-based compensation plans |
|
| (2,540 | ) |
|
| (1,921 | ) |
|
| (1,358 | ) |
Payment of contingent consideration for acquired business |
|
| (1,758 | ) |
|
| (1,543 | ) |
|
| (792 | ) |
Issuance of shares through share-based compensation plans |
|
| 844 |
|
|
| 624 |
|
|
| 623 |
|
Net cash and cash equivalents used in financing activities |
|
| (4,198 | ) |
|
| (23,909 | ) |
|
| (2,552 | ) |
Effect of exchange rate changes on cash and cash equivalents |
|
| 233 |
|
|
| (339 | ) |
|
| 814 |
|
Net increase in cash and cash equivalents |
|
| 18,285 |
|
|
| 44,618 |
|
|
| 29,911 |
|
Cash and cash equivalents at beginning of year |
|
| 112,388 |
|
|
| 67,770 |
|
|
| 37,859 |
|
Cash and cash equivalents at end of year |
| $ | 130,673 |
|
| $ | 112,388 |
|
| $ | 67,770 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid (received), net |
| $ | (3,848 | ) |
| $ | 4,301 |
|
| $ | 14,605 |
|
Litigation settlement received |
| $ | — |
|
| $ | — |
|
| $ | 13,000 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-9
ONTO INNOVATION INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the years ended January 1, 2022,
December 26, 2020 and December 31, 2019 2018 and 2017
(In thousands)
|
| Common Stock |
|
| Additional Paid-in |
|
| Accumulated Other Comprehensive |
|
| Accumulated |
|
|
|
|
|
| Common Stock |
|
| Additional Paid-in |
|
| Accumulated Other Comprehensive |
|
| Accumulated Earnings / |
|
|
|
|
| ||||||||||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Loss |
|
| Deficit |
|
| Total |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Income / (Loss) |
|
| (Deficit) |
|
| Total |
| ||||||||||||
Balance at December 31, 2016 |
|
| 25,033 |
|
| $ | 31 |
|
| $ | 381,189 |
|
| $ | (2,779 | ) |
| $ | (84,706 | ) |
| $ | 293,735 |
| ||||||||||||||||||||||||
Issuance of shares through share-based compensation plans, net |
|
| 348 |
|
|
| 1 |
|
|
| 623 |
|
|
| — |
|
|
| — |
|
|
| 624 |
| ||||||||||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 32,909 |
|
|
| 32,909 |
| ||||||||||||||||||||||||
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 5,670 |
|
|
| — |
|
|
| — |
|
|
| 5,670 |
| ||||||||||||||||||||||||
Cumulative effect of a change in accounting for share-based compensation |
|
| — |
|
|
| — |
|
|
| 72 |
|
|
| — |
|
|
| (72 | ) |
|
| — |
| ||||||||||||||||||||||||
Share-based compensation plan withholdings |
|
| (47 | ) |
|
| — |
|
|
| (1,358 | ) |
|
| — |
|
|
| — |
|
|
| (1,358 | ) | ||||||||||||||||||||||||
Redemption of stock warrants |
|
| 82 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||||||
Currency translation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,663 |
|
|
| — |
|
|
| 1,663 |
| ||||||||||||||||||||||||
Unrealized loss on investments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (89 | ) |
|
| — |
|
|
| (89 | ) | ||||||||||||||||||||||||
Balance at December 31, 2017 |
|
| 25,416 |
|
|
| 32 |
|
|
| 386,196 |
|
|
| (1,205 | ) |
|
| (51,869 | ) |
|
| 333,154 |
| ||||||||||||||||||||||||
Issuance of shares through share-based compensation plans, net |
|
| 358 |
|
|
| — |
|
|
| 624 |
|
|
| — |
|
|
| — |
|
|
| 624 |
| ||||||||||||||||||||||||
Repurchase of common stock |
|
| (853 | ) |
|
| (1 | ) |
|
| (21,068 | ) |
|
| — |
|
|
| — |
|
|
| (21,069 | ) | ||||||||||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 45,096 |
|
|
| 45,096 |
| ||||||||||||||||||||||||
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 6,062 |
|
|
| — |
|
|
| — |
|
|
| 6,062 |
| ||||||||||||||||||||||||
Share-based compensation plan withholdings |
|
| (66 | ) |
|
| — |
|
|
| (1,921 | ) |
|
| — |
|
|
| — |
|
|
| (1,921 | ) | ||||||||||||||||||||||||
Currency translation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (194 | ) |
|
| — |
|
|
| (194 | ) | ||||||||||||||||||||||||
Unrealized gain on investments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 136 |
|
|
| — |
|
|
| 136 |
| ||||||||||||||||||||||||
Balance at December 31, 2018 |
|
| 24,855 |
|
|
| 31 |
|
|
| 369,893 |
|
|
| (1,263 | ) |
|
| (6,773 | ) |
|
| 361,888 |
|
|
| 24,855 |
|
| $ | 31 |
|
| $ | 369,893 |
|
| $ | (1,263 | ) |
| $ | (6,773 | ) |
| $ | 361,888 |
|
Effect of merger |
|
| 25,060 |
|
|
| 19 |
|
|
| 890,112 |
|
|
| — |
|
|
| — |
|
|
| 890,131 |
|
|
| 25,060 |
|
|
| 19 |
|
|
| 890,112 |
|
|
| — |
|
|
| — |
|
|
| 890,131 |
|
Issuance of shares through share-based compensation plans, net |
|
| 377 |
|
|
| — |
|
|
| 2,131 |
|
|
| — |
|
|
| — |
|
|
| 2,131 |
|
|
| 377 |
|
|
| — |
|
|
| 2,131 |
|
|
| — |
|
|
| — |
|
|
| 2,131 |
|
Repurchase of common stock |
|
| (30 | ) |
|
| — |
|
|
| (744 | ) |
|
| — |
|
|
| — |
|
|
| (744 | ) |
|
| (30 | ) |
|
| — |
|
|
| (744 | ) |
|
| — |
|
|
| — |
|
|
| (744 | ) |
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,910 |
|
|
| 1,910 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,910 |
|
|
| 1,910 |
|
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 10,585 |
|
|
| — |
|
|
| — |
|
|
| 10,585 |
|
|
| — |
|
|
| — |
|
|
| 10,585 |
|
|
| — |
|
|
| — |
|
|
| 10,585 |
|
Share-based compensation plan withholdings |
|
| (78 | ) |
|
| — |
|
|
| (2,540 | ) |
|
| — |
|
|
| — |
|
|
| (2,540 | ) |
|
| (78 | ) |
|
| — |
|
|
| (2,540 | ) |
|
| — |
|
|
| — |
|
|
| (2,540 | ) |
Currency translation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 709 |
|
|
| — |
|
|
| 709 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 709 |
|
|
| — |
|
|
| 709 |
|
Unrealized loss on investments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (44 | ) |
|
| — |
|
|
| (44 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (44 | ) |
|
| — |
|
|
| (44 | ) |
Balance at December 31, 2019 |
|
| 50,184 |
|
| $ | 50 |
|
| $ | 1,269,437 |
|
| $ | (598 | ) |
| $ | (4,863 | ) |
| $ | 1,264,026 |
|
|
| 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 these consolidated financial statements
F-10F-9
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
1. | Organization and Nature of Operations: |
Onto Innovation Inc. (“Onto Innovation” or the “Company”) is a worldwide leader in the design, development, manufacture and support of process control tools that perform macro-defect inspectionsinspection and metrology, lithography systems, and process control analytical software used by semiconductor and advanced packaging device manufacturers. The Company’sCompany delivers comprehensive solutions throughout the semiconductor fabrication process with our families of proprietary products are also used in a numberthat provide critical yield-enhancing information, enabling microelectronic device manufacturers to drive down costs and time to market of other high technology industries including: silicon wafer substrates; light emitting diode (“LED”); vertical-cavity surface-emitting laser (“VCSEL”); micro-electromechanical system (“MEMS”); CMOS image sensor (“CIS”); power device; RF filter; data storage; and certain industrial and scientific applications.their devices. The Company provides process and yield management solutions used in bare silicon wafer production andboth wafer processing facilities, often referred to as “front-end” manufacturing, and in device packaging and test facilities, (orcommonly referred to as “back-end” manufacturing), respectively through a portfolio of standalone systems for 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, including three-dimensional features and film thickness, as well as optical, electrical and material properties. Our primary area of focus are products that provide critical yield-enhancing information, which is used by microelectronic device manufacturers to drive down costs and to decrease the time to market of their devices. All of Onto Innovation’s systems feature sophisticated software and production-worthy automation. In addition, themanufacturing. The Company’s advanced process control software portfolio includes powerful solutions for standalone tools, groups of tools, or factory-wide and enterprise-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 provider of process characterization equipment and software for wafer fabs and advanced packaging facilities.
Basis of Presentation. As further discussed in Note 3 of Notes to the Consolidated Financial Statements, Rudolph Technologies, Inc. (“Rudolph”) and Nanometrics Incorporated (“Nanometrics”) completed a merger effective October 25, 2019 (the “Merger”). Upon consummation of the Merger, the combined company was renamed Onto Innovation. The Merger was accounted for as a reverse acquisition where Rudolph was the accounting acquirer and Nanometrics was the legal acquirer in accordance with Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations” (“ASC 805”). Accordingly, Rudolph’s historical results of operations replaced the Nanometrics historical results of operations for all periods prior to the merger. Specifically, the accompanying Consolidated Financial Statements for all periods prior to the Merger are those of Rudolph and for the period after the Merger, also include Nanometrics. The Consolidated Financial Statements reflect the assets and liabilities of Rudolph at historical cost basis and the assets and liabilities of Nanometrics are reflected at fair value under the acquisition method. While Rudolph applied the acquisition method of accounting to Nanometrics, the legal capital in the current and prior periods has been retroactively adjusted to reflect the legal capital of Nanometrics. Accordingly, earnings per share has been retroactively restated for periods prior to the merger date.
Reclassifications. In conjunction with the Merger, the Company assessed the need to realign its financial statement presentation and certain income statement classifications were adjusted with prior periods reclassified to conform with current period presentation. The changes made were as follows:
|
|
|
|
|
|
F-11
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
2. | Summary of Significant Accounting Policies: |
Consolidation. The consolidated financial statements reflect the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Fiscal Year. In the first quarter of 2020, the Company changed its fiscal year end from December 31 to a 52-53 week fiscal year ending on the 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 promised goods or services are transferred to the 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 commitment from both parties, the rights 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 promise 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. Payment for the majority of the Company’s systems have 80-90% of the invoice amount due within 30 days and the remaining amount due upon completion of installation, recalibration and qualification by the customer. 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 training 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.
F-10
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 areis 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. Payment for software licensing, support and maintenance is generally due in 30 days.
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. Payment for parts is generally due in 30 days.
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. Payment for services is generally due in 30 days. Revenue from installation services is recognized at a point in time when installation is complete.
F-12
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
Practical Expedients
The Company generally expenses sales commissions when incurred because the amortization period is one year or 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 generally 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 contracts 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 1110 of Notes to the Consolidated Financial Statements.
Business Combinations. We accountThe 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 we use ourthe 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, ourthe Company’s 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 recordthe 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 ourits consolidated statements of operations. Accounting for business combinations requires ourthe Company’s management to make significant estimates and assumptions, especially at the acquisition date including ourits estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies, and contingent consideration, where applicable. Although we believethe Company believes the assumptions and estimates we haveit 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 ofEstimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates made by management include the allowancesallowance for doubtful accounts and convertible notes receivable,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 from those estimates.
These estimates and assumptions are based on historical experience and on various other factors which the Company believes to be reasonable under the circumstances. The Company may engage third-party valuation specialists to assist with estimates related to the valuation of financial instruments, assets and stock awards associated with various contractual arrangements. Such estimates often require the selection of appropriate valuation methodologies and significant judgment. Actual results could differ from these estimates under different assumptions or circumstances and such differences could be material.
Cash and Cash Equivalents. Cash and cash equivalents include cash and highly liquid debt instruments with original maturities of three months or less when purchased.
Marketable Securities. The Company determined that all of its investment securities are to be classified as available-for-sale. Available-for-sale debt securities are carried at fair value, with the unrealized gains and losses reported in stockholders’ equity under the caption “Accumulated other comprehensive loss.” Realized gains and losses and, interest and dividends on available-for-sale securities are included in interest income and other, net. Available-for-sale securities are classified as current assets regardless of their maturity date if they are available for use in current operations. The Company reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in
F-13
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
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 the gains and losses on marketable securities.
For additional information on the Company’s marketable securities, see Note 5 of Notes to the Consolidated Financial Statements.
Allowance for DoubtfulAccounts.Credit Losses. The Company evaluates the collectability of accounts receivablemaintains an allowance for credit losses that is estimated based on a combination of factors. Wherefactors including write-off history, aging analysis, forecast of future economic conditions and any specific known troubled accounts. The Company believes the Companyallowance is awareadequate to cover expected losses on trade receivables. Provisions for expected credit losses are classified as selling, general and administrative expense in the Consolidated Statements of circumstances that may impair a specific customer’sOperations. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to meet its financial obligation, the Company records a specific allowance against amounts due, thereby reducing the net recognized receivable to the amount management reasonably believes willmake payments, additional allowances may be collected. For all other customers, the Company recognizes allowances for doubtful accounts based on the length of time the receivables are outstanding, industry and geographic concentrations, the current business environment and historical experience.required.
