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," 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 semiconductors, primarily semiconductors packaged as integrated circuits within electronic devices, including 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 the 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 (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 2020, we completed certain integration activities and launched four new metrology systems into the marketplace. These new products were introduced as logic and foundry customers were increasing their capacity while following aggressive plans to transition their manufacturing to smaller nodes. Customer interactions centered around satisfying the immediate demand for logic devices with our existing product portfolio, while partnering with R&D groups to prepare for the process controls needed for the next generation of semiconductors that will require the latest systems from us. Our strong engineering teams have, and will continue to, deliver new products to our customers, followed by our field engineers providing customer support, while simultaneously achieving and surpassing our cost synergy targets that were established at the onset of the 2019 Merger. OnFebruary 28, 2020 , our Board of Directors determined that it is in the best interests of the Company to change its fiscal year end fromDecember 31 to a 52-53 week fiscal year ending on the Saturday closest toDecember 31 . The change is intended to align our fiscal periods more closely with industry peers and improve comparability. We made the fiscal year change on a prospective basis and have not adjusted operating results for prior periods. The fiscal year of 2020 began onJanuary 1, 2020 and endedDecember 26, 2020 .
The following table summarizes certain key financial information for the periods indicated below (in thousands, except per share and percent data):
Year Ended
December 26, December 31, December 31,
2020 2019(1) 2018(1)
Revenue $ 556,496 $ 305,896 $ 273,784
Gross profit $ 278,453 $ 135,028 $ 148,279
Gross profit as a percent of revenue 50 % 44 % 54 %
Total operating expenses $ 251,776 $ 140,071 $ 97,195
Net income $ 31,025 $ 1,910 $ 45,096
Diluted earnings per share $ 0.63 $ 0.06 $ 1.74
(1) On
and resulted in the combined company, which was renamed
Rudolph is treated as the accounting acquirer in the 2019 Merger
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and therefore the financial results include Rudolph for all periods presented
and the financial results of the former Nanometrics for the periods on or
after
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 14% to 16% for 2021 as compared to 2020. 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 26, 2020 ,December 31, 2019 andDecember 31, 2018 , aggregate sales to customers that individually represented at least five percent of our revenue accounted for 54.6%, 42.7%, and 18.3% of our revenue, respectively. Our cash, cash equivalents and marketable securities balance increased to$373.7 million at the end of fiscal 2020 compared to$320.2 million at the end of the fiscal 2019. This increase was primarily the result of$106.0 million of cash generated from operating activities. In addition, the Company used approximately$52.0 million to repurchase 1.9 million shares of common stock during 2020.
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 26 ,
Year Ended
2020 2019 2018
Revenue 100.0 % 100.0 % 100.0 %
Cost of revenue 50.0 % 55.9 % 45.8 %
Gross profit 50.0 % 44.1 % 54.2 %
Operating expenses:
Research and development 15.2 % 15.8 % 14.6 %
Sales and marketing 8.6 % 9.2 % 8.0 %
General and administrative 11.7 % 17.4 % 12.3 %
Amortization 9.7 % 3.4 % 0.6 %
Total operating expenses 45.2 % 45.8 % 35.5 %
Operating income (loss) 4.8 % (1.7 )% 18.7 %
Interest income, net 0.5 % 1.2 % 0.8 %
Other income (expense), net (0.5 )% 0.3 % - %
Income (loss) before provision (benefit) for
income taxes 4.8 % (0.2 )% 19.5 %
Provision (benefit) for income taxes (0.7 )% (0.8 )% 3.0 %
Net income 5.5 % 0.6 % 16.5 %
Results of Operations for 2020, 2019 and 2018
Revenue. Our revenue is derived from the sale of our systems and software, spare parts, and services. Our revenue was$556.5 million ,$305.9 million and$273.8 million for the years endedDecember 26, 2020 ,December 31, 2019 andDecember 31, 2018 , respectively. This represents an increase of 81.9% from 2019 to 2020 and an increase of 11.7% from 2018 to 2019. The increase in revenue of 81.9% in the fiscal year endedDecember 26, 2020 compared to the prior year is primarily attributable to revenue from the 2019 Merger now including revenue from the legacy Nanometrics business for the full fiscal year and increased investments from our foundry and logic customers. 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 2019 Merger, throughDecember 31, 2019 . 31
