ONTO INNOVATION INC. Overview
We are a worldwide leader in the design, development, manufacture and support of process control tools that perform macro-defect inspection and metrology, lithography systems, and process control analytical software used by semiconductor and advanced packaging device manufacturers. We deliver comprehensive solutions throughout the semiconductor fabrication process with our families of proprietary products that provide critical yield-enhancing information, enabling microelectronic device manufacturers to drive down costs and time to market of their devices. We provide process and yield management solutions used in both wafer processing facilities, often referred to as "front-end" and device packaging and test facilities, or "back-end" manufacturing, through a portfolio of standalone systems for macro-defect inspection, lithography, probe card test and analysis, and transparent and opaque thin film measurements. All of our systems feature sophisticated software and production-worthy automation. In addition, our advanced process control software portfolio includes powerful solutions for standalone tools, groups of tools, or factory-wide suites to enhance productivity and achieve significant cost savings. Our systems are backed by worldwide customer service and applications support. Our business is affected by the annual spending patterns of our customers on semiconductor capital equipment. The amount that our customers devote to capital equipment spending depends on a number of factors, including general worldwide economic conditions as well as other economic drivers such as personal computers, mobile devices, data centers, artificial intelligence and automotive sales. Current forecasts by industry analysts for the semiconductor device manufacturing industry project capital equipment spending to increase approximately 5% to 8% for 2020 as compared to 2019. Our revenue and profitability tend to follow the trends of certain segments within the semiconductor market. Historically, a significant portion of our revenue in each quarter and year has been derived from sales to relatively few customers, and we expect this trend to continue. For the years endedDecember 31, 2019 , 2018 and 2017, aggregate sales to customers that individually represented at least five percent of our revenue accounted for 42.7%, 18.3%, and 27.2% of our revenue, respectively.
Merger
OnJune 23, 2019 , Rudolph and Nanometrics, a provider of advanced process control metrology and software analytics, entered into the Merger Agreement to combine in an all-stock merger of equals transaction. The Merger was completed onOctober 25, 2019 . As a result of the Merger, Rudolph became a direct wholly-owned subsidiary of Nanometrics, which was renamed "OntoInnovation Inc. " upon the consummation of the Merger. Shares of common stock of Rudolph (NYSE: RTEC) ceased trading on theNew York Stock Exchange as of market close onOctober 25, 2019 .Onto Innovation (NYSE: ONTO) shares began trading on the NYSE onOctober 28, 2019 . At the effective time of the Merger, each issued and outstanding share of Rudolph Common Stock was converted into the right to receive 0.8042 shares ofOnto Innovation Common Stock (NYSE: ONTO). Immediately following the effective time of the Merger, each of Nanometrics' and Rudolph's stockholders owned approximately 50% of the combined company,Onto Innovation . Pursuant to the Merger Agreement, Onto Innovation accounts for the Merger as a reverse acquisition using the acquisition method of accounting in accordance with generally accepted accounting principles, with Rudolph being treated as the acquiring entity for accounting purposes. As such, the results of operations data below comprise the operating results of Rudolph and its consolidated subsidiaries for periods throughOctober 25, 2019 andOnto Innovation and its consolidated subsidiaries for periods on or afterOctober 26, 2019 . See Note 3 to the Consolidated Financial Statements set forth elsewhere in this Annual Report on Form 10-K for additional information regarding the Merger. 29
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Table of Contents Results of Operations
The following table sets forth, for the periods indicated, our results of operations as percentages of our revenue. Our results of operations are reported as one business segment.