Inventories. Inventories are stated at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less predictable costs of completion, disposal and transportation. Cost is generally determined on a first-in, first-out basis, and includes material, labor and manufacturing overhead costs. The Company reviews and sets standard costs as needed, but at a minimum, on an annual basis, at current manufacturing costs in order to approximate actual costs.
The Company evaluates inventories for excess quantities and obsolescence. The Company establishes 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 item to which it relates is scrapped or 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. 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. Charges to Cost of revenue for excess and obsolete inventories totaled $10,841 in 2019. Included in this amount is a charge of $5,945 recorded in the fourth quarter related to excess inventory from a deemphasized product line and the rationalization of service inventory after the Merger. In 2018 and 2017, the Company recorded charges of $3,042 and $3,833, respectively.
Property, Plant and Equipment. Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment is computed using the straight-line method over the estimated useful lives of the 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.
F-14F-12
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
Impairment of Long-Lived Assets and Finite-Lived Acquired Intangible Assets. Long-lived assets, such as property, plant, and equipment, and identifiable acquired intangible assets with definitefinite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. 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 31, 2018 and 2017.26, 2020.
Goodwill and Indefinite Lived Intangible Assets. Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives. 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 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 1 operating segment. NaN goodwill impairment occurred in 2019, 2018,fiscal years 2021, 2020, or 2017.2019. 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. 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 loss is recognized in an amount 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 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 6 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 cash equivalents and marketable securities. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for sales on credit. The Company maintains allowances for potential credit losses.
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 sells its productsCompany’s accounts receivable result primarily to end users infrom the United States, Asiasale of semiconductor equipment, related accessories 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.replacement parts. 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. Write-offs of uncollectible accounts have historically not been material. The Company participates in a dynamic high technology industry and believes that changes in anyactively monitors its customers' financial strength to reduce the risk 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.
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
F-15
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
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.loss.
Warranties. The Company generally provides a warranty on its products 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. 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. 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.
Income Taxes. The Company accounts for income taxes using the asset and liability approach for deferred taxes which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events 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 1413 of Notes to the Consolidated Financial Statements.
Translation of Foreign Currencies. The Company has branch operations or wholly-ownedCompany’s international branches and subsidiaries primarily generate and expend cash in the United States, Europe, Japan, China, Taiwan, Singapore and South Korea. Its international subsidiaries and branches operate primarily through the use oftheir local functional currencies. A substantial portioncurrency. Accordingly, all balance sheet accounts of the Company’s international systems salesthese local functional currency branches and subsidiaries are denominated intranslated into U.S. dollars with the exception of Japan. Consequently, we have relatively little exposure to foreign currency exchange risk with respect to these sales.
Assets and liabilities are translated at exchange rates in effect at the balance sheet date,fiscal period-end exchange rate, and income and expense accounts and cash flow items are translated atinto U.S. dollars using average monthly exchange rates duringin effect for the period. Net exchange gains or lossesThe resulting from the translation of foreign financial statementsadjustments are recorded as cumulative translation adjustments and the effect of exchange rates on intercompany transactions of a long-term investment nature are recorded directly as a separate component of stockholders’ equity under the caption, “Accumulated other comprehensive loss.” Any foreign currency gains or losses related to transactions are included in operating results. The Company had accumulated exchange losses resulting from the translation of foreign operation financial statements of $564$1,764 and $1,273$4,479 as of January 1, 2022 and December 31, 2019 and 2018,26, 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 1211 of Notes to the Consolidated Financial Statements.
Research and Development Costs. Expenditures for research and development are expensed as incurred.
Fair Value of Financial Instruments. The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their short maturities. The estimated fair value of these obligations is based, primarily, on a market approach, comparing the Company’s interest rates to those rates the Company believes it would reasonably receive upon re-entry into the market. Judgment is required to estimate the fair value using available market information and appropriate valuation methods.
For additional information on the Company’s fair value of financial instruments, see Note 4 of Notes to the Consolidated Financial Statements.
F-16
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
Derivative Instruments and Hedging Activities. The Company, when it considers itCompany’s policy is to be appropriate, enters into forward contracts to hedgemitigate the economic exposures arising fromeffect of exchange rate fluctuations on certain foreign currency denominated transactions. At December 31, 2019 and 2018, these contracts includedbusiness exposures. The Company has a policy that allows for the future saleuse of Japanese Yenderivative financial instruments to purchase U.S. dollars. Thehedge foreign currency forward contracts were entered into by the Company’s Japanese subsidiary to hedge a portion of certain intercompany obligations. Post-merger with Nanometrics, the Company enters into forward contracts for several other currencies including the Korean Won, Taiwanese dollarexchange rate fluctuations on forecasted revenue and Chinese Yuan Renminbi. The forward contracts are not designated as hedges for accounting purposes and therefore, the changenet monetary assets or liabilities denominated in fair value is recorded in general and administrative expenses in the Consolidated Statements of Operations.various foreign currencies. The Company records its forward contractscarries derivative financial instruments (derivatives) on the balance sheet at their fair valuevalues, in either prepaid expenses and other current assets or other current liabilities in the Consolidated 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 credit 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 31, 2019 and 201826, 2020 were as follows:
|
| December 31, |
|
| January 1, |
|
| December 26, |
| |||||||
|
| 2019 |
|
| 2018 |
|
| 2022 |
|
| 2020 |
| ||||
Notional amount |
|
| 38,887 |
|
|
| 6,746 |
|
| $ | 32,293 |
|
| $ | 37,580 |
|
Fair value of asset (liability) |
|
| 120 |
|
|
| (32 | ) | ||||||||
Fair value of liability |
|
| 26 |
|
|
| 36 |
| ||||||||
During the year ended January 1, 2022, the Company recognized a loss of $1,650 on maturities of forward contracts. During the years ended December 26, 2020 and December 31, 2019, and 2017, the Company recordedrecognized gains of $$510 and $343 and $105 on maturities of forward contracts, respectively. During the year ended December 31, 2018, the Company recognized a loss of $81 on maturities of forward contracts. The aggregate notional amounts of matured contracts were $420,460, $373,749 and $58,522 $8,465for 2021, 2020 and $9,582 for 2019, 2018 and 2017, 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 probable, 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 statement that such loss is not reasonably estimable. The Company expenses as incurred the costs of defending legal claims against the Company. The Company does not recognize gain contingencies until realized. See Note 109 of the Notes to the Consolidated Financial Statements, “Commitments and Contingencies” for a detailed description.
Recent Accounting Pronouncements.
Recently Adopted
Effective January 1, 2019,December 27, 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. The ASU is effective for the fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of ASU No. 2018-07 did not have a material impact on the Company’s consolidated financial position, results of operations, and cash flows.
Effective January 1, 2019, the Company adopted ASU No. 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The new guidance allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) from accumulated other comprehensive income to retained earnings. The guidance also requires certain new disclosures regardless of a company’s election. The standard is effective for annual periods beginning after December 15, 2018 and for interim periods within those annual periods, with earlier adoption permitted. The adoption of ASU No. 2018-02 did not have a material impact on the Company’s consolidated financial position, results of operations, and cash flows.
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This ASU eliminates Step 2 from the goodwill impairment test. Accordingly, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss
F-17
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
will be recognized in an amount equal to the excess, limited to the total amount of goodwill allocated to the reporting unit. The ASU is effective for the fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, with earlier adoption permitted. The adoption of ASU No. 2017-04 during 2019 did not have a material impact on the Company’s consolidated financial position, results of operations, and cash flows.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” ASU No. 2016-02 requires that lessees recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and lease liability. On January 1, 2019, the Company adopted ASU No. 2016-02 using the modified retrospective method which applies the provisions of the standard at the effective date without adjusting the comparative periods presented. The Company also elected the package of practical expedients.
There was not a cumulative-effect adjustment to the Company’s beginning retained earnings as a result of adopting ASU No. 2016-02. The Company has recognized additional operating lease assets and obligations of $14,426 as of January 1, 2019. As a result of the Merger, operating lease assets and obligations of $9,658 were assumed from the former Nanometrics. The Company elected to not reassess prior conclusions related to the identification, classification and accounting for initial direct costs for leases that commenced prior to January 1, 2019. For additional disclosure and detail, see Note 7 of the Notes to the Consolidated Financial Statements, “Leasing Arrangements.”
Recently Issued
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This standard simplifiessimplified the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifiessimplified aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifiesclarified the accounting for transactions that resultresulted in a step-up in the tax basis of goodwill and allocating consolidated income taxes to separate financial statements of entities not subject to income tax. ASU No. 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Upon adoption, the Company must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this new standard on its consolidated financial position, results of operations, and cash flows.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU is part of the FASB’s larger disclosure framework project intended to improve the effectiveness of financial statement footnote disclosure. ASU No. 2018-13 modifies required fair value disclosures related primarily to level 3 investments. This ASU is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The adoption of ASU No. 2018-13 is2019-12 did not expected to have a material effectsignificant impact on the Company’s consolidated financial position, results of operations, and cash flows.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” This ASU amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Accounting Standards Codification (“ASC”) 718. The ASU is effective for the fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. The adoption of ASU No. 2017-09 is not expected to have a material effect on the Company’s consolidated financial position, results of operations, and cash flows, if any.
F-18
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which represents a new credit loss standard that will change the impairment model for most financial assets and certain other financial instruments. Specifically, this guidance will require entities to utilize a new “expected loss” model as it relates to trade receivables, notes receivable and other commitments to extend credit held by a reporting entity. In addition, entities will be required to recognize an allowance for estimated credit losses on available-for-sale debt securities, regardless of the length of time that a security has been in an unrealized loss position. This guidance will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods, with early adoption permitted. The Company expects that the adoption of this guidance will not have a material impact on its consolidated financial position, results of operations, and cash flows.Recently Issued
Recently issued accounting guidance not discussed above is not applicable or did not have, or is not expected to have, a material impact to the Company.
3. | Business Combination: |
PursuantInspectrology, LLC
During the first quarter of 2021, the Company acquired Inspectrology, LLC (“Inspectrology”), a supplier of overlay 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 Agreementprincipals remaining with the Company for a period of one to three years.
The following table summarizes the preliminary fair value of assets acquired and Planliabilities assumed at the date of Merger dated asacquisition:
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 |
|
F-15
Onto Innovation
On October 25, 2019, the Company became Onto Innovation Inc. upon the effectiveness of the merger (the “Merger Agreement”“2019 Merger”), among between Nanometrics Incorporated (“Nanometrics”) and Rudolph Technologies, Inc. (“Rudolph”), Nanometrics Incorporated, (“Nanometrics”) and PV Equipment Inc., a wholly-owned subsidiary of Nanometrics, (“Merger Sub”) Merger Sub merged with and into Rudolph, with Rudolph continuing as a wholly-owned subsidiary of Onto Innovation (formerly Nanometrics) and the surviving corporation of the merger (the “Merger”). The Merger was effective on October 25, 2019 (the “Effective Time”). At the Effective Time, each share of Rudolph common stock, par value $0.001 per share, issued and outstanding immediately prior to the Effective Time (other than shares owned by Rudolph or Nanometrics) was converted into the right to receive 0.8042 (the “Exchange Ratio”) shares of common stock, par value $0.001 per share, of Onto Innovation common stock, par value $0.001 per share, and cash in lieu of any fractional shares of Onto Innovation common stock any former holder of Rudolph common stock would otherwise be entitled to receive. Immediately following the Effective Time of the Merger, Rudolph’s and Nanometrics’ common stockholders each owned approximately 50% of the outstanding common stock of the combined company on a fully diluted basis.
The Merger creates a company that is an end-to-end metrology, inspection, process control software, and lithography equipment providerCompany accounted for the semiconductor industry and other advanced markets with a global support organization whose technology development teams, and product portfolio creates unique end-to-end solutions across the entire semiconductor fabrication process. The company will be able to provide improved device yield at reduced manufacturing cycle time, supporting the accelerated product life cycles in the semiconductor and other advanced markets.
The combined company accounts for the2019 Merger as a reverse acquisition using the acquisition method of accounting in accordance with generally accepted accounting principles with (“GAAP”). GAAP requires that either Nanometrics or Rudolph being treated is designated as the acquiring entityacquirer for accounting purposes. In identifyingand financial reporting purposes (“Accounting Acquirer”). Based on the evidence available, Rudolph was designated as the accounting acquiring entity, Rudolph andAccounting Acquirer while Nanometrics reviewedwas the accounting guidance as provided in ASC 805, which takes into account the typeacquirer for legal purposes. Therefore, Rudolph’s historical results of consideration, the structureoperations replaced Nanometrics’ historical results of the merger and the other transactions contemplated by the merger agreement, relative outstanding share ownership, the composition of the combined company board of directors, designation of certain senior management positions of the combined company, mainly the Chief Executive Officer and the Chief Financial Officer, relative voting rights, relative size as measured by assets, revenue or earnings as well as other metrics an investor would use for evaluating the respective company’s current and future financial performance, which of the combining entities initiated the combination and where the combined company’s headquarters will be located.
