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EX-31.1 - EXHIBIT 31.1 - RUDOLPH TECHNOLOGIES INCa12312014exhibit311.htm
EX-31.2 - EXHIBIT 31.2 - RUDOLPH TECHNOLOGIES INCa12312014exhibit312.htm
EX-32.1 - EXHIBIT 32.1 - RUDOLPH TECHNOLOGIES INCa12312014exhibit321.htm
EX-21.1 - EXHIBIT 21.1 - RUDOLPH TECHNOLOGIES INCa12312014exhibit211.htm
EX-32.2 - EXHIBIT 32.2 - RUDOLPH TECHNOLOGIES INCa12312014exhibit322.htm
EX-10.10 - EXHIBIT 10.10 - RUDOLPH TECHNOLOGIES INCa12312014exhibit1010.htm
EXCEL - IDEA: XBRL DOCUMENT - RUDOLPH TECHNOLOGIES INCFinancial_Report.xls
EX-23.1 - EXHIBIT 23.1 - RUDOLPH TECHNOLOGIES INCa12312014exhibit231.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________
FORM 10-K
_____________________________
(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to          
Commission File No. 000-27965
_____________________________
RUDOLPH TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
_____________________________
Delaware
 
22-3531208
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
One Rudolph Road, P.O. Box 1000, Flanders, NJ 07836
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (973) 691-1300
_____________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class
 
Name of Exchange on Which Registered
Common Stock, $0.001 par value per share (including attached Series A Junior Participating Preferred Stock Purchase Rights)
 
New York Stock Exchange (NYSE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
_____________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x     No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
       Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No x
The aggregate market value of the voting stock held by non-affiliates of the registrant based on the closing price of the registrant’s stock price on June 30, 2014 of $9.88 was approximately $313,922,536.
The registrant had 32,272,877 shares of Common Stock outstanding as of February 2, 2015.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K incorporate by reference information from the definitive proxy statement for the registrant’s annual meeting of stockholders scheduled to be held on May 20, 2015.



TABLE OF CONTENTS
Item No.
 
Page
 
Certifications
 




FORWARD LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K are forward-looking statements, including those concerning our business momentum and future growth, the benefit to customers and market acceptance of our products and customer service, our ability to deliver both products and services consistent with our customers’ demands and expectations and strengthen our market position, our expectations of the semiconductor market outlook, future revenues, gross profits, research and development and engineering expenses, selling, general and administrative expenses, product introductions, technology development, manufacturing practices, cash requirements and anticipated trends and developments in and management plans for, our business and the markets in which we operate, our anticipated revenue as a result of recent acquisitions, and our ability to be successful in managing our cost structure and cash expenditures and results of litigation, including ongoing litigation with ITC and Camtek. The statements contained in this Annual Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the words such as, but not limited to, “anticipate,” “believe,” “expect,” “intend,” “plan,” “should,” “may,” “could,” “will” and words or phrases of similar meaning, as they relate to our management or us.
The forward-looking statements contained herein reflect our current expectations with respect to future events and are subject to certain risks, uncertainties and assumptions. The forward-looking statements reflect our position as of the date of this report and we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Actual results may differ materially from those projected in such forward-looking statements for a number of reasons including, but not limited to, the following: variations in the level of orders which can be affected by general economic conditions and growth rates in the semiconductor manufacturing industry and in the markets served by our customers, the global economic and political climates, difficulties or delays in product functionality or performance, the delivery performance of sole source vendors, the timing of future product releases, failure to respond adequately to either changes in technology or customer preferences, changes in pricing by us or our competitors, our ability to manage growth, risk of nonpayment of accounts receivable, changes in budgeted costs, our ability to leverage our resources to improve our position in our core markets, our ability to weather difficult economic environments, our ability to open new market opportunities and target high-margin markets, the strength/weakness of the back-end and /or front-end semiconductor market segments, our ability to successfully integrate acquired businesses, into our business and fully realize, or realize within the expected time frame, the expected combination benefits from any such acquisition, and the “Risk Factors” set forth in Item 1A. You should carefully review the cautionary statements and Risk Factors” contained in this Annual Report on Form 10-K. You should also review any additional disclosures and cautionary statements and Risk Factors” we include from time to time in our quarterly reports on Form 10-Q, current reports on Form 8-K and other filings we make with the Securities and Exchange Commission.

PART I
Item 1.
Business.

General
Rudolph Technologies, Inc. is a worldwide leader in the design, development, manufacture and support of defect inspection, advanced packaging lithography, thin film metrology, and data analysis systems and software used by microelectronics device manufacturers. We provide process and yield management solutions used in both wafer processing and final manufacturing through a family of standalone systems for macro-defect inspection, lithography, probe card test and analysis, and transparent and opaque thin film measurements. All Rudolph systems feature sophisticated software and production-worthy automation. In addition, our advanced process control software portfolio includes powerful solutions to enhance productivity and achieve significant cost savings. Rudolph systems are backed by worldwide customer service and applications support.
Advanced packaging has driven development of copper pillar bumps and Through Silicon Vias (“TSV”) as key enabling technologies where 2.5D and 3D assembly schemes are driving the “More than Moore” roadmap. To meet the critical need for measuring thick films, Rudolph launched SONUS Technology in 2014. A unique bulk acoustic metrology and defect detection technology that is non-contact and non-destructive. SONUS offers the ability to measure


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thick films and film stacks (e.g. copper pillar bumps), detect voids and cracks in metal films (e.g. TSVs) and identify areas of delamination.
Rudolph achieved record installations of both its Advanced Process Control (“APC”) software and yield management software (“YMS”) in 2014. Critical to customers is the ability to maintain yield during high-volume manufacturing. APC software such as run-to-run control and fault detection and classification software can be deployed into our customers’ manufacturing lines within days, where they will run continuously, to help improve the manufacturing process and increase yield. Yield management software meets the demand for productivity information driven by the need for increased yields. Rudolph’s fully-integrated YMS solutions are designed to analyze data from disparate sources and multiple sites to maximize productivity across the entire value chain.
In 2014 Rudolph saw increased adoption of its NSX® Metrology Series, a combined 3D metrology and inspection system, developed following Rudolph’s acquisition of selected assets of Tamar Technology (“Tamar”), a precision metrology company, of Newbury Park, CA, in April 2013. The NSX Metrology Series is designed to meet our customers’ need for throughput and process integration in high-volume production advanced packaging applications.
Rudolph earned certification to ISO 9001:2008 from SAI Global, an accredited registrar, for its lithography systems group in 2014. This final registration compliments the Company’s prior registration of its three other business units, inspection, metrology and software, completed in 2013. The Company is now registered for the design, manufacture, sale and support of capital equipment and process control software used for inspection, metrology, yield analysis and control of semiconductor and related device manufacturing processes, lithography for display products and advanced packaging.

Industry Trends
Advanced Packaging is a key technology that enables the miniaturization of electronic products, such as portable consumer devices, including smartphones and laptops. In electronics manufacturing, integrated circuit packaging is the final stage of semiconductor device fabrication, in which the tiny block of semiconducting material (die) is encased in a supporting package that provides an external electrical connection and prevents physical damage and corrosion.  Packaging refers loosely to the conductors and other structures that interconnect the circuits, feed them with electric power, discharge their heat and protect them from damage.  Today, the drive to pack more functions into a small space and reduce their power requirements demands that chip packages do much more than ever before. Examples of advanced packaging are varied and include flip-chip bumping, pillar bumping, wafer-level chip scale packaging and 3D packaging.
One solution using advanced packaging is the 3D integration of semiconductors and other devices. The technology involves stacking individual die or wafers in one integrated housing. Through silicon vias (TSV, 3D stacking) allow communication among the individual components. This offers the advantages of shorter signal paths and reduced power consumption, enhanced bandwidths, integration of heterogeneous components such as sub-chips, smaller surface area and reduced expense. The processes required for 3D integration are still being optimized for yield, and to ensure the functioning of individual microchips.
The current and projected adoption of smart mobile devices drives designed-in capability. There are no longer single function devices, but instead, various devices have been combined to provide multiple functions.  For example, smart phone users no longer need a GPS, digital camera and PDA. With the addition of a myriad of available “apps,” the potential uses seem endless.  As a result, advancements in mobile products are driving semiconductor advanced packaging and display manufacturers to implement next-generation technologies to meet the resulting requirements.  This technology shift has created multiple opportunities for Rudolph solutions.
Panel Lithography. Scalable technology is rapidly increasing in importance. Advanced packaging facilities looking to improve Cost of Ownership (“COO”) and increase productivity are transitioning to large rectangular panels ranging up to Gen 3.5 (approximately 650mm x 720mm). Traditional technology has been limited to standard wafer sizes. However, with companies progressively moving to fan-out packages, they are no longer limited to operating within the constraints of a round wafer. By responding to market opportunities and addressing the stringent demands of customers’ technical roadmaps, Rudolph is optimally positioned to capitalize on the emerging market of advanced packaging panel lithography. The JetStep® S Series, having emerged from the flat panel display market, is readily capable of processing both glass and organic laminate panels in the semiconductor advanced packaging market.



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450mm Wafer Transition. Multiple Rudolph systems continue to support 450mm wafer processing research and development. Our latest-generation defect inspection and thin film metrology tools are designed to increase the value of inspection and metrology data to improve process yields and profitability as the industry moves toward a full 450mm production ramp.

Technology
We believe that our expertise in engineering and our continued investment in research and development enable us to rapidly develop new technologies and products in response to emerging industry trends. The breadth of our technology enables us to offer a diverse combination of measurement technologies that provide process control for the majority of thin films used in semiconductor manufacturing. Unique features have been designed into our lithography systems to meet our customers’ changing process requirements. Our defect detection and classification technologies allow us to provide yield enhancement for critical front-end processes such as photolithography, diffusion, etch, CMP and outgoing quality control. Information learned through post-fab inspection is critical. Advanced macro defect inspection within the final manufacturing (back-end) process provides our customers with critical quality assurance and process information. Defects may be created during probing, bumping, dicing or general handling, and can have a major impact on device and process quality.
Inspection Business
Inspection Systems. Chip manufacturers deploy advanced macro defect inspection throughout the fab to monitor key process steps, gather process-enhancing information and ultimately, lower manufacturing costs. Field-established tools such as the F30 and NSX® inspection systems are found in wafer processing (front-end) and final manufacturing (back-end) facilities around the world. These high-speed tools incorporate features such as waferless recipe creation, tool-to-tool correlation and multiple inspection resolutions. In addition to wafer frontside inspection, Rudolph’s innovative Explorer Inspection Cluster incorporates wafer edge and backside inspection in one integrated platform to enhance productivity and continuously improve fab yield. Using Discover® yield management software, the vast amount of data gathered through automated inspection can be analyzed and classified to determine trends that ultimately affect yield.
All-surface Inspection. All-surface refers to inspection of the wafer frontside, edge, and backside as well as post-fab die. The edge inspection process focuses on the area near the wafer edge, an area that poses difficulty for traditional wafer frontside inspection technology due to its varied topography and process variation. Edge bevel inspection looks for defects on the side edge of a wafer. Edge bead removal and edge exclusion metrology involve a topside surface measurement required exclusively in the photolithography process, primarily to determine if wafers have been properly aligned for the edge exclusion region. The primary reason for wafer backside inspection is to determine if contamination has been created that may spread throughout the fab. For instance, it is critical that the wafer backside be free of defects prior to the photolithography process to prevent focus and exposure problems on the wafer frontside.
 Automated Defect Detection and Classification. Automating the defect detection and classification process is best done by a system that can mimic, or even extend, the response of the human eye, but at a much higher speed, with high resolution and more consistency. To do this, our systems capture full-color whole wafer images using simultaneous dark and bright field illumination. The resulting bright and dark field images are compared to those from an “ideal” wafer having no defects. When a difference is detected, its image is broken down into mathematical vectors that allow rapid and accurate comparison with a library of known classified defects stored in the tool’s database. Patented and proprietary enhancements of this approach enable very fast and highly repeatable image classification. The system is pre-programmed with an extensive library of default local, global and color defects and can also absorb a virtually unlimited amount of new defect classes. This allows customers to define defects based on their existing defect classification system, provides more reliable automated rework decisions and enables more accurate statistical process control data.
Classification. Classifying defects off-line enables automated inspection systems to maintain their high throughput. Using defect image files captured by automated inspection systems, operators are able to view high-resolution defect images to determine defects that cause catastrophic failure of a device, or killer defects. Classifying defects enables faster analysis by grouping defects found together as one larger defect, a scratch for example, and


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defects of similar types across a wafer lot to be grouped based on size, repeating defects and other user-defined specifications. Automatically classifying defects provides far greater yield learning than human classification.
 Yield Analysis. Using wafer maps, charts and graphs, the vast amounts of data gathered through automated inspection can be analyzed to determine trends across bumps, die, wafers and lots. This analysis may determine where in the process a variation is being introduced, allowing for enhancements to be made and yields improved. Defect data analysis is performed to identify, analyze and locate the source of defects and other manufacturing process excursions. Using either a single wafer map or a composite map created from multiple wafer maps, this analysis enables identification of defect patterns and distribution. When combined with inspection data from strategically-placed inspection points, this analysis may pinpoint the source of the defects so corrective action can be taken.
 Probe Card Test and Analysis. The combination of Fast 3D-OCM® (optical comparative metrology) Technology with improved testing accuracy and repeatability is designed to reduce total test time for even the most advanced large area probe cards. The 3-D capabilities enable users to analyze probe marks and probe tips in a rapid and information-rich format.
Lithography Business
Step and Repeat Technology. Rudolph steppers use projection optics to expose circuit patterns from a mask or reticle onto a substrate to achieve images with optimal fidelity. These systems employ light from a mercury arc lamp that is transmitted through a mask or reticle containing display circuit patterns. Substrates are aligned on the system and the mask is imaged through a projection lens in photoresist material coated on the substrate. The substrate is then moved, or “stepped,” to a second position to expose an adjacent area. Images can be “stitched” together precisely to form larger circuit patterns without any noticeable change in circuit performance. The system repeats the step and exposure process until the entire substrate is patterned. Once the exposure process has been completed, the substrate is developed with an alkali solution, such as Tetramethylammonium Hydroxide (“TMAH”) or sodium hydroxide (“NaOH”), to reveal the underlying material. The imaged photoresist serves as a barrier that allows for processing the underlying metal or insulating layers. The substrates then continue through the etching, stripping and deposition processes until multi-layer circuits are completed.
Advanced Packaging Lithography Systems. In order to deal with increased Input/Output, enhanced functionality, power efficiency and higher frequency, Integrated Device Manufacturers and Outsourced Semiconductor Assembly and Test facilities (“OSATs”) are moving to advanced packaging technologies such as TSV and three Dimensional Integrated Circuits (“3DIC”).  However, the associated substrates and processes are significantly different than those used in front-end wafer processing.  The added performance requires finer features, but the processes stress the substrates resulting in warped substrates.  Since most packaging is an additive process, thick films are used to enable the creation of features.  In order for equipment to effectively function in this environment, it must overcome these challenges. Rudolph’s JetStep® Systems have been specifically designed to meet these challenges head on. The JetStep W Series is designed for wafers and other round substrates while the JetStep S Series is designed for rectangular substrates (panels). Both systems boast a large printable field, which when combined with user-selectable wavelength options, maximizes throughput while not limiting resolution when needed.  High fidelity optics are able to image the fine features required while at the same time achieving superior depth of field to minimize non-flatness effects.  On-the-fly auto focus and an innovative reticle management system improve yield and utilization. These unique features result in a revolutionary lithography system specifically designed to meet advanced packaging challenges.
Flat Panel Display (“FPD”) Lithography. A critical aspect of any leading mobile device is the display. The display serves as the window to the user. Therefore, it must effectively present graphics such as detailed maps, high resolution photos and streaming video in order to meet user expectations. To accomplish this, the display transistor backplane, which is what controls the pixels, must operate at a high frequency and have high pixel resolution.  As a result, the transistors must have high mobility and only use a small portion of the pixel aperture. The backplane is manufactured on a sheet of glass; like the packaging substrate, it is non-flat and tends to distort further during processing. Additionally, the displays are getting larger. Manufacturers are looking to utilize larger sheets of glass, making throughput a challenge for the lithography equipment.  To overcome this, Rudolph’s JetStep G Series uses high-fidelity optics and the largest printable stepper field available enabling more displays per shot. This feature, combined with on-the-fly auto-focus and magnification compensation, maximizes throughput and yield.  Finally, the innovative grid stage allows the system to be easily scaled to meet the customer desired substrate size.