Year Ended December 31,
2019 2018 2017
Revenue 100.0 % 100.0 % 100.0 %
Cost of revenue 55.9 % 45.8 % 47.2 %
Gross profit 44.1 % 54.2 % 52.8 %
Operating expenses:
Research and development 15.8 % 14.6 % 14.8 %
Sales and marketing 9.2 % 8.0 % 8.1 %
General and administrative 17.4 % 12.3 % 10.9 %
Amortization 3.4 % 0.6 % 0.8 %
Patent litigation income - % - % (5.1 )%
Total operating expenses 45.8 % 35.5 % 29.5 %
Operating income (loss) (1.7 )% 18.7 % 23.3 %
Interest income, net 1.2 % 0.8 % 0.4 %
Other income (expense), net 0.3 % - % (0.2 )%
Income (loss) before provision (benefit) for
income taxes (0.2 )% 19.5 % 23.5 %
Provision (benefit) for income taxes (0.8 )% 3.0 % 10.6 %
Net income 0.6 % 16.5 % 12.9 %
Results of Operations for 2019, 2018 and 2017
Revenue. Our revenue is derived from the sale of our systems and software, spare parts, and services. Our revenue was$305.9 million ,$273.8 million and$255.1 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. This represents an increase of 11.7% from 2018 to 2019 and an increase of 7.3% from 2017 to 2018. The increase in revenue from 2018 to 2019 was primarily due to the inclusion of revenue from legacy Nanometrics business for the period fromOctober 25, 2019 , the effective date of the Merger, throughDecember 31, 2019 . This year-over-year increase in revenue was partially offset by overall spending declines in the semiconductor capital equipment industries. The increase in revenue from 2017 to 2018 was primarily due to an increase in capital spending by front-end memory manufacturers.
The following table lists, for the periods indicated, the different sources of our revenue in dollars (thousands) and as percentages of our total revenue:
Year Ended December 31,
2019 2018 2017
Systems and software $ 255,723 84 % $ 234,241 86 % $ 216,884 85 %
Parts 34,892 11 % 28,658 10 % 27,143 11 %
Services 15,281 5 % 10,885 4 % 11,071 4 %
Total revenue $ 305,896 100 % $ 273,784 100 % $ 255,098 100 %
Total systems and software revenue increased $21.5 million for the year ended
December 31, 2019 as compared to the year ended December 31, 2018 primarily due
to the inclusion of revenue from legacy Nanometrics for the period from the
effective date of the Merger. The year-over-year change in systems revenue was
driven by an increase of $29.9 million in process control systems revenue due to
inclusion of $56.0 million of revenue from legacy Nanometrics for the period
from the effective date of the Merger. This increase was partially offset by
decreased demand for our products in both advanced packaging and front-end
systems. Software licensing, support and maintenance revenue decreased $4.0
million , primarily due to a decrease in revenue from our process control and
yield management software. The year-over-year increase in parts and services
revenue in absolute dollars from 2018 to 2019 was primarily due to the inclusion
of $10.3 million of parts and service revenue from legacy Nanometrics for the
period from the effective date of the Merger. Parts and services revenue is
generated from part sales, maintenance service contracts, system upgrades, as
well as time and material billable service calls.
Total systems and software revenue increased for the year ended December 31,
2018 as compared to the year ended December 31, 2017 due to increased demand for
our products in front-end process control systems. The year-over-year increases
in process control systems revenue totaled $12.9 million , primarily due to
higher metrology system sales in the 2018 period. Lithography system revenue
increased $0.7 million , primarily due to the shipment of a JetStep G system
offset by lower shipments of our JetStep W systems in 2018. Licensing revenue
from software increased $3.7 million primarily due
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to an increase in revenue from our process control and yield management software. The year-over-year increase in parts and services revenue in absolute dollars from 2017 to 2018 was primarily due to increased spending by our customers on repairs of existing systems. Parts and services revenue is generated from part sales, maintenance service contracts, system upgrades, as well as time and material billable service calls. Gross Profit. Our gross profit has been and will continue to be affected by a variety of factors, including inventory step-up from purchase accounting, manufacturing efficiencies, provision for excess and obsolete inventory, pricing by competitors or suppliers, new product introductions, production volume, customization and reconfiguration of systems, international and domestic sales mix, system and software product mix, and parts and services margins. Our gross profit was$135.0 million ,$148.3 million and$134.6 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Our gross profit represented 44.1%, 54.2% and 52.8% for the years endedDecember 31, 2019 , 2018 and 2017, respectively. The decrease in gross profit as a percentage of revenue from 2018 to 2019 was primarily due to charges to cost of goods sold including a$15.4 million charge for the sale of inventory written-up to fair value upon the Merger and$7.8 million in additional charges related to excess and obsolete inventory. The increase in gross profit as a percentage of revenue from 2017 to 2018 was primarily due to a change in our systems and software product sales mix and the sale of a lithography system that had previously been partially written down. Operating Expenses
Our operating expenses consist of:
• Research and Development. The process control defect inspection and
metrology, advanced packaging lithography, and data analysis systems and
software market is characterized by continuous technological development
and product innovations. We believe that the rapid and ongoing
development of new products and enhancements of existing products,
including the transition to copper and low-k dielectrics, wafer level
packaging, the continuous shrinkage in critical dimensions, and theevolution of ultra-thin gate process control is critical to our success.