The acquisition method of accounting is based on ASC 805, and uses the fair value concepts defined in ASC Topic 820, “Fair Value Measurement” (“ASC 820”). The purchase price allocation described herein is preliminary and is based on the information that was available to make estimates of the fair value and may change as further information becomes available and additional analysis are completed. While the Company believes that such information provides a reasonable basis for estimating the fair values, more evidence and information may be obtained during the measurement period that results in changes to the estimated fair value amounts. The measurement period ends on the earlier of one year after the Effective Time or the date information about the facts and circumstances that existed at the Effective Time becomes available. Such adjustments, if necessary, will be recognized during the period in which that amounts are determined. These
F-19
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
adjustments may include: (1) changes in the fair value of certain intangible assets acquired; and (2) changes in deferred tax assets and liabilities related to the fair value estimates.
At the Effective Time of the Merger, Nanometrics changed its name to Onto Innovation Inc., and its shares began trading on the New York Stock Exchange (the “NYSE”) on October 28, 2019 (NYSE: ONTO). At the close of trading on October 25, 2019, Rudolph common stock ceased being listed on the NYSE. The accompanying consolidated financial statementsoperations for all periods presented are those of Rudolph with those of Nanometrics included only from the Effective Time through year-end.
The acquisition was nontaxable to the Company and certain of the assets acquired, including goodwill, will not be deductible for tax purposes. The acquired assets and liabilities of Nanometrics were recorded at their respective fair values including an amount for goodwill, which represents the purchase price paid in excess of the fair value of the net tangible and intangible assets acquired and liabilities assumed, and is attributable primarily to expected synergies, economies of scale and the assembled workforce of Nanometrics.
ASC 805 requires, among other things, that assets acquired, and liabilities assumed, be recognized at their fair values as of the Effective Time. In addition, ASC 805 requires that the consideration transferred be measured at the Effective Time of the Merger at the then-current market price. The market price of the shares of Rudolph common stock at the Effective Time was $28.50, which was based on the closing price of shares of Rudolph common stock on the NYSE on Friday, October 25, 2019, the last day of trading prior to the Effective Time.
ASC 820 defines the term “fair value” and sets forth the valuation requirements for any asset or liability measured at fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measurements. Fair value is defined in ASC 829 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be buyers and sellers in the principal (or most advantageous) market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants, As a result of these standards, the Company may be required to record the fair value of assets which are not intended to be used or sold and/or to value assets at fair values that do not reflect the Company’s intended use for those assets. Many of these fair value measurements can be highly subjective, and it is possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.
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. TUnder ASC 805, acquisition-related transaction costs (e.g., advisory, legal, investment banking and other professional fees) are not included as a component of consideration transferred but are accounted for as expenses in the periods in which such costs are incurred. Totalotal 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.Operations.
F-20
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
the assets acquired and the liabilities assumed. The following table summarizes the preliminaryfinal allocation of the total purchase consideration to the initial estimated fair values of the assets acquired and liabilities assumed as of October 25, 2019:at the 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 |
|
Property, plant and equipment | 77,451 |
Operating lease right-of-use assets | 9,658 |
Identifiable intangible assets | 374,900 |
Deferred income taxes |
|
Other assets | 850 |
Total assets acquired |
|
Accounts payable | (23,361) |
Payroll and related expenses | (20,290) |
Deferred revenue | (5,931) |
Other current liabilities |
|
Income taxes payable |
|
Other non-current liabilities | (90,113) |
Net assets acquired |
|
Goodwill |
|
Total purchase consideration | $890,131 |
|
|
The fair value of accounts receivable, net, consisted of gross contractual accounts receivable reduced by approximately $200 for receivables not expected to be collected as of 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, and raw materials. Factors that required 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. The Company recorded a $26,486 step-up of inventory to its fair value as of the Merger date based on the preliminary valuation.
The preliminary allocation of the intangible assets subject to amortization is as follows:
| Estimated |
| Weighted Average | |||
| Estimated Fair Value |
| Weighted Average Useful Life (years) | Fair Value |
| Useful Life (years) |
Developed technology | $260,500 |
| 6.6 | $260,500 |
| 6.6 |
In-process research and development | 46,600 |
| indefinite | 46,600 |
| indefinite |
Customer relationships | 53,000 |
| 13.1 | 53,000 |
| 13.1 |
Backlog | 6,700 |
| 1.1 | 6,700 |
| 1.1 |
Trademarks and trade names | 8,100 |
| 7.5 | 8,100 |
| 7.5 |
Total intangible assets | $374,900 |
|
| $374,900 |
|
|
Acquired intangible assets reported above are being amortized using the straight-line method over their estimated useful lives, which approximates the pattern of how the economic life is expected to be used. This includes amounts allocated to customer relationships because of anticipated high customer retention rates that are common in the semiconductor capital equipment industry.
Developed technology relates to Nanometrics’ 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
F-21
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
average estimated useful life of developed technologies was determined to be 6.6 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 distributor method under the income approach. This method reflects the present value of projected distributor margins to be derived from sales 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 13.1 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 multi-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 1.1 years and was based on historical order fulfilment rates.
Trademarks and trade names relate to the “Nanometrics” trademarks and trade names and were 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 names. The estimated useful life of the trademarks and trade names was determined to be 7.5 years and was based on the expected life of the trademarks and trade names and the cash flows anticipated over the forecast period.
Factors that required a 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.
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.
The Company believes the amounts of purchased intangible assets recorded above represent the fair values of and approximate the amounts a market participant would pay for such assets as of the Effective Time.
The results of operations of Nanometrics are reported in the Company’s consolidated financial statements from the Effective Time and include $66,261 of total net sales and an operating loss of $7,065 for the year ended December 31, 2019.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information summarizes the combined results of operations of Rudolph and Nanometrics, on a pro forma basis, as if the companies had combined at the beginning of fiscal year 2018. The pro forma financial information is presented for informational purposes only and may not necessarily reflect the actual results of operations that would have been achieved if the Merger had taken place on January 1, 2018, nor are they necessarily reflective of future results of operations. The pro forma information for all periods presented also includes adjustments to amortization charges for acquired intangible assets, depreciation charges for stepped-up fair value of acquired fixed assets, related tax effects and other adjustments.
F-22
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
The reported financial information for the year ended December 31, 2019 includes the results of Rudolph for the year then-ended and the results of Nanometrics from the Effective Time through December 31, 2019. The reported financial information for the year ended December 31, 2018 is the historical results of Rudolph:
| Year Ended December 31, |
| |||||||||||||
| 2019 |
|
| 2018 |
| ||||||||||
| Reported |
|
| Pro Forma |
|
| Reported |
|
| Pro Forma |
| ||||
Net revenue | $ | 305,896 |
|
| $ | 525,455 |
|
| $ | 273,784 |
|
| $ | 598,307 |
|
Net income attributable to Onto Innovation |
| 1,910 |
|
|
| 901 |
|
|
| 45,096 |
|
|
| 36,246 |
|
The pro forma results have been adjusted to eliminate $37,900 of merger-related costs incurred by Rudolph and Nanometrics that would have been incurred in 2017 had the Merger occurred on January 1, 2018.
4. | Fair Value Measurements: |
Fair Value of Financial Instruments
The Company has evaluated the estimated fair 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 short-term maturity of these instruments.
Fair Value Hierarchy
The Company applies a three-level valuation hierarchy for fair value measurements. This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are 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 asset or liability. Level 3 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 is significant to the fair value measurement.
F-23
F-17
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
The following tables provide the assets and liabilities carried at fair value measured on a recurring basis at December 31, 2019January 1, 2022 and December 31, 2018: 26, 2020:
|
| Fair Value Measurements Using |
|
| 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) |
|
| Carrying Value |
|
| Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
| ||||||||
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
January 1, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal notes and bonds |
| $ | 81,108 |
|
| $ | — |
|
| $ | 81,108 |
|
| $ | — |
|
| $ | 170,980 |
|
| $ | 0 |
|
| $ | 170,980 |
|
| $ | 0 |
|
Asset-backed securities |
|
| 10,779 |
|
|
| — |
|
|
| 10,779 |
|
|
| — |
|
|
| 2,009 |
|
|
| 0 |
|
|
| 2,009 |
|
|
| 0 |
|
Certificates of deposit |
|
| 30,507 |
|
|
| — |
|
|
| 30,507 |
|
|
| — |
|
|
| 33,192 |
|
|
| 0 |
|
|
| 33,192 |
|
|
| 0 |
|
Commercial paper |
|
| 30,708 |
|
|
| — |
|
|
| 30,708 |
|
|
| — |
|
|
| 73,113 |
|
|
| 0 |
|
|
| 73,113 |
|
|
| 0 |
|
Corporate bonds |
|
| 36,461 |
|
|
| — |
|
|
| 36,461 |
|
|
| — |
|
|
| 62,447 |
|
|
| 0 |
|
|
| 62,447 |
|
|
| 0 |
|
Foreign currency forward contracts |
|
| 120 |
|
|
| — |
|
|
| 120 |
|
|
| — |
| ||||||||||||||||
Total assets |
| $ | 189,683 |
|
| $ | — |
|
| $ | 189,683 |
|
| $ | — |
|
| $ | 341,741 |
|
| $ | 0 |
|
| $ | 341,741 |
|
| $ | 0 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration - acquisitions |
| $ | 569 |
|
| $ | — |
|
| $ | — |
|
| $ | 569 |
| ||||||||||||||||
Total liabilities |
| $ | 569 |
|
| $ | — |
|
| $ | — |
|
| $ | 569 |
| ||||||||||||||||
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Municipal notes and bonds |
| $ | 62,684 |
|
| $ | — |
|
| $ | 62,684 |
|
| $ | — |
| ||||||||||||||||
Total assets |
| $ | 62,684 |
|
| $ | — |
|
| $ | 62,684 |
|
| $ | — |
| ||||||||||||||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Contingent consideration - acquisitions |
| $ | 2,060 |
|
| $ | — |
|
| $ | — |
|
| $ | 2,060 |
| ||||||||||||||||
Foreign currency forward contracts |
|
| 32 |
|
|
| — |
|
|
| 32 |
|
|
| — |
|
| $ | 26 |
|
| $ | 0 |
|
| $ | 26 |
|
| $ | 0 |
|
Total liabilities |
| $ | 2,092 |
|
| $ | — |
|
| $ | 32 |
|
| $ | 2,060 |
|
| $ | 26 |
|
| $ | 0 |
|
| $ | 26 |
|
| $ | 0 |
|
The Company’s available-for-sale
|
| 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. The Level 3 assumptions used in the discounted cash flow model for the contingent consideration included projected revenue, timing of cash flows and estimates of discount rates of 0.0% and 9.2% for the years ended December 31, 2019 and 2018, respectively. A significant decrease in the projected revenue or increase in discount rates could result in a significantly lower fair value measurement for the contingent consideration.rates.
F-24
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
This table presents a reconciliation of all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2019:
|
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| |
Balance at December 31, 2018 |
| $ | 2,060 |
|
Total loss due to remeasurement included in general and administrative expense |
|
| 267 |
|
Additions |
|
| — |
|
Payments |
|
| (1,758 | ) |
Transfer into (out of) Level 3 |
|
| — |
|
Balance at December 31, 2019 |
| $ | 569 |
|
See Note 5 for additional discussion regarding the fair value of the Company’s marketable securities.
Fair Value of Other Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates fair value because of the short-term maturity of these instruments. The estimated fair value of these obligations is based, primarily, on a market approach, comparing the Company’s interest rates to those rates the Company believes it would reasonably receive upon re-entry into the market. Judgment is required to estimate the fair value using available market information and appropriate valuation methods.
The carrying amount of the convertible notes receivable approximates fair value based on current interest rates for instruments with similar characteristics. Convertible notes receivable are initially recognized at fair value. The Company does not subsequently adjust the fair value of these convertible notes receivable unless it is determined that the convertible note receivable is impaired. The Company considers the issuer’s financial condition, payment history, and other relevant factors when assessing the collectability of the convertible note and to reserve the portion of such convertible note for which collection does not appear likely.
5. | Marketable Securities: |
The Company has evaluated its investment policiesAt January 1, 2022 and determined that all of its marketable securities, which are comprised of debt securities, are to be classified as available-for-sale. The Company’s available-for-sale debt securities are carried at fair value, with the unrealized gains and losses reported in Stockholders’ equity under the caption “Accumulated other comprehensive loss.” Realized gains and losses on available-for-sale securities are included in “Other income (expense)” on the Consolidated Statements of Operations. The Company records other-than-temporary impairment charges for its available-for-sale debt securities when it intends to sell the securities, it is more-likely-than not that it will be required to sell the securities before a recovery, or when it does not expect to recover the entire amortized cost basis of the securities. The cost of securities sold is based on the specific identification method.
The Company has determined that the gross unrealized losses on its marketable securities at December 31, 2019 and 2018 are temporary in nature. The Company reviews its investment portfolio to identify and evaluate marketable securities 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 securities for a period of time sufficient to allow for any anticipated recovery in market value.