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Metrology Business
Optical Acoustics. Optical acoustic metrology involves the use of ultra-fast laser induced sonar for metal and opaque thin film measurement. This technology sends ultrasonic waves into multi-layer opaque films and then analyzes the resulting echoes to simultaneously determine the thickness of each individual layer in complex multi-layer metal film stacks. The echo’s amplitude and phase can be used to detect film properties, missing layers and interlayer problems. Since different phenomena affect amplitude and phase uniquely, a variety of process critical interlayer problems can be detected in a single measurement. The use of optical acoustics to measure multi-layer metal and opaque films was pioneered by scientists at Brown University (“Brown”) in collaboration with engineers at Rudolph. The proprietary optical acoustic technology in our PULSE Technology systems measures the thickness of single or multi-layer opaque films ranging from less than 40 Angstroms to greater than five microns. It provides these measurements at a rate of up to 70 wafers per hour within one to two percent accuracy and typically less than one percent repeatability. This range of thicknesses covers the majority of thick and thin metal films projected by the International Roadmap for Semiconductors to be used through the end of this decade. Our non-contact, non-destructive optical acoustic technology and small spot size enable our PULSE Technology systems to measure film properties directly on product wafers.
Opaque Film Metrology. The MetaPULSE® System gives customers the ability to simultaneously measure the thickness and other properties of up to six metal or other opaque film layers in a non-contact manner on product wafers. PULSE Technology uses an ultra-fast laser to generate sound waves that pass down through a stack of opaque films such as those used in copper or aluminum interconnect processes, sending back to the surface an echo that indicates film thickness, density, and other process critical parameters. We believe we are a leader in providing systems that can non-destructively measure opaque thin-film stacks with the speed and accuracy semiconductor device manufacturers demand in order to achieve high yields with the latest fabrication processes. The technology is ideal for characterizing copper interconnect structures. The MetaPULSE® System, used mainly for fast and accurate measurements of metal interconnect in front-end wafer processing applications, has now been chosen by back-end manufacturers to perform system measurements in new process applications, driven by the need for on-product metrology as feature sizes decrease and pattern densities increase.
Thick Film Metrology. Launched in 2014, SONUS Technology is designed for measuring thick films and film stacks used in copper pillar bumps and for detecting defects, such as voids, in TSVs. SONUS Technology is a non-contact, non-destructive acoustic metrology and defect detection technique that is designed to be of higher resolution, faster, and less costly than alternative techniques. SONUS Technology meets a critical need for measuring and inspecting the structures used to connect chips to each other and to the outside world. Copper pillar bumps and TSVs are critical interconnect technologies enabling 2.5D and 3D packaging. Plating process control for copper pillar bumping is directly related to the mechanical integrity of the interconnect and final device performance. Likewise, the quality of the TSV fill is critical to the electrical performance of stacked devices. Rudolph’s patented SONUS Technology offers the unique ability to measure individual films and film stacks to thicknesses of 100µm and detect voids as small as 0.5µm in TSVs with aspect ratios of 10:1 or greater.”
Ellipsometry. Ellipsometry is a non-contact, non-destructive optical technique for transparent thin film measurement. We have been an industry leader in ellipsometry technology for the last three decades. We hold patents on several ellipsometry technologies, including our proprietary technique that uses four lasers for multiple-angle of incidence, multiple wavelength ellipsometry. Laser ellipsometry technology is intended to enable our transparent film systems to provide the increasingly higher level of accuracy needed as thinner films and newer materials are introduced for future generations of semiconductor devices. We extended this same optical technology to characterize the scatterometry signal from patterned surfaces, allowing measurement of critical dimensions.
Reflectometry. For applications requiring broader spectral coverage, some of our ellipsometry tools are also equipped with a reflectometer. Reflectometry uses a white or ultraviolet light source to determine the properties of transparent thin films by analyzing the wavelength and intensity of light reflected from the surface of a wafer. This optical information is processed with software algorithms to determine film thickness and other material properties. By combining data from both the laser ellipsometer and broad spectrum reflectometer, it is possible to characterize films and film stacks that cannot be adequately analyzed by either method individually.
Transparent Film Metrology. Rudolph’s patented transparent film technology uses up to four lasers operating simultaneously at multiple angles and multiple wavelengths, providing powerful analysis and measurement capabilities.


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Unlike the white-light sources used in spectroscopic ellipsometers, laser light sources make our metrology tools inherently stable, increase measurement speed and accuracy, and reduce maintenance costs by minimizing the time required to re-qualify a light source when it is replaced. Rudolph’s S3000SX System is targeted for transparent films in advanced semiconductor fabrication applications at the 28nm node and below. The S3000 product family uses Rudolph’s proprietary Focused Beam Ellipsometry (“FBE”) and newly-designed Small Site Measurement Optics (“SSMO”) to measure the thickness of single layer and multi-layer films on product wafers including device area at site sizes as small as 30x30 nanometers.
Yield Management and Process Control Software
Process Control. We provide a wide range of advanced process control solutions, all designed to improve factory profitability, including run-to-run control, fault detection, classification and tool automation. Rudolph is a leading provider of Process Control Software in the semiconductor industry. APC employs software to automatically detect or predict tool failure (fault detection) as well as calculate recipe settings for a process that will drive the process output to target despite variations in the incoming material and disturbances within the process equipment. Process control software enables the factory to increase capacity and yield and to decrease rework and scrap. It enables reduced production costs by lowering consumables, process engineering time and manufacturing cycle time.
Yield Management. Semiconductor manufacturers use YMS to obtain valuable process yield and equipment productivity information. The data necessary to generate productivity information comes from many different sources throughout the fab: inspection and metrology systems, tool sensors, tool recipes, electrical tests and the fab environment. As the complexity and cost of manufacturing processes increase, the value of faster, better analysis to support critical manufacturing decisions grows too, so customers are demanding robust yield management systems that can analyze large, complex data sets quickly and effectively. Rudolph’s fully-integrated YMS are designed to analyze data from disparate sources and multiple sites to maximize productivity across the entire value chain.

Products
Rudolph markets and sells products to major logic, memory, data storage, flat panel and application-specific integrated circuit (“ASIC”) device manufacturers. Our customers rely on us for versatile inspection, lithography and metrology systems as well as process control software solutions. These systems are designed for high-volume production facilities and offer automated wafer handling for 200, 300 and 450mm configurations. Our systems operate at high throughput with ultra-clean operation and high reliability.

 
 
INSPECTION & TEST SYSTEMS
 
 
 
 
 
 
Type of Fab
 
First
 
 
Wafer
Final
Product
Introduced
Functionality
Processing
Manufacturing
F30™ Inspection Module
2011

5-objective turret enables resolution throughput flexibility
 
 

Speeds up to 150wph
 
 

Multiple resolutions; TSV sensor capability
 
 

Waferless recipe creation
 
 

Tool matching
X
 
 E30™ Inspection Module
2003

2D defect detection of the wafer’s edge
 
 

Metrology of edge feature
 
 

Incorporated into the Explorer Cluster
X
X
 B30™ Inspection Module
2003

2D defect detection of the wafer’s backside
 
 

Darkfield, brightfield and color imaging
 
 

2D defect detection of the wafer’s backside
X
X


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INSPECTION & TEST SYSTEMS (continued)
 
 
 
 
 
 
Type of Fab
 
First
 
 
Wafer
Final
Product
Introduced
Functionality
Processing
Manufacturing
Explorer® Inspection Cluster
2009

A family of multi surface inspection tools, using one or more inspection modules
 
 

Automated handling platform
 
 

Intelligent wafer scheduling
X
 
 NSX® Inspection System
1997

Fully automated defect detection >0.5 micron
 
 

2D wafer, die & bump inspection
 
 

In line, high-speed, 100% inspection
 
X
 NSX® Metrology System
2013

Fully automated defect detection and metrology
 
 

Wafer level packaging and TSV metrology
 
 

In line, high-speed, 100% defect inspection
 
X
Wafer Scanner™ Inspection System
1999

2D/3D bump dimensional inspection
 
 

2D bump/surface defect inspection
 
 

In line, high-speed, 100% inspection
 
X
 PrecisionWoRx®  System
2008

Probe card test & analysis
 
 

Configurable channels
 
 

High load forces
 
X
 ProbeWoRx® System
2003

Probe card production metrology
 
 

3D Optical Comparative Metrology
 
 

High-speed test times
 
 

Automated, one-touch measurements
 
X
AWX™ Series
2011

All-surface, unpatterned wafer inspection
 
 

Modular platform; wafer transfer and sorting capability
 
 

Includes automatic defect classification
 
 

450mm ready
X
 
Reflex TT™
2000

Manual load bare wafer inspection
 
 

Detects particles, scratches, area defects
 
 

50mm up to 450mm substrates
X
 
AMX™ 6000 Series
2011

Automated mask blank inspection
 
 

High throughput; 45 mask blanks per hour
 
 

Particle sensitivity down to 90nm LSE
X
 
Reflex TT™ MBI
2004

Manual load mask inspection
 
 

Ideal for R&D, process and tool development labs
 
 

Laser darkfield technology
X
 



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LITHOGRAPHY SYSTEMS
 
 
 
 
 
 
Type of Fab
 
First
 
 
Flat Panel
Final
Product
Introduced
 
 
Display
Manufacturing
JetStep® W Lithography System

2012

Designed to meet advanced packaging requirements
 
 

High throughput, diverse product mix, and tighter overlay
 
 

Finer resolution with superior depth of focus
 
X
JetStep® S Lithography System

2013

Designed to meet advanced packaging requirements
 
 

Supports panel lithography for fan-out packaging (up to Gen 3.5 panels)
 
 

Largest printable field of view (160mm lens field size)
 
X
JetStep® G35 FPD Photolithography Stepper


2006

Optimal throughput and resolution in Gen 3.5 configuration
 
 

High resolution imaging, 5um - 2.0um
 
 

Real-time auto focus measurement
X
 
JetStep® G45 FPD Photolithography Stepper

2007

Step and repeat printer for Gen 4.5 substrates
 
 

Automated substrate alignment
 
 

Largest printable field high fidelity projection lens and illumination system
X
 

 
 
METROLOGY SYSTEMS
 
 
 
 
 
Type of Fab
 
First
 
 
Wafer
Final
Product
Introduced
Functionality
Processing
Manufacturing
MetaPULSE® System 
1997

Non-contact system for thin opaque films
 
 

Patented Picosecond Ultrasonic Laser Sonar Technology (PULSE™)
 
 

Designed for advanced copper and non-copper applications
 
 

Improved throughput and repeatability
X
X
 S3000™ System
2006

Superior accuracy for transparent film measurements
 
 

Incorporates ellipsometry technology for transparent film application
 
 

Optimized price/performance for fabwide applications
 
 

Available with pattern recognition software
 
 

Enhanced data review mode
X
 
SONUS System

2014

Acoustic metrology and defect inspection

 
 

TSV void detection, thick single and multilayer films, Cu pillar bump film stack metrology, delamination
 
 

Thickness range: 10µm to >100µms
 
 

Manual and fully automated platforms
 
X



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DATA ANALYSIS & REVIEW SOFTWARE
 
 
 
 
 
 
Type of Fab
 
First
 
 
Wafer
Final
Product
Introduced
Functionality
Processing
Manufacturing
 ARTIST® Software
2003

Real-time monitoring software
 
 

Enables development of human-readable models
 
 

Frees users from manual monitoring
 
 

Minimize scrap and rework
X
X
AutoShell® Software
1998

Equipment automation software that interfaces to both tools and external resources
X
X
ControlWORKS® Software
1994

Designed to control process equipment
 
 

Minimizes the expense and time-to-market associated with developing control applications
X
 
Discover® Software
2007

Fabwide software for archival and retrieval of process related data
 
 

Facilitates root cause analysis, yield enhancement and yield learning
X
X
 Discover® Enterprise Software
2005

In line, all surface defect analysis and data management
 
 

Trend analysis and visualization tools
 
 

Wafer maps visualize all-surface defects
 
 

Identifies root cause of defects and process excursions
X
X
Discover Solar™ Software
2008

Helps photovoltaic (“PV”) cell manufacturers reduce manufacturing costs and increase average cell efficiencies
 
 

Designed for high volume c-Si cell and thin film production
 
 

Controls and optimizes the performance of the line
X
X
 GateWay™ Software
2003

Intercepts message traffic between the equipment and the host
 
 

Preserves value of existing automation investments
 
 

Increases reliability and function with zero development time
 
 

Diagnostic tool for solving communication problems
 
 

Connects applications to tools
X
X


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DATA ANALYSIS & REVIEW SOFTWARE (continued)
 
 
 
 
Type of Fab
 
First
 
 
Wafer
Final
Product
Introduced
Functionality
Processing
Manufacturing
 HarmonyASR™ Software
2005

Off line defect review and classification
 
 

Defects displayed in real time
 
 

Rapid classification of unknown defects; review of previously-classified defects
X
X
 Process Sentinel® Software
2006

Fabwide spatial process control system
 
 

Traces patterns back to yield-killing process issues
 
 

Combined defect and sort solution
 
 

Quickly isolates systemic faults
 
 

Advanced segmentation and wafer stacking capability
X
 
ProcessWORKS® Software
1998

Advanced process control software deployed in CMOS, high-mix ASIC, memory and disk head fabs
 
 

Proven in all major process areas
X
 
 RecipeWORKS™ Software
1998

Reduces impact on tool time
 
 

Stores recipes in a central repository
 
 

Enables engineers to manage recipes remotely
 
 

Allows users to setup security
 
 

Accepts settings from any run-to-run control application
X
X
 TrackWORKS® Software
1998

Configures and schedules preventive maintenance
 
 

View factory entities using operator-defined parameters
X
 
TrueADC® Enterprise Software
2007

Serving the entire fab
 
 

Defect classification with a high level of accuracy
 
 

Ensures database lookup, classification and timely response to the tool
 
 

Minimum impact to throughput
X
X
Yield Optimizer™ Software
2006

Builds predictive models
 
 

Optimizes yield and reduces excursions
 
 

Identifies the most critical metrology measurements for controlling yield
X
 
Genesis® Software

1997

Data acquisition and integration
 
 

Data mining
 
 

Parametric analysis
X
 



10


Customers
Over 100 microelectronic device manufacturers have purchased Rudolph tools and software for installation at multiple sites. We support a diverse customer base in terms of both geographic location and type of device manufactured. Our customers are located in 20 countries. See Note 16 to our consolidated financial statements in this Annual Report on Form 10-K for information concerning our geographic information.
 We depend on a relatively small number of customers and end users for a large percentage of our revenues. In the years 2012, 2013 and 2014, sales to end user customers that individually represented at least five percent of our revenues accounted for 50.9%, 41.6% and 23.9% of our revenues, respectively.