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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 26, Year Ended December 31,
2020 2019 2018
Systems and software $ 450,459 80 % $ 255,723 84 % $ 234,241 86 %
Parts 65,444 12 % 34,892 11 % 28,658 10 %
Services 40,593 8 % 15,281 5 % 10,885 4 %
Total revenue $ 556,496 100 % $ 305,896 100 % $ 273,784 100 %
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 revenue from legacy Nanometrics for the period. The
year-over-year change in systems revenue was primarily due to an increase of
$178.6 million of revenue from legacy Nanometrics for the period and increased
investment from our foundry and logic customers. The year-over-year increase in
parts and services revenue in absolute dollars from 2019 to 2020 was primarily
due to an increase of $54.3 million of parts and service revenue from legacy
Nanometrics for 2020. 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 $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 2019 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 2019 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 2019 Merger. Parts and services revenue is
generated from part sales, maintenance service contracts, system upgrades, as
well as time and material billable service calls.
The following table sets forth, for the periods indicated, our revenue by geographic region as percentages of our revenue.
Year Ended December 26, Year Ended December 31,
2020 2019 2018
Revenue $ 556,496 $ 305,896 $ 273,784
China 22 % 26 % 23 %
Taiwan 22 % 22 % 17 %
South Korea 16 % 14 % 19 %
United States 15 % 15 % 16 %
Japan 11 % 10 % 8 %
Europe 9 % 8 % 10 %
Southeast Asia 5 % 5 % 7 %
Total revenue 100 % 100 % 100 %
The overall
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$278.5 million ,$135.0 million and$148.3 million for the years endedDecember 26, 2020 ,December 31, 2019 andDecember 31, 2018 , respectively. Our gross profit represented 50.0%, 44.1% and 54.2% for the years endedDecember 26, 2020 ,December 31, 2019 andDecember 31, 2018 , respectively. 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 legacy Nanometrics results for the full fiscal year, partially offset by additional charges for excess and obsolete inventory. 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. The decrease in gross profit as a percentage of revenue from 2018 to 2019 was primarily due to charges to cost of goods sold 32
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including a$15.4 million charge for the sale of inventory written-up to fair value upon the 2019 Merger and$7.8 million in additional charges related to excess and obsolete inventory.
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 havemaintained and intend to continue our commitment to investing in research
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 patents. Our research
and development expenses were
million in fiscal years 2020, 2019 and 2018, respectively. The
year-over-year dollar increases from 2018 through 2020 were primarily due
to the 2019 Merger where research and development expenses for legacy
Nanometrics was included for the full 2020 fiscal year and in 2019
included from October 25, 2019 to December 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
marketing expenses were
fiscal years 2020, 2019 and 2018, respectively. The year-over-year dollar
increases from 2018 through 2020 were 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
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
respectively. The year-over-year dollar increases from 2018 through 2020
were primarily due to the 2019 Merger where general and administrative
expenses for legacy Nanometrics was included for the full 2020 fiscal
year and in 2019 included from October 25, 2019 to December 31, 2019 .
• Amortization of Identifiable Intangible Assets. Amortization of
identifiable intangible assets was
million in fiscal years 2020, 2019 and 2018, respectively. The
year-over-year dollar increases from 2018 through 2020 were primarily due
to additional amortization recorded associated with 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 October 25, 2019 to December 31, 2019 .
Interest income (expense), net. In fiscal years 2020, 2019 and 2018, net
interest income was $2.9 million , $3.7 million and $2.2 million ,
respectively. The decrease in net interest income from 2019 to 2020 was due to
lower interest rates during the 2020 period, partially offset by additional
interest income on a higher marketable securities balance following the 2019
Merger. 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 2019 Merger.
