ONTO INNOVATION INC. Executive Summary
We are a worldwide leader in the design, development, manufacture and support of process control tools that perform macro-defect inspection and metrology, lithography systems, and process control analytical software used by semiconductor and advanced packaging device manufacturers. We deliver comprehensive solutions throughout the semiconductor fabrication process with our families of proprietary products that provide critical yield-enhancing information, enabling microelectronic device manufacturers to drive down costs and time to market of their devices. We provide process and yield management solutions used in both wafer processing facilities, often referred to as "front-end" manufacturing, and in device packaging and test facilities, commonly referred to as "back-end" manufacturing. Our advanced process control software portfolio includes powerful solutions for standalone tools, groups of tools, or factory-wide suites to enhance productivity and achieve significant cost savings. Our principal market is semiconductor capital equipment. Semiconductors packaged as integrated circuits, or "chips", are used in consumer electronics, server and enterprise systems, mobile computing (including smart phones and tablets), data storage devices, and embedded automotive and control systems. Our core focus is the measurement and control of the structure, composition, and geometry of semiconductor devices as they are fabricated on silicon wafers to improve device performance and manufacturing yields. Our products and services are used by our customers who manufacture many types of integrated circuits for a multitude of applications, each having unique manufacturing challenges. This includes integrated circuits to enable information processing and management (logic integrated circuits), memory storage (NAND, 3D-NAND, NOR, and DRAM), analog devices (e.g., Wi-Fi and 5G radio integrated circuits, power devices), MEMS sensor devices (accelerometers, pressure sensors, microphones), image sensors, and other end markets including components for hard disk drives, LEDs, and power management. The semiconductor and electronics industries have also been characterized by constant technological innovation. We believe that, over the long term, our customers will continue to invest in advanced technologies and new materials to enable smaller design rules and higher density applications that fuel demand for process control equipment. During fiscal 2021, there was an increase in wafer fabrication equipment spending by semiconductor manufacturers, driven by the growing importance of semiconductor technology across a broadening range of industries, from mobile devices to cloud computing and high-performance computers. We are also seeing increasing global emphasis on more advanced power devices for electric vehicles and smart power grids to help combat climate change. Customer demand was strong throughout the year and we continued to increase our production output levels. Revenues in the four quarters of 2021 increased sequentially as customers transitioned to advanced nodes and increased advanced packaging volumes. While we have seen improvements in our own operations, we experienced higher costs of goods sold related to freight and logistics costs during the year. Risks and uncertainties related to the COVID-19 pandemic and the supply chain remain and we expect this uncertainty especially in the supply chain to continue to be a factor through at least the first half of 2022, and possibly the entire year.
Over the longer term, we believe that demand for semiconductors will continue to drive sustainable growth for our products and services across all of the markets we serve.
The following table summarizes certain key financial information for the periods indicated below (in thousands, except per share and percent data):
Year Ended
January 1, December 26,
2022 2020
Revenue $ 788,899 $ 556,496
Gross profit $ 429,086 $ 278,453
Gross profit as a percent of revenue 54 % 50 %
Total operating expenses $ 272,679 $ 251,776
Net income $ 142,349 $ 31,025
Diluted earnings per share $ 2.86 $ 0.63
• In fiscal 2021, revenue increased 41.8% compared to the fiscal 2020,
primarily due to an increase in sales to foundry and memory customers for
both advanced nodes and specialty devices and advanced packaging
applications.
• Gross margin as a percentage of revenue increased to 54% during fiscal 2021
compared to 50% in fiscal 2020 primarily driven by a favorable impact from
higher revenue volume of products and services, charges to cost of goods
sold in the 2020 period for both the sale of inventory written-up to fair
value upon the 2019 Merger and inventory reserve charges for a discontinued
product line.
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• The increase in operating expenses in fiscal 2021 compared to fiscal 2020
was mainly driven by onboarding of new headcount to support the growth we
are experiencing and an increase in employee-related expenses as a result of
higher variable compensation plan costs recorded during the year.
Our cash, cash equivalents and marketable securities balance increased to$511.3 million at the end of fiscal 2021 compared to$373.7 million at the end of the fiscal 2020. This increase was primarily the result of$175.3 million of cash generated from operating activities. This source of cash was partially offset by net cash of$23.8 million used for the purchase of Inspectrology and$12.0 million used for capital expenditures.