The following customers each accounted for more than 10% of total revenues for the indicated periods:
Year Ended December 31,
2012
 
2013
 
2014
Samsung Semiconductor Inc.
 
Intel Semiconductor Inc.
 
None
Advanced Semiconductor Engineering, Inc.
 
STATS ChipPAC Ltd.
 
 
We do not have purchase contracts with any of our customers that obligate them to continue to purchase our products.

Research and Development
The markets for equipment and systems for manufacturing semiconductor devices and for performing macro-defect inspection, advanced packaging lithography and thin film transparent and opaque process control metrology are characterized by continuous technological development and product innovations. We believe that the rapid and ongoing development of new products and enhancements to existing products is critical to our success. Accordingly, we devote a significant portion of our technical, management and financial resources to research and development programs. As of December 31, 2014, we employed 158 research and development personnel.
Our research and development expenditures in 2012, 2013 and 2014 were $39.3 million, $40.0 million and $40.6 million, respectively. We expect to continue our strong commitment to new product development and continue to allocate significant resources to these efforts in the future.

Sales, Customer Service and Application Support
We maintain an extensive network of direct sales, customer service and application support offices in the United States, Europe and Asia.
We provide our customers with comprehensive support before, during and after the delivery of our products. For example, in order to facilitate the smooth integration of our tools into our customers’ operations, we often assign dedicated, site-specific field service and applications engineers to provide long-term support at selected customer sites. We also provide comprehensive service and applications training for customers at our training facilities in Bloomington, Minnesota and Budd Lake, New Jersey and at customer locations. In addition, we maintain a group of highly skilled applications scientists at strategically located facilities throughout the world and at selected customer locations. As of December 31, 2014, we employed 274 sales and marketing, service and applications support personnel.

Manufacturing
Our principal manufacturing activities include assembly, final test and calibration. These activities are conducted in our manufacturing facilities in Bloomington, Minnesota and Wilmington, Massachusetts. Our core manufacturing competencies include electrical, optical and mechanical assembly and testing, as well as the management of new product transitions. While we use standard components and subassemblies wherever possible, most mechanical parts, metal fabrications and critical components used in our products are engineered and manufactured to our specifications. We continue to rely on subcontractors and turnkey suppliers to fabricate components, build assemblies and perform other non-core activities in a cost-effective manner. As of December 31, 2014, we employed 84 manufacturing personnel.


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We rely on a number of limited source suppliers for certain parts and subassemblies. This reliance creates a potential inability to obtain an adequate supply of required components, and reduced control over pricing and time of delivery of components. An inability to obtain adequate supplies would require us to seek alternative sources of supply or might require us to redesign our systems to accommodate different components or subassemblies. To date, we have not experienced any significant delivery delays. However, if we were forced to seek alternative sources of supply, manufacture such components or subassemblies internally, or redesign our products, this could prevent us from shipping our products to our customers on a timely basis, which could have a material adverse effect on our operations.

Intellectual Property
We have a policy of seeking patents on inventions governing new products or technologies as part of our ongoing research, development, and manufacturing activities. As of December 31, 2014, we have been granted, or hold exclusive licenses to, 253 U.S. and foreign patents. The patents we own, jointly own or exclusively license have expiration dates ranging from 2015 to 2034. We also have 96 pending regular and provisional applications in the U.S. and other countries. Our patents and applications principally cover various aspects of macro-defect detection and classification, transparent thin film measurement, altered material characterization, lithography techniques and automation.
 We have been granted exclusive licenses from Brown University Research Foundation, subject to rights retained by Brown and the United States government for their own non-commercial uses, for several patents relating to the optical acoustic technology underlying our MetaPULSE product family. The terms of these exclusive licenses are equal to the lives of the patents. We pay royalties to Brown based upon a percentage of our revenues from the sale of systems that incorporate technology covered by the Brown patents. We also have the right to support patent activity with respect to new ultra-fast acoustic technology developed by Brown scientists, and to acquire exclusive licenses to this technology. Brown may terminate the licenses if we fail to pay royalties to Brown or if we materially breach our license agreement with Brown.
 Our pending patents may never be issued, and even if they are, these patents, our existing patents and the patents we license may not provide sufficiently broad protection to protect our proprietary rights, or they may prove to be unenforceable. To protect our proprietary rights, we also rely on a combination of copyrights, trademarks, trade secret laws, contractual provisions and licenses. There can be no assurance that any patents issued to or licensed by us will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide us with a competitive advantage.
 The laws of some foreign countries do not protect our proprietary rights to the same degree as do the laws of the United States, and many U.S. companies have encountered substantial infringement problems in protecting their proprietary rights against infringement in such countries, some of which are countries in which we have sold and continue to sell products. There is a risk that our means of protecting our proprietary rights may not be adequate. For example, our competitors may independently develop similar technology or duplicate our products. If we fail to adequately protect our intellectual property, it would be easier for our competitors to sell competing products.

Competition
The market for semiconductor capital equipment is highly competitive. We face substantial competition from established companies in each of the markets that we serve. We principally compete with KLA-Tencor, Camtek and Ultratech. We compete to a lesser extent with companies such as Nanometrics, Nova Measuring Instruments and Nikon. Each of our products also competes with products that use different metrology techniques. Some of our competitors have greater financial, engineering, manufacturing and marketing resources, broader product offerings and service capabilities and larger installed customer bases than we do.
Significant competitive factors in the market for inspection and metrology systems include system performance, ease of use, reliability, cost of ownership, technical support and customer relationships. We believe that, while price and delivery are important competitive factors, the customers’ overriding requirement is for a product that meets their technical capabilities. To remain competitive, we believe we will need to maintain a high level of investment in research and development and process applications. No assurances can be given that we will continue to be competitive in the future.



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Backlog
We schedule production of our systems based upon order backlog and informal customer forecasts. We include in backlog only those orders to which the customer has assigned a purchase order number and for which delivery is anticipated within 12 months. Because shipment dates may be changed and customers may cancel or delay orders with little or no penalty, our backlog as of any particular date may not be a reliable indicator of actual sales for any succeeding period. At December 31, 2014, we had a backlog of approximately $37.6 million compared with a backlog of approximately $30.8 million at December 31, 2013.

Employees
As of December 31, 2014, we had 586 employees. Our employees are not represented by any collective bargaining agreements, and we have never experienced a work stoppage. We believe our employee relations are good.

Available Information
We were incorporated in Delaware in 1999. The Internet website address of Rudolph Technologies, Inc. is http://www.rudolphtech.com. The information on our website is not incorporated into this Annual Report. The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K (and any amendments to those reports) are made available free of charge, on or through our Internet website, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission, or SEC. All filings we make with the SEC are also available free of charge via EDGAR through the SEC’s website at http://www.sec.gov.
We also make available, free of charge, through the investors page on our corporate website, Rudolph Technologies’ corporate summary, Code of Business Conduct and Ethics and Financial Code of Ethics, charters of the committees of our Board of Directors, as well as other information and materials, including information about how to contact our Board of Directors, its committees and their members. To find this information and obtain copies, visit our website at http://www.rudolphtech.com.

Item 1A.
Risk Factors.
Risks Related to Rudolph
Our operating results have varied, and will likely continue to vary significantly, from quarter to quarter in the future, causing volatility in our stock price
Our quarterly operating results have varied in the past and will likely continue to vary significantly from quarter to quarter in the future, causing volatility in our stock price. Some of the factors that may influence our operating results and subject our stock to extreme price and volume fluctuations include:
changes in customer demand for our systems, which is influenced by economic conditions in the semiconductor device industry, demand for products that use semiconductors, market acceptance of our systems and products of our customers and changes in our product offerings;
seasonal variations in customer demand, including the tendency of European sales to slow significantly in the third quarter of each year;
the timing, cancellation or delay of customer orders, shipments and acceptance;
a significant portion of our revenue may be derived from the sale of a relatively small number of systems and accordingly, a small change in the number of systems we sell may cause significant changes in our operating results;
product development costs, including increased research, development, engineering and marketing expenses associated with our introduction of new products and product enhancements; and
the levels of our fixed expenses, including research and development costs associated with product development, relative to our revenue levels.


13


In light of these factors and the cyclical nature of the semiconductor industry, we expect to continue to experience significant fluctuations in quarterly and annual operating results. Moreover, many of our expenses are fixed in the short-term which, together with the need for continued investment in research and development, marketing and customer support, limits our ability to reduce expenses quickly. As a result, declines in net sales could harm our business and the price of our common stock could substantially decline.
Our largest customers account for a significant portion of our revenues, and our revenues and cash flows could significantly decline if one or more of these customers were to purchase significantly fewer of our systems or they delayed or canceled a large order
Sales to end user customers that individually represent at least five percent of our revenues typically account for, in the aggregate, a considerable amount of our revenues. We operate in the highly concentrated, capital-intensive semiconductor device manufacturing industry. Historically, a significant portion of our revenues in each quarter and year has been derived from sales to relatively few customers, and this trend is expected to continue. If any of our key customers were to purchase significantly fewer of our systems in the future, or if a large order were delayed or canceled, our revenues and cash flows could significantly decline. We expect that we will continue to depend on a small number of large customers for a significant portion of our revenues. In addition, as large semiconductor device manufacturers seek to establish closer relationships with their suppliers, we expect that our customer base will become even more concentrated.
Our customers may be unable to pay us for our products and services
Our customers include some companies that may from time to time encounter financial difficulties, especially in light of the current economic environment and the difficulties in the credit markets. If a customer’s financial difficulties become severe, the customer may be unwilling or unable to pay our invoices in the ordinary course of business, which could adversely affect collections of both our accounts receivable and unbilled services. The bankruptcy of a customer with a substantial account receivable could have a material adverse effect on our financial condition and results of operations. In addition, if a customer declares bankruptcy after paying us certain invoices, a court may determine that we are not properly entitled to that payment and may require repayment of some or all of the amount we received, which could adversely affect our financial condition and results of operations.
Variations in the amount of time it takes for us to sell our systems may cause fluctuations in our operating results, which could cause our stock price to decline
Variations in the length of our sales cycles could cause our revenues and cash flows, and consequently, our business, financial condition, operating results and cash flows, to fluctuate widely from period to period. This variation could cause our stock price to decline. Our customers generally take a long time to evaluate our inspection and/or film metrology systems and many people are involved in the evaluation process. We expend significant resources educating and providing information to our prospective customers regarding the uses and benefits of our systems in the semiconductor fabrication process. The length of time it takes for us to make a sale depends upon many factors including, but not limited to:
the efforts of our sales force;
the complexity of the customer’s fabrication processes;
the internal technical capabilities and sophistication of the customer;
the customer’s budgetary constraints; and
the quality and sophistication of the customer’s current metrology, inspection or lithography equipment.
Because of the number of factors influencing the sales process, the period between our initial contact with a customer and the time when we recognize revenue from that customer and receive payment, if ever, varies widely in length. Our sales cycles, including the time it takes for us to build a product to customer specifications after receiving an order to the time we recognize revenue, typically range from six to twenty-four months. Sometimes our sales cycles can be much longer, particularly with customers in Japan. During these cycles, we commit substantial resources to our sales efforts in advance of receiving any revenue, and we may never receive any revenue from a customer despite our


14


sales efforts. If we do make a sale, our customers often purchase only one of our systems, and then evaluate its performance for a lengthy period before purchasing any more of our systems. The number of additional products a customer purchases, if any, depends on many factors, including the customer’s capacity requirements. The period between a customer’s initial purchase and any subsequent purchases can vary from six months to a year or longer, and variations in the length of this period could cause further fluctuations in our operating results and possibly in our stock price.
Most of our revenues have been derived from customers outside of the United States subjecting us to operational, financial and political risks, such as unexpected changes in regulatory requirements, tariffs, political and economic instability, outbreaks of hostilities, and difficulties in managing foreign sales representatives and foreign branch operations as well as risks associated with foreign currency fluctuations
Due to the significant level of our international sales, we are subject to a number of material risks, including:
Compliance with foreign laws. Our business is subject to risks inherent in doing business internationally, including compliance with, inconsistencies among, and unexpected changes in, a wide variety of foreign laws and regulatory environments with which we are not familiar, including, among other issues, with respect to employees, protection of our intellectual property, and a wide variety of operational regulations and trade and export controls under domestic, foreign, and international law.
Unexpected changes in regulatory requirements including tariffs and other market barriers. The semiconductor device industry is a high-visibility industry in many of the European and Asian countries in which we sell our products. Because the governments of these countries have provided extensive financial support to our semiconductor device manufacturing customers in these countries, we believe that our customers could be disproportionately affected by any trade embargoes, excise taxes or other restrictions imposed by their governments on trade with United States companies such as ourselves. Any restrictions of these types could result in a reduction in our sales to customers in these countries.
Political and economic instability. We are subject to various global risks related to political and economic instabilities in countries in which we derive sales. If terrorist activities, armed conflict, civil or military unrest or political instability occurs outside of the U.S., these events may result in reduced demand for our products. There is considerable political instability in Taiwan related to its disputes with China and in South Korea related to its disputes with North Korea. In addition, several Asian countries, particularly Japan, have experienced significant economic instability. An outbreak of hostilities or other political upheaval in China, Taiwan or South Korea, or an economic downturn in Japan or other countries, would likely harm the operations of our customers in these countries. The effect of these types of events on our revenues and cash flows could be material because we derive substantial revenues from sales to semiconductor device foundries in Taiwan such as Taiwan Semiconductor Manufacturing Company Ltd., from memory chip manufacturers in South Korea such as Samsung, and from semiconductor device manufacturers in Japan such as Toshiba.
Difficulties in staffing and managing foreign branch operations. During periods of tension between the governments of the United States and certain other countries, it is often difficult for United States companies such as ourselves to staff and manage operations in such countries. Language and other cultural differences may also inhibit our sales and marketing efforts and create internal communication problems among our U.S. and foreign research and development teams, increasing the difficulty of managing multiple, remote locations performing various development, quality assurance, and yield ramp analysis projects.
Currency fluctuations as compared to the U.S. Dollar. A substantial portion of our international sales are denominated in U.S. dollars. As a result, if the dollar rises in value in relation to foreign currencies, our systems will become more expensive to customers outside the United States and less competitive with systems produced by competitors outside the United States. These conditions could negatively impact our international sales. Foreign sales also expose us to collection risk in the event it becomes more expensive for our foreign customers to convert their local currencies into U.S. dollars. Additionally, in the event a larger portion of our revenue becomes denominated in foreign currencies, we would be subject to a potentially significant exchange rate risk.


