NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Nature of Business, Basis of Presentation and Significant Accounting Policies
Description of Business
– Nanometrics Incorporated (“Nanometrics” or the “Company”) and its wholly-owned subsidiaries design, manufacture, market, sell and support optical critical dimension (“OCD”), thin film and overlay dimension metrology and inspection systems used primarily in the manufacturing of semiconductors, solar photovoltaics (“solar PV”) and high-brightness LEDs (“HB-LED”), as well as by customers in the silicon wafer and data storage industries. Nanometrics’ metrology systems precisely measure a wide range of film types deposited on substrates during manufacturing to control manufacturing processes and increase production yields in the fabrication of integrated circuits. The Company’s OCD technology is a patented critical dimension measurement technology that is used to precisely determine the dimensions on the semiconductor wafer that directly control the resulting performance of the integrated circuit devices. The thin film metrology systems use a broad spectrum of wavelengths, high-sensitivity optics, proprietary software, and patented technology to measure the thickness and uniformity of films deposited on silicon and other substrates as well as their chemical composition. The overlay metrology systems are used to measure the overlay accuracy of successive layers of semiconductor patterns on wafers in the photolithography process. Nanometrics’ inspection systems are used to find defects on patterned and unpatterned wafers at nearly every stage of the semiconductor production flow. The corporate headquarters of Nanometrics is located in Milpitas, California.
Basis of Presentation
– The accompanying condensed consolidated financial statements (“financial statements”) have been prepared on a consistent basis with the audited consolidated financial statements as of December 30, 2017 and include all normal recurring adjustments necessary to fairly state the information set forth therein. All significant intercompany accounts and transactions have been eliminated in consolidation.
The financial statements have been prepared in accordance with the regulations of the United States Securities and Exchange Commission (“SEC”) for interim periods in accordance with S-X Article 10, and, therefore, omit certain information and footnote disclosure necessary to present the statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The operating results for interim periods are not necessarily indicative of the operating results that may be expected for the entire year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 30, 2017, which were included in the Company’s Annual Report on Form 10-K filed with the SEC on February 26, 2018.
Fiscal Period
– The Company uses a 52/53 week fiscal year ending on the last Saturday of the calendar year. All references to the quarter refer to Nanometrics’ fiscal quarter. The fiscal quarters reported herein are 13 week periods.
Use of Estimates
– The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ materially from those estimates. Estimates are used for, but not limited to, revenue recognition, the provision for doubtful accounts, the provision for excess, obsolete, or slow-moving inventories, valuation of intangible and long-lived assets, warranty accruals, income taxes, valuation of stock-based compensation, and contingencies.
Changes to Significant Accounting Policies
Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in these financial statements.
The Company adopted the new accounting standard Topic 606,
Revenue from Contracts with Customers
and all the related amendments using the modified retrospective method of transition. As a result, the Company has changed its accounting policy for revenue recognition as detailed below. The Company adopted the new standard during the first quarter of 2018 for all contracts not substantially completed at the date of adoption, and the Company expects all new contracts will be governed by the new standard.
Revenue Recognition
– The Company derives revenue from the sale of process control metrology and inspection systems and related upgrades (“product revenue”) as well as spare part sales, billable service and service contracts (together “service revenue”). Upgrades are system software and hardware performance upgrades that extend the features and functionality of a product. Upgrades are included in product revenue, which consists of sales of complete, advanced process control metrology and inspection systems (the “system(s)”). Nanometrics’ systems consist of hardware and software components that function together to deliver the essential functionality of the system. Arrangements for sales of systems and upgrades often include defined customer-specified acceptance criteria.
7
The Company recognizes revenue when control of a good or service has transferred to a customer. The amount of revenue recognized reflects the amount which Nanometri
cs expects to be entitled to in exchange for the transfer of the goods or services in a contract with a customer. Revenue excludes amounts collected on behalf of third parties including taxes assessed by governmental authorities that are both imposed on a
nd concurrent with a specific revenue producing transaction. Shipping and handling costs associated with outbound freight both before and after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included i
n cost of revenues. Nanometrics records revenue on a gross basis, rather than net, as it acts as the principal in all of its contractual arrangements and not as an agent.
Nanometrics follows a 5-Step process to evaluate its contracts with customers to determine the amount and timing of revenue recognition.
Nanometrics first identifies whether a legally enforceable contract with a customer exists. A legally enforceable contract creates enforceable rights and obligations on both parties. Nanometrics evaluates the following criteria in its evaluation and if all criteria are not met, a contract does not exist and any revenue that otherwise would be recorded because a good or service had been transferred to a customer is deferred until such time that a contract exists: (1) both Nanometrics and the customer have approved the contract and are committed to perform, (2) Nanometrics can identify each party’s rights regarding the goods or services to be transferred, (3) Nanometrics can identify the payment terms for the goods or services to be delivered, (4) the contract has commercial substance, and (5) it is probable that Nanometrics will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. Historically, the Company has not experienced Customer payment defaults that would lead it to conclude that it does not have a contract under the new standard. Nanometrics evidences all its contracts in writing and the identification of the contract may include (1) reference to a master agreement that governs for multiple years, (2) a Volume Purchase Agreement that generally governs for 12 months and is negotiated with the larger customers to establish pricing for a committed volume of business, or (3) purchase orders which often govern the purchase of a single system or service item.
Once the contract has been identified, Nanometrics evaluates the promises in the contract to identify performance obligations. Many of the contracts include more than one performance obligation – for example the delivery of a system generally includes the promise to install the system in the customer’s facility. Additionally, a contract could include the purchase of multiple systems or the purchase of a system and an upgrade. Promises in contracts which do not result in the transfer of a good or service are not performance obligations, as well as those promises that are administrative in nature, or are immaterial in the context of the contract. Generally, Nanometrics performance obligations can be categorized as (1) systems – including refurbished systems, (2) installation obligations, (3) hardware upgrades, (4) non-operating system software options / upgrades, (5) spare parts, (6) service contracts, (7) billable services and (8) other miscellaneous service items.
Once the performance obligations in the contract have been identified, Nanometrics estimates the transaction price of the contract. The estimate includes amounts that are fixed as well as those that can vary based on contractual terms (e.g., performance bonuses/penalties, amounts payable to customers, rebates, prompt payment discounts, etc.) These variable consideration items are rare as most Nanometrics contracts include only fixed amounts. It is expected that estimates of variable consideration will be immaterial for Nanometrics and would occur if customers did not meet their contractual purchase commitments and Nanometrics is entitled to recover additional contract consideration.
