NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
NOTE 1. Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements have been prepared by Rudolph Technologies, Inc. (the “Company” or “Rudolph”) and in the opinion of management reflect all adjustments, consisting of normal recurring accruals, necessary for their fair presentation in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual amounts could differ materially from reported amounts. The interim results for the three month period ended March 31, 2018 are not necessarily indicative of results to be expected for the entire year or any future periods. This interim financial information should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 10-K”) filed with the Securities and Exchange Commission (“SEC”). The accompanying condensed consolidated balance sheet at December 31, 2017 has been derived from the audited consolidated financial statements included in the 2017 10-K.
Recent Accounting Pronouncements
Recently Adopted
Effective January 1, 2018, the Company adopted ASU No. 2016-16, “Income Tax (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” This ASU, which is part of the Board’s simplification initiative, is intended to reduce the complexity of U.S. GAAP and diversity in practice related to the tax consequences of certain types of intra-entity asset transfers, particularly those involving intellectual property. The adoption of ASU No. 2016-16 did not have any impact on the Company’s consolidated financial position, results of operations, and cash flows.
Effective January 1, 2018, the Company adopted ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This ASU provides guidance on statement of cash flows presentation for eight specific cash flow issues where diversity in practice exists. The adoption of ASU No. 2016-15 did not have a material impact on the Company’s consolidated financial position, results of operations, and cash flows.
Effective January 1, 2018, the Company adopted ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes nearly all existing revenue recognition guidance. The core principle of Topic 606 is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
As a result of the adoption of ASC 606, the Company changed its accounting policy for revenue recognition. Refer to Note 2, “Revenue” for further information.
Recently Issued
In February 2018, the FASB issued ASU 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 “2017 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 and interim periods within those annual periods beginning after December 15, 2018, with earlier adoption permitted. The adoption of ASU 2018-02 is not expected to have a material effect 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 (Topic718): 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 Company is currently evaluating the effect the adoption of ASU No. 2017-09 will have on its consolidated financial position, results of operations, and cash flows.
In January 2017, the 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,
7
Table of Contents
limited to the total amount of goodwill allocated to the reporting unit. The ASU is effective for the fiscal years beginning aft
er December 15, 2019 and for interim periods within those fiscal years. The Company is currently evaluating the effect the adoption of ASU No. 2017-04 will have on its consolidated financial position, results of operations, and cash flows.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326),” which introduces new guidance for the accounting for credit losses on instruments within its scope. Given the breadth of that scope, the new ASU will impact both financial services and non-financial services entities. The standard is effective for fiscal years beginning after December 15, 2020. The Company is currently evaluating the effect the adoption of ASU No. 2016-13 will have on its consolidated financial position, results of operations, and cash flows.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The standard requires that lessees recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASU No. 2016-02 also requires disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information. 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 this ASU will result in an increase in right-of-use assets and corresponding liabilities. The Company is evaluating the timing and other effects of its adoption of this ASU on its 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.
NOTE 2. Revenue
Adoption of Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers”
On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company did not record a cumulative impact due to the adoption of Topic 606.
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 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 in 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 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 using expected cost plus margin.
Disaggregated Revenue
The following table presents the Company’s revenue disaggregated by revenue source (in thousands, unaudited):
|
Three Months Ended
|
|
|
March 31,
|
|
|
2018
|
|
|
2017
|
|
Systems
|
$
|
56,102
|
|
|
$
|
43,893
|
|
Software licensing, support and maintenance
|
|
7,455
|
|
|
|
7,498
|
|
Parts
|
|
6,985
|
|
|
|
6,330
|
|
Services
|
|
2,554
|
|
|
|
2,958
|
|
Total revenue
|
$
|
73,096
|
|
|
$
|
60,679
|
|
8
Table of Contents
The following table represents a disaggregation of revenue by timing of revenue:
|
Three Months Ended
|
|
|
March 31,
|
|
|
2018
|
|
Point in time
|
$
|
69,396
|
|
Over time
|
|
3,700
|
|
Total revenue
|
$
|
73,096
|
|
See Note 14 for additional discussion of the Company’s disaggregated revenue detail.