15


If we deliver systems with defects, our credibility will be harmed and the sales and market acceptance of our systems will decrease
Our systems are complex and have occasionally contained errors, defects and bugs when introduced. Defects may be created during probing, bumping, dicing or general handling, and can have a major impact on device and process quality. When this occurs, our credibility and the market acceptance and sales of our systems could be harmed. Further, if our systems contain errors, defects or bugs, computer viruses or malicious code as a result of cyber attacks to our computer networks, we may be required to expend significant capital and resources to alleviate these problems. Defects could also lead to product liability as a result of product liability lawsuits against us or against our customers. We have agreed to indemnify our customers under certain circumstances against liability arising from defects in our systems. Our product liability policy currently provides $2.0 million of aggregate coverage, with an overall umbrella limit of $14.0 million. In the event of a successful product liability claim, we could be obligated to pay damages significantly in excess of our product liability insurance limits.
If we are not successful in developing new and enhanced products for the semiconductor device manufacturing industry, we will lose sales and market share to our competitors
We operate in an industry that is highly competitive and subject to evolving industry standards, rapid technological changes, rapid changes in consumer demands and the rapid introduction of new, higher performance systems with shorter product life cycles. To be competitive in our demanding market, we must continually design, develop and introduce in a timely manner new inspection, lithography and film metrology systems that meet the performance and price demands of semiconductor device manufacturers. We must also continue to refine our current systems so that they remain competitive. We expect to continue to make significant investments in our research and development activities. We may experience difficulties or delays in our development efforts with respect to new systems, and we may not ultimately be successful in our product enhancement efforts to improve and advance products or in responding effectively to technological change, as not all research and development activities result in viable commercial products. In addition, we cannot provide assurance that we will be able to develop new products for the most opportunistic new markets and applications. Any significant delay in releasing new systems could cause our products to become obsolete, adversely affect our reputation, give a competitor a first-to-market advantage or cause a competitor to achieve greater market share. In addition, new product offerings that are highly complex in terms of software or hardware may require application or service work such as bug fixing prior to acceptance, thereby delaying revenue recognition.
If new products developed by us do not gain general market acceptance, we will be unable to generate revenues and recover our research and development costs
Inspection, lithography and metrology product development is inherently risky because it is difficult to foresee developments in semiconductor device manufacturing technology, coordinate technical personnel, and identify and eliminate system design flaws. Further, our products are complex and often the applications to our customers’ businesses are unique. Any new systems we introduce may not achieve or sustain a significant degree of market acceptance and sales.
We expect to spend a significant amount of time and resources developing new systems and refining our existing systems. In light of the long product development cycles inherent in our industry, these expenditures will be made well in advance of the prospect of deriving revenue from the sale of those systems. Our ability to commercially introduce and successfully market new systems are subject to a wide variety of challenges during the development cycle, including start-up bugs, design defects, and other matters that could delay introduction of these systems. In addition, since our customers are not obligated by long-term contracts to purchase our systems, our anticipated product orders may not materialize, or orders that are placed may be canceled. As a result, if we do not achieve market acceptance of new products, we may be unable to generate sufficient revenues and cash flows to recover our research and development costs and our market share, revenue, operating results or stock price would be negatively impacted.


16


Even if we are able to develop new products that gain market acceptance, sales of these new products could impair our ability to sell existing products
Competition from our new systems could have a negative effect on sales of our existing systems and the prices that we could charge for these systems. We may also divert sales and marketing resources from our current systems in order to successfully launch and promote our new or next generation systems. This diversion of resources could have a further negative effect on sales of our current systems and the value of inventory.
If our relationships with our large customers deteriorate, our product development activities could be adversely affected
The success of our product development efforts depends on our ability to anticipate market trends and the price, performance and functionality requirements of semiconductor device manufacturers. In order to anticipate these trends and ensure that critical development projects proceed in a coordinated manner, we must continue to collaborate closely with our largest customers. Our relationships with these and other customers provide us with access to valuable information regarding trends in the semiconductor device industry, which enables us to better plan our product development activities. If our current relationships with our large customers are impaired, or if we are unable to develop similar collaborative relationships with important customers in the future, our product development activities could be adversely affected.
Our ability to reduce costs is limited by our ongoing need to invest in research and development and to provide customer support activities
Our industry is characterized by the need for continual investment in research and development as well as customer service and support. As a result, our operating results could be materially affected if operating costs associated with our research and development as well as customer support activities increase in the future or we are unable to reduce those activities.
We may fail to adequately protect our intellectual property and, therefore, lose our competitive advantage
Our future success and competitive position depend in part upon our ability to obtain and maintain proprietary technology for our principal product families, and we rely, in part, on patent and trade secret law and confidentiality agreements to protect that technology. If we fail to adequately protect our intellectual property, it will give our competitors a significant advantage. We own or have licensed a number of patents relating to our transparent and opaque thin film metrology, lithography and macro-defect inspection systems, and have filed applications for additional patents. Any of our pending patent applications may be rejected, and we may be unable to develop additional proprietary technology that is patentable in the future.
In addition, the patents that we do own or that have been issued or licensed to us may not provide us with competitive advantages and may be challenged by third parties. Further, third parties may also design around these patents. In addition to patent protection, we rely upon trade secret protection for our confidential and proprietary information and technology. We routinely enter into confidentiality agreements with our employees and other third parties. Even though these agreements are in place there can be no assurances that trade secrets and proprietary information will not be disclosed, that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets, or that we can fully protect our trade secrets and proprietary information. Violations by others of our confidentiality agreements and the loss of employees who have specialized knowledge and expertise could harm our competitive position and cause our sales and operating results to decline as a result of increased competition. Costly and time-consuming litigation might be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection might adversely affect our ability to continue our research or bring products to market.


17


Protection of our intellectual property rights, or the efforts of third parties to enforce their own intellectual property rights against us, may result in costly and time-consuming litigation, substantial damages, lost product sales and/or the loss of important intellectual property rights
We may be required to initiate litigation in order to enforce any patents issued to or licensed by us, or to determine the scope or validity of a third party’s patent or other proprietary rights. Any litigation, regardless of outcome, could be expensive and time consuming, and could subject us to significant liabilities or require us to re-engineer our products or obtain expensive licenses from third parties. There can be no assurance that any patents issued to or licensed by us will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide us with a competitive advantage.
In addition, our commercial success depends in part on our ability to avoid infringing or misappropriating patents or other proprietary rights owned by third parties. From time to time, we may receive communications from third parties asserting that our products or systems infringe, or may infringe, the proprietary rights of these third parties. These claims of infringement may lead to protracted and costly litigation, which could require us to pay substantial damages or have the sale of our products or systems stopped by an injunction. Infringement claims could also cause product or system delays or require us to redesign our products or systems, and these delays could result in the loss of substantial revenues. We may also be required to obtain a license from the third party or cease activities utilizing the third party’s proprietary rights. We may not be able to enter into such a license or such a license may not be available on commercially reasonable terms. Accordingly, the loss of important intellectual property rights could hinder our ability to sell our systems, or make the sale of these systems more expensive. For additional information regarding recent patent litigation, see Item 3. (“Legal Proceedings”).
Our efforts to protect our intellectual property may be less effective in certain foreign countries, where intellectual property rights are not as well protected as in the United States
The laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States, and many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement abroad. For example, Taiwan is not a signatory of the Patent Cooperation Treaty, which is designed to specify rules and methods for defending intellectual property internationally. The publication of a patent in Taiwan prior to the filing of a patent in Taiwan would invalidate the ability of a company to obtain a patent in Taiwan. Similarly, in contrast to the United States where the contents of patents remain confidential during the patent application process, in Taiwan the contents of a patent are published upon filing which provides competitors an advance view of the contents of a patent application prior to the establishment of patent rights. Consequently, there is a risk that we may be unable to adequately protect our proprietary rights in certain foreign countries. If this occurs, it would be easier for our competitors to develop and sell competing products in these countries.
Some of our current and potential competitors have significantly greater resources than we do, and increased competition could impair sales of our products or cause us to reduce our prices
The market for semiconductor capital equipment is highly competitive. We face substantial competition from established companies in each of the markets we serve. We principally compete with KLA-Tencor, Camtek and Ultratech. We compete to a lesser extent with companies such as Nanometrics and Nikon. Each of our products also competes with products that use different metrology, inspection or lithography techniques. Some of our competitors have greater financial, engineering, manufacturing and marketing resources, broader product offerings and service capabilities and larger installed customer bases than we do. As a result, these competitors may be able to respond more quickly to new or emerging technologies or market developments by devoting greater resources to the development, promotion and sale of products, which, in turn, could impair sales of our products. Further, there may be significant merger and acquisition activity among our competitors and potential competitors, which, in turn, may provide them with a competitive advantage over us by enabling them to rapidly expand their product offerings and service capabilities to meet a broader range of customer needs.
Many of our customers and potential customers in the semiconductor device manufacturing industry are large companies that require global support and service for their semiconductor capital equipment. We believe that our global support and service infrastructure is sufficient to meet the needs of our customers and potential customers. However, some of our competitors have more extensive infrastructures than we do, which could place us at a disadvantage when


18


competing for the business of global semiconductor device manufacturers. Many of our competitors are investing heavily in the development of new systems that will compete directly with our systems. We have from time to time selectively reduced prices on our systems in order to protect our market share, and competitive pressures may necessitate further price reductions. We expect our competitors in each product area to continue to improve the design and performance of their products and to introduce new products with competitive prices and performance characteristics. These product introductions would likely require us to decrease the prices of our systems and increase the level of discounts that we grant our customers. Price reductions or lost sales as a result of these competitive pressures would reduce our total revenues and could adversely impact our financial results.
Because of the high cost of switching equipment vendors in our markets, it is sometimes difficult for us to win customers from our competitors even if our systems are superior to theirs
We believe that once a semiconductor device manufacturer has selected one vendor’s capital equipment for a production-line application, the manufacturer generally relies upon that capital equipment and, to the extent possible, subsequent generations of the same vendor’s equipment, for the life of the application. Once a vendor’s equipment has been installed in a production line application, a semiconductor device manufacturer must often make substantial technical modifications and may experience production-line downtime in order to switch to another vendor’s equipment. Accordingly, unless our systems offer performance or cost advantages that outweigh a customer’s expense of switching to our systems, it will be difficult for us to achieve significant sales to that manufacturer once it has selected another vendor’s capital equipment for an application.
We must attract and retain experienced senior executives and other key personnel with knowledge of semiconductor device manufacturing and inspection, metrology or lithography equipment to help support our future growth, and competition for such personnel in our industry is high
Our success depends to a significant degree upon the continued contributions of our key executive management, engineering, sales and marketing, customer support, finance and manufacturing personnel. The loss of any of these key personnel through resignations, retirement or other circumstances, each of whom would be extremely difficult to replace, could harm our business and operating results. Although we have employment and noncompetition agreements with key members of our senior management team, these individuals or other key employees may still leave us, which could have a material adverse effect on our business. We do not have key person life insurance on any of our executives. In addition, to support our future growth, we will need to attract and retain additional qualified employees. Competition for such personnel in our industry is intense, and we may not be successful in attracting and retaining qualified employees.
We obtain some of the components and subassemblies included in our systems from a limited group of suppliers, and the partial or complete loss of one of these suppliers could cause production delays and a substantial loss of revenues
We obtain some of the components and subassemblies included in our systems from a limited group of suppliers and do not have long-term contracts with many of our suppliers. Our dependence on limited source suppliers of components and our lack of long-term contracts with many of our suppliers exposes us to several risks, including a potential inability to obtain an adequate supply of components, price increases, late deliveries and poor component quality. Disruption or termination of the supply of these components could delay shipments of our systems, damage our customer relationships and reduce our sales. From time to time in the past, we have experienced temporary difficulties in receiving shipments from our suppliers. The lead-time required for shipments of some of our components can be as long as six months. In addition, the lead time required to qualify new suppliers for lasers could be as long as a year, and the lead time required to qualify new suppliers of other components could be as long as nine months. If we are unable to accurately predict our component needs, or if our component supply is disrupted, we may miss market opportunities by not being able to meet the demand for our systems. Further, a significant increase in the price of one or more of these components or subassemblies could seriously harm our results of operations and cash flows.