F-25
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
At December 31, 2019 and 2018,26, 2020, marketable securities are categorized as follows:
|
| Amortized Cost |
|
| Gross Unrealized Holding Gains |
|
| Gross Unrealized Holding Losses |
|
| Fair Value |
|
| Amortized Cost |
|
| Gross Unrealized Holding Gains |
|
| Gross Unrealized Holding Losses |
|
| Fair Value |
| ||||||||
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
January 1, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Municipal notes and bonds |
| $ | 80,926 |
|
| $ | 188 |
|
| $ | 6 |
|
| $ | 81,108 |
|
| $ | 171,203 |
|
| $ | 38 |
|
| $ | 261 |
|
| $ | 170,980 |
|
Asset-backed securities |
|
| 10,767 |
|
|
| 12 |
|
|
| — |
|
|
| 10,779 |
|
|
| 2,009 |
|
|
| 0 |
|
|
| 0 |
|
|
| 2,009 |
|
Certificates of deposit |
|
| 30,500 |
|
|
| 7 |
|
|
| — |
|
|
| 30,507 |
|
|
| 33,200 |
|
|
| 2 |
|
|
| 10 |
|
|
| 33,192 |
|
Commercial paper |
|
| 30,707 |
|
|
| 1 |
|
|
| — |
|
|
| 30,708 |
|
|
| 73,152 |
|
|
| 2 |
|
|
| 41 |
|
|
| 73,113 |
|
Corporate bonds |
|
| 36,409 |
|
|
| 52 |
|
|
| — |
|
|
| 36,461 |
|
|
| 62,634 |
|
|
| 29 |
|
|
| 216 |
|
|
| 62,447 |
|
Total marketable securities |
| $ | 189,309 |
|
| $ | 260 |
|
| $ | 6 |
|
| $ | 189,563 |
|
| $ | 342,198 |
|
| $ | 71 |
|
| $ | 528 |
|
| $ | 341,741 |
|
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
December 26, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Municipal notes and bonds |
| $ | 62,681 |
|
| $ | 43 |
|
| $ | 40 |
|
| $ | 62,684 |
|
| $ | 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 |
| $ | 62,681 |
|
| $ | 43 |
|
| $ | 40 |
|
| $ | 62,684 |
|
| $ | 236,649 |
|
| $ | 372 |
|
| $ | 19 |
|
| $ | 237,002 |
|
The amortized cost and estimated fair value of marketable securities classified by the maturity date listed on the security, regardless of the Consolidated Balance Sheet classification, is as follows at January 1, 2022 and December 31, 2019 and 2018:26, 2020:
|
| December 31, 2019 |
|
| December 31, 2018 |
|
| January 1, 2022 |
|
| December 26, 2020 |
| ||||||||||||||||||||
|
| Amortized Cost |
|
| Fair Value |
|
| Amortized Cost |
|
| Fair Value |
|
| Amortized Cost |
|
| Fair Value |
|
| Amortized Cost |
|
| Fair Value |
| ||||||||
Due within one year |
| $ | 152,649 |
|
| $ | 152,852 |
|
| $ | 47,767 |
|
| $ | 47,732 |
|
| $ | 219,353 |
|
| $ | 219,211 |
|
| $ | 170,099 |
|
| $ | 170,321 |
|
Due after one through five years |
|
| 36,660 |
|
|
| 36,711 |
|
|
| 14,914 |
|
|
| 14,952 |
|
|
| 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 |
| $ | 189,309 |
|
| $ | 189,563 |
|
| $ | 62,681 |
|
| $ | 62,684 |
|
| $ | 342,198 |
|
| $ | 341,741 |
|
| $ | 236,649 |
|
| $ | 237,002 |
|
F-19
The following table summarizes the estimated fair value and gross 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 31, 2019 and 2018.26, 2020.
|
| In Unrealized Loss Position For Less Than 12 Months |
|
| In Unrealized Loss Position For Greater Than 12 Months |
|
| 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 |
|
| Fair Value |
|
| Gross Unrealized Losses |
|
| Fair Value |
|
| Gross Unrealized Losses |
| ||||||||
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
January 1, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Municipal notes and bonds |
| $ | 14,166 |
|
| $ | 6 |
|
| $ | — |
|
| $ | — |
|
| $ | 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 |
| $ | 14,166 |
|
| $ | 6 |
|
| $ | — |
|
| $ | — |
|
| $ | 242,432 |
|
| $ | 462 |
|
| $ | 2,587 |
|
| $ | 66 |
|
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
December 26, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Municipal notes and bonds |
| $ | 27,952 |
|
| $ | 30 |
|
| $ | 4,671 |
|
| $ | 10 |
|
| $ | 8,641 |
|
| $ | 4 |
|
| $ | 0 |
|
| $ | 0 |
|
Commercial paper |
|
| 8,862 |
|
|
| 3 |
|
|
| 0 |
|
|
| 0 |
| ||||||||||||||||
Corporate bonds |
|
| 14,947 |
|
|
| 12 |
|
|
| 0 |
|
|
| 0 |
| ||||||||||||||||
Total marketable securities |
| $ | 27,952 |
|
| $ | 30 |
|
| $ | 4,671 |
|
| $ | 10 |
|
| $ | 32,450 |
|
| $ | 19 |
|
| $ | 0 |
|
| $ | 0 |
|
See Note 4 for additional discussion regarding the fair value of the Company’s marketable securities.
F-26
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
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, 2017, net of accumulated impairment charge of $192,872 |
| $ | 22,495 |
|
Goodwill acquired during the period |
|
| — |
|
Balance at December 31, 2018 |
|
| 22,495 |
|
Goodwill acquired during the period (Note 3) |
|
| 284,653 |
|
Balance at December 31, 2019 |
| $ | 307,148 |
|
|
|
|
|
|
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 |
|
|
|
|
|
|
F-20
Purchased Intangible Assets
Purchased intangible assets as of January 1, 2022 and December 31, 2019 and 201826, 2020 are as follows:
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net |
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net |
| ||||||
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
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 |
| $ | 326,726 |
|
| $ | 67,861 |
|
| $ | 258,865 |
|
| $ | 326,877 |
|
| $ | 110,851 |
|
| $ | 216,026 |
|
Customer and distributor relationships |
|
| 69,261 |
|
|
| 11,078 |
|
|
| 58,183 |
|
|
| 69,261 |
|
|
| 20,654 |
|
|
| 48,607 |
|
Trademarks and trade names |
|
| 12,461 |
|
|
| 4,156 |
|
|
| 8,305 |
|
|
| 12,461 |
|
|
| 5,337 |
|
|
| 7,124 |
|
Total finite-lived intangible assets |
|
| 408,448 |
|
|
| 83,095 |
|
|
| 325,353 |
|
|
| 408,599 |
|
|
| 136,842 |
|
|
| 271,757 |
|
In-process research and development |
|
| 46,600 |
|
|
| — |
|
|
| 46,600 |
|
|
| 46,600 |
|
|
| — |
|
|
| 46,600 |
|
Total identifiable intangible assets |
| $ | 455,048 |
|
| $ | 83,095 |
|
| $ | 371,953 |
|
| $ | 455,199 |
|
| $ | 136,842 |
|
| $ | 318,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Finite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Developed technology |
| $ | 66,177 |
|
| $ | 59,692 |
|
| $ | 6,485 |
| ||||||||||||
Customer and distributor relationships |
|
| 9,560 |
|
|
| 9,082 |
|
|
| 478 |
| ||||||||||||
Trademarks and trade names |
|
| 4,361 |
|
|
| 3,876 |
|
|
| 485 |
| ||||||||||||
Total identifiable intangible assets |
| $ | 80,098 |
|
| $ | 72,650 |
|
| $ | 7,448 |
| ||||||||||||
Intangible asset amortization expense amounted to $10,44551,366, $1,534$53,746 and $1,940$10,445 for the years ended January 1, 2022, December 26, 2020 and December 31, 2019, 2018 and 2017, respectively. Assuming no change in the gross carrying value of identifiable intangible assets and estimated lives, estimated amortization expenses are $53,741 for 2020, $48,009 for 2021, $47,610$55,273 for 2022, $47,135$54,798 for 2023, $49,113 for 2024, $32,563 for 2025, and $41,450$31,370 for 2024.2026.
7. | Leasing Arrangements: |
The Company leases space fordetermines if an arrangement is a lease at its corporate headquarters, manufacturing, sales and service operations, vehicles and information technology equipment under operating leases. All of the Company’s leases are operating leases. The Company elected not to apply Accounting Standard Codification Topic 842 (“ASC 842”) to arrangements with lease terms of less than 12 months.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 obligationsthe corresponding lease liabilities, depending on their maturity, are reflected withinincluded in “Other current liabilities” or “Other non-current liabilities” in the captions “OperatingConsolidated Balance Sheets.
Right-of-use assets represent the right to use an underlying asset for the lease right-of-useterm and lease liabilities represent the obligation to make lease payments arising from the lease. Right-of-use assets” “Current operating and lease obligations,”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 “Non-current operating lease obligations,” respectively,maintenance costs. Leases with a term of one year or less are not recorded on the Consolidated Balance Sheets.
OperatingSheets and lease costs were $4,124 during the twelve months ended December 31, 2019. These costs are primarily related to long-term operatingexpense for these leases but also include immaterial amounts for short-term leases less than 12 months. Operating lease costs areis recognized on a straight-line basis over the termslease term.
The Company uses its estimated incremental borrowing rate in determining the present value of lease payments considering the term of the leases.lease, 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 non-lease components as a single lease component.
AdditionalLease costs for operating leases were $5,964 and $6,756 for the years ended January 1, 2022 and December 26, 2020, respectively. Operating lease right-of-use assets of $2,946 werecosts are generally recognized as non-cash asset additions that resulted from new operatingover the lease liabilities as ofterm. The Company elected the twelve months ended December 31, 2019. Cash paidpractical expedient to not provide comparable presentation for amounts included in theperiods prior to adoption.
F-27F-21
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
measurementDetails of operating lease liabilities was $3,872 during the twelve months ended December 31, 2019 and is included in operating cash flows.
The Company often has the option to renew lease terms for buildings and other assets. The exercise of lease renewal options is generally at the Company’s sole discretion. In addition, certain lease arrangements may be terminated prior to their original expiration date at the Company’s discretion. The Company evaluates renewal and termination options at the lease commencement date to determine if it is reasonably certain to exercise the option on the basis of economic factors. The weighted average of the remaining lease term for operating leases as of December 31, 2019 was 6.7 years.
The discount rate implicit within the Company’s leases is generally not determinable and therefore the Company determines the discount rate based on its incremental borrowing rate. The incremental borrowing rate for our leases is determined based on the lease term in which lease payments are made. The weighted average discount rate used to measure operating lease liabilities as of December 31, 2019 was 4.5%.
The following table presents information about the amount and timing of cash flows arising from 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 December 31, 2019:January 1, 2022 is as follows:
|
|
|
|
| ||||
Maturity of Lease Liabilities |
| Lease Payments |
| |||||
2020 |
| $ | 5,901 |
| ||||
2021 |
|
| 4,659 |
| ||||
Fiscal Year |
|
|
|
| ||||
2022 |
|
| 4,059 |
|
| $ | 5,029 |
|
2023 |
|
| 3,398 |
|
|
| 4,058 |
|
2024 |
|
| 2,939 |
|
|
| 3,457 |
|
2025 |
|
| 3,342 |
| ||||
2026 |
|
| 1,919 |
| ||||
Thereafter |
|
| 8,196 |
|
|
| 3,299 |
|
Total undiscounted operating lease payments |
|
| 29,152 |
|
|
| 21,104 |
|
Less: Imputed interest |
|
| 4,276 |
| ||||
Less: imputed interest |
|
| 2,402 |
| ||||
Present value of operating lease liabilities |
| $ | 24,876 |
|
| $ | 18,702 |
|
8. |
|
On May 31, 2018, the Company entered into a convertible loan agreement with Simax Precision Technologies Limited (“the borrower”), which allowed them to borrow up to $15,000 in multiple promissory notes with an interest rate of 4.25% per annum payable on a semi-annual basis. The Company expected to be a supplier of lithography modules to Simax, which is used in the manufacture, sale and service of lithography systems. At December 31, 2019, the Company had $5,000 in outstanding convertible notes receivable with the borrower.
During the fourth quarter 2019, the Company and the borrower began negotiations to end their relationship as it pertains to this agreement. The Company determined that it is unlikely that a portion of the convertible note receivable will be collectable, and a reserve in the amount of $2,000 was recorded during the period ended December 31, 2019. In addition, the Company ceased recognizing interest income on these convertible notes receivable as of September 30, 2019.
| Balance Sheet |
Inventories
Inventories are comprised of the following:
|
| December 31, |
|
| January 1, |
|
| December 26, |
| |||||||
|
| 2019 |
|
| 2018 |
|
| 2022 |
|
| 2020 |
| ||||
Materials |
| $ | 108,492 |
|
| $ | 61,025 |
|
| $ | 157,343 |
|
| $ | 124,926 |
|
Work-in-process |
|
| 42,694 |
|
|
| 21,910 |
|
|
| 60,415 |
|
|
| 44,829 |
|
Finished goods |
|
| 24,948 |
|
|
| 13,885 |
|
|
| 25,350 |
|
|
| 21,462 |
|
Total inventories |
| $ | 176,134 |
|
| $ | 96,820 |
|
| $ | 243,108 |
|
| $ | 191,217 |
|
F-28
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
Property, Plant and Equipment
Property, plant and equipment, net, is comprised of the following:
|
| December 31, |
|
| January 1, |
|
| December 26, |
| |||||||
|
| 2019 |
|
| 2018 |
|
| 2022 |
|
| 2020 |
| ||||
Land and building |
| $ | 47,222 |
|
| $ | 2,584 |
|
| $ | 48,297 |
|
| $ | 47,544 |
|
Machinery and equipment |
|
| 56,504 |
|
|
| 29,097 |
|
|
| 50,226 |
|
|
| 52,833 |
|
Furniture and fixtures |
|
| 3,968 |
|
|
| 3,226 |
|
|
| 2,534 |
|
|
| 4,013 |
|
Computer equipment and software |
|
| 15,770 |
|
|
| 7,906 |
|
|
| 13,856 |
|
|
| 15,549 |
|
Leasehold improvements |
|
| 13,069 |
|
|
| 9,448 |
|
|
| 13,710 |
|
|
| 12,927 |
|
|
|
| 136,533 |
|
|
| 52,261 |
|
|
| 128,623 |
|
|
| 132,866 |
|
Accumulated depreciation |
|
| (38,113 | ) |
|
| (33,387 | ) |
|
| (46,529 | ) |
|
| (44,916 | ) |
Total property, plant and equipment, net |
| $ | 98,420 |
|
| $ | 18,874 |
|
| $ | 82,094 |
|
| $ | 87,950 |
|
F-22
Depreciation expense amounted to $5,965, $4,848$14,435, $13,832 and $3,990$5,965 for the years ended January 1, 2022, December 26, 2020 and December 31, 2019, 2018 and 2017, respectively.