Systems 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 customer acceptance, which includes installation, recalibration and qualification by the customer. Customer acceptance is generally based on the Company’s products meeting published performance specifications, which have been demonstrated prior to shipment. The Company provides an assurance warranty on its systems for a period of twelve to fifteen 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.
Software Licensing, Support and Maintenance Revenue
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 are recognized upfront at the point in time when the software is made available to the customer. Licensing support and maintenance is recognized as the support and maintenance is 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.
Contract Liabilities
The Company records contract liabilities when the customer has been billed in advance of the Company completing its performance obligations. These amounts are recorded as deferred revenue in the Consolidated Balance Sheets. The opening balance in deferred revenue was $7,206 as of January 1, 2018.
Changes in deferred revenue were as follows:
|
Three Months Ended
|
|
|
March 31,
|
|
|
2018
|
|
Beginning Balance, December 31, 2017
|
$
|
7,206
|
|
Deferral of revenue
|
|
4,553
|
|
Recognition of deferred revenue
|
|
(2,986
|
)
|
Ending Balance, March 31, 2018
|
$
|
8,773
|
|
9
Table of Contents
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 at the amount to which it has the right to invoice.
NOTE 3. Fair Value Measurements
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.
The following tables provide the assets and liabilities carried at fair value measured on a recurring basis at March 31, 2018 and December 31, 2017:
|
|
|
|
|
|
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)
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal notes and bonds
|
|
$
|
110,074
|
|
|
$
|
—
|
|
|
$
|
110,074
|
|
|
$
|
—
|
|
Corporate bonds
|
|
|
2,192
|
|
|
|
—
|
|
|
|
2,192
|
|
|
|
—
|
|
Total assets
|
|
$
|
112,266
|
|
|
$
|
—
|
|
|
$
|
112,266
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration - acquisitions
|
|
$
|
2,911
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,911
|
|
Foreign currency forward exchange contracts
|
|
|
388
|
|
|
|
—
|
|
|
|
388
|
|
|
|
—
|
|
Total liabilities
|
|
$
|
3,299
|
|
|
$
|
—
|
|
|
$
|
388
|
|
|
$
|
2,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal notes and bonds
|
|
$
|
109,589
|
|
|
$
|
—
|
|
|
$
|
109,589
|
|
|
$
|
—
|
|
Foreign currency forward exchange contracts
|
|
|
45
|
|
|
|
—
|
|
|
|
45
|
|
|
|
—
|
|
Total assets
|
|
$
|
109,634
|
|
|
$
|
—
|
|
|
$
|
109,634
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration - acquisitions
|
|
$
|
2,593
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,593
|
|
Total liabilities
|
|
$
|
2,593
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,593
|
|
The Company’s available-for-sale debt securities classified as Level 1 are based on quoted market prices that are available in active markets.
The Company’s 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 exchange contracts are primarily measured based on the foreign currency spot and forward 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.
10
Table of Contents
Level 3 liabilities consisted of contingent consideration related to an acq
uisition 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 9.4% and 8.6% for the three months ended March 31, 2018 and 2017, 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.
This table presents a reconciliation of all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2018:
|
|
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
|
|
Balance at December 31, 2017
|
|
$
|
2,593
|
|
Additions
|
|
|
—
|
|
Total loss included in selling, general and administrative expense
|
|
|
318
|
|
Payments
|
|
|
—
|
|
Transfers into (out of) Level 3
|
|
|
—
|
|
Balance at March 31, 2018
|
|
$
|
2,911
|
|
See Note 4 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.
NOTE 4. Marketable Securities
The Company has evaluated its investment policies and has determined that all of its marketable securities, which is 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 debt securities are included in “Other expense” in the Condensed 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 March 31, 2018 and December 31, 2017 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.