Key Events
Business Combination. In the first quarter of 2021, the Company acquiredInspectrology, LLC , a supplier of overlay metrology for controlling lithography and etch processes in the compound semiconductor market. The purchase consideration consisted of$24.0 million in cash paid at closing and an earnout subject to achievement of certain revenue targets for fiscal year 2021 and fiscal year 2022. As ofJanuary 1, 2022 ,$2.3 million of the earnout has been achieved with potential for up to an additional payment of$5.0 million based on fiscal 2022 results. Impact of the COVID-19 Pandemic on Our Business. As ofFebruary 25, 2022 , our operations have been impacted by our pandemic response, as described below, given the global nature of our workforce and our operations, but we have not experienced significant financial impact directly related to the pandemic. The ultimate extent to which COVID-19 will impact our business depends on future developments, which are highly uncertain and very difficult to predict, including the effectiveness and utilization of vaccines for COVID-19 and its variants, new information that may emerge concerning the severity of COVID-19 and its variants, and actions to contain or limit their spread. We have prioritized the health and safety of our employees and customers in our pandemic response. As governmental authorities implement restrictions on commercial operations, we have continued to ensure compliance with these directives while also maintaining business continuity for our essential operations. We have a global workforce. Although our manufacturing facilities are inthe United States , we maintain offices and have employees inthe United States ,South Korea ,Japan ,Taiwan ,China ,Singapore andEurope . Our operations at these offices are subject to various governmental directives and, as a result thereof, we have instituted a work-from-home policy for these employees to the extent practical. Where our essential employees are required to continue to report to work to perform their responsibilities, we have implemented staggered shifts or otherwise adjusted work schedules to maximize our operating capacity while adhering to applicable restrictions, including recommended distancing between persons. We have also provided our essential employees with appropriate protective equipment and have enhanced and increased cleanings at our facilities. At this time, we have not experienced any reduction in productivity, though we have incurred certain costs related to the implementation of these policies and practices. In addition, we have enhanced our email screening and cyber monitoring of our devices to further support our work from home policy. As certain countries have relaxed restrictions over the past few months, we have restarted certain activities in accordance with local guidelines. We may take further actions that we determine to be in the best interests of our employees or as may be required by federal, state, or local authorities. To date, the COVID-19 pandemic has disrupted the way that we conduct business but has not had a material adverse impact on our operations. We have not experienced significant delays in customer deliveries, but we are impacted by the global shortage in electronic components and our supply chain is strained in some cases as the availability of materials, logistics and freight options are challenging in many jurisdictions. Demand for our products was consistent with or exceeded our expectations for the fourth quarter of fiscal 2021. However, further disruptions to our supply chain in connection with the sourcing of materials, equipment and engineering support, and services from geographic areas that have been impacted by COVID-19 may pose risks to our business, results of operations and financial condition. In this time of uncertainty as a result of the COVID-19 pandemic, we are continuing to serve our customers while taking appropriate precautionary measures to provide a safe work environment for our employees and customers. The extent of the pandemic's effect on our operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include the duration, scope and severity of the pandemic, the severity of newly identified strains of COVID-19, the actions taken to contain or mitigate its impact, such as the extent of restrictions on gatherings and travel, the impact on governmental programs and budgets, the development, administration, efficacy and public utilization of treatments and vaccines, and the resumption of widespread economic activity. Trade tensions betweenthe United States andChina may escalate as a result of COVID-19 or otherwise and could result in the imposition of additional tariffs, trade restrictions or policy changes, any of which could increase costs of our product components and pricing of, and consumer demand for, our products, which could have a negative effect on our results of operations. 33
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Although the inherent uncertainty of the unprecedented and rapidly evolving crisis makes it difficult to predict with any confidence the likely impact on our future operations, the COVID-19 pandemic could have a material adverse impact on our consolidated business, results of operations and financial condition.
For a discussion of certain risks related to the international nature of our business and our operations and the COVID-19 pandemic, see Part I, Item 1A - Risk Factors of this 2021 Form 10-K.