Once the transaction price of the contract has been identified, Nanometrics allocates the transaction price to the identified performance obligations. This is done on a relative selling price basis using standalone selling prices (“SSP”). For most performance obligations, Nanometrics does not have observable SSP’s as they are not regularly sold on a standalone basis however if a performance obligation does have an observable SSP it is used for allocation purposes (e.g. spares parts are sold using a standard price list and often sold separately). Without observable SSP’s, Nanometrics estimates the SSP using a methodology which maximizes the use of observable inputs – namely a cost plus gross margin approach.
Lastly, Nanometrics records the amount allocated to each performance obligation as revenue when control of that good or service has transferred to the customer. Nanometrics first evaluates whether a good or service is transferred over time, and if it is not, then it is recorded at a point in time. For service contracts, Nanometrics records revenue based on its measurement of progress, and the best method to determine this is the percentage of the stand-ready obligation that is completed to date as this best reflects the value of the service transferred to the customer. All other items at Nanometrics are recorded at a point in time other than the service contracts with customers. The timing of satisfaction of the performance obligation to payment is dependent upon the negotiated payment terms but generally occurs within 30 to 60 days. Nanometrics evaluates the following indicators to determine the point in time at which control transfers to the Customer, and may apply judgment in this evaluation: (1) whether Nanometrics has a present right to payment, (2) whether the customer has legal title, (3) whether the customer has physical possession, (4) whether the customer has significant risks and rewards of ownership, and (5) whether customer acceptance is a formality (i.e., whether customer acceptance of the tool is reasonably assured). Typically, for new product introductions, Nanometrics defers revenue recognition until formal customer acceptance is received from the customer. In almost all other situations, there is little or no significant judgment applied by Nanometrics in determining if control of a good or service has transferred to a customer. Additionally, for system shipments to Japan, revenue is deferred because typical contractual terms indicate that payment is not due, and title does not transfer until customer acceptance occurs.
8
The Company warrants its products against defects in manufacturing. Upon recognition of product revenue, this assurance-type warranty is recorded as a liability for anticipated warranty costs. On occasion, customers request a warranty period longer than the Company's standard warranty. In those instances, in which extended warranty services are separately quoted to the customer or if the warranty includes services beyond just an assurance that the product will work as intended, an additional performance obligation is created, and the associated revenue is deferred and recognized as service revenue ratably over the term of the extended warranty period. The portion of service contracts and extended warranty services agreements that are uncompleted at the end of any reporting period are included in deferred revenue.
Frequently, the Company delivers products and various services in a single transaction. The Company's deliverables consist of tools, installation, upgrades, billable services, spare parts, and service contracts. The Company's typical multi-element arrangements include a sale of one or multiple tools that include installation and standard warranty. Other arrangements consist of a sale of tools bundled with service elements or delivery of different types of services. The Company's tools, upgrades, and spare parts are generally delivered to customers within a period of up to six months from order date. Installation is usually performed soon after delivery of the tool. The portion of revenue associated with installation is deferred based on relative selling price and that revenue is recognized upon completion of the installation and receipt of final acceptance. Billable services are billed on a time and materials basis and performed as requested by customers. Under service contract arrangements, services are provided as needed over the fixed arrangement term, with terms normally up to twelve months. The Company does not grant its customers a general right of return or any refund terms and may impose a penalty on orders cancelled prior to the scheduled shipment date. Consideration received from customers for cancelled orders is rare as orders are typically not cancelled once placed.
When performance obligations are not transferred to a customer at the end of a reporting period, the amount allocated to those performance obligations is deferred until control of these performance obligations is transferred to the customer. If performance obligations cannot be accounted for as separate units of accounting, the entire arrangement is accounted for as a single unit of accounting and revenue is deferred until all elements are delivered and all revenue recognition requirements are met. These liabilities arising from contracts with customers are reported as Deferred Revenue in the consolidated balance sheet. The amount of revenue recognized in the three months ended September 29, 2018 that was included in the contract liability balance as of the beginning of the quarter was $3.1 million. Generally, all contracts have expected durations of one year or less. Accordingly, Nanometrics applies the practical expedient allowed for in U.S. GAAP and does not disclose information about remaining performance obligations that have original expected durations of one year or less.
Nanometrics incurs costs related to the acquisition of its contract with customers in the form of sales commissions. Sales commissions are paid to the internal direct sales team as well as to third-party representatives, and distributors. Contractual agreements, with each of these parties, outline commissions structures and rates to be paid. Generally, the contracts are all individual procurement decisions by the customers and are not for significant periods of time, nor do they include renewal provisions. As such, most of the contracts have an economic life of significantly less than a year, although some volume purchase agreements might extend beyond 12 months (the capitalization and amortization of commission costs for contracts that extend beyond one year is immaterial for Nanometrics). Accordingly, the Company expense these contract acquisition costs in accordance with the practical expedient outlined in U.S. GAAP when the underlying contract asset is less than one year.
Nanometrics does not incur any costs to fulfill the contracts with customers that is not already reported in compliance with another applicable standard (for example, inventory or plant, property and equipment). Given the nature of the systems, the Company does not have costs which are separately identifiable to just a particular contract (for example, dedicated labs).
Nanometrics records accounts receivable when revenue has been recorded and the amount due from the customer is reasonably assured and unconditionally due. In certain situations, Nanometrics may record revenue because goods or services have been transferred to the customer, but the amount is not unconditionally due. In these situations, a contract asset is reflected in the consolidated balance sheet (Unbilled A/R). This amount is subsequently reported as accounts receivable when the condition that made the amount conditional is resolved (for example, when the final installation obligation is completed, and Nanometrics has recorded revenue for the delivery of the system in an amount larger than what has been invoiced). The balance of contract assets included in the Accounts Receivable at September 29, 2018 was $3.0 million. The opening balance of contract assets was $4.5 million and $4.3 million for the three and nine months ended September 29, 2018, respectively, reflecting no significant change during either period.
9
The following tables summarize the impacts of Topic 606 adoption on the
Company’s financial statements for the three and nine months ended September 29, 2018 (in thousands, except per share data):
|
|
Three Months Ended September 29, 2018
|
|
|
Nine Months Ended September 29, 2018
|
|
|
|
As Reported
|
|
|
Balances
Without
Adoption of
ASC 606
|
|
|
Effect of
Change
Higher/(Lower)
|
|
|
As Reported
|
|
|
Balances
Without
Adoption of
ASC 606
|
|
|
Effect of
Change
Higher/(Lower)
|
|
Net Revenue
|
|
$
|
76,590
|
|
|
$
|
77,478
|
|
|
$
|
(888
|
)
|
|
$
|
247,507
|
|
|
$
|
244,668
|
|
|
$
|
2,839
|
|
Net Income
|
|
$
|
11,568
|
|
|
$
|
12,169
|
|
|
$
|
(601
|
)
|
|
$
|
45,624
|
|
|
$
|
43,779
|
|
|
$
|
1,845
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.48
|
|
|
$
|
0.51
|
|
|
$
|
(0.03
|
)
|
|
$
|
1.90
|
|
|
$
|
1.82
|
|
|
$
|
0.08
|
|
Diluted
|
|
$
|
0.47
|
|
|
$
|
0.50
|
|
|
$
|
(0.03
|
)
|
|
$
|
1.86
|
|
|
$
|
1.78
|
|
|
$
|
0.08
|
|
Note 2. New Accounting Pronouncements
Recently Adopted Accounting Standards
In October 2016, the Financial Accounting Standards Board (the “FASB”) issued an accounting standard update which requires the recognition of the income tax
consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company adopted this standard in the first quarter of fiscal 2018 using a modified retrospective approach. The adoption did not have a material impact on the financial statements.