At March 31, 2018 and December 31, 2017, marketable securities are categorized as follows:
|
|
Amortized Cost
|
|
|
Gross Unrealized Holding Gains
|
|
|
Gross Unrealized Holding Losses
|
|
|
Fair Value
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal notes and bonds
|
|
$
|
110,211
|
|
|
$
|
1
|
|
|
$
|
138
|
|
|
$
|
110,074
|
|
Corporate bond
|
|
|
2,192
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,192
|
|
Total marketable securities
|
|
$
|
112,403
|
|
|
$
|
1
|
|
|
$
|
138
|
|
|
$
|
112,266
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal notes and bonds
|
|
$
|
109,750
|
|
|
$
|
—
|
|
|
$
|
161
|
|
|
$
|
109,589
|
|
Total marketable securities
|
|
$
|
109,750
|
|
|
$
|
—
|
|
|
$
|
161
|
|
|
$
|
109,589
|
|
11
Table of Contents
The amortized cost and estimated fair value of marketable securities classified by the maturity date listed on the security, regardless of the Condensed Consolida
ted Balance Sheet classification, is as follows at March 31, 2018 and December 31, 2017:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
Due within one year
|
|
$
|
99,714
|
|
|
$
|
99,609
|
|
|
$
|
104,742
|
|
|
$
|
104,605
|
|
Due after one through five years
|
|
|
12,689
|
|
|
|
12,657
|
|
|
|
5,008
|
|
|
|
4,984
|
|
Due after five through ten years
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Due after ten years
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total marketable securities
|
|
$
|
112,403
|
|
|
$
|
112,266
|
|
|
$
|
109,750
|
|
|
$
|
109,589
|
|
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 March 31, 2018 and December 31, 2017:
|
|
Unrealized Loss Position For
Less Than 12 Months
|
|
|
Unrealized Loss Position For
Greater Than 12 Months
|
|
|
|
Fair Value
|
|
|
Gross Unrealized Losses
|
|
|
Fair Value
|
|
|
Gross Unrealized Losses
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal notes and bonds
|
|
$
|
98,376
|
|
|
$
|
138
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
|
$
|
98,376
|
|
|
$
|
138
|
|
|
$
|
—
|
|
|
$
|
—
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal notes and bonds
|
|
$
|
98,805
|
|
|
$
|
161
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
|
$
|
98,805
|
|
|
$
|
161
|
|
|
$
|
—
|
|
|
$
|
—
|
|
See Note 2 for additional discussion regarding the fair value of the Company’s marketable securities.
NOTE 5. Derivative Instruments and Hedging Activities
The Company, when it considers it to be appropriate, enters into forward exchange contracts to hedge the economic exposures arising from foreign currency denominated transactions. At March 31, 2018 and December 31, 2017, these contracts included the future sale of Japanese Yen to purchase U.S. dollars. Derivative instruments are recognized as either, “Prepaid expenses and other current assets” or “Other current liabilities” in the Condensed Consolidated Balance Sheets and are measured at fair value. The foreign currency forward exchange contracts were entered into by the Company’s Japanese subsidiary to economically hedge a portion of certain intercompany obligations. The forward exchange contracts are not designated as hedges for accounting purposes and decreases in the fair value of $433 and $250 for the three months ended March 31, 2018 and 2017, respectively, are recorded within the caption “Other expense (income)” in the Condensed Consolidated Statements of Operations.