Results of Operations
The following table sets forth, for the periods indicated, our results of operations as percentages of our revenue. Our results of operations are reported as one business segment.
Year Ended
January 1, December 26, December 31,
2022 2020 2019
Revenue 100.0 % 100.0 % 100.0 %
Cost of revenue 45.6 % 50.0 % 55.9 %
Gross profit 54.4 % 50.0 % 44.1 %
Operating expenses:
Research and development 12.2 % 15.2 % 15.8 %
Sales and marketing 7.3 % 8.6 % 9.2 %
General and administrative 8.6 % 11.7 % 17.4 %
Amortization 6.5 % 9.7 % 3.4 %
Total operating expenses 34.6 % 45.2 % 45.8 %
Operating income (loss) 19.8 % 4.8 % (1.7 )%
Interest income, net 0.1 % 0.5 % 1.2 %
Other income (expense), net (0.2 )% (0.5 )% 0.3 %
Income (loss) before provision
(benefit) for income taxes 19.7 % 4.8 % (0.2 )%
Provision (benefit) for income taxes 1.7 % (0.7 )% (0.8 )%
Net income 18.0 % 5.5 % 0.6 %
Results of Operations for 2021, 2020 and 2019
Revenue. Our revenue is derived from the sale of our systems and software, spare parts, and services. Our revenue was$788.9 million ,$556.5 million and$305.9 million for the years endedJanuary 1, 2022 ,December 26, 2020 andDecember 31, 2019 , respectively. This represents an increase of 41.8% from 2020 to 2021 and an increase of 81.9% from 2019 to 2020.
The following table lists, for the periods indicated, the different sources of our revenue in dollars (thousands) and as percentages of our total revenue:
Year Ended
January 1, December 26, December 31,
2022 2020 2019
Systems and software $ 669,114 85 % $ 450,459 80 % $ 255,723 84 %
Parts 72,753 9 % 65,444 12 % 34,892 11 %
Services 47,032 6 % 40,593 8 % 15,281 5 %
Total revenue $ 788,899 100 % $ 556,496 100 % $ 305,896 100 %
Total systems and software revenue increased $218.7 million for the year ended
January 1, 2022 , as compared to the year ended December 26, 2020 , primarily due
to an increase in overall demand for our products from semiconductor industry
customers, particularly in specialty devices and advanced packaging and advanced
nodes applications, and the inclusion of $22.3 million of revenue from the
Inspectrology acquisition. The year-over-year change in systems revenue was
primarily due to an increase in units shipped in our metrology and inspection
product lines. Parts and services revenue is generated from part sales,
maintenance service contracts, and system upgrades, as well as time and material
billable service calls. During fiscal 2021, the increase in parts and services
revenue was primarily due to increased spending by our customers on system
upgrades and repairs of existing systems.
Total systems and software revenue increased $194.7 million for the year ended
December 26, 2020 , as compared to the year ended December 31, 2019 , primarily
due to the inclusion of $178.6 million of revenue from legacy Nanometrics for
the
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period and increased investment from our foundry and logic customers. Parts and services revenue is generated from part sales, maintenance service contracts, system upgrades, as well as time and material billable service calls. During fiscal 2020, parts and services revenue increased primarily due to inclusion of$54.3 million of parts and service revenue from legacyNanometrics for 2020.
The following table sets forth, for the periods indicated, our revenue by geographic region as percentages of our revenue.