Other assets
Other assets is comprised of the following:
|
| December 31, |
|
| January 1, |
|
| December 26, |
| |||||||
|
| 2019 |
|
| 2018 |
|
| 2022 |
|
| 2020 |
| ||||
Convertible notes receivable, net of allowance of $2,000 |
| $ | 3,000 |
|
| $ | 5,000 |
| ||||||||
Operating lease right-of-use assets |
|
| 23,588 |
|
|
| — |
|
| $ | 17,488 |
|
| $ | 19,669 |
|
Other |
|
| 1,351 |
|
|
| 506 |
|
|
| 4,228 |
|
|
| 1,668 |
|
Total other assets |
| $ | 27,939 |
|
| $ | 5,506 |
|
| $ | 21,716 |
|
| $ | 21,337 |
|
Accrued liabilities
Accrued liabilities is comprised of the following:
|
| December 31, |
|
| January 1, |
|
| December 26, |
| |||||||
|
| 2019 |
|
| 2018 |
|
| 2022 |
|
| 2020 |
| ||||
Payroll and related expenses |
| $ | 19,365 |
|
| $ | 10,648 |
|
| $ | 32,581 |
|
| $ | 30,270 |
|
Warranty |
|
| 6,348 |
|
|
| 2,441 |
|
|
| 9,093 |
|
|
| 6,062 |
|
Other |
|
| 491 |
|
|
| 611 |
|
|
| 1,368 |
|
|
| 743 |
|
Total accrued liabilities |
| $ | 26,204 |
|
| $ | 13,700 |
|
| $ | 43,042 |
|
| $ | 37,075 |
|
|
|
|
|
|
|
|
|
| ||||||||
Other current liabilities
Other current liabilities is comprised of the following:
|
| December 31, |
|
| January 1, |
|
| December 26, |
| |||||||
|
| 2019 |
|
| 2018 |
|
| 2022 |
|
| 2020 |
| ||||
Contingent consideration - acquisitions |
| $ | 569 |
|
| $ | 1,422 |
| ||||||||
Customer deposits |
| $ | 9,459 |
|
| $ | 15,177 |
| ||||||||
Current operating lease obligations |
|
| 3,968 |
|
|
| 4,470 |
| ||||||||
Income tax payable |
|
| 2,783 |
|
|
| — |
|
|
| 6,315 |
|
|
| 4,109 |
|
Current operating lease obligations |
|
| 4,906 |
|
|
| — |
| ||||||||
Customer deposits |
|
| 1,994 |
|
|
| 1,135 |
| ||||||||
Accrued inventory |
|
| 1,614 |
|
|
| 1,103 |
| ||||||||
Accrued professional fees |
|
| 1,520 |
|
|
| 532 |
|
|
| 912 |
|
|
| 1,184 |
|
Other |
|
| 5,786 |
|
|
| 3,351 |
|
|
| 7,506 |
|
|
| 3,559 |
|
Total other current liabilities |
| $ | 19,172 |
|
| $ | 7,543 |
|
| $ | 28,160 |
|
| $ | 28,499 |
|
F-29
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
Other non-current liabilities
Other non-current liabilities is comprised of the following:
|
| December 31, |
|
| January 1, |
|
| December 26, |
| |||||||
|
| 2019 |
|
| 2018 |
|
| 2022 |
|
| 2020 |
| ||||
Non-current operating lease obligations |
| $ | 13,754 |
|
| $ | 16,455 |
| ||||||||
Unrecognized tax benefits (including interest) |
| $ | 6,384 |
|
| $ | 5,409 |
|
|
| 7,861 |
|
|
| 3,812 |
|
Non-current operating lease obligations |
|
| 19,970 |
|
|
| — |
| ||||||||
Contingent consideration - acquisitions |
|
| — |
|
|
| 638 |
| ||||||||
Deferred revenue |
|
| 2,464 |
|
|
| 1,314 |
|
|
| 1,693 |
|
|
| 1,292 |
|
Other |
|
| 2,953 |
|
|
| 3,800 |
|
|
| 5,643 |
|
|
| 6,153 |
|
Total non-current liabilities |
| $ | 31,771 |
|
| $ | 11,161 |
|
| $ | 28,951 |
|
| $ | 27,712 |
|
| 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. The Company sold $9,018$20,384 of receivables during the year ended December 31, 2019.January 1, 2022. There were no material gains or losses on the sale of such receivables. There were 0 amounts due from such third-party financial institutions at December 31, 2019.January 1, 2022.
F-23
Intellectual Propertyproperty Indemnification Obligations
The Company has entered into agreements with customers that include limited intellectual property indemnification obligations that are customary in the industry. These guarantees generally require the Company to compensate the other party for certain damages and costs incurred as a result of third-party intellectual property claims arising from these transactions. The nature of the intellectual property indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its customers. Historically, the Company has not made any indemnification payments under such agreements and 0 amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees.
Warranty Reserves
The Company generally 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 be incurred during the warranty period and records a liability in the amount of such costs at the time revenue is recognized. The Company’s estimate is based primarily on historical experience. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Settlements of warranty reserves are generally associated with 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.
Changes in the Company’s warranty reserves are as follows:
|
| Year Ended December 31, |
|
| Year Ended |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| January 1, 2022 |
|
| December 26, 2020 |
| ||||
Balance, beginning of the period |
| $ | 2,441 |
|
| $ | 2,427 |
|
| $ | 6,485 |
|
| $ | 6,348 |
|
Accruals |
|
| 4,265 |
|
|
| 3,486 |
|
|
| 11,892 |
|
|
| 7,707 |
|
Warranty liability assumed in Merger |
|
| 4,227 |
|
|
| — |
| ||||||||
Warranty liability assumed from Inspectrology acquisition (Note 3) |
|
| 407 |
|
|
| — |
| ||||||||
Usage |
|
| (4,585 | ) |
|
| (3,472 | ) |
|
| (9,102 | ) |
|
| (7,570 | ) |
Balance, end of the period |
| $ | 6,348 |
|
| $ | 2,441 |
|
| $ | 9,682 |
|
| $ | 6,485 |
|
F-30
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
Legal Matters
From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business. The following reflects an overview of the material activitiesdevelopments with regard to these matters.the Company’s pending material legal proceedings.
Optical Solutions Inc. v. Nanometrics Incorporated (Case No. 18-cv-00417-BLF): On August 2, 2017, Nanometrics 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 Nanometrics 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, Nanometrics 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, Nanometrics moved to transfer the Complaint to the United States District Court for the Northern District of California (the “Court”“Northern District of California”). On December 20, 2017, Nanometrics 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 relief 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 Court of New Hampshire issued an order granting Nanometrics’ motion to transfer the Complaint to the Northern District of California and denying Nanometrics’ motion to dismiss the Complaint without prejudice. On June 14, 2018, the Complaint was consolidated with Nanometrics’ complaint against OSI. On August 9, 2018, OSI filed an Amended Complaint. On September 19, 2018, Nanometrics filed a motion to dismiss OSI’s Amended Complaint for failure to state a claim. Nanometrics’ motion to dismiss was heard on February 28, 2019. On March 5, 2019, the CourtNorthern District of California granted Nanometrics’ Motionmotion to Dismissdismiss 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 of 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 CourtNorthern District of California granted the Company’s Motionmotion to dismiss with leave to amend. OSI filed a Third Amended Complaint on January 21, 2020. Trial has beenOn 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 thisthe matter to have a material impact on its financial position, results of operations, or cash flows.
Following the announcement of the proposed merger transaction between Nanometrics Incorporated and Rudolph Technologies, Inc., two purported class action complaints and three complaints were filed on behalf of Rudolph’s stockholders against Rudolph and its directors; of those five complaints, three were filed in the United States District Court for the District of Delaware, one in the United States District Court for the District of New Jersey, and one in the United States District Court for the District of Massachusetts. One of those five complaints also named Nanometrics and the subsidiary formed to effectuate the proposed merger transaction as defendants. A sixth complaint was filed on behalf of a Nanometrics stockholder against Nanometrics and its directors in the United States District Court for the Northern District of California. The complaints are captioned as follows: Stein v. Rudolph Technologies, Inc., et al. (D. Del.); Rosenblatt et al. v. Rudolph Technologies, Inc., et al. (D. Del.); Stein et al. v. Rudolph Technologies, Inc., et al. (D. Del.); Parikh v. Rudolph Technologies, Inc., et al. (D.N.J.); Roy v. Rudolph Technologies, Inc., et al. (D. Mass.); and Bryden-Moore v. Nanometrics Inc., et al. (N.D. Cal.). The Company refers to these actions collectively as the “Shareholder Actions.” The complaints in the Shareholder Actions generally asserted claims under Sections 14(a) and 20(a) of the Exchange Act challenging the adequacy of certain disclosures made in the version of the joint proxy statement/prospectus filed with the SEC on August 15, 2019, or, solely with respect to the complaint captioned Roy v. Rudolph Technologies, Inc., et al. (D. Mass.), the version of the joint proxy statement/prospectus filed with the SEC on September 10, 2019. The complaints generally sought, among other relief, an injunction preventing Rudolph from holding the Rudolph special meeting or consummating the transaction, an injunction preventing the Company from consummating the transaction, damages in the event that the merger is consummated, and attorneys’ fees. On October 11, 2019, plaintiffs in each of the Shareholder Actions agreed in principle to dismiss their claims in connection with the issuance of certain supplemental disclosures regarding the transaction and reserved the right to seek attorneys’ fees. The supplemental disclosures were filed with the Securities and Exchange Commission that same day. Subsequently, each of the plaintiffs filed a Notice of Voluntary Dismissal and a negotiation regarding the collective plaintiffs’ mootness fee claims was finalized. The payment for the plaintiffs’ mootness fee claims, which was immaterial, was thereafter made and the Shareholder Actions have been closed.
Royalty Agreements
Under various licensing agreements, the Company is obligated to pay royalties based on net sales of products sold. There are no minimum annual royalty payments. Royalty expense amounted to $1,429, $1,904 and $1,117 for the years ended December 31, 2019, 2018 and 2017, respectively.
F-31
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
Open and Committed Purchase Orders
TheAs of January 1, 2022, the Company has open and committed purchase orders of $97,877 as$373,638, of December 31, 2019.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 December 31, 2019January 1, 2022 was approximately $91,258$131,402 with an available interest rate of 3.3%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.
| Revenue |
The following table represents a disaggregation of revenue by timing of revenue:
|
| Year Ended December 31, |
|
| Year Ended |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| January 1, 2022 |
|
| December 26, 2020 |
| ||||
Point-in-time |
| $ | 286,130 |
|
| $ | 257,124 |
|
| $ | 749,276 |
|
| $ | 527,677 |
|
Over-time |
|
| 19,766 |
|
|
| 16,660 |
|
|
| 39,623 |
|
|
| 28,819 |
|
Total revenue |
| $ | 305,896 |
|
| $ | 273,784 |
|
| $ | 788,899 |
|
| $ | 556,496 |
|
See Note 1615 of the Notes to the Consolidated Financial Statements for additional discussion of the Company’s disaggregated revenue in detail.
Contract Liabilities
The Company records contract liabilities when the customer has been billed in advance of the Company completing its performance obligations. Theseobligations primarily related to service contracts and installation. For contracts that have a duration of one year or less, these amounts are recorded as current deferred revenue in the Consolidated Balance Sheets. As of January 1, 2022 and December 26, 2022, the Company carried 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 December 31, |
|
| Year Ended |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| January 1, 2022 |
|
| December 26, 2020 |
| ||||
Balance, beginning of the period |
| $ | 8,080 |
|
| $ | 7,206 |
|
| $ | 15,627 |
|
| $ | 15,093 |
|
Deferred revenue assumed in Merger |
|
| 5,931 |
|
|
| — |
| ||||||||
Deferred revenue assumed from Inspectrology acquisition (Note 3) |
|
| 386 |
|
|
| — |
| ||||||||
Deferral of revenue |
|
| 28,651 |
|
|
| 19,326 |
|
|
| 69,656 |
|
|
| 43,398 |
|
Recognition of deferred revenue |
|
| (27,569 | ) |
|
| (18,452 | ) |
|
| (53,997 | ) |
|
| (42,864 | ) |
Balance, ending of the period |
| $ | 15,093 |
|
| $ | 8,080 |
|
| $ | 31,672 |
|
| $ | 15,627 |
|
|
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.