In August 2016, the FASB issued an accounting standard which addresses eight specific cash flow classification issues. This update is effective for public companies for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted, including in an interim period. The standard is to be applied through a retrospective transition method to each period presented. If it is impracticable to apply retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The adoption of this guidance did not have an impact on the Company’s consolidated statement of cash flows.
In May 2014, the FASB issued an accounting standard update which requires an entity to recognize the amount of revenue to which it expects to be entitled to for transferring promised goods or services to customers. The Company adopted Topic 606 Revenue from Contracts with Customers with a date of initial application of December 31, 2017. The Company applied Topic 606 using the modified retrospective method by recognizing the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of equity at December 31, 2017. This method was chosen due to the Company’s inability to review all necessary contract information to adopt the standard using the full retrospective method. Both methods are allowed per U.S. GAAP. Therefore, the comparative information has not been adjusted and continues to be reported under Topic 605.
Recently Issued Accounting Standards
In August 2018, the FASB issued an accounting standard update to provide additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The amendments in this update should be applied retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the effect of this update on its consolidated financial condition and results of operations.
10
In August 2018, the FASB issued an a
ccounting standard update which improves the effectiveness of fair value measurement disclosures in the notes to the financial statements. The update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fi
scal years. Certain amendments within the update should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods prese
nted upon their effective date. Early adoption is permitted. Entities are permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date. The adoption of
this guidance is not expected to have a significant impact on the Company’s consolidated results of operations or consolidated statement of cash flows.
In June 2018, the FASB issued an accounting standard update which simplifies the accounting for nonemployee share-based payment transactions. The accounting for share-based payments to nonemployees and employees will be substantially aligned because of this update. The standard is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated results of operations or consolidated statement of cash flows.
In January 2017, the FASB issued an accounting standard update which simplifies the subsequent measurement of goodwill and removes step 2 from the goodwill impairment test. Instead, an entity should record an impairment charge based on excess of a reporting unit’s carrying amount over its fair value. The standard is effective for public companies for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial condition and results of operations.
In June 2016, the FASB issued an accounting standard which requires measurement and timely recognition of expected credit losses for financial assets. The update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The standard is to be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the effect of this update on its consolidated financial condition and results of operations.
In February 2016, the FASB issued an accounting standard update which requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). For lessees, leases will continue to be classified as either operating or financing in the income statement. The standard is effective for public companies for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. This standard is required to be applied with a modified retrospective transition approach. The Company generally does not finance purchases of equipment or other capital but does lease some equipment and facilities. The Company has established a cross-functional implementation team to evaluate and identify the impact of this update on its financial position, results of operations and cash flows. Based on the preliminary work completed, the Company is considering the possible implications of the update, including the discount rate to be used in valuing new and existing leases, procedural and operational changes that may be necessary to comply with the provisions of the guidance and all applicable financial statement disclosures required by the new guidance. The Company is also in the process of identifying changes to its business processes, systems and controls to support adoption of the new standard. The Company expects to adopt this standard on December 30, 2018 and anticipates most its existing operating lease commitments will be recognized as operating lease liabilities and right-of-use assets.
In July 2018, the FASB issued an accounting standard update which provided certain transition relief on the comparative reporting requirement for lessees. Under this update, the FASB provided an additional transition method in addition to the existing transition method by allowing entities to initially apply Topic 842 at the adoption date (such as January 1, 2019, for calendar-year-end public business entities) and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The amendments in this update change only when the Company is required to initially apply Topic 842 Leases, it does not change how such Topic will be applied. Since the Company has not yet adopted Topic 842 Leases, the amendments in this update will be effective for the Company when Topic 842 becomes effective for the Company. The Company expects to adopt Topic 842 Leases on December 30, 2018.
11
Note 3. Fair Value Measurements and Disclosures
The Company determines the fair values of its financial instruments based on the fair value hierarchy established in FASB Accounting Standards Codification (“ASC”) 820,
Fair Value Measurement
, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. The fair value hierarchy prioritizes the inputs into the following three levels that may be used to measure fair value:
Level 1
— Quoted prices in active markets for identical assets or liabilities.
Level 2
— Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3
— Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Such unobservable inputs include an estimated discount rate used in the Company’s discounted present value analysis of future cash flows, which reflects the Company’s estimate of debt with similar terms in the current credit markets. As there is currently minimal activity in such markets, the actual rate could be materially different.
Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard assumes that the transaction to sell the asset or transfer the liability occurs in the principal or most advantageous market for the asset or liability and establishes that the fair value of an asset or liability shall be determined based on the assumptions that market participants would use in pricing the asset or liability.
The following tables present the Company’s assets and liabilities measured at estimated fair value on a recurring basis, excluding accrued interest components, categorized in accordance with the fair value hierarchy (in thousands), as of the following dates:
|
|
September 29, 2018
|
|
|
December 30, 2017
|
|
|
|
Fair Value Measurements
Using Input Types
|
|
|
|
|
|
|
Fair Value Measurements
Using Input Types
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
1,684
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,684
|
|
|
$
|
256
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
256
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency debt securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,495
|
|
|
|
—
|
|
|
|
1,495
|
|
Certificates of deposits
|
|
|
—
|
|
|
|
14,502
|
|
|
|
—
|
|
|
|
14,502
|
|
|
|
—
|
|
|
|
14,497
|
|
|
|
—
|
|
|
|
14,497
|
|
Commercial paper
|
|
|
—
|
|
|
|
11,185
|
|
|
|
—
|
|
|
|
11,185
|
|
|
|
—
|
|
|
|
7,949
|
|
|
|
—
|
|
|
|
7,949
|
|
Corporate debt securities
|
|
|
—
|
|
|
|
36,950
|
|
|
|
—
|
|
|
|
36,950
|
|
|
|
—
|
|
|
|
47,968
|
|
|
|
—
|
|
|
|
47,968
|
|
Asset-backed Securities
|
|
|
—
|
|
|
|
14,198
|
|
|
|
—
|
|
|
|
14,198
|
|
|
|
—
|
|
|
|
10,221
|
|
|
|
—
|
|
|
|
10,221
|
|
Total marketable securities
|
|
$
|
—
|
|
|
$
|
76,835
|
|
|
$
|
—
|
|
|
$
|
76,835
|
|
|
$
|
—
|
|
|
$
|
82,130
|
|
|
$
|
—
|
|
|
$
|
82,130
|
|
Total
(1)
|
|
$
|
1,684
|
|
|
$
|
76,835
|
|
|
$
|
—
|
|
|
$
|
78,519
|
|
|
$
|
256
|
|
|
$
|
82,130
|
|
|
$
|
—
|
|
|
$
|
82,386
|
|
(1)
|
Excludes $94.4 million and $34.6 million held in operating accounts as of September 29, 2018 and December 30, 2017, respectively.