The dollar equivalent of the U.S. dollar forward exchange contracts and related fair values as of March 31, 2018 and December 31, 2017 were as follows:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Notional amount
|
|
$
|
8,181
|
|
|
$
|
8,417
|
|
Fair value of asset (liability)
|
|
$
|
(388
|
)
|
|
$
|
45
|
|
12
Table of Contents
NOTE 6. Purchased Intangible Assets
Purchased intangible assets as of March 31, 2018 and December 31, 2017 are as follows:
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite-lived intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology
|
|
$
|
65,927
|
|
|
$
|
58,812
|
|
|
$
|
7,115
|
|
Customer and distributor relationships
|
|
|
9,560
|
|
|
|
8,883
|
|
|
|
677
|
|
Trade names
|
|
|
4,361
|
|
|
|
3,801
|
|
|
|
560
|
|
Total identifiable intangible assets
|
|
$
|
79,848
|
|
|
$
|
71,496
|
|
|
$
|
8,352
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite-lived intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology
|
|
$
|
65,827
|
|
|
$
|
58,522
|
|
|
$
|
7,305
|
|
Customer and distributor relationships
|
|
|
9,560
|
|
|
|
8,818
|
|
|
|
742
|
|
Trade names
|
|
|
4,361
|
|
|
|
3,776
|
|
|
|
585
|
|
Total identifiable intangible assets
|
|
$
|
79,748
|
|
|
$
|
71,116
|
|
|
$
|
8,632
|
|
Intangible asset amortization expenses for the three months ended March 31, 2018 and 2017 were $380 and $505, respectively. Assuming no change in the gross carrying value of identifiable intangible assets and estimated lives, estimated amortization expense for the remainder of 2018 will be $1,146, and for each of the next five years estimated amortization expense amounts to $1,527 for 2019, $1,325 for 2020, $577 for 2021, $511 for 2022, and $494 for 2023.
NOTE 7. Balance Sheet Details
Inventories
Inventories are comprised of the following:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Materials
|
|
$
|
47,404
|
|
|
$
|
39,765
|
|
Work-in-process
|
|
|
23,612
|
|
|
|
20,923
|
|
Finished goods
|
|
|
8,747
|
|
|
|
6,833
|
|
Total inventories
|
|
$
|
79,763
|
|
|
$
|
67,521
|
|
The Company has established reserves of $13,161 and $13,035 as of March 31, 2018 and December 31, 2017, respectively, for slow moving and obsolete inventory, which are included in the amounts above.
Property, Plant and Equipment
Property, plant and equipment, net is comprised of the following:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Land and building
|
|
$
|
2,584
|
|
|
$
|
2,584
|
|
Machinery and equipment
|
|
|
29,789
|
|
|
|
29,870
|
|
Furniture and fixtures
|
|
|
3,143
|
|
|
|
3,201
|
|
Computer equipment and software
|
|
|
5,846
|
|
|
|
5,444
|
|
Leasehold improvements
|
|
|
9,346
|
|
|
|
9,472
|
|
|
|
|
50,708
|
|
|
|
50,571
|
|
Accumulated depreciation
|
|
|
(33,210
|
)
|
|
|
(33,229
|
)
|
Total property, plant and equipment, net
|
|
$
|
17,498
|
|
|
$
|
17,342
|
|
13
Table of Contents
Other assets
Other assets is comprised of the following:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Deferred income taxes
|
|
$
|
14,879
|
|
|
$
|
14,879
|
|
Other
|
|
|
506
|
|
|
|
492
|
|
Total other assets
|
|
$
|
15,385
|
|
|
$
|
15,371
|
|
Other current liabilities
Other current liabilities is comprised of the following:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Intangible asset acquisition - Stella Alliance
|
|
$
|
200
|
|
|
$
|
100
|
|
Contingent consideration - acquisitions
|
|
|
794
|
|
|
|
634
|
|
Customer deposits
|
|
|
2,347
|
|
|
|
5,561
|
|
Other
|
|
|
5,675
|
|
|
|
2,989
|
|
Total other current liabilities
|
|
$
|
9,016
|
|
|
$
|
9,284
|
|
Other non-current liabilities
Other non-current liabilities is comprised of the following:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Unrecognized tax benefits (including interest)
|
|
$
|
4,694
|
|
|
$
|
4,660
|
|
Contingent consideration - acquisitions
|
|
|
2,117
|
|
|
|
1,959
|
|
Deferred revenue
|
|
|
876
|
|
|
|
983
|
|
Other
|
|
|
3,207
|
|
|
|
2,859
|
|
Total other non-current liabilities
|
|
$
|
10,894
|
|
|
$
|
10,461
|
|
NOTE 8. Commitments and Contingencies
Intellectual Property 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 no 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 15 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 15 months prior to the quarter-end and warranty accruals are related to sales during the same year.