Year Ended
January 1, December 26, December 31,
2022 2020 2019
Revenue $ 788,899 $ 556,496 $ 305,896
Taiwan 25 % 22 % 22 %
South Korea 20 % 16 % 14 %
China 19 % 22 % 26 %
United States 16 % 15 % 15 %
Europe 8 % 9 % 8 %
Japan 8 % 11 % 10 %
Southeast Asia 4 % 5 % 5 %
Total revenue 100 % 100 % 100 %
The overall
Gross Profit. Our gross profit has been and will likely continue to be affected by a variety of factors, including manufacturing efficiencies, provision for excess and obsolete inventory, pricing by competitors or suppliers, new product introductions, production volume, inventory step-up from purchase accounting, customization and reconfiguration of systems, international and domestic sales mix, system and software product mix, and parts and services margins. Our gross profit was$429.1 million ,$278.5 million and$135.0 million for the years endedJanuary 1, 2022 ,December 26, 2020 , andDecember 31, 2019 , respectively. Our gross profit represented 54.4%, 50.0% and 44.1% for the years endedJanuary 1, 2022 ,December 26, 2020 , andDecember 31, 2019 , respectively. The increase in gross profit as a percentage of revenue from 2020 to 2021 was primarily due to higher factory utilization associated with stronger sales levels in the 2021 fiscal period, inventory reserve charges for a discontinued product line and the sale of inventory written-up to fair value upon the 2019 Merger in the 2020 fiscal period. This increase in gross profit was partially offset by supply chain cost increases in the 2021 fiscal period. The increase in gross profit as a percentage of revenue from 2019 to 2020 was primarily due to a favorable impact from higher revenue volume of products and services from the 2019 Merger with inclusion of legacyNanometrics results for the full fiscal year, partially offset by additional charges for excess and obsolete inventory in the 2020 fiscal period. During the fourth quarter of the year endedDecember 26, 2020 , we recognized a write-down of inventory in the amount of$8.1 million for our JetStep X300 product line to net realizable value based on future demand and market conditions. Operating Expenses.
Our operating expenses consist of:
• Research and Development. We believe that it is critical to continue to
make substantial investments in research and development to ensure the
availability of innovative technology that meets the current and
projected requirements of our customers' most advanced designs. We have
maintained, and intend to continue, our commitment to investing inresearch and development in order to continue to offer new products and
technologies. Accordingly, we devote a significant portion of our
technical, management and financial resources to research and development
programs. Research and development expenditures consist primarily of
salaries and related expenses of employees engaged in research, design
and development activities. They also include consulting fees, the costof related supplies and legal costs to defend our intellectual property.
Our research and development expenses were
and
year-over-year dollar increase from 2020 through 2021 was primarily due
to increased costs related to new product initiatives and increased
variable compensation plan costs. The year-over-year dollar increase from
2019 through 2020 was primarily due to the 2019 Merger where research and
development expenses for legacy
2020 fiscal year and in 2019 included from
31, 2019. We continue to maintain our commitment to investing in new
product development and enhancement to existing products.
• Sales and Marketing. Sales and marketing expenses are primarily comprised
of salaries and related costs for sales and marketing personnel, as well
as commissions and other non-personnel related expenses. Our sales and
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marketing expenses were
fiscal years 2021, 2020 and 2019, respectively. The year-over-year dollar
increase from 2020 through 2021 was primarily due to increased personnel
costs, including variable compensation plan costs. The year-over-year
dollar increase from 2019 through 2020 was primarily due to the 2019
Merger where sales and marketing expenses for legacy Nanometrics was
included for the full 2020 fiscal year and in 2019 included from October
25, 2019 to December 31, 2019 .
• General and Administrative. General and administrative expenses are
primarily comprised of salaries and related costs for general
administrative personnel, as well as other non-personnel related
expenses. Our general and administrative expenses were
$65.3 million and$53.0 million in fiscal years 2021, 2020 and 2019, respectively. The year-over-year dollar increase from 2020 through 2021 was primarily due to increased personnel costs, including variable compensation plan costs. The year-over-year dollar increases from 2019 through 2020 were primarily due to the 2019 Merger where general and
administrative expenses for legacy
2020 fiscal year and in 2019 included from
31, 2019.