See “Note 4. Cash and Investments” of the Notes to Condensed Consolidated Financial Statements for more information.
|
The fair values of the marketable securities that are classified as Level 1 in the table above were derived from quoted market prices for identical assets or liabilities in active markets that the Company can access. The fair value of marketable securities that are classified as Level 2 in the table above were derived from non-binding market consensus prices that were corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques with all significant inputs derived from or corroborated by observable market data. There were no transfers of instruments between Level 1, Level 2 and Level 3 during the financial periods presented.
12
Derivatives
The Company uses foreign currency exchange forward contracts to mitigate variability in gains and losses generated from the re-measurement of certain monetary assets and liabilities denominated in foreign currencies. These derivatives are carried at fair value with changes recorded in other income (expense), net in the condensed consolidated statements of operations. Changes in the fair value of these derivatives are largely offset by re-measurement of the underlying assets and liabilities. The derivatives have maturities of approximately 30 days.
The settlement of forward foreign currency contracts included in the three months ended September 29, 2018 and September 30, 2017 was a gain of $0.2 million and $0.3 million, respectively. The settlement of forward exchange contracts included in the nine months ended September 29, 2018 and September 30, 2017 was a loss of $1.5 million and a gain of $1.0 million, respectively. These are included in other income (expense), net, in the condensed consolidated statements of operations.
The following table presents the notional amounts and fair values of the Company’s outstanding derivative instruments in U.S. Dollar equivalent as of the following dates (in millions):
|
|
September 29, 2018
|
|
|
December 30, 2017
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Notional
Amount
|
|
|
Asset
|
|
|
Liability
|
|
|
Notional
Amount
|
|
|
Asset
|
|
|
Liability
|
|
Undesignated Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward Foreign Currency Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
$
|
20.8
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
27.5
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
Sell
|
|
$
|
27.3
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
16.8
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
Note 4. Cash and Investments
The following tables present cash, cash equivalents, and available-for-sale investments as of the following dates (in thousands):
|
|
September 29, 2018
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Market
Value
|
|
Cash
|
|
$
|
94,419
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
94,419
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
1,684
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,684
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
14,496
|
|
|
|
6
|
|
|
|
—
|
|
|
|
14,502
|
|
Commercial paper
|
|
|
11,185
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,185
|
|
Corporate debt securities
|
|
|
37,038
|
|
|
|
—
|
|
|
|
(88
|
)
|
|
|
36,950
|
|
Asset-backed securities
|
|
|
14,224
|
|
|
|
—
|
|
|
|
(26
|
)
|
|
|
14,198
|
|
Total cash, cash equivalents, and marketable securities
|
|
$
|
173,046
|
|
|
$
|
6
|
|
|
$
|
(114
|
)
|
|
$
|
172,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Market
Value
|
|
Cash
|
|
$
|
34,643
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
34,643
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
256
|
|
|
|
—
|
|
|
|
—
|
|
|
|
256
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency securities
|
|
|
1,500
|
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
1,495
|
|
Certificates of deposits
|
|
|
14,498
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
14,497
|
|
Commercial paper
|
|
|
7,952
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
7,949
|
|
Corporate debt securities
|
|
|
48,073
|
|
|
|
—
|
|
|
|
(105
|
)
|
|
|
47,968
|
|
Asset-backed securities
|
|
|
10,240
|
|
|
|
—
|
|
|
|
(19
|
)
|
|
|
10,221
|
|
Total cash, cash equivalents, and marketable securities
|
|
$
|
117,162
|
|
|
$
|
—
|
|
|
$
|
(133
|
)
|
|
$
|
117,029
|
|
13
Available-for-sale marketable securities, readily convertible to cash, with maturity dates of 90 days or less are classified as cash equivalents, while those wit
h maturity dates greater than 90 days are classified as marketable securities within short-term assets. All marketable securities as of September 29, 2018 and December 30, 2017, were available-for-sale and reported at fair value based on the estimated or q
uoted market prices as of the balance sheet date.
Realized gains and losses on sale of securities are recorded in other income (expense), net, in the Company’s condensed consolidated statement of operations. For the three and nine months ended September 29, 2018 and September 30, 2017, net realized gains and losses were not material.
Unrealized gains or losses, net of tax effect, are recorded in accumulated other comprehensive income (loss) within stockholders’ equity. Both the gross unrealized gains and gross unrealized losses for the three and nine months ended September 29, 2018 and September 30, 2017 were not material, and no marketable securities had other than temporary impairment.
All marketable securities as of September 29, 2018 and December 30, 2017, had maturity dates of less than 36 and 24 months, respectively.
Note 5. Accounts Receivable
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 condensed consolidated balance sheets as the criteria for sale treatment had been met. The Company pays administrative fees as well as interest, which ranged 0.62% to 1.68% during the nine months ended September 29, 2018, based on the anticipated length of time between the date the sale is consummated, and the expected collection date of the receivables sold.
The Company sold $12.8 million and $6.1 million of receivables during the three months ended September 29, 2018 and September 30, 2017, respectively, and $47.5 million and $15.5 million of receivables during the nine months ended September 29, 2018 and September 30, 2017, respectively. There were no amounts due from such third party financial institutions at September 29, 2018 and December 30, 2017.