Accordingly, we devote a significant portion of our technical, management
and financial resources to research and development programs. Research
and development expenditures consist primarily of salaries and related
expenses of employees engaged in research, design and development
activities. They also include consulting fees, the cost of related
supplies and legal costs to defend our patents. Our research and
development expenses were
in 2019, 2018 and 2017, respectively. The year-over-year dollar increase
from 2018 to 2019 was primarily due to increased compensation resulting
from the inclusion of
legacy Nanometrics resulting from the Merger. The year-over-year dollar
increase from 2017 to 2018 was primarily due to increased compensation
and development initiatives. These costs were partially offset by
decreased litigation expenses. 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
marketing expenses were
2019, 2018 and 2017, respectively. The year-over-year dollar increase
from 2018 to 2019 was primarily due to the inclusion of
sales and marketing expenses of legacy Nanometrics resulting from the
Merger. The year-over-year increase from 2017 to 2018 was primarily due
to compensation costs resulting from headcount and salary increases and
an increase in sales commissions
• 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
year-over-year dollar increase from 2018 to 2019 was primarily due to the
inclusion of $4.4 million in general and administrative expenses oflegacy Nanometrics resulting from the Merger. In addition, we incurred
change in control compensation expenses. The year-over-year dollar
increase from 2017 to 2018 was primarily due to compensation costs
resulting from headcount and salary increases.
• Amortization of Identifiable Intangible Assets. Amortization of
identifiable intangible assets was
million in 2019, 2018 and 2017, respectively. The year-over-year increase
in amortization expense from 2018 to 2019 was due additional amortization
recorded associated with additional purchased intangible assets recorded
as a result of the Merger. The year-over-year decreases in amortization
expense from 2017 to 2018 were due to certain intangible assets becoming
fully amortized during these periods.
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• Patent Litigation Income. During the twelve months ended
2019 and 2018, there was no patent litigation income. During the twelve
months ended
infringement litigation with Camtek.
Interest income (expense), net. In 2019, 2018 and 2017, net interest income was$3.7 million ,$2.2 million and$1.0 million , respectively. The increase in net interest income from 2018 to 2019 was due to interest earned on our marketable securities and additional interest income on a higher marketable securities balance following the Merger with Nanometrics. The increase in net interest income from 2017 to 2018 was due to higher interest earned on our marketable securities. Income taxes. The following table provides details of income tax (dollars in millions): Year Ended December 31, 2019 2018 2017 Income before income taxes$ (0.6 ) $ 53.3 $ 59.8
Provision (benefit) for income taxes
419.9 % 15.5 % 45.0 %
The income tax provision differs from the federal statutory income tax rate of
21% for 2019 primarily due to a benefit related to the Foreign Derived
Intangible Income Deduction ("FDII") of $2.3 million and tax benefits for
research and development credits of $2.1 million , partially offset by
non-deductible transaction costs of $1.1 million and Section 162(m) limitation
on the deductibility of executive compensation of $0.8 million .
The income tax provision differs from the federal statutory income tax rate of
21% for 2018 primarily due to Foreign Derived Intangible Income Deduction
("FDII") from Public law No. 115-97, known as the Tax Cuts and Jobs Act (the
"Tax Act") of $2.2 million , tax benefits for research and development credits of
$2.3 million , offset by a Section 162(m) limitation on the deductibility of
executive compensation of $0.5 million and additional Accounting Standards
Codification ("ASC") 740-10 tax reserves of $0.6 million .