19


Any prolonged disruption in the operations of our manufacturing facility could have a material adverse effect on our revenues
Our manufacturing processes are highly complex and require sophisticated and costly equipment and a specially designed facility. As a result, any prolonged disruption in the operations of our manufacturing facility, whether due to technical or labor difficulties, or destruction of or damage as a result of a fire or any other reason, could seriously harm our ability to satisfy our customer order deadlines. If we cannot timely deliver our systems, our results from operations and cash flows could be materially and adversely affected.
Our business is subject to cybersecurity risks
Threats to information technology systems associated with cybersecurity risks and cyber incidents or attacks continue to grow. Cybersecurity attacks could include, but are not limited to, malicious software, viruses, attempts to gain unauthorized access to our data and the unauthorized release, corruption or loss of our data, loss of our intellectual property, theft of our proprietary or licensed technology, loss or damage to our data delivery systems, other electronic security breaches that could lead to disruptions in our critical systems, and increased costs to prevent, respond to or mitigate cybersecurity events. It is possible that our business, financial and other systems could be compromised, which might not be noticed for some period of time. Although we utilize various procedures and controls to mitigate our exposure to such risk, cybersecurity attacks are evolving and unpredictable and we cannot guarantee that any risk prevention measures implemented will be successful. The occurrence of such an attack could lead to financial losses and have a material adverse effect on our reputation, business, financial condition and results of operations.
Failure to adjust our orders for parts and subcomponents in an accurate and timely manner in response to changing market conditions or customer acceptance of our products could adversely affect our financial position and results of operations
Our earnings could be negatively affected and our inventory levels could materially increase if we are unable to predict our inventory needs in an accurate and timely manner and adjust our orders for parts and subcomponents should our needs increase or decrease materially due to unexpected increases or decreases in demand for our products. Any material increase in our inventories could result in an adverse effect on our financial position, while any material decrease in our ability to procure needed inventories could result in an inability to supply customer demand for our products, thus adversely affecting our revenues.
Our ability to fulfill our backlog may have an effect on our long term ability to procure contracts and fulfill current contracts
Our ability to fulfill our backlog may be limited by our ability to devote sufficient financial and human capital resources and limited by available material supplies. If we do not fulfill our backlog in a timely manner, we may experience delays in product delivery which would postpone receipt of revenue from those delayed deliveries. Additionally, if we are consistently unable to fulfill our backlog, this may be a disincentive to customers to award large contracts to us in the future until they are comfortable that we can effectively manage our backlog.
We may choose to acquire new and complementary businesses, products or technologies instead of developing them ourselves, and may be unable to complete these acquisitions or may not be able to successfully integrate an acquired business in a cost-effective and non-disruptive manner
Our success depends on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures. To this end, we have, from time to time, engaged in the process of identifying, analyzing and negotiating possible acquisition transactions, and from time to time acquiring one or more businesses, and we expect to continue to do so in the future. We may choose to acquire new and complementary businesses, products, technologies and/or services instead of developing them ourselves. We may, however, face competition for acquisition targets from larger and more established companies with greater financial resources, making it more difficult for us to complete acquisitions. We cannot provide any assurance that we will be successful in consummating future acquisitions on favorable terms or that we will realize the benefits that we anticipate from one or more acquisitions that we consummate. Integrating any business, product technology or service we acquire


20


could be expensive and time-consuming and/or disrupt our ongoing business. Further, there are numerous risks associated with acquisitions and potential acquisitions, including but not limited to:
diversion of management’s attention from day-to-day operational matters and current products and customers;
lack of synergy, or the inability to successfully integrate the new business or to realize expected synergies;
failure to commercialize the new technology or business;
failure to meet the expected performance of the new technology or business;
failure to retain key employees and customer or supplier relationships;
lower-than-expected market opportunities or market acceptance of any new products; and
unexpected reduction of sales of existing products by new products.
Our inability to consummate one or more acquisitions on such favorable terms or our failure to realize the intended benefits from one or more acquisitions, could have a material adverse effect on our business, liquidity, financial position and/or results of operations, including as a result of our incurrence of indebtedness and related interest expense and our assumption of unforeseen contingent liabilities. In order to finance any acquisitions, we might need to raise additional funds through public or private equity or debt financings. In that event, we could be forced to obtain financing on terms that are not favorable to us and, in the case of equity financing, that result in dilution to our stockholders. In addition, any impairment of goodwill or other intangible assets, amortization of intangible assets, write-down of other assets or charges resulting from the costs of acquisitions and purchase accounting could harm our business and operating results.
If we cannot effectively manage growth, our business may suffer
Over the long-term, we intend to grow our business by increasing our sales efforts and completing strategic acquisitions. To effectively manage growth, we must, among other things:
engage, train and manage a larger sales force and additional service personnel;
expand the geographic coverage of our sales force;
expand our information systems;
identify and successfully integrate acquired businesses into our operations; and
administer appropriate financial and administrative control procedures.
Growth of our business will likely place a significant strain on our management, financial, operational, technical, sales and administrative resources. Any failure to effectively manage our growth may cause our business to suffer and our stock price to decline.
Changes in tax rates or tax liabilities could affect results
As a global company, we are subject to taxation in the United States and various other countries. Significant judgment is required to determine and estimate worldwide tax liabilities. Our future annual and quarterly tax rates could be affected by numerous factors, including changes in the (1) applicable tax laws; (2) composition of earnings in countries with differing tax rates; or (3) recoverability of our deferred tax assets and liabilities. In addition, we are subject to regular examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Although we believe our tax estimates are reasonable, there can be no assurance that any final determination will not be materially different from the treatment reflected in our historical income tax provisions and accruals, which could materially and adversely affect our results of operations.


21


Turmoil or fluctuations in the credit markets and the financial services industry may negatively impact our business, results of operations, financial condition or liquidity
During recent years, global credit markets and the financial services industry have experienced a period of unprecedented turmoil and upheaval characterized by tightening of the credit markets, weakening of the global economy and an unprecedented level of intervention from the United States and other governments. Adverse economic conditions, such as sustained periods of economic uncertainty or a crisis in the financial markets may have a material adverse effect on our liquidity and financial condition if our ability to obtain credit from the capital financial markets or from trade creditors were to be impaired. In addition, a worsening economy or an economic crisis could also adversely impact our customers’ ability to finance the purchase of systems from us or our suppliers’ ability to provide us with product, either of which may negatively impact our business and results of operations.
Our debt service obligations may adversely affect our financial condition and cash flows from operations
As a result of our sale of $60.0 million of 3.75% convertible senior notes on July 25, 2011 (the “Notes”), we now have long-term debt.
Our maintenance of indebtedness could have important consequences because:
   •
it may impair our ability to obtain additional financing in the future;
   •
an increased portion of our cash flows will have to be dedicated towards making semi-annual interest payments and repaying the principal in 2016;
   •
it may make us more vulnerable to downturns in our business, our industry or the economy in general.
Our ability to generate sufficient cash to pay our expenses and debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors. We will not be able to control many of these factors, such as economic conditions and governmental regulations. If we are at any time unable to generate sufficient cash to pay our debt obligations, we may be required to attempt to renegotiate the terms of our debt obligations, seek to refinance all or a portion of our debt obligations or obtain additional financing. There can be no assurance that we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us. Failure to make a payment on our debt obligations, or to fail to satisfy one or more covenants under our debt agreements, could also result in acceleration of all of our debt obligations, including the Notes, which would materially adversely affect our business, financial condition and results of operations.
We may not have the ability to raise the funds necessary to settle conversions of the Notes or to repurchase the Notes upon a fundamental change,” and our future debt may contain limitations on our ability to pay cash upon conversion or to repurchase the Notes
Upon the occurrence of a “fundamental change” (as defined in the indenture that governs the Notes), subject to certain conditions, holders of the Notes will have the right to require us to repurchase their Notes for cash at 100% of their principal amount plus accrued and unpaid interest, if any. In addition, upon conversion of the Notes, we will be required to make cash payments of up to $1,000 for each $1,000 in principal amount of Notes converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Notes surrendered for repurchase upon a fundamental change or to make cash payments in respect of Notes that are being converted. In addition, our ability to repurchase the Notes or to pay cash upon conversions of the Notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase Notes at a time when the repurchase is required by the indenture or to pay any cash payable on future conversions of the Notes as required by the indenture would constitute a default under the indenture. A default under the indenture or a fundamental change itself could also lead to a default under agreements governing any future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes or make cash payments upon conversions of the Notes.



22


New regulations related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers
On August 22, 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, the SEC adopted new requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties. These regulations require companies to perform due diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. The first such report was filed with the SEC on May 29, 2014. The implementation of these new requirements could adversely affect the sourcing, availability and pricing of minerals used in the manufacture of semiconductor devices, including our products. In addition, we have incurred and will continue to incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free.
Risks Related to the Semiconductor Industry
Cyclicality in the semiconductor device industry has led to substantial decreases in demand for our systems and may from time to time continue to do so
Our operating results are subject to significant variation due to the cyclical nature of the semiconductor device industry. Our business depends upon the capital expenditures of semiconductor device manufacturers, which, in turn, depend upon the current and anticipated market demand for semiconductors and products using semiconductors. The timing, length and severity of the up-and-down cycles in the semiconductor equipment industry are difficult to predict. In recent years, the industry has experienced significant downturns, generally in connection with declines in economic conditions. This cyclical nature of the industry in which we operate affects our ability to accurately predict future revenue and, thus, future expense levels. When cyclical fluctuations result in lower than expected revenue levels, operating results may be adversely affected and cost reduction measures may be necessary in order for us to remain competitive and financially sound. During a down cycle, we must be in a position to adjust our cost and expense structure to prevailing market conditions and to continue to motivate and retain our key employees. In addition, during periods of rapid growth, we must be able to increase manufacturing capacity and personnel to meet customer demand. We can provide no assurance that these objectives can be met in a timely manner in response to industry cycles. If we fail to respond to industry cycles, our business could be seriously harmed.
Our future rate of growth is highly dependent on the development and growth of the market for microelectronic device inspection, lithography and metrology equipment
We target our products to address the needs of microelectronic device manufacturers for defect inspection, metrology and lithography. If for any reason the market for microelectronic device inspection, lithography or metrology equipment fails to grow in the long term, we may be unable to maintain current revenue levels in the short term and maintain our historical growth in the long term. Growth in the inspection market is dependent to a large extent upon microelectronic manufacturers replacing manual inspection with automated inspection technology. Growth in the metrology market is dependent to a large extent upon new chip designs and capacity expansion of microelectronic manufacturers. There is no assurance that manufacturers will undertake these actions at the rate we expect.


23


Risks Related to our Stock
Provisions of our charter documents and Delaware law, as well as our stockholder rights plan, could discourage potential acquisition proposals and/or delay, deter or prevent a change in control of our company
Provisions of our certificate of incorporation and bylaws, as well as our stockholder rights plan, may inhibit changes in control of our company not approved by our Board of Directors. These provisions also limit the circumstances in which a premium can be paid for the common stock, and in which a proxy contest for control of our board may be initiated. These provisions provide for:
a prohibition on stockholder actions through written consent;
a requirement that special meetings of stockholders be called only by our chief executive officer or Board of Directors;
advance notice requirements for stockholder proposals and director nominations by stockholders;
limitations on the ability of stockholders to amend, alter or repeal our by-laws;
the authority of our board to issue, without stockholder approval, preferred stock with such terms as the board may determine; and
the authority of our board, without stockholder approval, to adopt a Stockholder Rights Plan. Such a Shareholder Rights Plan was adopted by the Board of Directors on June 27, 2005.
We are also entitled to avail ourselves of the protections of Section 203 of the Delaware General Corporation Law, which could inhibit changes in control of us.
Our stock price is volatile
The market price of our common stock has fluctuated widely. From the beginning of fiscal year 2009 through the end of fiscal year 2014, our stock price fluctuated between a high of $14.10 per share and a low of $1.95 per share. Consequently, the current market price of our common stock may not be indicative of future market prices, and we may be unable to sustain or increase the value of an investment in our common stock. Factors affecting our stock price may include:
variations in operating results from quarter to quarter;
changes in earnings estimates by analysts or our failure to meet analysts’ expectations;
changes in the market price per share of our public company customers;
market conditions in the semiconductor and other industries into which we sell products;
general economic conditions;
political changes, hostilities or natural disasters such as hurricanes and floods;
low trading volume of our common stock; and
the number of firms making a market in our common stock.
In addition, the stock market has recently experienced significant price and volume fluctuations. These fluctuations have particularly affected the market prices of the securities of high technology companies like ours. Any such market fluctuations in the future could adversely affect the market price of our common stock.

Item 1B.
Unresolved Staff Comments.
None.



24


Item 2.
Properties.
Our executive office building is located at One Rudolph Road in Flanders, New Jersey. We own and lease facilities for engineering, manufacturing, sales and service related purposes in the United States and seven other countries — China, Germany, Japan, South Korea, Singapore, Taiwan and Scotland. The following table indicates the location, the general purpose and the square footage of our principal facilities. The expiration years of the leases covering the leased facilities are also indicated.
Location
 
Facility Purpose
 
Approximate Square Footage
 
Lease Expiration Year, Unless Owned
Flanders, New Jersey

Executive Office

20,000


Owned

Budd Lake, New Jersey

Engineering and Service

61,500


2016

Bloomington, Minnesota

Engineering, Manufacturing and Service

98,500


2019

Tewksbury, Massachusetts

Engineering and Service

7,000


2017

Wilmington, Massachusetts

Engineering, Manufacturing and Service

43,000


2019

Richardson, Texas

Engineering

21,000


Owned

Bohemia, New York

Engineering

6,000


2016

Snoqualmie, Washington

Engineering and Service

27,000


2018

Newbury Park, California

Engineering and Service

3,000


2017

Tianjin, China

Engineering

5,000


2017

Hsin-Chu, Taiwan

Sales and Service

10,500


2015

Takatsu, Japan

Sales and Service

3,500


2017

Sungnam-si, South Korea

Sales and Service

9,000


2017

Shanghai, China

Sales and Service

2,500


2016

Singapore

Sales and Service

2,500


2016

Scotland, United Kingdom

Sales and Service

1,000


2015

Mainz, Germany

Engineering, Sales and Service

6,500


2015

We also lease office space for other smaller sales and service offices in several locations throughout the world.
We believe that our existing facilities and capital equipment are adequate to meet our current requirements, and that suitable additional or substitute space is available on commercially reasonable terms if needed.
On November 14, 2014, we announced the closing of our facility in Mainz, Germany and will relocate the operations to our facilities in Snoqualmie, Washington and Bloomington, Minnesota with a target completion date of March 31, 2015.



25


Item 3.
Legal Proceedings.