14
Note 6. Financial Statement Components
The following tables provide details of selected financial statement components as of the following dates (in thousands):
|
|
At
|
|
|
|
September 29, 2018
|
|
|
December 30, 2017
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials and sub-assemblies
|
|
$
|
31,619
|
|
|
$
|
32,187
|
|
Work in process
|
|
|
20,590
|
|
|
|
13,498
|
|
Finished goods
|
|
|
6,675
|
|
|
|
7,175
|
|
Inventories
|
|
|
58,884
|
|
|
|
52,860
|
|
Inventories-delivered systems
|
|
|
1,858
|
|
|
|
1,534
|
|
Total inventories
|
|
$
|
60,742
|
|
|
$
|
54,394
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net:
(1)
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
15,571
|
|
|
$
|
15,573
|
|
Building and improvements
|
|
|
21,226
|
|
|
|
20,880
|
|
Machinery and equipment
|
|
|
39,652
|
|
|
|
36,380
|
|
Furniture and fixtures
|
|
|
2,494
|
|
|
|
2,420
|
|
Software
|
|
|
9,915
|
|
|
|
9,558
|
|
Capital in progress
|
|
|
2,919
|
|
|
|
4,418
|
|
Total property, plant and equipment, gross
|
|
|
91,777
|
|
|
|
89,229
|
|
Accumulated depreciation and amortization
|
|
|
(48,642
|
)
|
|
|
(44,419
|
)
|
Total property, plant and equipment, net
|
|
$
|
43,135
|
|
|
$
|
44,810
|
|
|
|
|
|
|
|
|
|
|
(1)
Total depreciation and amortization expense was $1.6 million and $1.6 million for the three months ended September 29, 2018 and September 30, 2017, respectively, and $4.9 million and $5.1 million for the nine months ended September 29, 2018 and September 30, 2017, respectively.
|
|
|
|
|
|
|
|
|
|
|
Other Current Liabilities:
|
|
|
|
|
|
|
|
|
Accrued warranty
|
|
$
|
4,258
|
|
|
$
|
4,863
|
|
Accrued taxes
|
|
|
1,201
|
|
|
|
813
|
|
Third party commissions
|
|
|
837
|
|
|
|
76
|
|
Accrued professional services
|
|
|
537
|
|
|
|
534
|
|
Other
|
|
|
1,637
|
|
|
|
963
|
|
Total other current liabilities
|
|
$
|
8,470
|
|
|
$
|
7,249
|
|
Components of Accumulated Other Comprehensive Income (Loss)
|
|
Foreign
Currency
Translations
|
|
|
Defined
Benefit
Pension Plans
|
|
|
Unrealized
Income (Loss)
on Investment
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Balance as of December 30, 2017
|
|
$
|
(1,647
|
)
|
|
$
|
(387
|
)
|
|
$
|
(90
|
)
|
|
$
|
(2,124
|
)
|
Current period change
|
|
|
(530
|
)
|
|
|
—
|
|
|
|
7
|
|
|
|
(523
|
)
|
Balance as of September 29, 2018
|
|
$
|
(2,177
|
)
|
|
$
|
(387
|
)
|
|
$
|
(83
|
)
|
|
$
|
(2,647
|
)
|
The items above, except for unrealized income (loss) on investment, did not impact the Company’s income tax provision. The amounts reclassified from each component of accumulated other comprehensive income (loss) into income statement line items were insignificant.
15
Note 7. Goodwill and Intangible Assets
The following table summarizes the activity in the Company’s goodwill during the nine months ended September 29, 2018:
|
|
(in thousands)
|
|
Balance as of December 30, 2017
|
|
$
|
10,232
|
|
Foreign currency movements
|
|
|
379
|
|
Balance as of September 29, 2018
|
|
$
|
10,611
|
|
Finite-lived intangible assets are recorded at cost, less accumulated amortization. Finite-lived intangible assets as of September 29, 2018 and December 30, 2017 consisted of the following (in thousands):
|
|
September 29, 2018
|
|
|
|
Adjusted cost
|
|
|
Accumulated
amortization
|
|
|
Net carrying
amount
|
|
Developed technology
|
|
$
|
20,917
|
|
|
$
|
(16,816
|
)
|
|
$
|
4,101
|
|
Customer relationships
|
|
|
9,445
|
|
|
|
(9,445
|
)
|
|
|
—
|
|
Brand names
|
|
|
1,927
|
|
|
|
(1,927
|
)
|
|
|
—
|
|
Patented technology
|
|
|
2,252
|
|
|
|
(2,252
|
)
|
|
|
—
|
|
Trademark
|
|
|
80
|
|
|
|
(80
|
)
|
|
|
—
|
|
Total
|
|
$
|
34,621
|
|
|
$
|
(30,520
|
)
|
|
$
|
4,101
|
|
|
|
December 30, 2017
|
|
|
|
Adjusted cost
|
|
|
Accumulated
amortization
|
|
|
Net carrying
amount
|
|
Developed technology
|
|
$
|
18,887
|
|
|
$
|
(16,681
|
)
|
|
$
|
2,206
|
|
Customer relationships
|
|
|
9,438
|
|
|
|
(9,438
|
)
|
|
|
—
|
|
Brand names
|
|
|
1,927
|
|
|
|
(1,927
|
)
|
|
|
—
|
|
Patented technology
|
|
|
2,252
|
|
|
|
(2,252
|
)
|
|
|
—
|
|
Trademark
|
|
|
80
|
|
|
|
(80
|
)
|
|
|
—
|
|
Total
|
|
$
|
32,584
|
|
|
$
|
(30,378
|
)
|
|
$
|
2,206
|
|
The amortization of finite-lived intangibles is computed using the straight-line method. Estimated lives of finite-lived intangibles range from two to ten years. The total amortization expense for the three months ended September 29, 2018 and September 30, 2017 was $35,000 and $51,000, respectively, and $105,000 and $155,000 for the nine months ended September 29, 2018 and September 30, 2017, respectively.
There were no impairment charges related to intangible assets recorded during the nine months ended September 29, 2018 and September 30, 2017.
The estimated future amortization expense of finite intangible assets as of September 29, 2018 is as follows (in thousands):
Fiscal Years
|
|
Amounts
|
|
2018 (remaining three months)
|
|
|
35
|
|
2019
|
|
|
209
|
|
2020
|
|
|
571
|
|
2021
|
|
|
571
|
|
2022
|
|
|
571
|
|
Thereafter
|
|
|
2,144
|
|
Total future amortization expense
|
|
$
|
4,101
|
|
16
Note 8. Warranties
The Company generally sells its products with a 12 months repair or replacement warranty from the date of acceptance or shipment date. The Company accrues estimated future warranty costs based upon the historical relationship of warranty costs to the cost of products sold. The estimated future warranty obligations related to product sales are recorded in the period in which the related revenue is recognized. The estimated future warranty obligations are affected by the warranty periods, sales volumes, product failure rates, material usage, and labor and replacement costs incurred in correcting a product failure. If actual product failure rates, material usage, labor or replacement costs were to differ from the Company’s estimates, revisions to the estimated warranty obligations would be required. For new product introductions where limited or no historical information exists, the Company may use warranty information from other previous product introductions to guide it in estimating its warranty accrual.