The income tax provision differs from the federal statutory income tax rate of
21% for 2017 primarily due to new regulations resulting from the Tax Act of $9.5
million , offset by tax benefits for research and development credits of $1.6
million , section 199 manufacturing deduction of $1.6 million and excess tax
benefits on vesting of restricted stock of $1.6 million .
The Tax Act, which was enacted and signed into law on December 22, 2017 , reduced
the U.S. federal corporate tax rate from 35% to 21%, effective January 1, 2018 .
Also, on December 22, 2017 , the SEC issued Staff Accounting Bulletin No. 118
("SAB 118"), which provides guidance on accounting for tax effects of the Tax
Act. SAB 118 provides a measurement period of up to one year from the enactment
date to complete the accounting. Any adjustments during this measurement period
will be included in net earnings from continuing operations as an adjustment to
income tax expense in the reporting period when such adjustments are determined.
Based on the information available and current interpretation of the rules, we
estimated the impact of the reduction in the corporate tax rate and
remeasurement of certain deferred tax assets and liabilities. The provisional
amount recorded in the fourth quarter of 2017 related to the remeasurement of
our deferred tax balance resulted in additional income tax expense of $8.0
million . During the fourth quarter of 2018, we completed the accounting for such
revaluation and recorded an additional $0.8 million in tax expense. The prior
year provisional impact and current year finalization of the Tax Act summarized
below, which is included as a component of the provision from income taxes is
further described in Note 12 in the accompanying Notes to the Consolidated
Financial Statements included in this Annual Report on Form 10-K (dollars in
millions).
Year Ended December 31,
2019 2018
Re-measurement of U.S. deferred tax assets and
liabilities $ - $ -
Transition tax on non-U.S. subsidiaries' earnings - 0.1
Foreign tax credits applied against transition
tax - -
Valuation allowance for unused foreign tax
credits 1.0 0.7
Total impact of the Tax Act on the provision
for income taxes $ 1.0 $ 0.8
Our future effective income tax rate depends on various factors, such as future
impacts of the Tax Act, possible further tax legislation, the geographic
composition of our pre-tax income, the amount of our pre-tax income as business
activities fluctuate, non-deductible expenses incurred in connection with
acquisitions and research and development credits as a percentage of aggregate
pre-tax income.
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Liquidity and Capital Resources
At
Net cash and cash equivalents provided by operating activities for the years endedDecember 31, 2019 , 2018 and 2017 totaled$18.1 million ,$35.1 million and$64.2 million , respectively. During the year endedDecember 31, 2019 , cash provided by operating activities was primarily due to net income, adjusted to exclude the effect of non-cash charges, of$53.5 million , a decrease in income taxes of$7.6 million , which were partially offset by a decrease in accounts payable of$12.1 million , a decrease in accrued and other liabilities of$6.7 million , an increase in inventories of$9.3 million , an increase in accounts receivable of$9.7 million and an increase in prepaid expenses and other assets of$5.1 million . During the year endedDecember 31, 2018 , cash provided by operating activities was primarily due to net income, adjusted to exclude the effect of non-cash charges, of$64.3 million , an increase in accounts payable of$3.5 million , a decrease in income taxes of$1.1 million , a decrease in account receivable of$0.7 million and an increase in accrued and other liabilities of$0.2 million , which were partially offset by an increase in inventories of$31.5 million , and an increase in prepaid expenses and other assets of$3.1 million . The increase in inventories of$31.5 million was primarily due to increased sales projections of our latest products and new product initiatives. During the year endedDecember 31, 2017 , cash provided by operating activities was primarily due to net income, adjusted to exclude the effect of non-cash charges, of$65.9 million , an increase in accrued and other liabilities of$5.2 million , an increase in accounts payable of$3.2 million and a decrease in account receivable of$0.4 million , which were partially offset by an increase in income taxes of$4.7 million , an increase in inventory of$4.2 million , and an increase in prepaid expenses and other assets of$1.7 million . Net cash and cash equivalents provided by investing activities for the years endedDecember 31, 2019 and 2018 was$4.1 million and$33.8 million , respectively. Net cash and cash equivalents used in investing activities for the year endedDecember 31, 2017 totaled$32.5 million . During the year endedDecember 31, 2019 , net cash provided by investing activities included proceeds from maturities and sales of marketable securities of$94.5 million and cash acquired in the Merger of$43.9 million , which were partially offset by purchases of marketable securities of$127.5 million and purchases of property, plant and equipment of$6.8 million . During the year endedDecember 31, 2018 , net cash provided by investing activities included proceeds from sales