From time to time, we are subject to legal proceedings and claims in the ordinary course of business. As previously disclosed, in December 2007, we completed the acquisition of specific assets and liabilities of the semiconductor division of Applied Precision LLC (“Applied”). As a result of the acquisition, we assumed certain liabilities of Applied including a lawsuit filed in the United States District Court, District of Arizona, by Integrated Technology Corporation (“ITC”) which alleged Applied’s PrecisionPoint, PrecisionWoRx® and ProbeWoRx® products infringed an ITC patent (Integrated Technology Corporation v. Rudolph Technologies, Inc., No. CV-06-2182-PHX-ROS). Prior to trial, the District Court ruled that such products sold prior to August of 2007 (the “pre-August 2007 tools”) infringed the ITC patent. At trial in December of 2011, a trial verdict was rendered in which the jury found that while our products manufactured after August of 2007 (the “post-August 2007 tools”) did not literally infringe ITC’s patent, the products were found to infringe under a rule known as the doctrine of equivalents, a legal principle which expands the language of patent claims to encompass products or processes which may otherwise be found not to literally infringe the patent. The jury awarded $15.5 million to ITC in damages for sales made during the years 2000-2011, of which approximately one-half related to sales for pre-August 2007 tools. The jury found that for the sales of the post-August 2007 tools, the infringement was willful. On July 23, 2012, the District Court issued an Order which affirmed the jury’s award, applied treble damages to the portion of the jury award related to post-August 2007 tool sales and granted ITC’s motion for attorney’s fees and prejudgment interest on the verdict and attorney’s fees. At that time, the District Court also enjoined us from future infringement of the ITC patent and from selling or supplying the applicable products with the applicable features from or into the United States. We appealed the injunction, the District Court Order and the damages assessment. In October 2012, the injunction was stayed by the U.S. Federal Court of Appeals and thereafter in June of 2013, the patent expired. On November 4, 2013, the U.S. Federal Court of Appeals issued a ruling which reversed the judgment of infringement against all post-August 2007 tools, reversed the finding of willfulness, vacated the treble damages award, vacated the award of attorney’s fees and costs, remanded the issue back to the District Court for further review, and affirmed the award of damages and interest for the pre-August 2007 tools. As a result, the matter is resolved with regard to the alleged infringement of the post-August 2007 tools. With regard to the damages assessment against the pre-August 2007 tools, on March 4, 2014, we filed a Petition for a Writ of Certiorari with the U.S. Supreme Court to appeal the basis of the Federal Court of Appeals’ decision affirming the damages award for the pre-August 2007 tools. On June 30, 2014, the Supreme Court denied our Petition and as a result, we increased our related litigation accrual by $9.6 million for a total accrual of $13.9 million. On July 22, 2014, we then paid to ITC $10.6 million which represented only the damages and interest portion of the judgment. Since the patent expired in June of 2013 and payment of the judgment has been made, this matter is fully resolved with the sole exception of the issue of the remanded attorney’s fees. On August 8, 2014, the District Court issued an order for setting the attorney’s fees award at $3.3 million which we appealed to the U.S. Federal Court of Appeals on September 5, 2014. We believe that we have meritorious defenses regarding this issue and intend to continue to vigorously prosecute the matter. The $3.3 million is held in escrow and is recorded in “Prepaid expenses and other current assets” in the Consolidated Balance Sheet at December 31, 2014. The corresponding liability is recorded under the caption, “Other current liabilities,” in the Consolidated Balance Sheet at December 31, 2014. We expect this to be the maximum liability reasonably possible for the attorney’s fees, excluding interest, for this lawsuit with respect to both the pre-August 2007 and post-2007 August tools.
In our patent infringement suit against Camtek, Ltd., of Migdal Hamek, Israel, concerning our proprietary continuous scan wafer inspection technology, the U.S. Federal Court of Appeals issued a ruling on August 22, 2011.  In its opinion, the Appellate Court affirmed multiple rulings from trial at the District Court level including (i) finding our U.S. Patent No. 6,826,298 valid, (ii) the part of the infringement ruling based on the finding that Camtek’s Falcon product strobes “based on velocity,” and (iii) the dismissal of Camtek’s claim against us for inequitable conduct against the U.S. Patent and Trademark Office.  The court did, however, revise one claim construction ruling made by the District Court in the original case.  As a result, the Appellate Court set aside the verdict delivered by the jury for damages and the District Court’s decision to enter an injunction against Camtek’s selling Falcon tools in the U.S. and remanded the case back to the trial court for a limited trial on this single infringement issue.  On March 31, 2014, the District Court ruled in our favor, finding that Camtek’s Falcon tools continue to infringe our patent even under the revised claim construction of the patent, obviating the need for the limited trial.  On February 9, 2015, the District Court issued an Order granting our Motion for Final Judgment, reinstating the original damages and applying prejudgment interest for a total award of $14.5 million. In addition, the District Court issued a permanent injunction against Camtek from “making, using, selling and offering to sell any of its Falcon machines and any machines that are colorable imitations


26


thereof in the United States, intended for sale and use within the United States, until the expiration of the ‘6,298 patent [projected to be in 2020].” Camtek has 30 days in which to appeal the decision should they so choose. 
This lawsuit was initially brought in 2005 by August Technology prior to its merger with us. We have subsequently filed a lawsuit against Camtek alleging infringement of our U.S. Patent No. 7,729,528, also related to our proprietary continuous scan wafer inspection technology.  This lawsuit is currently stayed pending resolution of a re-examination petition filed by Camtek with the U.S. Patent and Trademark Office.


Item 4.
Mine Safety Disclosures.

None.



27


PART II

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our Common Stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “RTEC.” Set forth below is a line graph comparing the annual percentage change in the cumulative return to the stockholders of the Company’s Common Stock with the cumulative return of the NYSE Composite Index and a custom peer group for the period commencing on December 31, 2009 and ending on December 31, 2014. The peer group is comprised of capital equipment manufacturers for the semiconductor industry with relatively comparable revenues and market capitalizations to that of the Company. The peer group was recommended by a global management consulting firm. The companies included in the peer group are MKS Instruments, Inc., FEI Company, Brooks Automation, Inc., Veeco Instruments, Inc., Cabot Microelectronics Corporation, FormFactor, Inc., Axcelis Technologies, Inc., Advanced Energy Industries, Inc., Cohu, Inc., EMCORE Corporation, Mattson Technology, Inc., LTX-Credence, Corporation, Nanometrics, Incorporated, Ultratech, Inc., PDF Solutions, Inc. and AXT, Inc.
The information contained in the performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference into such filing.
The graph assumes that $100 was invested on December 31, 2009 in the Company’s Common Stock in each index, and that all dividends were reinvested. No cash dividends have been declared or paid on the Company’s Common Stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.
 
12/09
 
12/10
 
12/11
 
12/12
 
12/13
 
12/14
Rudolph Technologies, Inc. 
100.0

 
122.47

 
137.80

 
200.00

 
174.71

 
152.24

NYSE Composite
100.0

 
113.76

 
109.70

 
127.54

 
161.19

 
172.26

Peer Group
100.0

 
114.24

 
105.80

 
121.68

 
161.18

 
166.57



28


On December 16, 2013, we transferred the listing of our Common Stock from the NASDAQ Global Select Market to the NYSE. The following table sets forth, for the periods indicated, the high and low sale prices per share of our common stock as reported on the NASDAQ Global Select Market through December 20, 2013 and on the NYSE thereafter.
 
Price Range of
Common Stock
 
High

Low
Year Ended December 31, 2013
 


 

First Quarter
$
14.10


$
10.65

Second Quarter
$
12.65


$
10.42

Third Quarter
$
13.29


$
10.08

Fourth Quarter
$
11.95


$
10.12

Year Ended December 31, 2014
 


 

First Quarter
$
12.32


$
10.49

Second Quarter
$
11.74


$
8.91

Third Quarter
$
10.39


$
8.97

Fourth Quarter
$
10.44


$
8.10


As of February 6, 2015, there were 70 stockholders of record of our common stock and approximately 6,557 beneficial stockholders. The closing market value of our common stock on February 6, 2015 was $12.09 per share.
We have never declared or paid a cash dividend on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain our earnings, if any, for the development of our business and the share repurchase of our common stock. Additionally, covenants in the indenture governing the Notes restrict our ability to declare or pay cash dividends. The declaration of any future dividends by us is within the discretion of our Board of Directors and will be dependent on our earnings, financial condition and capital requirements as well as any other factors deemed relevant by our Board of Directors.
In July 2008, our Board of Directors authorized us to repurchase up to 3.0 million shares of our common stock with no established end date. The authorization allows for repurchases to be made in the open market or through negotiated transactions from time to time. At December 31, 2014, there were 1.6 million shares available for future stock repurchases under this repurchase authorization. The shares of common stock purchased under the share repurchase authorization are being retired. In January 2015, our Board of Directors approved an additional 1.4 million shares to the existing repurchase plan, bringing the total current authorization back to 3.0 million shares. For further information, see Note 18 in the accompanying consolidated financial statements.



29


Item 6.
Selected Financial Data.
The following selected financial data should be read in conjunction with our Consolidated Financial Statements and the related Notes thereto appearing elsewhere in this Annual Report on Form 10-K, and under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The balance sheet data as of December 31, 2013 and 2014 and the statement of operations data for the years ended December 31, 2012, 2013 and 2014 set forth below were derived from our audited consolidated financial statements included elsewhere in this Form 10-K. The balance sheet data as of 2010, 2011 and 2012, and the statement of operations data for the years ended December 31, 2010 and 2011 were derived from our audited consolidated financial statements not included herein.

 
Year Ended December 31,
 
2010

2011

2012

2013

2014
 
(In thousands, except per share data)
Statement of Operations Data:
 


 


 


 


 

Revenues
$
195,305


$
187,196


$
218,486


$
176,238


$
181,218

Cost of revenues
91,405


86,843


102,811


85,506


85,730

Gross profit
103,900


100,353


115,675


90,732


95,488

Operating expenses:
 

 
 

 
 
 
 
 
 
Research and development
33,387


36,298


39,331


39,994


40,576

Selling, general and administrative
38,173


40,826


40,225


41,542


53,799

Amortization
1,715


1,757


1,853


2,592


2,422

Total operating expenses
73,275


78,881


81,409

 
84,128


96,797

Operating income (loss)
30,625


21,472


34,266

 
6,604


(1,309
)
Interest income (expense)
167


(1,925
)

(4,377
)

(5,079
)

(5,317
)
Other income (expense)
(255
)

847


(482
)

8


(65
)
Income before provision (benefit) for income taxes
30,537


20,394


29,407

 
1,533

 
(6,691
)
Provision (benefit) for income taxes
3,522


(4,832
)

(14,458
)

(1,925
)

(2,051
)
Net income (loss)
$
27,015


$
25,226


$
43,865


$
3,458


$
(4,640
)
Earnings (loss) per share:
 

 
 

 
 

 
 

 
 

Basic
$
0.86


$
0.79


$
1.36


$
0.11


$
(0.14
)
Diluted
$
0.86


$
0.78


$
1.34


$
0.10


$
(0.14
)
Weighted average shares outstanding:
 

 
 

 
 

 
 

 
 

Basic
31,286


31,744


32,226


32,783


33,124

Diluted
31,492


32,256


32,853


33,388


33,124


 
December 31,
 
2010

2011

2012

2013

2014
Balance Sheet Data:
 


 


 


 


 

Cash and cash equivalents
$
71,120


$
96,671


$
104,253


$
80,790


$
43,114

Marketable securities
629


70,888


64,963


86,582


113,871

Working capital
159,745


234,244


251,530


256,488


254,455

Total assets
219,053


305,911


364,584


371,362


366,637

Convertible senior notes


46,524


49,010


51,751


54,773

Accumulated deficit
(207,523
)

(182,297
)

(138,432
)

(134,974
)

(139,614
)
Total stockholders’ equity
185,034


221,778


270,489


279,003


267,328



30


Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview
We are a worldwide leader in the design, development, manufacture and support of high-performance control metrology, defect inspection, advanced packaging lithography, thin film metrology, and data analysis systems and software used by microelectronic device manufacturers. We provide process and yield management solutions used in both wafer processing and final manufacturing through a family of standalone systems for macro-defect inspection, lithography, probe card test and analysis, and transparent and opaque thin film measurements. All Rudolph systems feature sophisticated software and production-worthy automation. Rudolph systems are backed by worldwide customer support.
In April 2013, we announced that we had acquired specific assets of Tamar Technology, located in Newbury Park, California (“Tamar acquisition”). The acquired business has been integrated into our inspection technology group.  The impact of the acquisition was not material to our consolidated financial position or results of operations.
Rudolph’s 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 computer, tablet, cell phone, other personal electronic devices and automotive sales. Current forecasts by industry analysts for the semiconductor device manufacturing industry project a year-over-year increase in capital spending of approximately 5% to 10% for 2015. Our revenues and profitability, tend to closely follow the strength or weakness of the semiconductor market. We monitor capital equipment spending through announced capital spending plans by our customers and monthly-published industry data such as the book-to-bill ratio. The book-to-bill ratio is a 3-month running statistic that compares bookings or orders placed with capital equipment suppliers to billings or shipments. A book-to-bill ratio above 1.0 shows that semiconductor device equipment manufacturers are ordering equipment at a pace that exceeds the equipment suppliers’ shipments for the period. The three month rolling average North American semiconductor equipment book-to-bill ratio was 1.0 for the month of December 2014, increasing from the September 2014 book-to-bill ratio of 0.9.
Historically, a significant portion of our revenues in each quarter and year has been derived from sales to relatively few customers, and we expect this trend to continue. For the years ended December 31, 2012, 2013 and 2014, sales to customers that individually represented at least five percent of our revenues accounted for 50.9%, 41.6%, and 23.9% of our revenues, respectively.
    
We do not have purchase contracts with any of our customers that obligate them to continue to purchase our products, and they could cease purchasing products from us at any time. A delay in purchase or cancellation by any of our large customers could cause quarterly revenues to vary significantly. In addition, during a given quarter, a significant portion of our revenues may be derived from the sale of a relatively small number of systems. The following table presents the average selling price range for our systems in 2014.
System
 
Average Selling Price Per System
Macro-defect inspection and probe card and test analysis
 
$250,000 to $1.7 million
Transparent film measurement
 
$800,000 to $1.2 million
Opaque film measurements
 
$1.0 million to $1.8 million
Lithography steppers
 
$3.0 million to $8.0 million
A significant portion of our revenues has been derived from customers outside of the United States. A substantial portion of our international sales are denominated in U.S dollars. We expect that revenues generated from customers outside of the United States will continue to account for a significant percentage of our revenues. 
The sales cycle for our systems typically ranges from six to twenty-four months, and can be longer when our customers are evaluating new technology. Due to the length of these cycles, we invest significantly in research and development and sales and marketing in advance of generating revenues related to these investments.