Components of the warranty accrual, which were included in the accompanying condensed consolidated balance sheets with other current liabilities, were as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 29, 2018
|
|
|
September 30, 2017
|
|
|
September 29, 2018
|
|
|
September 30, 2017
|
|
Balance as of beginning of period
|
|
$
|
4,906
|
|
|
$
|
4,602
|
|
|
$
|
4,863
|
|
|
$
|
3,838
|
|
Accruals for warranties issued during
period
|
|
|
1,020
|
|
|
|
1,020
|
|
|
|
3,915
|
|
|
|
3,800
|
|
Settlements during the period
|
|
|
(1,668
|
)
|
|
|
(1,080
|
)
|
|
|
(4,520
|
)
|
|
|
(3,096
|
)
|
Balance as of end of period
|
|
$
|
4,258
|
|
|
$
|
4,542
|
|
|
$
|
4,258
|
|
|
$
|
4,542
|
|
Note 9. Commitments and Contingencies
Intellectual Property Indemnification Obligations
– The Company will, from time to time, in the normal course of business, agree to indemnify certain customers, vendors or others against third party claims that the Company’s products, when used for their intended purpose(s), or the Company’s intellectual property, infringe the intellectual property rights of such third parties or other claims made against parties with whom it enters into contractual relationships. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. Historically, the Company has not made payments under these obligations and believes that the estimated fair value of these agreements is immaterial. Accordingly, no liabilities have been recorded for these obligations in the accompanying condensed consolidated balance sheets as of September 29, 2018 and December 30, 2017.
Legal Proceedings -
From time to time, the Company is subject to various legal proceedings or claims arising in the ordinary course of business.
On August 2, 2017, the Company was named as defendant in a complaint filed in New Hampshire Superior Court (“Complaint”). The Complaint, brought by Optical Solutions, Inc. (“OSI”), alleges claims arising from a purported exclusive purchase contract between OSI and the Company pertaining to certain product. On September 18, 2017, the Company removed the action to the United States District Court for the District of New Hampshire. On September 25, 2017, the Company moved to transfer the Complaint to the District Court for the Northern District of California. On December 20, 2017, the Company filed its complaint against OSI in the California Superior Court for the County of Santa Clara alleging claims arising from OSI’s breach of certain purchase orders. The Company’s 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 the Company’s motion to transfer OSI’s Complaint to the Northern District of California and denying the Company’s motion to dismiss the Complaint without prejudice. On June 14, 2018, OSI’s Complaint was consolidated with the Company’s complaint against OSI. On August 9, 2018, OSI filed an Amended Complaint. On September 19, 2018, the Company filed a motion to dismiss OSI’s Amended Complaint for failure to state a claim. The Company’s motion to dismiss is set to be heard on February 28, 2019. Trial has been set for May 16, 2022.
The Company records a provision for a loss when it believes that it is both probable that a loss has been incurred and the amount can be reasonably estimated. Based on current information, the Company believes it does not have any probable and reasonably estimable losses related to any current legal proceedings and claims. Although it is difficult to predict the outcome of legal proceedings, the Company believes that any liability that may ultimately arise from the resolution of these ordinary course matters will not have a material adverse effect on the business, financial condition and results of operations.
17
Note 10. Net Income Per Share
The Company presents both basic and diluted net income per share on the face of its condensed consolidated statements of operations. Basic net income per share excludes the effect of potentially dilutive shares and is computed by dividing net income by the weighted-average number of shares of common stock outstanding for the period. Diluted net income per share is computed using the weighted-average number of shares of common stock outstanding for the period plus the effect of all dilutive securities representing potential shares of common stock outstanding during the period.
A reconciliation of the share denominator of the basic and diluted net income per share computations for three and nine months ended September 29, 2018 and September 30, 2017 is as follows (in thousands):
|
|
Three Month Ended
|
|
|
Nine Months Ended
|
|
|
|
September 29, 2018
|
|
|
September 30, 2017
|
|
|
September 29, 2018
|
|
|
September 30, 2017
|
|
Weighted average common shares
outstanding used in basic net
income per share calculation
|
|
|
24,059
|
|
|
|
25,494
|
|
|
|
24,065
|
|
|
|
25,320
|
|
Potential dilutive common stock
equivalents, using treasury stock method
|
|
|
407
|
|
|
|
438
|
|
|
|
486
|
|
|
|
613
|
|
Weighted average shares used in diluted
net income per share calculation
|
|
|
24,466
|
|
|
|
25,932
|
|
|
|
24,551
|
|
|
|
25,933
|
|
Note 11. Stockholders’ Equity and Stock-Based Compensation
Options and Employee Stock Purchase Plan (“ESPP”) Awards
The fair value of each option and ESPP award is estimated on the grant date using the Black-Scholes valuation model and the assumptions noted in the following table. The expected lives of options granted were calculated using the simplified method allowed by the Staff Accounting Bulletin No. 107,
Share-Based Payment
. The risk-free rates were based on the U.S Treasury rates in effect during the corresponding period of grant. The expected volatility was based on the historical volatility of the Company’s stock price. The dividend yield reflects that the Company has not paid any cash dividends since inception and does not intend to pay any cash dividends in the foreseeable future.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 29, 2018
|
|
|
September 30, 2017
|
|
|
September 29, 2018
|
|
|
September 30, 2017
|
|
Employee Stock Purchase Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life
|
|
0.5 years
|
|
|
0.5 years
|
|
|
0.5 years
|
|
|
0.5 years
|
|
Volatility
|
|
52.5%
|
|
|
38.9%
|
|
|
39.1%
|
|
|
37.2%
|
|
Risk free interest rate
|
|
2.14%
|
|
|
1.13%
|
|
|
1.86%
|
|
|
0.91%
|
|
Dividends
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
No stock options were awarded during the nine months ended September 29, 2018 and September 30, 2017.
A summary of activity of stock options during the nine months ended September 29, 2018 is as follows:
|
|
Number of
Shares
Outstanding
(Options)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic
Value
(in
Thousands)
|
|
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 30, 2017
|
|
|
216,326
|
|
|
$
|
16.82
|
|
|
|
1.76
|
|
|
$
|
1,748
|
|
Exercised
|
|
|
(132,932
|
)
|
|
|
17.46
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding at September 29, 2018
|
|
|
83,394
|
|
|
|
15.80
|
|
|
|
1.44
|
|
|
|
1,811
|
|
Exercisable at September 29, 2018
|
|
|
83,394
|
|
|
$
|
15.80
|
|
|
|
1.44
|
|
|
$
|
1,811
|
|
18
The aggregate intrinsic value in the above table represents the total pretax intrinsic value, based on the Company’s closing stock price of $37.52 and $24.92
as of September 28, 2018 and December 29, 2017, respectively, the last trading day of each period, which would have been received by the option holders had all option holders exercised their options as of such date. The total intrinsic value of options ex
ercised during the three months ended September 29, 2018 and September 30, 2017 was $1.4 million and $1.0 million, respectively, and during the nine months ended September 29, 2018 and September 30, 2017 was $2.5 million and $2.4 million, respectively.