Changes in the Company’s warranty reserves are as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Balance, beginning of the period
|
|
$
|
2,427
|
|
|
$
|
1,788
|
|
Accruals
|
|
|
959
|
|
|
|
855
|
|
Usage
|
|
|
(820
|
)
|
|
|
(648
|
)
|
Balance, end of the period
|
|
$
|
2,566
|
|
|
$
|
1,995
|
|
14
Table of Contents
Warranty reserves are reported in the Condensed Consolidated Balance Sheets within the caption “Accounts payable and accrued liabilities.”
Legal Matters
From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business. There are no legal proceedings pending or threatened against the Company that management believes are likely to have a material adverse effect on the Company’s consolidated financial position or otherwise.
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 March 31, 2018 was approximately $99 million with an available interest rate of 3.3%. 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.
NOTE 9. Share-Based Compensation
Restricted Stock Unit Activity
A summary of the activity with respect to the Company’s nonvested restricted stock units during the three months ended March 31, 2018 is as follows:
|
|
Number of Shares
|
|
|
Weighted Average
Grant Date Fair Value
|
|
Nonvested at December 31, 2017
|
|
|
1,014
|
|
|
$
|
14.88
|
|
Granted
|
|
|
109
|
|
|
$
|
27.36
|
|
Vested
|
|
|
(159
|
)
|
|
$
|
12.52
|
|
Forfeited
|
|
|
(7
|
)
|
|
$
|
13.37
|
|
Nonvested at March 31, 2018
|
|
|
957
|
|
|
$
|
16.71
|
|
Included in the number of shares granted in the table directly above are 53 market performance-based restricted stock units (MPRSUs) granted to executives for 2018. Vesting of these MPRSUs is contingent upon the Company meeting certain total shareholder return (TSR) levels as compared to a select peer group over three years from the year granted. The 2018 MPRSUs cliff vest at the end of the three-year period and have a maximum potential to vest at 200% (105 shares) based on TSR performance. The related share-based compensation expense is determined based on the estimated fair value of the underlying shares on the date of grant and is recognized straight-line over the vesting term. The estimated fair value per share of the MPRSUs was $30.76.
As of March 31, 2018 and December 31, 2017, there was $10,791 and $9,420 of total unrecognized compensation cost related to restricted stock units granted under the Company’s stock plans, respectively. That cost is expected to be recognized over a weighted average period of 2.2 years for each of the respective periods.
NOTE 10. Other Expense
Other expense is comprised of the following:
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Foreign currency exchange losses (gains), net
|
|
$
|
183
|
|
|
$
|
269
|
|
Rental income
|
|
|
(1
|
)
|
|
|
—
|
|
Total other expense
|
|
$
|
182
|
|
|
$
|
269
|
|
15
Table of Contents
NOTE 11. Income Taxes
The following table provides details of income taxes:
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Income before income taxes
|
|
$
|
17,674
|
|
|
$
|
9,607
|
|
Provision for income taxes
|
|
$
|
2,544
|
|
|
$
|
2,456
|
|
Effective tax rate
|
|
|
14.4
|
%
|
|
|
25.6
|
%
|
The income tax provision for the three months ended March 31, 2018 was computed based on the Company’s annual forecast of profit by jurisdiction and forecasted effective tax rate for the year. The changes in the Company’s effective tax rate for the three months ended March 31, 2018 as compared to the same period in 2017 are primarily due to enactment of U.S. tax reform, which provides for a change in the corporate tax rate from 35% to 21%, changes in the mix of forecasted earnings by jurisdictions and the Foreign Derived Intangible Income Deduction.
The 2017 Tax Act was enacted on December 22, 2017. The 2017 Tax Act reduces the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The Company is applying the guidance in SAB 118 when accounting for the enactment-date effects of the 2017 Tax Act. At March 31, 2018, the Company has not completed its accounting for all of the tax effects of the 2017 Tax Act. In all cases, the Company will continue to make and refine its calculations as additional analysis is completed. The Company’s estimates may also be affected as it gains a more thorough understanding of the 2017 Tax Act. These changes could be material to income tax expense.