31


Results of Operations
The following table sets forth, for the periods indicated, our statements of operations data as percentages of our revenues. Our results of operations are reported as one business segment.
 
Year Ended December 31,
 
2012

2013

2014
Revenues
100.0
 %

100.0
 %

100.0
 %
Cost of revenues
47.1


48.5


47.3

Gross profit
52.9


51.5


52.7

Operating expenses:








Research and development
18.0


22.7


22.4

Selling, general and administrative
18.4


23.6


29.7

Amortization
0.8


1.5


1.3

Total operating expenses
37.2


47.8


53.4

Operating income (loss)
15.7


3.7


(0.7
)
Interest expense
(2.0
)

(2.9
)

(2.9
)
Other income (expense)
(0.2
)

0.1


(0.1
)
Income before provision (benefit) income taxes
13.5


0.9


(3.7
)
Benefit for income taxes
(6.6
)

(1.1
)

(1.1
)
Net income (loss)
20.1
 %

2.0
 %

(2.6
)%

Results of Operations 2012, 2013 and 2014
Revenues. Our revenues are derived from the sale of our systems, services, spare parts and software licensing. Our revenues were $218.5 million, $176.2 million and $181.2 million for the years ended 2012, 2013 and 2014, respectively. This represents a decrease of 19.3% from 2012 to 2013 and an increase of 2.8% from 2013 to 2014. The decrease in revenue from 2012 to 2013 was primarily due to decreased capital spending in the front-end semiconductor manufacturers, principally by our foundry customers and advanced packaging industry. The increase in revenue from, 2013 to 2014 was primarily due to increased capital spending by back-end semiconductor manufacturers, principally by our advanced packaging customers.
The following table lists, for the periods indicated, the different sources of our revenues in dollars (thousands) and as percentages of our total revenues:
 
Year Ended December 31,
 
2012

2013

2014
Systems and software:
 


 


 


 


 


 

Inspection
$
128,917


59
%

$
89,089


51
%

$
87,818


49
%
Metrology
38,001


17
%

26,500


15
%

24,590


14
%
       Data analysis and review
19,840


9
%

17,927


10
%

24,042


13
%
Lithography


%

8,548


5
%

11,163


6
%
Parts
20,802


10
%

21,078


12
%

20,334


11
%
Services
10,926


5
%

13,096


7
%

13,271


7
%
Total revenue
$
218,486


100
%

$
176,238


100
%

$
181,218


100
%

Total systems and software revenue decreased for the year ended December 31, 2013 as compared to the year ended December 31, 2012 due to a decrease in demand for our products in advanced packaging and front-end systems.


32


This contributed to a decrease in the number of inspection systems sold year-over-year and reflected a decrease in inspection systems revenue of $39.8 million. The year-over-year decreases in metrology systems revenue of $11.5 million and data analysis and review software revenues of $1.9 million from 2012 to 2013 were primarily due to decreased sales across all metrology product families and decreased licensing revenue from the data analysis and review software product category. The year-over-year increase in lithography systems revenue from 2012 to 2013 of $8.5 million was due to our entrance into the lithography market. The average selling price of similarly configured systems has been consistent and therefore did not have a material impact on our revenue for the same period. Systems revenue generated by our latest product releases and major enhancements in each of our product families amounted to 67% of total revenue for 2012 compared to 64% of total revenue for 2013. The year-over-year increase in parts and service revenues in absolute dollars from 2012 to 2013 was primarily due to increased spending by our customers on repairs of existing systems. Parts and services revenues are 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, 2014 as compared to the year ended December 31, 2013 due to an increase in licensing and lithography revenue. There was a year-over-year increase in lithography revenue of $2.6 million, however, the number of units sold decreased slightly. Licensing revenue from the data analysis and review software product category increased $6.1 million primarily in increased licensing revenue from our process control software. The year-over-year increase in system and software revenue was partially offset by a decrease in inspection systems revenue of $1.3 million, however, there was a slight increase in the number of inspection units sold. There was a decrease in metrology revenue of $1.9 million due to a decrease in demand for metrology systems. Systems revenue generated by our latest product releases and major enhancements in each of our product families amounted to 64% of total revenue for 2013 compared to 61% of total revenue for 2014. The year-over-year increase in parts and service revenues in absolute dollars from 2013 to 2014 was primarily due to increased spending by our customers on repairs of existing systems. Parts and services revenues are generated from part sales, maintenance service contracts, system upgrades, as well as time and material billable service calls.
Deferred revenues of $8.0 million were recorded in Other current liabilities at December 31, 2014 and primarily consisted of $5.5 million for deferred maintenance agreements and $2.5 million for outstanding deliverables.
Gross Profit. Our gross profit has been and will continue to be affected by a variety of factors, including manufacturing efficiencies, excess and obsolete inventory write-offs, pricing by competitors or suppliers, new product introductions, production volume, customization and reconfiguration of systems, international and domestic sales mix, and parts and service margins. Our gross profit was $115.7 million, $90.7 million and $95.5 million for the years ended December 31, 2012, 2013 and 2014, respectively. The decrease in gross profit as a percentage of revenue from 2012 to 2013 was primarily due to lower volume of system and software sales as well as product mix. The increase in gross profit as a percentage of revenue from 2013 to 2014 was primarily due to higher volume of software sales as well as product mix.
Operating Expenses
Our operating expenses consist of:
Research and Development. The macro-defect inspection, thin film transparent, opaque process control, and probe card test analysis 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 the evolution 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 expense was $39.3 million, $40.0 million and $40.6 million in 2012, 2013 and 2014, respectively. The year-over-year dollar increase from 2012 to 2013 was primarily due to higher compensation and project costs, as well as, additional research and development costs for acquired businesses in the latter part of 2012 and in 2013. The year-over-year dollar increase from 2013 to 2014 was primarily due to charges related to our restructuring


33


plan announced in November 2014. We continue to maintain our commitment to investing in new product development and enhancement to existing products.
Selling, General and Administrative. Selling, general and administrative expense is primarily comprised of salaries and related costs for sales, marketing, and general administrative personnel, as well as commissions and other non-personnel related expenses. Our selling, general and administrative expense was $40.2 million, $41.5 million and $53.8 million in 2012, 2013 and 2014, respectively. The year-over-year increase from 2012 to 2013 in selling, general and administrative expense was primarily due to the inclusion of selling, general and administrative expenses for acquired businesses in 2012 and 2013. The year-over-year increase from 2013 to 2014 was primarily due to increased litigation expenses related to the final judgment awarded to Integrated Technology Corporation (“ITC”), higher share based compensation expenses and restructuring charges. For more information on the ITC litigation, See Part I Item 3 of this Form 10-K.
Amortization of Identifiable Intangible Assets.  Amortization of identifiable intangible assets was $1.9 million, $2.6 million and $2.4 million in 2012, 2013 and 2014, respectively. The increase in amortization expense from 2012 to 2013 was due to amortization of intangible assets from acquired businesses in 2012 and 2013. The decrease in amortization expense from 2013 to 2014 was due to certain intangible assets becoming fully amortized during the period.
Interest expense,net. In 2012, 2013 and 2014, net interest expense was $4.4 million, $5.1 million and $5.3 million, respectively. The year-over-year increase in net interest expense from 2012 to 2014 was primarily due to increased amortization of the interest discount related to the convertible senior notes.
Income taxes. The following table provides details of income tax (dollars in millions):
 
Year Ended December 31,
 
2012
 
2013
 
2014
Income (loss) before income taxes
$
29.4

 
$
1.5

 
$
(6.7
)
Benefit for income taxes
$
(14.5
)
 
$
(1.9
)
 
$
(2.1
)
Effective tax rate
(49.2
)%
 
(125.6
)%
 
(30.7
)%
The income tax benefit differs from the federal statutory income tax rate of 35% in 2012, primarily as a result of reversal of valuation allowances, partially offset by taxes accrued in foreign jurisdictions.
The income tax benefit differs from the federal statutory income tax rate of 35% for 2013, primarily from research and development tax credits which were not available in 2012 as a result of legislation, foreign tax credits, and the reversal of unrecognized tax benefits, offset by $1.3 million of expense related to a correction of prior year income tax balances recognized in the fourth quarter of 2013. The correction of the prior year income tax balance was not considered material to the prior year or current year financial statements.
The income tax benefit differs from the federal statutory income tax rate of 35% for 2014, primarily due to an increase in our valuation allowance and taxes accrued in foreign jurisdictions, partially offset by research and development tax credits.
Litigation. As discussed in Part I, Item 3. “Legal Proceedings”, we are subject to legal proceedings and claims, which include, among other things, our on-going litigation with ITC in a patent infringement action related to the predictive scrub feature of our PrecisionPoint™, PrecisionWoRx® and ProbeWoRx® products in which we were the defendants. See Part I, Item 3 for a discussion of this action and the U.S. Federal Court of Appeals ruling reversing the finding of infringement against products sold after August of 2007 and its order of other relief in this matter. The U.S. Federal Court of Appeals did affirm the jury’s finding of damages against us related to products sold prior to August of 2007 for which we ultimately paid $10.6 million to ITC to satisfy the damages award. The District Court subsequently issued an order awarding ITC $3.3 million in attorney’s fees which we are in the process of pursuing an appeal. In an adverse judgment against us in this matter, the amount identified by the Court will not have a material impact on our results of operations and will also not have a material impact on our liquidity and financial condition.



34


Liquidity and Capital Resources
At December 31, 2013, our cash, cash equivalents and marketable securities totaled $167.4 million, while working capital amounted to $265.3 million. At December 31, 2014, we had $157.0 million of cash, cash equivalents and marketable securities and $254.5 million in working capital.
Typically during periods of revenue growth, changes in accounts receivable and inventories represent a use of cash as we incur costs and expend cash in advance of receiving cash from our customers. Similarly, during periods of declining revenue, changes in accounts receivable and inventories represent a source of cash as inventory purchases decline and revenue from prior periods is collected.
Net cash and cash equivalents provided by operating activities for the years ended December 31, 2012, 2013 and 2014 totaled $22.1 million, $6.1 million and $4.3 million, respectively. During the year ended December 31, 2012, cash provided by operating activities was primarily due to net income, adjusted to exclude the effect of non-cash charges, of $39.4 million, and an increase in deferred revenue of $3.6 million, a decrease in income taxes of $3.5 million, and an increase in other liabilities of $1.0 million, partially offset by an increase accounts receivable of $14.7 million, an increase in inventory of $6.7 million and an decrease in accounts payable of $2.7 million, and an increase in prepaid and other assets of $1.4 million.
During the year ended December 31, 2013, cash provided by operating activities was primarily due to net income, adjusted to exclude the effect of non-cash charges, of $19.8 million, a decrease in account receivable of $2.6 million, and a decrease in prepaid expenses and other assets of $1.4 million, partially offset by an increase in inventory of $6.8 million, a decrease in other liabilities of $3.0 million, an increase in income taxes of $4.6 million, a decrease in deferred revenue of $2.4 million, and a decrease in accounts payable of $0.9 million.
During the year ended December 31, 2014, cash provided by operating activities was primarily due to net loss, adjusted to exclude the effect of non-cash charges, of $12.4 million, an increase in accounts payable of $3.8 million, a decrease in income tax receivable of $1.2 million, a decrease in accounts receivable of $1.1 million, and an increase in other liabilities of $0.6 million, partially offset by an increase in inventories of $9.4 million, an increase in prepaid expenses and other of $4.7 million, and a decrease in deferred revenue of $0.8 million.
Net cash and cash equivalents used in investing activities for the years ended December 31, 2012, 2013 and 2014 totaled $14.9 million, $30.0 million and $28.5 million, respectively. During the year ended December 31, 2012, net cash used by investing activities included purchases of marketable securities of $96.3 million, acquisition costs for business combinations of $18.6 million, and capital expenditures of $2.4 million, which were partially offset by proceeds from sales of marketable securities of $102.4 million. During the year ended December 31, 2013, net cash used by investing activities included purchases of marketable securities of $119.1 million, capital expenditures of $4.9 million, and acquisition costs for business combinations of $3.4 million, which were partially offset by proceeds from sales of marketable securities of $97.3 million. During the year ended December 31, 2014, net cash used by investing activities included purchases of marketable securities of $243.7 million, and capital expenditures of $2.1 million, which were partially offset by proceeds from sales of marketable securities of $217.2 million. Capital expenditures over the next twelve months are expected to be approximately $6.0 million to $8.0 million.
Net cash provided by (used in) financing activities was $0.5 million, $1.4 million and $(12.7) million in 2012, 2013 and 2014, respectively. In the 2012 and 2013 periods, net cash provided by financing activities comprised proceeds received from sales of shares through share-based compensation plans and tax benefit from share-based compensation plans. In 2014, financing activities included the purchase of shares under the share repurchase authorization of $12.8 million and net proceeds from other financing activities.
From time to time we evaluate whether to acquire new or complementary businesses, products and/or technologies. We may fund all or a portion of the purchase price of these acquisitions in cash, stock, or a combination of cash and stock.
In July 2008, our Board of Directors authorized the Company to repurchase up to 3.0 million shares of our common stock with no established end date. The authorization allows for repurchases to be made in the open market or through negotiated transactions from time to time. At December 31, 2014, 1.6 million shares remained available for future stock repurchases under this repurchase authorization. The shares of common stock purchased under the share repurchase authorization are being retired. In January 2015, our Board of Directors approved an additional 1.4


35


million shares to the existing repurchase authorization, bringing the total current authorization back to 3.0 million shares. For further information, see Note 18 in the accompanying consolidated financial statements.
We had a $40 million irrevocable standby letter of credit available with Credit Suisse AG which was required to secure the damages assessment in connection with the ITC Litigation discussed in Legal Proceedings. On July 22, 2014, we paid $10.6 million to ITC through a draw down of the letter of credit. Pursuant to the terms of the letter of credit, upon draw down of the funds, the letter of credit was collateralized by securities held in the Company’s investment portfolios which were immediately sold to satisfy the letter of credit payment. The letter of credit was subsequently canceled upon completion of this payment.
On July 25, 2011, we issued $60,000 aggregate principal amount of 3.75% Convertible Senior Notes due 2016 (the “Notes”) at par. The Notes pay interest semi-annually in arrears on January 15 and July 15 of each year at an annual rate of 3.75% and will mature on July 15, 2016, unless earlier converted or repurchased. The Notes may be converted, under certain circumstances, based on an initial conversion rate of 77.241 shares of Company common stock per $1 principal amount of Notes, which represents an initial conversion price of approximately $12.95 per share. Concurrently with the issuance of the Notes, we purchased a convertible note hedge for $14,507 and sold a warrant for $7,007. The separate convertible note hedge and warrant transactions are structured to reduce the potential future economic dilution associated with the conversion of the Notes.
Our future capital requirements will depend on many factors, including the timing and amount of our revenues and our investment decisions, which will affect our ability to generate additional cash. We expect that our existing cash, cash equivalents and marketable securities will be sufficient to meet our anticipated cash requirements for working capital, capital expenditures and other cash needs for the next twelve months. 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 at December 31, 2014, 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 $5.3 million at December 31, 2014. We are currently unable to provide a reasonably reliable estimate of the amount or periods when cash settlement of this liability may occur.
 