Rudolph Technologies, Inc. 2018 Stock Plan (the “2018 Plan”). The 2018 Plan provides for the grant of 2,709 stock awards and stock options to employees, directors and consultants at an exercise price equal to or greater than the fair market value of the common stock on the date of grant. Restricted stock units granted under the 2018 Plan typically vest over a three to five-year period for employees and one year for directors; however, other vesting periods are allowable under the 2018 Plan. Restricted stock units granted to employees have time based or performance based vesting. If options were to be granted under the 2018 Plan, they would typically grade vest over a five-year period and expire ten years from the date of
F-32F-25
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
grant. As of December 31, 2019 and 2018, there were shares of common stock available for issuance pursuant to future grants under the 2018 Plan totaling 2,478 and 2,680, respectively.
Rudolph Technologies,Onto Innovation Inc. 20092020 Stock Plan (the “2009 Plan”). The 2009 Plan provided for the grant of 4,711 stock options and other stock awards to employees, directors and consultants at an exercise price equal to or greater than the fair market value of the common stock on the date of grant. Options granted under the 2009 Plan typically grade vested over a five-year period and expired ten years from the date of grant. Restricted stock units granted under the 2009 Plan typically vested over a three to five-year period for employees and one year for directors; however, other vesting periods were allowable under the 2009 Plan. Restricted stock units granted to employees have time based or performance based vesting. In the second quarter of 2018, the 2009 Plan was terminated and therefore as of December 31, 2019 and 2018, there were 0 shares of common stock available for issuance pursuant to future grants under the 2009 Plan.
Nanometrics Incorporated 2005 Amended and Restated Equity Incentive Plan (the “2005“2020 Plan”). The 20052020 Plan provides for the grant of 4,7143,744 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 20052020 Plan typically grade vest over a three-year period and expire ten years from the date of grant. Restricted stock units granted under the 20052020 Plan typically vest over a three-year period for employees and one year for directors; however, other vesting periods are allowable under the 20052020 Plan. Restricted stock units (“RSU”) granted to employees have time based or performance basedperformance-based vesting. As of December 31, 2019,January 1, 2022, there were 1,2533,376 shares of common stock available for issuance pursuant to future grants under the 20052020 Plan.
The following table reflects share-based compensation expense by type of award:
|
| Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Share-based compensation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units, including all performance and market based awards |
| $ | 10,421 |
|
| $ | 6,062 |
|
| $ | 5,433 |
|
Stock options and employee stock purchase options |
|
| 164 |
|
|
| — |
|
|
| 237 |
|
Total share-based compensation |
|
| 10,585 |
|
|
| 6,062 |
|
|
| 5,670 |
|
Tax effect on share-based compensation |
|
| 2,283 |
|
|
| 1,362 |
|
|
| 2,052 |
|
Net effect on net income |
| $ | 8,302 |
|
| $ | 4,700 |
|
| $ | 3,618 |
|
Effect on earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (0.28 | ) |
| $ | (0.18 | ) |
| $ | (0.14 | ) |
Diluted |
| $ | (0.28 | ) |
| $ | (0.18 | ) |
| $ | (0.14 | ) |
F-33
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
Restricted Stock Unit Activity
A summary of the Company’s restricted stock unit activity with respect to the years ended December 31, 2019, 2018 and 2017 follows:
|
| Number of Shares |
|
| Weighted Average Grant Date Fair Value |
| ||
Nonvested at December 31, 2016 |
|
| 914 |
|
| $ | 15.29 |
|
Granted |
|
| 225 |
|
| $ | 28.23 |
|
Vested |
|
| (258 | ) |
| $ | 14.80 |
|
Forfeited |
|
| (65 | ) |
| $ | 17.14 |
|
Nonvested at December 31, 2017 |
|
| 816 |
|
| $ | 18.50 |
|
Granted |
|
| 228 |
|
| $ | 34.80 |
|
Vested |
|
| (325 | ) |
| $ | 17.73 |
|
Forfeited |
|
| (80 | ) |
| $ | 22.12 |
|
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 |
|
As of December 31, 2019, there was $22,230 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 1.9 years.
F-34
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
Stock Option Activity
A summary of the Company’s stock option activity with respect to the years ended December 31, 2019, 2018 and 2017 follows:
|
| Shares |
|
| Weighted Average Exercise Price Per Share |
|
| Weighted Average Remaining Contractual Term (years) |
|
| Aggregate Intrinsic Value |
| ||||
Outstanding at December 31, 2016 |
|
| 173 |
|
| $ | 12.67 |
|
|
|
|
|
|
|
|
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (114 | ) |
|
| 11.37 |
|
|
|
|
|
|
|
|
|
Expired |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017 |
|
| 59 |
|
|
| 15.20 |
|
|
|
|
|
|
|
|
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (22 | ) |
|
| 15.20 |
|
|
|
|
|
|
|
|
|
Expired |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018 |
|
| 37 |
|
| $ | 15.20 |
|
|
|
|
|
|
|
|
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Assumed in Merger |
|
| 12 |
|
|
| 16.27 |
|
|
|
|
|
|
|
|
|
Exercised |
|
| (2 | ) |
|
| 14.96 |
|
|
|
|
|
|
|
|
|
Expired |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019 |
|
| 47 |
|
| $ | 15.49 |
|
|
| 2.4 |
|
| $ | 985 |
|
Vested or expected to vest at December 31, 2019 |
|
| 47 |
|
| $ | 15.49 |
|
|
| 2.4 |
|
| $ | 985 |
|
Exercisable at December 31, 2019 |
|
| 47 |
|
| $ | 15.49 |
|
|
| 2.4 |
|
| $ | 985 |
|
The total intrinsic value of the stock options exercised during 2019, 2018 and 2017 was $51, $384 and $853, respectively. As of December 31, 2019, there was 0 unrecognized compensation cost related to stock options granted under the plans.
The options outstanding and exercisable at December 31, 2019 were in the following exercise price ranges:
|
| Options Outstanding |
|
| Options Exercisable |
| ||||||||||||||
Range of Exercise Prices |
| Shares |
|
| Weighted Average Remaining Contractual Life (years) |
|
| Weighted Average Exercise Price |
|
| Shares |
|
| Weighted Average Exercise Price |
| |||||
$14.08 - $14.08 |
|
| 1 |
|
|
| 0.7 |
|
| $ | 14.08 |
|
|
| 1 |
|
| $ | 14.08 |
|
$15.20 - $15.20 |
|
| 35 |
|
|
| 3.0 |
|
| $ | 15.20 |
|
|
| 35 |
|
| $ | 15.20 |
|
$15.61 - $18.22 |
|
| 9 |
|
|
| 0.5 |
|
| $ | 16.37 |
|
|
| 9 |
|
| $ | 16.37 |
|
$18.79 - $18.79 |
|
| 1 |
|
|
| 1.2 |
|
| $ | 18.79 |
|
|
| 1 |
|
| $ | 18.79 |
|
$14.08 - $18.79 |
|
| 47 |
|
|
| 2.4 |
|
| $ | 15.49 |
|
|
| 47 |
|
| $ | 15.49 |
|
Employee Stock Purchase Plan
Rudolph Technologies,Onto Innovation Inc. 20182020 Employee Stock Purchase Plan (the “2018 ESPP”). The 2018 ESPP was terminated in the third quarter of 2019 as a result of the Merger. Under the terms of the ESPP, eligible employees may have had up to 15% of eligible compensation deducted from their pay and applied to the purchase of shares of Company common stock. The
F-35
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
price the employee would pay for each share of stock was 95% of the fair market value of Company common stock at the end of the applicable six-month purchase period. The ESPP was intended to qualify under Section 423 of the Internal Revenue Code and was a non-compensatory plan as defined by FASB ASC 718, “Stock Compensation.” NaN stock-based compensation expense attributable to the 2018 ESPP was recorded for the years ended December 31, 2019, 2018 and 2017.
Nanometrics Incorporated Amended and Restated 2003 Employee Stock Purchase Plan (the “2003“2020 ESPP”). Under the terms of the 20032020 ESPP, eligible employees may have up to 10%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 85%85 % of the lesser of the fair market value of Company common stock at the beginning or the end of the applicable six-month purchase period. The 20032020 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.” Stock-based compensation expense attributable to the 2003 ESPP was $165 for the year ended December 31, 2019.
Through the Company’s employee stock purchase plans, employees purchased 72, 13242, 91 and 1172 shares during the twelve months ended January 1, 2022, December 26, 2020 and December 31, 2019, 2018 and 2017, respectively. As of January 1, 2022 and December 31, 2019 and 2018,26, 2020, there were 2361,258 and 1,206,1,500, shares available for issuance under the Company’s employee stock purchase plans,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 a 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 price performance or market price performance is measured using the closing price for the 20-trading days prior to the dates the performance period begins and ends.
F-26
The following table summarizes the Company’s combined service-based RSUs and market-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 |
|
Of the 765 shares outstanding at January 1, 2022, 667 are service-based RSUs and 98 are market-based PRSUs. The fair 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 grant. The fair value of the 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 the grant, resulting in a weighted average grant-date fair value per share of $80.04, $47.86, and $21.49, respectively.
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 2019. 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 $1,317, $1,118$2,544, $2,315 and $1,047$1,317 for the years ended January 1, 2022, December 26, 2020 and December 31, 2019, 2018 and 2017, respectively.