Foreign-Derived Intangible Income:
The 2017 Tax Act provides tax incentives to U.S. companies to earn income from the sale, lease or license of goods and services abroad in the form of a deduction for foreign-derived intangible income (“FDII”). FDII is taxed at an effective rate of 13.1% for taxable years beginning after December 31, 2017 and at an effective rate of 16.4% for taxable years beginning after December 31, 2025. The accounting for the deduction for FDII is similar to a special deduction and should be accounted for based on the guidance in ASC 740-10-25-37. The tax benefits for special deductions ordinarily are recognized no earlier than the year in which they are deductible on the tax return. As of March 31, 2018, the Company has made sufficient progress in its calculations to reasonably estimate the effect on its estimated annual effective tax rate. Due to the large portions of its sales being made to non-U.S. customers this adjustment decreased its effective tax rate by 4.8%. The Company will continue to refine its calculations, which may result in changes to this amount.
The Company does not expect other provisions of the 2017 Tax Act, including global intangible low-taxed income (“GILTI”), the new interest expense limitations and base erosion anti-abuse tax (“BEAT”) to have a material impact on the Company’s effective tax rate.
Deferred Tax Assets and Liabilities:
The Company remeasured certain deferred tax assets and liabilities based on the rate to which they are expected to reverse to in the future, which is anticipated to be 21%. The Company recorded a provisional amount of $8.0 million as of December 31, 2017 related to the remeasurement of certain deferred tax balances. Due to the continued refinement of its transition tax calculation, discussed further below, and the effect it may have on the measurement of NOLs and other carryforwards, it will continue to analyze and refine its calculations related to the measurement of these balances.
One-Time Transition Tax:
The one-time transition tax is based on its total post-1986 earnings and profits (“E&P”), which it has deferred from U.S. income taxes under previous U.S. law. The Company originally recorded a provisional amount for its one-time transition tax liability for all of its foreign subsidiaries, resulting in a transition tax benefit (net of foreign tax credits) of $0.1 million being recorded at December 31, 2017. As it continues to refine its E&P analysis, the Company will refine its calculations of the one-time transition tax, which could affect the measurement of this liability. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.
The Company currently has a partial valuation allowance recorded against certain foreign and state net operating loss and credit carryforwards where the realizability of such deferred tax assets is substantially in doubt. Each quarter, the Company assesses the likelihood that it will be able to recover its deferred tax assets. The Company considers available evidence, both positive and negative, including forecasted earnings in assessing the need for a valuation allowance. As a result of the Company’s analysis, it concluded that it is more likely than not that a portion of its deferred tax assets will not be realized. Therefore, the Company continues to provide a valuation allowance against certain deferred tax assets. The Company continues to monitor available evidence and may reverse some or all of the remaining valuation allowance in future periods, if appropriate. The Company has a recorded valuation allowance against certain of its deferred tax assets of $2,447 as of March 31, 2018 and December 31, 2017.
16
Table of Contents
NOTE 12. Earnings Per Share
Basic earnings 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 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.