• Amortization of Identifiable Intangible Assets. Amortization of
identifiable intangible assets, primarily purchased technology, was
million,
2019, respectively. The year-over-year dollar decrease from 2020 through
2021 was primarily due to certain intangible assets becoming fully
amortized, partially offset by amortization for newly acquired intangible
assets in 2021. The year-over-year dollar increase from 2019 through 2020
was primarily due to amortization of additional purchased intangible
assets recorded as a result of the 2019 Merger where such amortization
expense was included for the full 2020 fiscal year and in 2019 included
from
Interest income, net. In fiscal years 2021, 2020 and 2019, net interest income was$1.2 million ,$2.9 million and$3.7 million , respectively. The decrease in net interest income from 2020 to 2021 was due to lower interest rates during the 2021 period. The decrease in net interest income from 2019 to 2020 was due to lower interest rates during the 2020 period. Income taxes. The following table provides details of income tax (dollars in millions): Year Ended January 1, December 26, December 31, 2022 2020 2019 Income (loss) before provision (benefit) for income taxes$ 155.7 $ 26.9 $ (0.6 ) Provision (benefit) for income taxes$ 13.3 $ (4.2 ) $ (2.5 ) Effective tax rate 8.6 % (15.5 )% (419.9 )% The income tax provision differs from the federal statutory income tax rate of 21% for 2021 primarily due to a benefit related to the Foreign Derived Intangible Income Deduction ("FDII") of$11.1 million , excess benefits related to stock compensation of$3.8 million , tax benefits for research and development credits of$3.6 million , tax benefit from foreign income being taxed at lower rates of$3.8 million , and a one-time benefit of$2.0 million from a reduction to recorded tax reserve related to a lapse of statute of limitations. These benefits were partially offset by the inclusion ofU.S. tax on foreign source income of$1.7 million . The income tax provision differs from the federal statutory income tax rate of 21% for 2020 primarily due to a benefit related to the FDII of$4.3 million , tax benefits for research and development credits of$4.9 million , and a one-time benefit related to the closure of anIRS audit for tax years 2016 through 2018 of$2.9 million . These benefits were partially offset by the inclusion of Global Intangible Low-Taxed Income ("GILTI") of$2.0 million . The income tax provision differs from the federal statutory income tax rate of 21% for 2019 primarily due to a benefit related to the FDII of$2.3 million and tax benefits for research and development credits of$2.1 million , partially offset by non-deductible transaction costs of$1.1 million and Section 162(m) limitation on the deductibility of executive compensation of$0.8 million . Our future effective income tax rate depends on various factors, such as future impacts of the Tax Act, possible further tax legislation, the geographic composition of our pre-tax income, the amount of our pre-tax income as business activities fluctuate, non-deductible expenses incurred in connection with acquisitions and research and development credits as a percentage of aggregate pre-tax income. OnMarch 27, 2020 , the "Coronavirus Aid, Relief and Economic Security Act" (the "CARES Act") was enacted. The CARES Act includes provisions relating to refundable payroll tax credits, deferral of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company filed a 36
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claim for a refund of prior years' income taxes paid under the provisions of the
CARES Act which resulted in a tax benefit of
Unanticipated changes in our tax provisions or exposure to additional tax liabilities could affect our profitability and cash flow. We are subject to income and other taxes inthe United States and foreign jurisdictions. Changes in applicableU.S. (federal, state and local) or foreign tax laws and regulations, or their interpretation and application, including the possibility of retroactive effect, have affected and could continue to affect our tax expense and profitability as, for example, they did in 2017 upon passage of the Tax Cuts and Jobs Act. In addition, the final determination of any state or federal tax audits or related litigation, in particular with regard to the sustainment of our positions on research credits and timing of revenue recognition under IRC Section 451(b), could be materially different from our historical income tax provisions and accruals. Beginning in 2022, the TCJA eliminates the existing option to deduct research and development expenditures and requires taxpayers to amortize them over five years pursuant to IRC Section 174. AlthoughCongress is considering legislation that would defer the amortization requirement to later years, we have no assurance that the provision will be repealed or otherwise modified. If the requirement is not modified, it will reduce our cash flows beginning in 2022. Changes in our tax provisions or an increase in our tax liabilities, whether due to changes in applicable laws and regulations, the interpretation or application thereof, or a final determination of tax audits or litigation or agreements, could have a material adverse effect on our financial position, results of operations and/or cash flows.
Liquidity and Capital Resources
AtJanuary 1, 2022 , we had$511.3 million of cash, cash equivalents and marketable securities and$793.6 million in working capital. AtDecember 26, 2020 , we had$373.7 million of cash, cash equivalents and marketable securities and$611.6 million in working capital. Net cash and cash equivalents provided by operating activities for the years endedJanuary 1, 2022 ,December 26, 2020 andDecember 31, 2019 totaled$175.3 million ,$106.0 million and$18.1 million , respectively.