of marketable securities of$186.3 million , which was partially offset by purchases of marketable securities of$140.0 million , purchases of property, plant and equipment of$7.5 million and cash advanced on a convertible note receivable of$5.0 million . During the year endedDecember 31, 2017 , net cash used in investing activities included purchases of marketable securities of$164.7 million , purchases of property, plant and equipment of$10.2 million , and purchase of intangible assets of$1.0 million , which were partially offset by proceeds from sales of marketable securities of$143.3 million . Net cash used in financing activities was$4.2 million ,$23.9 million and$2.6 million in 2019, 2018 and 2017, respectively. During the year endedDecember 31, 2019 , financing activities used cash to pay taxes related to shares withheld for share based compensation plans of$2.5 million , pay contingent consideration for acquired business of$1.8 million , and purchase shares of our common stock under share repurchase authorizations of$0.7 million . These uses of cash were partially offset by proceeds from sales of shares through employee stock plans of$0.8 million . During the year endedDecember 31, 2018 , financing activities used cash to purchase shares of our common stock under share repurchase authorizations of$21.1 million , pay taxes related to shares withheld for share based compensation plans of$1.9 million and pay contingent consideration for acquired business of$1.5 million . These uses of cash were partially offset by proceeds from sales of shares through employee stock plans of$0.6 million . During the year endedDecember 31, 2017 , financing activities included the redemption of stock warrants of$1.0 million , tax payments related to shares withheld for share-based compensation plans of$1.4 million and payment of contingent consideration for acquired businesses of$0.8 million , which were partially offset by proceeds from sales of shares through employee stock plans of$0.6 million . From time to time, we evaluate whether to acquire new or complementary businesses, products and/or technologies. We may fund all of or a portion of the price of these investments or acquisitions in cash, stock, or a combination of cash and stock. OnMay 31, 2018 , we entered into a convertible loan agreement withSimax Precision Technologies Limited ("the borrower"), which allowed them to borrow up to$15.0 million in multiple promissory notes with an interest rate of 4.25% per annum payable on a semi-annual basis. We expected to be a supplier of lithography modules to Simax, which is used in the manufacture, sale and service of lithography systems. AtDecember 31, 2019 , we had$5.0 million in outstanding convertible notes receivable with the borrower. 33
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During the fourth quarter of 2019, we began negotiations with the borrower to end our relationship as it pertains to this agreement. We determined that it is unlikely that a portion of the convertible note receivable will be collectable, and a reserve in the amount of$2.0 million was recorded during the period endedDecember 31, 2019 . In addition, we ceased recognizing interest income on these convertible notes receivable as ofSeptember 30, 2019 . See Note 8 in the accompanying Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further information. Following the Merger, we assumed the share repurchase authorization approved onMarch 14, 2019 , by the former Nanometrics Board of Directors. This share repurchase authorization allows us to purchase up to$80.0 million worth of shares of our common stock. Under the terms of this share repurchase authorization, shares may be repurchased through open market or privately negotiated transactions. No shares have been repurchased under this repurchase authorization.
For further information regarding our share repurchases, see Note 18 in the accompanying Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
We have a credit agreement with a bank that provides for a line of credit that is secured by the marketable securities we have with the bank. We are permitted to borrow up to 70% of the value of eligible securities held at the time the line of credit is accessed. As ofDecember 31, 2019 , the available line of credit was approximately$91.3 million with an available interest rate of 3.3%. 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. 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. 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 atDecember 31, 2019 , and the effect such obligations are expected to have on our liquidity and cash flows in future periods. This table excludes the liability for unrecognized tax benefits that totaled approximately$10.6 million atDecember 31, 2019 . We are currently unable to provide a reasonably reliable estimate of the amount or periods when cash settlement of this liability may occur (dollars in thousands). Payments due by period Less than 1 1-3 3-5 More than Total year years years 5 years Operating lease obligations$ 29,152 $ 5,901 $ 12,116 $ 5,856 $ 5,279 Open and committed purchase orders 97,877 93,705 4,172 - - Total$ 127,029 $ 99,606 $ 16,288 $ 5,856 $ 5,279
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a material effect on our financial condition, results of operations or liquidity and capital resources.