Restricted Stock Units (“RSUs”)
Time-based RSUs are valued using the market value of the Company’s common stock on the date of grant, assuming no expectation of dividends paid.
A summary of activity for RSUs during the nine months ended September 29, 2018 is as follows:
Summary of activity for RSUs
|
|
Number
of RSUs
|
|
|
Weighted
Average Fair
Value
|
|
Outstanding RSUs as of December 30, 2017
|
|
|
790,299
|
|
|
$
|
22.46
|
|
Granted
|
|
|
423,891
|
|
|
|
37.20
|
|
Released
|
|
|
(315,621
|
)
|
|
|
20.51
|
|
Cancelled
|
|
|
(131,571
|
)
|
|
|
25.80
|
|
Outstanding RSUs as of September 29, 2018
|
|
|
766,998
|
|
|
$
|
30.83
|
|
Market-Based Performance Stock Units (“PSUs”)
In addition to granting RSUs that vest on the passage of time only, the Company granted PSUs to certain executives. The PSUs vest in three tranches over one, two and three years based on the relative performance of the Company’s stock during those periods, compared to a peer group over the same period. If target stock price performance is achieved, 66.7% of the shares of the Company’s stock subject to the PSUs will vest and up to a maximum of 100% of the shares subject to the PSUs will vest if the maximum stock price performance is achieved for each tranche.
A summary of activity for PSUs for the nine months ended September 29, 2018 is as follows:
Summary of activity for PSUs
|
|
Number
of PSUs
|
|
|
Weighted
Average Fair
Value
|
|
Outstanding PSUs as of December 30, 2017
|
|
|
129,950
|
|
|
$
|
15.60
|
|
Granted
|
|
|
63,133
|
|
|
|
24.54
|
|
Released
|
|
|
(47,929
|
)
|
|
|
12.14
|
|
Cancelled
|
|
|
(32,991
|
)
|
|
|
25.92
|
|
Outstanding PSUs as of September 29, 2018
|
|
|
112,163
|
|
|
$
|
19.25
|
|
The preceding table reflects the maximum awards that can be achieved upon full vesting.
Valuation of PSUs
On the date of grant, the Company estimated the fair value of PSUs using a Monte Carlo simulation model. The assumptions for the valuation of PSUs are summarized as follows:
|
|
2018 Award
|
|
|
2017 Award
|
|
Grant Date Fair Value Per Share
|
|
$20.73-$25.18
|
|
|
$
|
26.75
|
|
Weighted-average assumptions/inputs:
|
|
|
|
|
|
|
|
|
Expected Dividend
|
|
|
—
|
|
|
|
—
|
|
Range of risk-free interest rates
|
|
2.39%-2.63%
|
|
|
1.40%
|
|
Range of expected volatilities for peer group
|
|
22%-66%
|
|
|
23%-62%
|
|
19
Stock-based Compensation Expense
Stock-based compensation expense for all share-based payment awards made to the Company’s employees and directors pursuant to the employee stock option and employee stock purchase plans by function were as follows (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 29, 2018
|
|
|
September 30, 2017
|
|
|
September 29, 2018
|
|
|
September 30, 2017
|
|
Cost of products
|
|
$
|
224
|
|
|
$
|
216
|
|
|
$
|
455
|
|
|
$
|
628
|
|
Cost of service
|
|
|
223
|
|
|
|
161
|
|
|
|
564
|
|
|
|
463
|
|
Research and development
|
|
|
744
|
|
|
|
509
|
|
|
|
1,727
|
|
|
|
1,262
|
|
Selling
|
|
|
779
|
|
|
|
639
|
|
|
|
2,049
|
|
|
|
1,707
|
|
General and administrative
|
|
|
1,242
|
|
|
|
922
|
|
|
|
3,434
|
|
|
|
2,715
|
|
Total stock-based compensation
expense related to employee
stock options and employee stock
purchases
|
|
$
|
3,212
|
|
|
$
|
2,447
|
|
|
$
|
8,229
|
|
|
$
|
6,775
|
|
Note 12. Income Taxes
The Company accounts for income taxes under the provisions of ASC 740, Accounting for Income Taxes. The Company adjusts its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. The Company also records the tax effect of unusual or infrequently occurring discrete items, including changes in judgment about valuation allowances and effects of changes in tax laws or tax rates, in the interim period in which they occur. The Company's effective tax rate reflects the impact of a portion of its earnings being taxed in foreign jurisdictions as well as a valuation allowance maintained on certain deferred tax assets.
The Company’s tax provision takes into account the changes in the tax laws under Tax Cuts and Jobs Act (the “Act” or “TCJA”), signed into law on December 22, 2017, including the reduction of the federal corporate tax rate from 35% to 21%. Other components of the Act are accounted for based on the Company’s interpretation of the most current guidance available and are subject to revisions as the Company completes its analysis of the Act, collects and prepares necessary data, and interprets any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service (“IRS”), FASB, and other standard-setting and regulatory bodies. The Company’s accounting for the tax effects of the Act will be completed during the measurement period, which should not extend beyond one year from the enactment date.
The TCJA creates a new Global Intangible Low-Taxed Income (“GILTI”) requirement under which certain income earned by controlled foreign corporations (“CFC”s) must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder’s “net CFC tested income” over the net deemed tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income.
Because of the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the TCJA and the application of ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing the Company’s global income to determine what the impact is expected to be. The Company is not yet able to reasonably estimate the effect of this provision of the TCJA. Therefore, the Company has not made a policy decision regarding whether to record deferred taxes on GILTI. As a result, for the period ended September 29, 2018, the Company has treated GILTI as a period cost and will continue to refine the calculations as additional analysis is completed.
The provision for income taxes consists of the following (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 29, 2018
|
|
|
September 30, 2017
|
|
|
September 29, 2018
|
|
|
September 30, 2017
|
|
Provision for income taxes
|
|
$
|
2,921
|
|
|
$
|
1,756
|
|
|
$
|
10,258
|
|
|
$
|
4,492
|
|
20
The Company recorded a tax provision of $2.9 million and $1.8 million for the three months ended September 29, 2018 and September 30, 2017, respectively. The increase in the tax provision for 2018
from 2017 was primarily related to the Company’s increased profitability for the three months ending September 29, 2018, offset by less U.S. tax required on foreign earnings under the TCJA.
The Company recorded a tax provision of $10.3 million and $4.5 million for the nine months ended September 29, 2018 and September 30, 2017, respectively. The increase in the tax provision for 2018 from 2017 was primarily related to the Company’s increased profitability and less U.S. tax required on foreign earnings under the TCJA for the nine months ended September 29, 2018, a one-time benefit for an entity classification change, and a higher tax benefit associated with the settlement of equity options/awards for the nine months ended September 30, 2017.