The following table sets forth the weighted average number of stock options and restricted stock units that have been excluded from the calculation of diluted earnings per share as their effect would have been antidilutive:
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Stock options
|
|
|
—
|
|
|
|
—
|
|
Restricted stock units
|
|
|
33
|
|
|
|
25
|
|
Total
|
|
|
33
|
|
|
|
25
|
|
The Company’s basic and diluted earnings per share amounts are as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,130
|
|
|
$
|
7,151
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic earnings per share - weighted average shares
outstanding
|
|
|
31,662
|
|
|
|
31,290
|
|
Effect of potential dilutive securities:
|
|
|
|
|
|
|
|
|
Employee stock options and restricted stock
units - dilutive shares
|
|
|
655
|
|
|
|
762
|
|
Warrant - dilutive shares
|
|
|
—
|
|
|
|
6
|
|
Diluted earnings per share - weighted average shares
outstanding
|
|
|
32,317
|
|
|
|
32,058
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.48
|
|
|
$
|
0.23
|
|
Diluted
|
|
$
|
0.47
|
|
|
$
|
0.22
|
|
NOTE 13. Accumulated Other Comprehensive Loss
Comprehensive income includes net income, foreign currency translation adjustments, and net unrealized gains and losses on available-for-sale debt securities. See the Condensed 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 loss, net of tax, are as follows:
|
|
Foreign currency
translation
adjustments
|
|
|
Net unrealized
(gains) losses on
marketable
securities
|
|
|
Accumulated other
comprehensive loss
(income)
|
|
Beginning Balance, December 31, 2017
|
|
$
|
1,079
|
|
|
$
|
126
|
|
|
$
|
1,205
|
|
Net current period other comprehensive income
|
|
|
(632
|
)
|
|
|
(23
|
)
|
|
|
(655
|
)
|
Reclassifications
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Ending balance, March 31, 2018
|
|
$
|
447
|
|
|
$
|
103
|
|
|
$
|
550
|
|
NOTE 14. 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
17
Table of Contents
support of high-performance process control defect inspection and met
rology, advanced packaging lithography, and process control software systems used by microelectronics device manufacturers, and therefore the Company has one reportable segment. The Company’s chief operating decision maker is the Chief Executive Officer.
The chief operating decision maker allocates resources and assesses performance of the business and other activities at the reporting segment level.
The following table lists the different sources of revenue:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Systems and Software:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Process control
|
|
$
|
48,033
|
|
|
|
66
|
%
|
|
$
|
43,876
|
|
|
|
72
|
%
|
Lithography
|
|
|
8,069
|
|
|
|
11
|
%
|
|
|
17
|
|
|
|
—
|
%
|
Software licensing, support and maintenance
|
|
|
7,455
|
|
|
|
10
|
%
|
|
|
7,498
|
|
|
|
13
|
%
|
Parts
|
|
|
6,985
|
|
|
|
10
|
%
|
|
|
6,330
|
|
|
|
10
|
%
|
Services
|
|
|
2,554
|
|
|
|
3
|
%
|
|
|
2,958
|
|
|
|
5
|
%
|
Total revenue
|
|
$
|
73,096
|
|
|
|
100
|
%
|
|
$
|
60,679
|
|
|
|
100
|
%
|
For geographical revenue reporting, revenue is attributed to the geographic location in which the product is shipped. Revenue by geographic region is as follows:
|
|
Three Months Ended
|
|
|
|
March
31
,
|
|
|
|
2018
|
|
|
2017
|
|
Revenue from third parties:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
9,068
|
|
|
$
|
9,009
|
|
Taiwan
|
|
|
14,467
|
|
|
|
13,833
|
|
Japan
|
|
|
4,130
|
|
|
|
3,208
|
|
China
|
|
|
17,971
|
|
|
|
14,101
|
|
South Korea
|
|
|
17,230
|
|
|
|
9,530
|
|
Singapore
|
|
|
4,282
|
|
|
|
3,266
|
|
Other Asia
|
|
|
1,917
|
|
|
|
114
|
|
Germany
|
|
|
1,324
|
|
|
|
3,080
|
|
Other Europe
|
|
|
2,707
|
|
|
|
4,538
|
|
Total revenue
|
|
$
|
73,096
|
|
|
$
|
60,679
|
|
The following customer accounted for more than 10% of total revenue for the indicated periods.
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Customer A
|
|
|
14.2
|
%
|
|
|
17.2
|
%
|
Customer B
|
|
|
11.2
|
%
|
|
|
—
|
%
|
NOTE 15. Share Repurchase Authorization
In January 2015, the Board of Directors authorized the Company to repurchase up to 3,000 shares of the Company’s common stock with no established end date. The authorization allows for repurchases to be made in the open market or through negotiated transactions from time to time. During the three months ended March 31, 2018, the Company did not repurchase any shares of common stock pursuant to the share repurchase authorization. At March 31, 2018, there were 711 shares available for future stock repurchases under this share repurchase authorization. Shares of common stock purchased under the share repurchase authorization are retired.