Critical Accounting Policies
Management's discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements included in this Annual Report on Form 10-K, which have been prepared in accordance with accounting principles generally accepted 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 reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable, inventories, business acquisitions, intangible assets, share-based payments, income taxes and warranty obligations. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. These estimates and judgments are regularly 34
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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. EffectiveJanuary 1, 2018 , we adopted the requirements of Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." Revenue is recognized when control of the promised goods or services are transferred to our customers in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services. We account for a contract when it has approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We account for shipping and handling activities as the fulfillment of a promise to transfer goods to the customer and therefore record these activities under the caption "Cost of revenue." Sales tax and any other taxes collected concurrent with revenue producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. Contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or the expected cost-plus margin. Revenue from systems is recognized when we transfer control of the product to our customer. To indicate transfer of control, we must have a present right to payment, legal title must have passed to the customer and the customer must have the significant risks and rewards of ownership. We generally transfer control for system sales when the customer or the customer's agent picks up the system at our facility. Payment for the majority of our systems have 80-90% of the invoice amount due within 30 days and the remaining amount due upon completion of installation, recalibration and qualification by the customer. We provide an assurance warranty on our systems for a period of twelve to fourteen months against defects in material and workmanship. We provide for the estimated cost of product warranties at the time revenue is recognized. Depending on the terms of the systems arrangement, we may also defer the recognition of a portion of the consideration expected to be received because we have to satisfy a future obligation (e.g., installation, training and extended warranties). We use an observable price to determine the standalone selling price for separate performance obligations or a cost-plus margin approach when one is not available. Revenue from software licenses is recognized upfront at the point in time when the software is made available to the customer. Software licenses provide the customer with limited rights to use the software. Revenue from licensing support and maintenance is recognized as the support and maintenance are provided, which is over the contract period. Payment for software licensing, support and maintenance is generally due in 30 days. Revenue from parts is recognized when we transfer control of the product, which typically occurs when we ship the product from our facilities to the customer. Payment for parts is generally due in 30 days. Revenue from services primarily consists of service contracts, which provide additional maintenance coverage beyond our assurance warranty on our products, service labor, consulting and training. Revenue from service contracts is recognized ratably over the term of the service contract. Revenue from service labor, consulting and training is recognized as services are performed. Payment for services is generally due in 30 days. We record contract liabilities when the customer has been billed in advance of completing our performance obligations. These amounts are recorded as deferred revenue in the Consolidated Balance Sheets. Business combinations. We account for business combinations under the acquisition method of accounting, which requires us to recognize separately from goodwill the assets acquired, and the liabilities assumed at their acquisition date fair values. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in our consolidated statements of operations. Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date including our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies, and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based, in part, on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Estimates in valuing certain acquired 35
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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. 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. Long-Lived Assets and 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 2018 or 2017. Accounting for Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our actual current tax exposure together with our temporary differences resulting from differing treatment of items for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Management judgment is required in determining our provision for income taxes and any valuation allowance recorded against our deferred tax assets. The need for a valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred taxes will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust the valuation allowance, which could materially impact our financial position and results of operations. AtDecember 31, 2019 and 2018, we had recorded valuation allowances of$14.2 million and$3.2 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. We recognize liabilities for uncertain tax positions based on a two-step process. The first step requires us to determine if the weight of available evidence indicates that the tax position has met the threshold for recognition; therefore, we must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50% likely of being realized when effectively settled. This measurement step is inherently difficult and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We reevaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues, and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an additional charge to the tax provision in the period. Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If additional taxes are assessed as a result of an audit or litigation, it could have a material effect on our income tax provision and net income in the period or periods for which that determination is made.