• Cash provided by operating activities increased in fiscal 2021 compared
to fiscal 2020 primarily due to higher net income, adjusted to exclude
the effect of non-cash charges, of
and other liabilities of
$2.5 million , partially offset by an increase in inventories of$14.7 million , an increase in prepaid expenses and other assets of$12.2 million and an increase in accounts receivable of$2.0 million .
• Cash provided by operating activities increased in fiscal 2020 compared
to fiscal 2019 primarily due to higher net income, adjusted to exclude
the effect of non-cash charges, of
and other liabilities of
and other assets of
$23.5 million , partially offset by an increase in inventories of$33.1 million , an increase in accounts receivable of$16.1 million and a decrease in income taxes of$8.8 million .
Net cash and cash equivalents used in investing activities for the years ended
• During the year ended
activities included purchases of marketable securities, net of proceeds
from sales of marketable securities of $106.0 million , purchase of
business net of cash acquired of $23.8 million , and purchases of
property, plant and equipment of $12.0 million .
• During the year ended
activities included purchases of marketable securities, net of proceeds
from sales of marketable securities of $47.6 million and purchases of
property, plant and equipment of $3.8 million , partially offset by cash
received from convertible note receivable of $2.8 million .
• During the year ended
activities included cash acquired in the 2019 Merger of
partially offset by purchases of marketable securities, net of proceeds
from marketable securities of
plant and equipment of
Net cash provided by financing activities was$2.7 million for the year endedJanuary 1, 2022 . For the years endedDecember 26, 2020 andDecember 31, 2019 financing activities used$53.7 million and$4.2 , respectively.
• During the year ended
from shares issued through share-based compensation plans of $10.1
million , partially offset by cash used to pay taxes related to shares
withheld for share based compensation plans of $7.4 million .
• During the year ended
to primarily purchase shares of our common stock under the share
repurchase authorization of $52.0 million .
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• During the year ended
to primarily pay taxes related to shares withheld for share based
compensation plans of
acquired business of
From time to time, we evaluate whether to acquire new or complementary businesses, products and/or technologies. We may fund all of or a portion of the price of these investments or acquisitions in cash, stock, or a combination of cash and stock. In the first quarter of 2021, the Company acquiredInspectrology, LLC for$24.0 million in cash and an earnout subject to the achievement of certain revenue targets earned for fiscal 2021 through 2022. The earnout achieved for fiscal 2021 was$2.3 million and is anticipated to be paid in the first half of fiscal 2022. There is potential earnout for up to an additional payment of$5.0 million depending on fiscal 2022 results. InNovember 2020 , the Onto Innovation Board of Directors approved a new share repurchase authorization, which allows the Company to repurchase up to$100 million worth of shares of its common stock. Repurchases may be made through both public market and private transactions from time to time with shares purchased being subsequently retired. AtJanuary 1, 2022 , there was$100 million available for future share repurchases.
For further information regarding our share repurchases, see Note 17 in the accompanying Notes to the Consolidated Financial Statements included in this Form 10-K.
We have a credit agreement with a bank that provides for a line of credit that is secured by the marketable securities we have with the bank. We are permitted to borrow up to 70% of the value of eligible securities held at the time the line of credit is accessed. As ofJanuary 1, 2022 , the available line of credit was approximately$131.4 million with an available interest rate of 1.8%. The credit agreement is available to us until such time that either party terminates the arrangement at its discretion. To date, we have not utilized the line of credit. Our future capital requirements will depend on many factors, including the timing and amount of our revenue and our investment decisions, which will affect our ability to generate additional cash. In addition, although the ultimate impact of the COVID-19 pandemic on our future results remains uncertain, we believe our business model and our current cash reserves leave us well-positioned to manage our business through this crisis as it continues to unfold. We expect that our existing cash, cash equivalents, marketable securities and availability under our line of credit will be sufficient to meet our anticipated cash requirements for working capital, capital expenditures and other cash needs for the next 12 months following the filing of this Form 10-K. Thereafter, if cash generated from operations and financing activities is insufficient to satisfy our working capital requirements, we may seek additional funding through bank borrowings, sales of securities or other means. Market conditions due to the COVID-19 pandemic or other factors may have an impact on our ability to access such additional funding. Our borrowing capacity under our existing line of credit is tied to the value of eligible securities held at the time of borrowing, which may be negatively impacted by market conditions due to COVID-19 and government responses thereto or other factors. In addition, a reduction in or volatility with respect to our stock price or a general market downturn could materially impact our ability to sell securities on favorable terms or at all. There can be no assurance that we will be able to raise any such capital on terms acceptable to us or at all.