The Company continues to maintain a valuation allowance against its California and Switzerland deferred tax assets as a result of uncertainties regarding the realization of the assets due to cumulative losses and uncertainty of future taxable income. The Company will continue to assess the realizability of the deferred tax assets in each of the applicable jurisdictions and maintain the valuation allowances until sufficient positive evidence exists to support a reversal. In the event the Company determines that the deferred tax assets are realizable, an adjustment to the valuation allowance will be reflected in the tax provision for the period such determination is made.
The Company is subject to taxation in the U.S. and various states including California, and foreign jurisdictions including Korea, Japan, Taiwan, China, Singapore, Germany, U.K., France, and Israel. Due to tax attribute carry-forwards, the Company is subject to examination for tax years 2003 forward for U.S. tax purposes. The Company is also subject to examination in various states for tax years 2002 forward. The Company is subject to examination for tax years 2010 forward for various foreign jurisdictions.
The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The total amount of penalties and interest were not material as of September 29, 2018 and September 30, 2017. During the next twelve months, the Company anticipates increases in its unrecognized tax benefits of approximately $0.5 million.
Note 13. Segment, Geographic, Product and Significant Customer Information
The Company has one operating segment, which is the sale, design, manufacture, marketing and support of optical critical dimension and thin film systems. The following tables summarize total net revenues and long-lived assets (excluding intangible assets) attributed to significant countries (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 29, 2018
|
|
|
September 30, 2017
|
|
|
September 29, 2018
|
|
|
September 30, 2017
|
|
Total net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South Korea
|
|
$
|
23,598
|
|
|
$
|
22,269
|
|
|
$
|
92,397
|
|
|
$
|
72,388
|
|
Japan
|
|
|
19,693
|
|
|
|
4,781
|
|
|
|
48,090
|
|
|
|
17,400
|
|
United States
|
|
|
8,414
|
|
|
|
6,231
|
|
|
|
22,545
|
|
|
|
28,101
|
|
China
|
|
|
14,486
|
|
|
|
3,403
|
|
|
|
50,861
|
|
|
|
17,420
|
|
Taiwan
|
|
|
1,883
|
|
|
|
2,304
|
|
|
|
4,918
|
|
|
|
19,016
|
|
Singapore
|
|
|
5,842
|
|
|
|
9,774
|
|
|
|
20,377
|
|
|
|
12,229
|
|
Other
|
|
|
2,674
|
|
|
|
7,913
|
|
|
|
8,319
|
|
|
|
13,862
|
|
Total net revenues
|
|
$
|
76,590
|
|
|
$
|
56,675
|
|
|
$
|
247,507
|
|
|
$
|
180,416
|
|
|
|
September 29, 2018
|
|
|
December 30, 2017
|
|
Long-lived tangible assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
42,013
|
|
|
$
|
43,427
|
|
International
|
|
|
1,122
|
|
|
|
1,383
|
|
Total long-lived tangible assets
|
|
$
|
43,135
|
|
|
$
|
44,810
|
|
21
With respect to customer concentration, Samsung Electronics Co. Ltd., Yangtze Memory Technologies Co. Ltd., SK Hynix, and Toshiba Corporation each accounted for more than 10%
of total sales for the three months ended September 29, 2018, and Samsung Electronics Co. Ltd., SK Hynix, Toshiba Corporation, Yangtze Memory Technologies Co. Ltd., and Micron Technology, Inc. each accounted for more than 10% of total sales for the nine m
onths ended September 29, 2018. Samsung Electronics Co. Ltd., Intel Corporation, and Micron Technology, Inc. each accounted for more than 10% of total sales for the three months ended September 30, 2017, and Samsung Electronics Co. Ltd., SK Hynix, Intel Co
rporation, and Micron Technology, Inc. each accounted for more than 10% of total sales for the nine months ended September 30, 2017.
With respect to accounts receivable concentration, Toshiba Corporation and SK Hynix each accounted for more than 10% of total accounts receivable as of September 29, 2018. Samsung Electronics Co. Ltd., Micron Technology, Inc., and Intel Corporation each accounted for more than 10% of total accounts receivable as of December 30, 2017.
Note 14. Subsequent Event
Acquisition – 4D Technology Corporation
On October 26, 2018, the Company entered into a Stock Purchase Agreement with
4D Technology Corporation (“4D”) and each of the 4D stockholders pursuant to which the Company agreed to acquire all the outstanding stock of 4D in exchange for $36 million in cash and 125,117 shares of the Company’s common stock, par value $0.001 per share, valued at approximately $4 million, subject to adjustment based on the amount of cash, working capital, indebtedness, and transaction expenses of 4D (collectively, the “Purchase Price”). The closing of the transaction, which is subject to the satisfaction of customary closing conditions, is expected to occur prior to the end of the current fiscal year – December 29, 2018.
The shares of the Company’s common stock are to be issued to the three principal stockholders of 4D (the “Principal Stockholders”). Pursuant to the terms of the Stock Purchase Agreement and related Escrow Agreement, $4 million in cash and 125,117 of the shares of the Company’s common stock will be withheld from the Purchase Price and placed in escrow to fund any post-closing adjustments to the purchase price and to secure the indemnification obligations of the Principal Stockholders to the Company. The Principal Stockholders have agre
ed to indemnify the Company for
inaccuracies in the representations or the breach of the warranties or covenants made by 4D, and for certain other matters, subject to certain limitations.
4D is a supplier of high-performance interferometric measurement and inspection systems located in Tucson, Arizona. Their solutions are used primarily in the manufacture of advanced aerospace and industrial systems as well as for scientific research and semiconductor applications. 4D pioneered Dynamic Interferometry, which enables specialized applications for high-precision surface shape and profile. The addition of this business and technology will enable the Company to serve new markets in advanced process control metrology and inspection. In addition to expanding the Company’s served markets, 4D’s technology will enable next-generation systems for leading semiconductor device applications and is a natural complement to the Company’s current optical metrology and inspection solutions.
Given the short period of time from entering into the Stock Purchase Agreement to the filing of this Form 10-Q, the Company is in the process of compiling the initial accounting for the 4D combination, including the determination of the fair value of tangible assets acquired and liabilities assumed, the valuation of intangibles acquired, income and non-income based taxes, residual goodwill and the amount of goodwill that will be deductible for tax purposes.
Gain on Disposal of Fixed Asset – Condominium
On October 31, 2018, the Company closed escrow on the sale of one of two condominiums it owns in Milpitas, California, at a sales price of $1.0 million. The Company expects to report a gain on the sale of the asset, net of certain fees and commissions, as a component of other income, during its fiscal year ended December 29, 2018 of approximately $0.9 million. As part of its facilities strategy, the Company has determined that it will no longer house traveling employees in owned condominiums and has begun divesting such assets.
22