| Other Income (Expense), Net: |
Other income (expense), net is comprised of the following:
| Year Ended December 31, |
| Year Ended |
| ||||||||||||||||||
| 2019 |
|
| 2018 |
|
| 2017 |
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| ||||||
Foreign currency exchange gains (losses), net | $ | 676 |
|
| $ | (255 | ) |
| $ | (457 | ) | $ | (2,020 | ) |
| $ | (3,070 | ) |
| $ | 676 |
|
Gain on casualty insurance claim |
| — |
|
|
| 302 |
|
|
| — |
| |||||||||||
Rental income |
| 2 |
|
|
| — |
|
|
| — |
| |||||||||||
Other |
| 102 |
|
|
| 9 |
|
|
| — |
|
| 132 |
|
|
| 362 |
|
|
| 104 |
|
Total other income (expense), net | $ | 780 |
|
| $ | 56 |
|
| $ | (457 | ) | $ | (1,888 | ) |
| $ | (2,708 | ) |
| $ | 780 |
|
F-36F-27
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
| Income Taxes: |
The components of income tax expense are as follows:
|
| Year Ended December 31, |
|
| Year Ended |
| ||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| ||||||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
| $ | (27 | ) |
| $ | 4,423 |
|
| $ | 6,020 |
|
| $ | 21,791 |
|
| $ | 1,466 |
|
| $ | (27 | ) |
State |
|
| 88 |
|
|
| 1,038 |
|
|
| 507 |
|
|
| 1,007 |
|
|
| 371 |
|
|
| 88 |
|
Foreign |
|
| 1,548 |
|
|
| 626 |
|
|
| 3,159 |
|
|
| 3,153 |
|
|
| 5,637 |
|
|
| 1,548 |
|
|
|
| 1,609 |
|
|
| 6,087 |
|
|
| 9,686 |
|
|
| 25,951 |
|
|
| 7,474 |
|
|
| 1,609 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
| (4,730 | ) |
|
| 1,961 |
|
|
| 17,034 |
|
|
| (9,475 | ) |
|
| (10,355 | ) |
|
| (4,730 | ) |
State |
|
| 506 |
|
|
| (73 | ) |
|
| 643 |
|
|
| (540 | ) |
|
| (1,036 | ) |
|
| 506 |
|
Foreign |
|
| 108 |
|
|
| 275 |
|
|
| (470 | ) |
|
| (2,603 | ) |
|
| (240 | ) |
|
| 108 |
|
|
|
| (4,116 | ) |
|
| 2,163 |
|
|
| 17,207 |
|
|
| (12,618 | ) |
|
| (11,631 | ) |
|
| (4,116 | ) |
Total income tax expense (benefit) |
| $ | (2,507 | ) |
| $ | 8,250 |
|
| $ | 26,893 |
|
| $ | 13,333 |
|
| $ | (4,157 | ) |
| $ | (2,507 | ) |
The income before tax is comprised of the following:
|
| Year Ended December 31, |
|
| Year Ended |
| ||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| ||||||
Domestic operations |
| $ | (7,087 | ) |
| $ | 49,089 |
|
| $ | 57,079 |
|
| $ | 136,143 |
|
| $ | (120 | ) |
| $ | (7,087 | ) |
Foreign operations |
| $ | 6,490 |
|
| $ | 4,257 |
|
| $ | 2,723 |
|
| $ | 19,539 |
|
| $ | 26,988 |
|
| $ | 6,490 |
|
The provision 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 26, 2020 and December 31, 2019, and 2018, and 35% for years ended December 31, 2017 to income before provision for income taxes as follows:
|
| Year Ended December 31, |
|
| Year Ended |
| ||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| ||||||
Federal income tax provision at statutory rate |
| $ | (125 | ) |
| $ | 11,203 |
|
| $ | 20,931 |
| ||||||||||||
Federal income tax provision (benefit) at statutory rate |
| $ | 32,693 |
|
| $ | 5,642 |
|
| $ | (125 | ) | ||||||||||||
State taxes, net of federal effect |
|
| 113 |
|
|
| 747 |
|
|
| 573 |
|
|
| 1,066 |
|
|
| 126 |
|
|
| 113 |
|
Foreign taxes, net of federal effect |
|
| (1,277 | ) |
|
| 17 |
|
|
| (238 | ) |
|
| (3,817 | ) |
|
| 596 |
|
|
| (1,277 | ) |
Domestic manufacturing benefit |
|
| — |
|
|
| — |
|
|
| (1,569 | ) | ||||||||||||
Foreign Derived Intangible Income ("FDII") Deduction |
|
| (2,278 | ) |
|
| (2,217 | ) |
|
| — |
|
|
| (11,061 | ) |
|
| (4,262 | ) |
|
| (2,278 | ) |
Global Intangible Low-Taxes Income ("GILTI") inclusion |
|
| 1,786 |
|
|
| 113 |
|
|
| — |
|
|
| 1,721 |
|
|
| 2,013 |
|
|
| 1,786 |
|
Non-deductible officer's compensation |
|
| 826 |
|
|
| 526 |
|
|
| — |
|
|
| 689 |
|
|
| 213 |
|
|
| 826 |
|
Research & development tax credit |
|
| (2,126 | ) |
|
| (2,298 | ) |
|
| (1,559 | ) |
|
| (3,607 | ) |
|
| (4,858 | ) |
|
| (2,126 | ) |
Remeasurement of deferred tax balances, related to the Tax Act |
|
| — |
|
|
| (33 | ) |
|
| 8,020 |
| ||||||||||||
Transition tax on foreign earnings, related to the Tax Act |
|
| — |
|
|
| 138 |
|
|
| (106 | ) | ||||||||||||
Tax impact of audit and statue closures |
|
| (1,987 | ) |
|
| (2,905 | ) |
|
| — |
| ||||||||||||
Impact of the CARES Act |
|
| (732 | ) |
|
| (1,141 | ) |
|
| — |
| ||||||||||||
Other |
|
| 574 |
|
|
| 54 |
|
|
| 841 |
|
|
| (1,632 | ) |
|
| 419 |
|
|
| 574 |
|
Provision (benefit) for income taxes |
| $ | (2,507 | ) |
| $ | 8,250 |
|
| $ | 26,893 |
|
| $ | 13,333 |
|
| $ | (4,157 | ) |
| $ | (2,507 | ) |
Effective tax rate |
|
| 420 | % |
|
| 15 | % |
|
| 45 | % |
|
| 9 | % |
|
| (16 | )% |
|
| (420 | )% |
F-37F-28
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
Deferred tax assets and liabilities are comprised of the following:
|
| December 31, |
|
|
|
|
|
|
|
|
| |||||
|
| 2019 |
|
| 2018 |
|
| January 1, 2022 |
|
| December 26, 2020 |
| ||||
Deferred Tax Assets: |
|
|
|
|
|
|
|
| ||||||||
Deferred tax assets: |
|
|
|
|
|
|
|
| ||||||||
Reserves and accruals |
| $ | 8,254 |
|
| $ | 4,880 |
|
| $ | 15,084 |
|
| $ | 13,874 |
|
Deferred revenue |
|
| 1,219 |
|
|
| 1,201 |
|
|
| 4,729 |
|
|
| 1,648 |
|
Share-based compensation |
|
| 2,955 |
|
|
| 1,259 |
|
|
| 3,023 |
|
|
| 2,556 |
|
Tax credit carryforward |
|
| 11,307 |
|
|
| 2,484 |
|
|
| 10,339 |
|
|
| 10,801 |
|
Net operating losses |
|
| 6,008 |
|
|
| 1,692 |
|
|
| 3,254 |
|
|
| 4,849 |
|
Depreciation and amortization |
|
| 7,151 |
|
|
| 4,298 |
|
|
| 368 |
|
|
| 687 |
|
Operating lease right-of-use assets (1) |
|
| 4,965 |
|
|
| — |
| ||||||||
Operating lease liabilities |
|
| 3,575 |
|
|
| 4,261 |
| ||||||||
Other |
|
| 1,128 |
|
|
| 777 |
|
|
| 2,364 |
|
|
| 1,877 |
|
Gross deferred tax assets |
|
| 42,987 |
|
|
| 16,591 |
|
|
| 42,736 |
|
|
| 40,553 |
|
Less: valuation allowance |
|
| (14,160 | ) |
|
| (3,172 | ) |
|
| (10,948 | ) |
|
| (14,238 | ) |
Total deferred tax assets after valuation allowance |
|
| 28,827 |
|
|
| 13,419 |
|
|
| 31,788 |
|
|
| 26,315 |
|
Deferred Tax Liabilities: |
|
|
|
|
|
|
|
| ||||||||
Deferred tax liabilities: |
|
|
|
|
|
|
|
| ||||||||
Depreciation and amortization |
|
| (89,286 | ) |
|
| (609 | ) |
|
| (63,554 | ) |
|
| (75,608 | ) |
Operating lease liabilities (1) |
|
| (4,709 | ) |
|
| — |
| ||||||||
Operating lease right of use assets |
|
| (3,469 | ) |
|
| (3,960 | ) | ||||||||
Other |
|
| (416 | ) |
|
| — |
|
|
| (224 | ) |
|
| (135 | ) |
Gross deferred tax liabilities |
|
| (94,411 | ) |
|
| (609 | ) |
|
| (67,247 | ) |
|
| (79,703 | ) |
Net deferred tax assets (liabilities) |
| $ | (65,584 | ) |
| $ | 12,810 |
| ||||||||
Net deferred tax liabilities |
| $ | (35,459 | ) |
| $ | (53,388 | ) | ||||||||
(1) As discussed in Note 7 to the Consolidated Financial Statements, in 2019, the Company adopted an updated accounting standard that resulted in the recognition of operating right-of-use assets and lease liabilities. The Company adopted this standard using a transition method that does not require application to periods prior to adoption.
At January 1, 2022 and December 31, 2019 and 2018,26, 2020, the Company had recorded valuation allowances of $14,160$10,948 and $3,172,$14,238, respectively, on a certain portion of the Company’s deferred tax assets to reflect the deferred tax assets at the net amount that is more likely than not to be realized. The Company maintained a full valuation allowance on its remaining foreign tax credits in the amount of $2,366, as well as maintaining a full valuation allowances against its China, Switzerland and United Kingdom deferred tax assets of $478, $3,434 and $443, respectively. The Company also maintainedmaintains a valuation allowance against a portion of its federal, California and foreign deferred tax assets of $7,439.$3,232, $7,547, and $169, respectively.
In assessing the realizability of deferred tax assets, the Company uses a more likely than not standard. If it is determined that it 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 the Company’s deferred tax assets will be realized as of December 31, 2019,January 1, 2022, the Company relied primarily on the reversal of deferred tax liabilities as well as projected future taxable income.
At December 31, 2019,January 1, 2022, the Company had federal,tax effected state and foreign net operating loss carryforwards of $1,997, $25,630$1,732 and $20,986,$1,522, respectively. The federal, state and foreign net operating loss carryforwards expire on various dates beginning in 20202022 through 2035.2037.
At December 31, 2019,January 1, 2022, the Company had federalforeign tax credit carryforwards and state research & development credits of $3,232, and foreign tax credit carryforwards of $6,859, $9,948 and $2,366,$10,672, respectively. The state research & development credits are set to expire at various dates beginning in 2025. The foreign tax credit is set to expire at various dates throughbeginning at December 31, 2029. The state research & development credits have no expiration dates.
As of December 31, 2019,January 1, 2022, the Company has provided U.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
F-38
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
foreign withholding taxes that may be required from certain jurisdictions in the event of a cash distribution have been provided for.
F-29
The total amount of unrecognized tax benefits are as follows:
|
| December 31, |
| |||||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| ||||||
Balance, beginning of the period |
| $ | 5,528 |
|
| $ | 4,880 |
|
| $ | 4,827 |
|
| $ | 13,486 |
|
| $ | 15,143 |
|
| $ | 5,528 |
|
Gross increases—tax positions in prior period |
|
| 9,989 |
|
|
| 496 |
|
|
| 171 |
|
|
| 156 |
|
|
| 347 |
|
|
| 9,989 |
|
Gross decreases—tax positions in prior period |
|
| (932 | ) |
|
| (61 | ) |
|
| (362 | ) |
|
| (204 | ) |
|
| — |
|
|
| (932 | ) |
Gross increases—current-period tax positions |
|
| 558 |
|
|
| 213 |
|
|
| 244 |
|
|
| 1,193 |
|
|
| 1,048 |
|
|
| 558 |
|
Lapse of statute of limitations |
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||
Closure of audit/statute limitation |
|
| (2,258 | ) |
|
| (3,052 | ) |
|
| — |
| ||||||||||||
Balance, end of the period |
| $ | 15,143 |
|
| $ | 5,528 |
|
| $ | 4,880 |
|
| $ | 12,373 |
|
| $ | 13,486 |
|
| $ | 15,143 |
|
The unrecognized tax benefitbenefits at January 1, 2022 and December 31, 201926, 2020 were $12,373 and 2018 were $15,143 and $5,528,$13,486, respectively, of which $10,649$7,832 and $4,995,$8,863, respectively, would be reflected as an adjustment to income tax expense if recognized. The year over year increasedecrease from 20182020 to 20192021 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 does 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 income tax expense. During the years ended January 1, 2022, December 26, 2020 and December 31, 2019, 2018 and 2017, the Company recognized approximately $236, $199$(814), $(193) and $246,$236, respectively, in interest and penalties (benefit) expense associated with uncertain tax positions. As of January 1, 2022 and December 31, 2019 and 2018,26, 2020, the Company had accrued interest and penalties expense related toincluded in the table of unrecognized tax benefits of $1,681$430 and $1,445,$1,487, respectively.
The Company is subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. The Company is subject to ordinary statute of limitation rules of three and four years for federal and state returns, respectively. However, due to tax attribute 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 is 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 2011 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.
| Accumulated Other Comprehensive |
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:
F-39
|
| 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 |
|
F-30
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
The components of accumulated other comprehensive loss, net of tax, are as follows:
|
| Foreign currency translation adjustments |
|
| Net unrealized (gains) losses on marketable securities |
|
| Accumulated other comprehensive loss (income) |
| |||
Balance at December 31, 2017 |
| $ | 1,079 |
|
| $ | 126 |
|
| $ | 1,205 |
|
Net current period other comprehensive loss |
|
| 194 |
|
|
| (136 | ) |
|
| 58 |
|
Reclassifications |
|
| — |
|
|
| — |
|
|
| — |
|
Balance at December 31, 2018 |
|
| 1,273 |
|
|
| (10 | ) |
|
| 1,263 |
|
Net current period other comprehensive income |
|
| (709 | ) |
|
| 44 |
|
|
| (665 | ) |
Reclassifications |
|
| — |
|
|
| — |
|
|
| — |
|
Balance at December 31, 2019 |
| $ | 564 |
|
| $ | 34 |
|
| $ | 598 |
|
| Segment Reporting and Geographic Information: |
The Company is engaged in the design, development, manufacture and support of high-performance control metrology, defect inspection, advanced packaging 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, advanced packaging 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.