Contractual Obligations
The following table summarizes our significant contractual obligations atJanuary 1, 2022 , and the effect such obligations are expected to have on our liquidity and cash flows in future periods. We are currently unable to provide a reasonably reliable estimate of the amount or periods when cash settlement of this liability may occur (dollars in thousands). Payments due by period Less than 1 1-3 3-5 More than Total year years years 5 years Operating lease obligations$ 21,104 $ 5,029 $ 7,515 $ 5,261 $ 3,299 Purchase obligations (1) 373,638 345,334 28,304 - - Total$ 394,742 $ 350,363 $ 35,819 $ 5,261 $ 3,299
(1) Represents our agreements to purchase goods and services consisting of
outstanding purchase orders for goods and services.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements included in this Form 10-K, which have been prepared in accordance with accounting principles generally accepted inthe United States . We review the accounting policies we use in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the 38
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reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable, inventories, business acquisitions, intangible assets, share-based payments, income taxes and warranty obligations. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. These estimates and judgments are regularly reviewed by management on an ongoing basis at the end of each quarter prior to the public release of our financial results. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our Consolidated Financial Statements. Revenue Recognition. Revenue is recognized when control of the promised goods or services are transferred to our customers in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services. We account for a contract when it has approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We account for shipping and handling activities as the fulfillment of a promise to transfer goods to the customer and therefore record these activities under the caption "Cost of revenue." Sales tax and any other taxes collected concurrent with revenue producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. Contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or the expected cost-plus margin. Revenue from systems is recognized when we transfer control of the product to our customer. To indicate transfer of control, we must have a present right to payment, legal title must have passed to the customer and the customer must have the significant risks and rewards of ownership. We generally transfer control for system sales when the customer or the customer's agent picks up the system at our facility. We provide an assurance warranty on our systems for a period of twelve to fourteen months against defects in material and workmanship. We provide for the estimated cost of product warranties at the time revenue is recognized. Depending on the terms of the systems arrangement, we may also defer the recognition of a portion of the consideration expected to be received because we have to satisfy a future obligation (e.g., installation and extended warranties). We use an observable price to determine the standalone selling price for separate performance obligations or a cost-plus margin approach when one is not available. Revenue from software licenses is recognized upfront at the point in time when the software is made available to the customer. Software licenses provide the customer with limited rights to use the software. Revenue from licensing support and maintenance is recognized as the support and maintenance are provided, which is over the contract period.
Revenue from parts is recognized when we transfer control of the product, which typically occurs when we ship the product from our facilities to the customer.
Revenue from services primarily consists of service contracts, which provide
additional maintenance coverage beyond our assurance warranty on our products,
service labor, consulting and training. Revenue from service contracts is
recognized ratably over the term of the service contract. Revenue from service
labor, consulting and training is recognized as services are performed.
We record contract liabilities when the customer has been billed in advance of
completing our performance obligations. These amounts are recorded as deferred
revenue in the Consolidated Balance Sheets.