Impact of Recent Accounting Pronouncements
Recently Adopted
EffectiveJanuary 1, 2019 , we adopted ASU No. 2018-07, "Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting." This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. The ASU is effective for the fiscal years beginning afterDecember 15, 2018 , including interim periods within that fiscal year. The adoption of ASU No. 2018-07 did not have a material impact on our consolidated financial position, results of operations, and cash flows. 36
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EffectiveJanuary 1, 2019 , we adopted ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." The new guidance allows companies to reclassify stranded tax effects resulting from the Tax Act from accumulated other comprehensive income to retained earnings. The guidance also requires certain new disclosures regardless of a company's election. The standard is effective for annual periods beginning afterDecember 15, 2018 and for interim periods within those annual periods, with earlier adoption permitted. The adoption of ASU No. 2018-02 did not have a material impact on our consolidated financial position, results of operations, and cash flows. InJanuary 2017 , theFinancial Accounting Standards Board ("FASB") issued ASU No. 2017-04, "Intangibles -Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." This ASU eliminates Step 2 from the goodwill impairment test. Accordingly, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to the excess, limited to the total amount of goodwill allocated to the reporting unit. The ASU is effective for the fiscal years beginning afterDecember 15, 2019 and for interim periods within those fiscal years, with earlier adoption permitted. The adoption of ASU No. 2017-04 in 2019 did not have a material impact on our consolidated financial position, results of operations, and cash flows. InFebruary 2016 , the FASB issued ASU No. 2016-02, "Leases (Topic 842)." ASU No. 2016-02 requires that lessees recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and lease liability. OnJanuary 1, 2019 , we adopted ASU No. 2016-02 using the modified retrospective method which applies the provisions of the standard at the effective date without adjusting the comparative periods presented. We also elected the package of practical expedients. There was not a cumulative-effect adjustment to our beginning retained earnings as a result of adopting ASU No. 2016-02. We recognized additional operating lease assets and obligations of$14.4 million as ofJanuary 1, 2019 . As a result of the Merger, operating lease assets and obligations of$9.7 million were assumed from the former Nanometrics. We elected to not reassess prior conclusions related to the identification, classification and accounting for initial direct costs for leases that commenced prior toJanuary 1, 2019 . For additional disclosure and detail, see Note 7 of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Recently Issued
InDecember 2019 , the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating consolidated income taxes to separate financial statements of entities not subject to income tax. ASU No. 2019-12 is effective for fiscal years beginning afterDecember 15, 2020 , with early adoption permitted. Upon adoption, we must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. We are currently evaluating the impact of this new standard on our consolidated financial position, results of operations, and cash flows. InAugust 2018 , the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." This ASU is part of the FASB's larger disclosure framework project intended to improve the effectiveness of financial statement footnote disclosure. ASU No. 2018-13 modifies required fair value disclosures related primarily to level 3 investments. This ASU is effective for annual periods beginning afterDecember 15, 2019 and interim periods within those annual periods. The adoption of ASU No. 2018-13 is not expected to have a material effect on our consolidated financial position, results of operations, and cash flows. InMay 2017 , the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting." This ASU amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. The ASU is effective for the fiscal years beginning afterDecember 15, 2019 and for interim periods within those fiscal years. The adoption of ASU No. 2017-09 is not expected to have a material effect on our consolidated financial position, results of operations, and cash flows, if any. InJune 2016 , the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which represents a new credit loss standard that will change the impairment model for most financial assets and certain other financial instruments. Specifically, this guidance will require entities to utilize a new "expected loss" model as it relates to trade receivables, notes receivable and other commitments to extend credit held by a reporting entity. In addition, entities will be required to recognize an allowance for estimated credit losses on 37
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available-for-sale debt securities, regardless of the length of time that a security has been in an unrealized loss position. This guidance will be effective for annual reporting periods beginning afterDecember 15, 2019 , including interim periods within those annual reporting periods, with early adoption permitted. We expect that the adoption of this guidance will not have a material impact on our consolidated financial position, results of operations, and cash flows.
Recently issued accounting guidance not discussed above is not applicable or did not have, or is not expected to have, a material impact to the Company.
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