The following table lists the different sources of revenue:
|
| Year Ended December 31, |
|
| Year Ended |
| ||||||||||||||||||||||||||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| ||||||||||||||||||||||||||||||
Systems and software |
| $ | 255,723 |
|
|
| 84 | % |
| $ | 234,241 |
|
|
| 86 | % |
| $ | 216,884 |
|
|
| 85 | % |
| $ | 669,114 |
|
|
| 85 | % |
| $ | 450,459 |
|
|
| 80 | % |
| $ | 255,723 |
|
|
| 84 | % |
Parts |
|
| 34,892 |
|
|
| 11 | % |
|
| 28,658 |
|
|
| 10 | % |
|
| 27,143 |
|
|
| 11 | % |
|
| 72,753 |
|
|
| 9 | % |
|
| 65,444 |
|
|
| 12 | % |
|
| 34,892 |
|
|
| 11 | % |
Services |
|
| 15,281 |
|
|
| 5 | % |
|
| 10,885 |
|
|
| 4 | % |
|
| 11,071 |
|
|
| 4 | % |
|
| 47,032 |
|
|
| 6 | % |
|
| 40,593 |
|
|
| 8 | % |
|
| 15,281 |
|
|
| 5 | % |
Total revenue |
| $ | 305,896 |
|
|
| 100 | % |
| $ | 273,784 |
|
|
| 100 | % |
| $ | 255,098 |
|
|
| 100 | % |
| $ | 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:
|
| Year Ended December 31, |
|
| Year Ended |
| ||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| ||||||
Revenue from third parties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 46,717 |
|
| $ | 43,944 |
|
| $ | 36,104 |
| ||||||||||||
Taiwan |
|
| 66,601 |
|
|
| 45,312 |
|
|
| 63,079 |
|
| $ | 194,458 |
|
| $ | 120,959 |
|
| $ | 66,601 |
|
South Korea |
|
| 43,997 |
|
|
| 51,750 |
|
|
| 44,180 |
|
|
| 160,373 |
|
|
| 90,193 |
|
|
| 43,997 |
|
Singapore |
|
| 10,699 |
|
|
| 14,371 |
|
|
| 12,775 |
| ||||||||||||
China |
|
| 151,027 |
|
|
| 125,023 |
|
|
| 80,017 |
| ||||||||||||
United States |
|
| 123,858 |
|
|
| 81,708 |
|
|
| 46,717 |
| ||||||||||||
Europe |
|
| 64,943 |
|
|
| 49,697 |
|
|
| 23,023 |
| ||||||||||||
Japan |
|
| 29,816 |
|
|
| 22,361 |
|
|
| 18,943 |
|
|
| 61,186 |
|
|
| 59,295 |
|
|
| 29,816 |
|
Germany |
|
| 4,899 |
|
|
| 14,913 |
|
|
| 15,580 |
| ||||||||||||
China |
|
| 80,017 |
|
|
| 63,243 |
|
|
| 35,925 |
| ||||||||||||
Other Europe |
|
| 18,124 |
|
|
| 12,260 |
|
|
| 23,768 |
| ||||||||||||
Other Asia |
|
| 5,026 |
|
|
| 5,630 |
|
|
| 4,744 |
| ||||||||||||
Southeast Asia |
|
| 33,054 |
|
|
| 29,621 |
|
|
| 15,725 |
| ||||||||||||
Total revenue |
| $ | 305,896 |
|
| $ | 273,784 |
|
| $ | 255,098 |
|
| $ | 788,899 |
|
| $ | 556,496 |
|
| $ | 305,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
F-40
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
|
| 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. |
| ||||||||
In 2019, sales to Taiwan Semiconductor Manufacturing Co. Ltd and SK Hynix Inc. accounted for 13.4% and 13.1%, respectively, of the Company’s revenue. In 2018, sales to SK Hynix Inc. accounted for 12.2% of the Company’s revenue. No individual end user customer accounted for more than 10% of the Company’s revenue in 2017. The Company does not have purchase contracts with any of its customers that obligate them to continue to purchase its products.
At December 31, 2019,January 1, 2022, 1 customer, Taiwan Semiconductor Manufacturing Co. Ltd., accounted for more than 10% of net accounts receivable. At December 31, 2018, 0 individual customer26, 2020, 3 customers, Samsung Semiconductor, Taiwan Semiconductor Manufacturing Co. Ltd., and SK Hynix Inc., accounted for more than 10% of net accounts receivable.
Substantially all of the Company’s long-lived assets are located within the United States of America.
F-31
|
Basic earningsincome per share is calculated using the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in the same manner and also gives effect to all dilutive common stock equivalent shares outstanding during the period. Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive. In accordance with U.S. GAAP, these shares were not included in calculating diluted earnings per share.
For the year ended December 31, 2019, the weighted average number of restrictedRestricted stock units and stock options excluded fromare included in the computationcalculation of diluted earnings per share, were 69 and 0, respectively. For the year ended December 31, 2018, the weighted average number of restricted stock units and stock options excluded from the computation of diluted earnings per share were 52 and 0, respectively. For the year ended December 31, 2017, the weighted average number of restricted stock units and stock options excluded from the computation of diluted earnings per share were 8 and 0, respectively.except when their effect would be anti-dilutive.
The Company’s basic and diluted earnings per share amounts are as follows:
|
| December 31, |
| |||||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| January 1, 2022 |
|
| December 26, 2020 |
|
| December 31, 2019 |
| ||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 1,910 |
|
| $ | 45,096 |
|
| $ | 32,909 |
|
| $ | 142,349 |
|
| $ | 31,025 |
|
| $ | 1,910 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share - weighted average shares outstanding |
|
| 29,729 |
|
|
| 25,470 |
|
|
| 25,325 |
|
|
| 49,242 |
|
|
| 49,136 |
|
|
| 29,729 |
|
Effect of potential dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units and stock options - dilutive shares |
|
| 278 |
|
|
| 426 |
|
|
| 539 |
| ||||||||||||
Warrants - dilutive shares |
|
| — |
|
|
| — |
|
|
| 1 |
| ||||||||||||
Restricted stock units, employee stock purchase grants and stock options - dilutive shares |
|
| 486 |
|
|
| 339 |
|
|
| 278 |
| ||||||||||||
Diluted earnings per share - weighted average shares outstanding |
|
| 30,007 |
|
|
| 25,895 |
|
|
| 25,865 |
|
|
| 49,728 |
|
|
| 49,475 |
|
|
| 30,007 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.06 |
|
| $ | 1.77 |
|
| $ | 1.30 |
|
| $ | 2.89 |
|
| $ | 0.63 |
|
| $ | 0.06 |
|
Diluted |
| $ | 0.06 |
|
| $ | 1.74 |
|
| $ | 1.27 |
|
| $ | 2.86 |
|
| $ | 0.63 |
|
| $ | 0.06 |
|
17. | Share Repurchase Authorization: |
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 |
|
F-41F-32
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
|
|
In October 2018, the Rudolph Board of Directors approved a share repurchase authorization, which allowed Rudolph to repurchase up to $40,000 worth of shares of the Rudolph’s common stock. The authorization provided for repurchases to be made in the open market or through negotiated transactions from time to time. The share repurchase authorization was terminated on October 25, 2019 due to the closing of the Merger.
The following table summarizes the Company’s stock repurchases:
|
| Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Shares of common stock repurchased |
|
| 37 |
|
|
| 1,061 |
|
|
| — |
|
Cost of stock repurchased |
| $ | 744 |
|
| $ | 21,069 |
|
| $ | - |
|
Average price paid per share |
| $ | 19.85 |
|
| $ | 19.86 |
|
| $ | - |
|
Following the Merger, the Company assumed the share repurchase authorization approved on March 14, 2019, by the former Nanometrics Board of Directors. This share repurchase authorization allows for the Company to purchase up to $80,000 worth of shares of its common stock. Under the terms of this share repurchase authorization, shares may be repurchased through open market or privately negotiated transactions. NaN shares have been repurchased under this repurchase authorization as of December 31, 2019.
F-42
ONTO INNOVATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share data)
|
|
The following tables present certain unaudited consolidated quarterly financial information for the years ended December 31, 2019 and 2018. In the opinion of the Company’s management, this quarterly information has been prepared on the same basis as the consolidated financial statements and includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information for the periods presented. The results of operations for any quarter are not necessarily indicative of results for the full year or for any future period.
Year-over-year quarterly comparisons of the Company’s results of operations may not be meaningful, as the sequential quarterly comparisons set forth below tend to reflect the cyclical activity of the semiconductor industry as a whole. Other quarterly fluctuations in expenses are related directly to sales activity and volume and may also reflect the timing of operating expenses incurred throughout the year, and changes in tax rates.
|
| Quarters Ended |
|
|
|
|
| |||||||||||||
|
| March 31, 2019 |
|
| June 30, 2019 |
|
| September 30, 2019 |
|
| December 31, 2019 |
|
| Total |
| |||||
Revenue |
| $ | 60,892 |
|
| $ | 61,511 |
|
| $ | 62,935 |
|
| $ | 120,558 |
|
| $ | 305,896 |
|
Gross profit |
|
| 32,019 |
|
|
| 31,911 |
|
|
| 31,511 |
|
|
| 39,587 |
|
| $ | 135,028 |
|
Income (loss) before income taxes |
|
| 8,795 |
|
|
| 6,121 |
|
|
| 6,908 |
|
|
| (22,421 | ) |
| $ | (597 | ) |
Net income (loss) |
|
| 7,576 |
|
|
| 5,526 |
|
|
| 6,560 |
|
|
| (17,752 | ) |
| $ | 1,910 |
|
Income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.31 |
|
| $ | 0.22 |
|
| $ | 0.26 |
|
| $ | (0.41 | ) |
| $ | 0.06 |
|
Diluted |
| $ | 0.30 |
|
| $ | 0.22 |
|
| $ | 0.26 |
|
| $ | (0.41 | ) |
| $ | 0.06 |
|
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 24,863 |
|
|
| 25,032 |
|
|
| 25,079 |
|
|
| 43,609 |
|
|
| 29,729 |
|
Diluted |
|
| 25,144 |
|
|
| 25,250 |
|
|
| 25,305 |
|
|
| 43,609 |
|
|
| 30,007 |
|
|
| Quarters Ended |
|
|
|
|
| |||||||||||||
|
| March 31, 2018 |
|
| June 30, 2018 |
|
| September 30, 2018 |
|
| December 31, 2018 |
|
| Total |
| |||||
Revenue |
| $ | 73,096 |
|
| $ | 77,476 |
|
| $ | 60,432 |
|
| $ | 62,780 |
|
| $ | 273,784 |
|
Gross profit |
|
| 42,421 |
|
|
| 41,736 |
|
|
| 31,454 |
|
|
| 32,668 |
|
|
| 148,279 |
|
Income before income taxes |
|
| 17,674 |
|
|
| 17,290 |
|
|
| 8,368 |
|
|
| 10,014 |
|
|
| 53,346 |
|
Net income |
|
| 15,130 |
|
|
| 14,697 |
|
|
| 7,187 |
|
|
| 8,082 |
|
|
| 45,096 |
|
Income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.59 |
|
| $ | 0.57 |
|
| $ | 0.28 |
|
| $ | 0.32 |
|
| $ | 1.77 |
|
Diluted |
| $ | 0.58 |
|
| $ | 0.56 |
|
| $ | 0.28 |
|
| $ | 0.32 |
|
| $ | 1.74 |
|
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 25,463 |
|
|
| 25,621 |
|
|
| 25,655 |
|
|
| 25,146 |
|
|
| 25,470 |
|
Diluted |
|
| 25,989 |
|
|
| 26,086 |
|
|
| 26,063 |
|
|
| 25,449 |
|
|
| 25,895 |
|
F-43
ONTO INNOVATION INC. AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Column A |
| Column B |
|
| Column C |
|
| Column D |
|
| Column E |
|
| 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 |
|
| Balance at Beginning of Period |
|
| Charged to (Recovery of) Costs and Expense |
|
| Charged to Other Accounts (net) |
|
| Deductions |
|
| Balance at End of Period |
| ||||||||||
Year 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
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 |
|
| $ | 691 |
|
| $ | 363 |
|
| $ | — |
|
| $ | (193 | ) |
| $ | 1,247 |
|
Deferred tax valuation allowance |
|
| 3,172 |
|
|
| 942 |
|
|
| 10,046 |
|
|
| — |
|
|
| 14,160 |
|
|
| 3,172 |
|
|
| 942 |
|
|
| 10,046 |
|
|
| — |
|
|
| 14,160 |
|
Allowance for convertible notes receivable |
|
| — |
|
|
| 2,000 |
|
|
| — |
|
|
| — |
|
|
| 2,000 |
|
|
| — |
|
|
| 2,000 |
|
|
| — |
|
|
| — |
|
|
| 2,000 |
|
Year 2018: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Allowance for doubtful accounts |
| $ | 460 |
|
| $ | 293 |
|
| $ | — |
|
| $ | 62 |
|
| $ | 691 |
| ||||||||||||||||||||
Deferred tax valuation allowance |
|
| 2,447 |
|
|
| 725 |
|
|
| — |
|
|
| — |
|
|
| 3,172 |
| ||||||||||||||||||||
Year 2017: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Allowance for doubtful accounts |
| $ | 680 |
|
| $ | (222 | ) |
| $ | — |
|
| $ | (2 | ) |
| $ | 460 |
| ||||||||||||||||||||
Deferred tax valuation allowance |
|
| 1,924 |
|
|
| 626 |
|
|
| (103 | ) |
|
| — |
|
|
| 2,447 |
| ||||||||||||||||||||
F-44F-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.
| Onto Innovation Inc. (Registrant) | |
|
| |
| By: | /s/ Michael P. Plisinski |
|
| Michael P. Plisinski Chief Executive Officer |
| Date: | February 25, |
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, 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 |
|
|
|
|
|
/s/ Michael P. Plisinski |
| Chief Executive Officer (Principal Executive Officer) |
| February 25, |
Michael P. Plisinski |
|
|
|
|
|
|
|
|
|
/s/ Steven R. Roth |
| Senior Vice President, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
| February 25, |
Steven R. Roth | ||||
|
|
| ||
|
|
|
| |
|
|
|
|
|
/s/ Leo Berlinghieri |
| Director |
| February 25, |
Leo Berlinghieri |
|
|
|
|
|
|
|
|
|
/s/ Edward J. Brown, Jr. |
| Director |
| February 25, |
Edward J. Brown Jr. | ||||
|
|
| ||
| ||||
|
|
| ||
|
|
|
|
|
|
|
|
|
|
/s/ David B. Miller |
| Director |
| February 25, |
David B. Miller | ||||
/s/ Karen M. Rogge | Director | February 25, 2022 | ||
Karen M. Rogge |
|
|
|
|
|
|
|
|
|
/s/ Bruce C. Rhine |
| Director |
| February 25, |
Bruce C. Rhine |
|
|
|
|
|
|
|
|
|
/s/ Christopher A. Seams |
| Director |
| February 25, |
Christopher A. Seams | ||||
|
|
| ||
|
|
|
|
|
|
|
|
|
|
/s/ Christine A. Tsingos |
| Director |
| February 25, |
Christine A. Tsingos |
|
|
|
|
|
|
| ||
|