Business combinations. We account for business combinations under the
acquisition method of accounting, which requires us to recognize separately from
goodwill the assets acquired, and the liabilities assumed at their acquisition
date fair values. While we use our best estimates and assumptions to accurately
value assets acquired and liabilities assumed at the acquisition date as well as
contingent consideration, where applicable, our estimates are inherently
uncertain and subject to refinement. As a result, during the measurement period,
which may be up to one year from the acquisition date, we record adjustments to
the assets acquired and liabilities assumed with the corresponding offset to
goodwill. Upon the conclusion of the measurement period or final determination
of the values of assets acquired or liabilities assumed, whichever comes first,
any subsequent adjustments are recognized in our consolidated statements of
operations. Accounting for business combinations requires our management to make
significant estimates and assumptions, especially at the acquisition date
including our estimates for intangible assets, contractual obligations assumed,
restructuring liabilities, pre-acquisition contingencies, and contingent
consideration, where applicable. Although we believe the assumptions and
estimates we have made in the past have been reasonable and appropriate, they
are based, in part, on historical experience and information obtained from the
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management of the acquired companies and are inherently uncertain. Estimates in valuing certain acquired intangible assets under the income approach include growth in future expected cash flows from product sales, acquired technologies, technology obsolescence rates, estimated cash flows from the projects when completed and discount rates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. Excess and Obsolete Inventory. Inventories are stated at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less predictable costs of completion, disposal and transportation. Cost is generally determined on a first-in, first-out basis, and includes material, labor and manufacturing overhead costs. We review and set standard costs as needed, but at a minimum, on an annual basis, at current manufacturing costs in order to approximate actual costs. We maintain reserves for our excess and obsolete inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future product lifecycles, product demand and market conditions. If actual product lifecycles, product demand and market conditions are less favorable than those originally projected by management, additional inventory write-downs may be required.Goodwill and Indefinite Lived Intangible Assets.Goodwill is tested for impairment during the fourth quarter, or whenever events or circumstances indicate that its carrying value may not be recoverable.Goodwill impairment is tested at the reporting unit level, which is defined as an operating segment or one level below the operating segment. The Company has one operating segment.Goodwill is reviewed for impairment using either a qualitative assessment or a quantitative goodwill impairment test. If the Company chooses to perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. When the Company performs the quantitative goodwill impairment test, it compares fair value to carrying value, which includes goodwill. If fair value exceeds carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss. Intangible assets with indefinite lives, including in-process research and development ("IPR&D"), are tested for impairment if impairment indicators arise and, at a minimum, annually. However, the Company is permitted to first assess qualitative factors to determine if a quantitative impairment test is necessary. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that an indefinite-lived intangible asset's fair value is less than its carrying amount. Otherwise, no further impairment testing is required. The indefinite-lived intangible asset impairment test consists of a one-step analysis that compares the fair value of the intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. We consider many factors in evaluating whether the value of intangible assets with indefinite lives may not be recoverable, including, but not limited to estimates of future cash flows, the discount rate, terminal growth rates, general economic conditions, our outlook and market performance of our industry and recent and forecasted financial performance.
There was no impairment of goodwill or IPR&D for the years presented.
Long-Lived Assets and Finite-Lived Acquired Intangible Assets. We periodically review long-lived assets, other than goodwill, for impairment whenever changes in events or circumstances indicate that the carrying amount of an asset may not be recoverable. Assumptions and estimates used in the determination of impairment losses, such as future cash flows and disposition costs, may affect the carrying value of long-lived assets and the impairment of such long-lived assets, if any, could have a material effect on our consolidated financial statements. During the year endedDecember 31, 2019 , we recognized a$0.5 million impairment loss on long-lived assets. No such indicators were noted in 2021 or 2020. Accounting for Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our current tax exposure together with our temporary differences resulting from differing treatment of items for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Management judgment is required in determining our provision for income taxes and any valuation allowance recorded against our deferred tax assets. The need for a valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred taxes will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust the valuation allowance, which could materially impact our financial position and results of operations. AtJanuary 1, 2022 andDecember 26, 2020 , we had recorded valuation allowances of$10.9 million and$14.2 million on certain of our deferred tax assets to reflect the deferred tax assets at the net amount that is more likely than not to be realized. We evaluated the realizability of the deferred tax assets based on positive earnings as well as the projected earnings in future years and believe it is more likely than not that the substantial majority of our deferred tax asset will be realized in the future years. We will continue to monitor the realizability of the deferred tax assets and evaluate the valuation allowance. 40
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We recognize liabilities for uncertain tax positions based on a two-step process. The first step requires us to determine if the weight of available evidence indicates that the tax position has met the threshold for recognition; therefore, we must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50% likely of being realized when effectively settled. This measurement step is inherently difficult and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We reevaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues, and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an additional charge to the tax provision in the period. Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If additional taxes are assessed as a result of an audit or litigation, it could have a material effect on our income tax provision and net income in the period or periods for which that determination is made.
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