Income taxes. The following table provides details of income tax (dollars in
millions):
Year Ended
December 26, Year Ended December 31,
2020 2019 2018
Income (loss) before provision (benefit)
for income taxes $ 26.9 $ (0.6 ) $ 53.3
Provision (benefit) for income taxes $ (4.2 ) $ (2.5 ) $ 8.3
Effective tax rate (15.5 )% (419.9 )% 15.5 %
The income tax provision differs from the federal statutory income tax rate of
21% for 2020 primarily due to a benefit related to the Foreign Derived
Intangible Income Deduction ("FDII") of $4.3 million , tax benefits for research
and development credits of $4.9 million , and a one-time benefit related to the
closure of an IRS audit for tax years 2016 through 2018 of $2.9 million . These
benefits were partially offset by the inclusion of Global Intangible Low-Taxed
Income ("GILTI") of $2.0 million .
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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 . The income tax provision differs from the federal statutory income tax rate of 21% for 2018 primarily due to 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 . 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 claim for a refund of prior years' income taxes paid under the provisions of the CARES Act which resulted in a tax benefit of$1.1 million as the 2019 net operating loss was carried back to a year with higher tax rates.
Liquidity and Capital Resources
At
Net cash and cash equivalents provided by operating activities for the years endedDecember 26, 2020 ,December 31, 2019 andDecember 31, 2018 totaled$106.0 million ,$18.1 million and$35.1 million , respectively.
• 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
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 provided by operating activities decreased
in fiscal 2019 compared to fiscal 2018 primarily due to lower net income,
adjusted to exclude the effect of non-cash charges, of
decrease in accounts payable of
receivable of
liabilities of
assets of $2.0 million , which were partially offset by an increase in
inventories of $22.2 million and a decrease in income taxes of $6.6
million .
Net cash and cash equivalents used in investing activities for the year ended
December 26, 2020 was $48.6 million . For the years ended December 31, 2019 and
December 31, 2018 , investing activities provided net cash and cash equivalents
of $4.1 million and $33.8 million , respectively.
• 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
• During the year ended
activities included proceeds from sales of marketable securities, net of
purchases of marketable securities of
purchases of property, plant and equipment of $7.5 million and cash
advanced on a convertible note receivable of $5.0 million .
Net cash used in financing activities was $53.7 million , $4.2 million and $23.9
million for the years ended December 26, 2020 , December 31, 2019 and December
31, 2018 , respectively.
• During the year ended
to primarily purchase shares of our common stock under the share
repurchase authorization of $52.0 million .
• During the year ended
to primarily pay taxes related to shares withheld for share based
compensation plans of
acquired business of $1.8 million .
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• During the year ended
to primarily purchase shares of our common stock under share repurchase
authorizations of
for share based compensation plans 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. InNovember 2020 , the Company's Board of Directors approved a share repurchase authorization, which allows the Company to repurchase up to$100 million worth of shares of its common stock. This share repurchase authorization replaces the remaining balance of$28 million from the prior share repurchase authorization. Repurchases may be made through both public market and private transactions from time to time. AtDecember 26, 2020 , 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 ofDecember 26, 2020 , the available line of credit was approximately$78.4 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 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. 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 atDecember 26, 2020 , 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$8.9 million atDecember 26, 2020 . We are currently unable to provide a reasonably reliable estimate of the amount or periods when cash settlement of this liability may occur (dollars in thousands). Payments due by period Less than 1 1-3 3-5 More than Total year years years 5 years Operating lease obligations$ 24,242 $ 5,185 $ 10,850 $ 4,832 $ 3,375 Open and committed purchase orders 137,819 136,526 273 - 1,020 Total$ 162,061 $ 141,711 $ 11,123 $ 4,832 $ 4,395
Off-Balance Sheet Arrangements
The Company does not have any off balance sheet arrangements that have or are
reasonably likely to have a material current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
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Table of Contents 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 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 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, 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.
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
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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 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 2020 or 2018. 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 26, 2020 andDecember 31, 2019 , we had recorded valuation allowances of$14.2 million and$14.2 million on certain of our deferred tax assets to reflect the deferred tax assets 37
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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.
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