Payments due by period
 
(In thousands)
 
Total

Less than 1
year

1-3
years

3-5
years

More than
5 years
Debt and interest obligations
$
64,500


$
2,250


$
62,250


$


$

Operating lease obligations
11,921


3,858


4,650


2,941


472

Open and committed purchase orders
11,781


11,781







Total
$
88,202


$
17,889


$
66,900


$
2,941


$
472


Off-Balance Sheet Arrangements
The Company does not have any significant 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.



36


Critical Accounting Policies
Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. 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, revenues 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 and the Audit Committee 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 provided that there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collection of the related receivable is reasonably assured. Revenue recognition generally results at the following points: (1) for all transactions where legal title passes to the customer upon shipment, revenue is recognized upon shipment for all products that have been demonstrated to meet product specifications prior to shipment; the portion of revenue associated with certain installation-related tasks is deferred, and that revenue is recognized upon completion of the installation-related tasks; (2) for products that have not been demonstrated to meet product specifications prior to shipment, revenue is recognized at customer technical acceptance; (3) for transactions with multiple elements, such as sales of products that include software and services, the revenue relating to the undelivered elements is deferred using the relative selling price method utilizing vendor-specific objective evidence (“VSOE”) or estimated sales prices (“ESP”) until delivery of the deferred elements. Third-party evidence is not typically used to determine selling prices as to limited availability of reliable competitor products’ selling prices. The ESP is established considering multiple factors including, but not limited to, gross margin objectives, internal costs and competitor pricing strategies.
Revenues from parts sales are recognized at the time of shipment. Revenue from training and service contracts is recognized ratably over the training period and contract period. A provision for the estimated cost of fulfilling warranty obligations is recorded at the time the related revenue is recognized.
Revenue from software license fees is recognized upon shipment or customer acknowledgment if collection of the resulting receivable is probable, the fee is fixed or determinable, and VSOE exists to allocate a portion of the total fee to any undelivered elements of the arrangement. License support and maintenance revenue is recognized ratably over the contract period.
Deferred revenue represents undelivered items, prepaid service contract revenue and prepaid license support and maintenance revenue. Deferred revenue is recognized in accordance with our revenue recognition policies described above.
Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We specifically analyze accounts receivable and analyze historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, or if our assumptions are otherwise incorrect, additional allowances may be required.
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 life-cycles, product demand and market conditions. If actual product life-cycles, product demand and market conditions are less favorable than those originally projected by management, additional inventory write-downs may be required.


37


Business Acquisitions. We account for acquired or merged businesses using the purchase method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition or merger at their respective fair values. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our consolidated financial position and results of operations. Accordingly, for significant acquisitions, we typically obtain assistance from independent valuation specialists.
There are several methods that can be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, we typically utilize the “income method.” This method starts with a forecast of all of the expected future net cash flows. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method or other methods include the projected future cash flows (including timing) and the discount rate reflecting the risks inherent in the future cash flows. Determining the useful life of an intangible asset also requires judgment. For example, different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives. All of these judgments and estimates can significantly impact our consolidated financial position and results of operations.
Goodwill. Our formal annual impairment testing date for goodwill is October 31st or prior to the next annual testing date if an event occurs or circumstances change that would make it more likely than not that the fair value of a reporting unit is below its carrying amount. Under the amendments of ASC 350-10, ASU No. 2011-08, Testing Goodwill for Impairment, beginning in the first quarter of 2012, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, we elect this option and after assessing the totality of events or circumstances, we determine it is not likely that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. We have not elected this option to date. The goodwill impairment test is a two-step process which requires us to make judgmental assumptions regarding fair value. The first step consists of estimating the fair value of our aggregated reporting unit using the market value of our common stock at October 31st, multiplied by the number of outstanding common shares (market capitalization) and an implied control premium as if it were to be acquired by a single stockholder. We obtain information on completed sales of similar companies in a comparable industry to estimate an implied control premium for us. We compare the estimated fair value of the reporting unit to its carrying value which includes goodwill. If the results of the initial market capitalization test produce results which are below the reporting unit carrying value, we will also consider if the market capitalization is temporarily low and, if so, we may also perform a discounted cash flow test. If the estimated fair value is less than the carrying value, the second step is completed to compute the impairment amount by determining the “implied fair value” of goodwill. This determination requires the allocation of the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any remaining unallocated fair value represents the “implied fair value” of goodwill which is compared to the corresponding carrying value to compute the goodwill impairment amount.
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. No such indicators were noted in 2014.
Share-Based Compensation. The fair value of our stock options is estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes valuation calculation requires us to estimate key assumptions such as future stock price volatility, expected terms, risk-free rates and dividend yield. Expected stock price volatility is based on historical volatility of our stock. We use historical data to estimate option exercises and employee terminations within the valuation model. The expected term of options granted is derived from an analysis of historical exercises and remaining contractual life of stock options, and represents the period of time that options granted are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. We have never paid cash dividends, and do not currently intend to pay cash dividends, and thus have assumed a 0% dividend yield. If our actual experience differs significantly from the assumptions used to compute our share-based compensation cost, or if different assumptions had been used, we may have recorded too much or too little share-based compensation cost. In addition, we are required to estimate the expected forfeiture rate of our share grants and only recognize the expense


38


for those shares expected to vest. If the actual forfeiture rate is materially different from our estimate, our share-based compensation expense could be materially different.
Warranties. We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.
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. Significant 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. At December 31, 2013 and 2014, we had valuation allowances of $1.6 million and $2.4 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 from 2012 through 2014 as well as the projected earnings in future years and believe it is more likely than not that the 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
In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This standard sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about our ability to continue as a going concern, and if so, to provide related footnote disclosures. The standard is effective for annual and interim reporting periods ending after December 15, 2016. We are currently evaluating this new standard and expect it to have no material impact on our financial position, results of operations, and cash flows.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. ASU 2014-09 will be effective for the Company starting in the first quarter of 2017. ASU 2014-09 allows for two methods of adoption: (a) “full retrospective” adoption, meaning the standard is applied to all periods presented, or (b) “modified


39


retrospective” adoption, meaning the cumulative effect of applying ASU 2014-09 is recognized as an adjustment to the 2017 opening retained earnings balance. We are in the process of determining the adoption method as well as the effects the adoption of ASU 2014-09 will have on our consolidated financial position, results of operations, and cash flows.
In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosure of Disposal of Components of an Entity.” ASU 2014-08 address issues with reporting by changing the criteria for reporting discontinued operations and enhancing convergence of the FASB’s and the International Accounting Standard Board’s (“IASB”) reporting requirements for discontinued operations. The standard is effective for all businesses activities that, on acquisition, are classified as held for sale or all disposals of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. We are currently evaluating this new standard and expect it to have no impact on our financial position, results of operations, and cash flows.

Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate and Credit Market Risk
We are exposed to changes in interest rates and market liquidity including our investments in certain available-for-sale securities and our convertible senior notes. Our available-for-sale securities consist of fixed and variable rate income investments (Municipal notes, bonds and an auction rate security). We continually monitor our exposure to changes in interest rates, market liquidity and credit ratings of issuers from our available-for-sale securities. It is possible that we are at risk if interest rates, market liquidity or credit ratings of issuers change in an unfavorable direction. The magnitude of any gain or loss will be a function of the difference between the fixed rate of the financial instrument and the market rate and our financial condition and results of operations could be materially affected. Based on a sensitivity analysis performed on our financial investments held as of December 31, 2014, an immediate adverse change of 10% in interest rates (e.g. 3.00% to 3.30%) would result in an immaterial decrease in the fair value of our available-for-sale securities. The interest rate on our convertible senior notes is fixed. Therefore, any change in interest rates will not have an impact on our consolidated financial position, results of operations or cash flows.
Foreign Currency Risk
We have branch operations in Taiwan, Singapore and South Korea and wholly-owned subsidiaries in Europe, Japan and China. Our international subsidiaries and branches operate primarily using local functional currencies. These foreign branches and subsidiaries are limited in their operations and level of investment so that the risk of currency fluctuations is not material. A hypothetical 10% appreciation or depreciation in the U.S. dollar relative to the reporting currencies of our foreign subsidiaries at December 31, 2014 would have affected the foreign-currency-denominated non-operating expenses of our foreign subsidiaries by approximately $0.2 million. We cannot accurately predict future exchange rates or the overall impact of future exchange rate fluctuations on our business, results of operations and financial condition.
A substantial portion of our international systems sales are denominated in U.S. dollars with the exception of Japan and, as a result, we have relatively little exposure to foreign currency exchange risk with respect to these sales. Substantially all our sales in Japan are denominated in Japanese yen. From time to time, we may enter into forward exchange contracts to economically hedge a portion of, but not all, existing and anticipated foreign currency denominated transactions expected to occur within 12 months. The change in fair value of the forward contracts is recognized in the Consolidated Statements of Operations each reporting period. As of December 31, 2013 and 2014, we had six and five forward contracts outstanding, respectively. The total notional contract value of these outstanding forward contracts at December 31, 2013 and 2014 was $1.0 million and $1.6 million, respectively. We do not use derivative financial instruments for trading or speculative purposes.

Item 8.
Financial Statements and Supplementary Data.
The consolidated financial statements required by this item are set forth on the pages indicated at Item 15(a) of this Annual Report on Form 10-K.


40



Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.

Item 9A.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time period specified in SEC rules and forms. These controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, we have recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is required to apply judgment in evaluating its controls and procedures.
We performed an evaluation under the supervision and with the participation of our management, including our principal executive and principal financial officers, to assess the effectiveness of the design and operation of our disclosure controls and procedures under the Exchange Act as of December 31, 2014. Based on that evaluation, our management, including our principal executive and principal financial officers, concluded that our disclosure controls and procedures were effective as of December 31, 2014 at the reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (“COSO”). Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2014.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our consolidated financial statements as of and for the year ended December 31, 2014 have been audited by Ernst & Young LLP, our independent registered public accounting firm, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Ernst & Young LLP has also audited our internal control over financial reporting as of December 31, 2014, as stated in its attestation report included elsewhere in this Annual Report on Form 10-K.
There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company’s quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Item 9B.
Other Information.
None.



41


PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K because we expect to file a definitive proxy statement within one hundred twenty (120) days after the end of the fiscal year pursuant to Regulation 14A (the “Proxy Statement”) for our Annual Meeting of Stockholders currently scheduled for May 20, 2015, and the information included in the Proxy Statement is incorporated herein by reference.

Item 10.
Directors, Executive Officers and Corporate Governance.
The information required by this Item with respect to directors and executive officers, is included under the headings “Proposal One: Election of Directors,” “Executive Officers” and “Corporate Governance Principles and Practices” in the Proxy Statement, which is incorporated herein by reference. Information regarding compliance with Section 16 of the Securities Exchange Act of 1934, as amended, is incorporated by reference to the information under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
Code of Ethics. We have adopted a code of ethics that applies to our principal executive officer, principal financial officer and controller. This code of ethics is posted on our internet website address at http://www.rudolphtech.com. We will post on our website any amendment to or waiver from a provision of our code of ethics as may be required, and within the time period specified, by applicable SEC rules.

Item 11.
Executive Compensation.
The information required by this Item, is included under the headings “Executive Compensation,” “Compensation of Directors” and “Compensation Committee Interlocks and Insider Participation” in the Proxy Statement, which is incorporated herein by reference.

Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item, is included under the headings “Security Ownership” and “Equity Compensation Plan Information” in the Proxy Statement, which is incorporated herein by reference.

Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item, is included under the headings “Related Persons Transactions Policy” and “Board Independence” in the Proxy Statement, which is incorporated herein by reference.

Item 14.
Principal Accounting Fees and Services.
The information required by this Item, is included under the heading “Proposal 3: Ratification of Appointment of Independent Registered Public Accountants” in the Proxy Statement, which is incorporated herein by reference.



42


PART IV

Item 15.
Exhibits and Financial Statement Schedule.
(a)The following documents are filed as part of this Annual Report on Form 10-K:
1.
Financial Statements
The consolidated financial statements and consolidated financial statement information required by this Item are included on pages F-1 through F-8 of this report. The Reports of Independent Registered Public Accounting Firm appear on pages F-2 through F-3 of this report.
2.
Financial Statement Schedule
See Index to financial statements on page F-1 of this report.
3.
Exhibits
The following is a list of exhibits. Where so indicated, exhibits, which were previously filed, are incorporated by reference.
Exhibit No.
 
Description
 
 
 
3.1
 
Restated Certificate of Incorporation of Registrant, as amended (Conformed Version) (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q (SEC File No. 000-27965) filed on August 2, 2013).

3.2
 
Restated Bylaws of Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-27965) filed on August 1, 2007).
3.3
 
Amendment to Restated Bylaws of Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-27965) filed on February 2, 2009).
4.1
 
Rights Agreement (incorporated by reference to Exhibit 4.1 of the Registrant’s Registration Statement on Form 8-A (SEC File No. 000-27965) filed on June 28, 2005).
4.2
 
August Technology Corporation 1997 Stock Incentive Plan (incorporated by reference to the Appendix to August Technology Corporation’s Proxy Statement for its 2004 Annual Shareholders Meeting (SEC File No. 000-30637) filed on March 11, 2004).
4.3
 
Indenture, dated as of July 25, 2011, by and between The Bank of New York Mellon Trust Company, N.A., as Trustee, and Rudolph Technologies, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-27965) filed on July 25, 2011).
10.1+
 
License Agreement, dated June 28, 1995, between the Registrant and Brown University Research Foundation (incorporated by reference to Exhibit (10.1) to the Registrant’s Registration Statement on Form S-1, as amended (SEC File No. 333-86821), filed on September 9, 1999).
10.2*
 
Form of Indemnification Agreement (incorporated by reference to Exhibit (10.3) to the Registrant’s Registration Statement on Form S-1, as amended (SEC File No. 333-86821), filed on October 5, 1999).
10.3*
 
Amended 1996 Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10.15 to Registrant’s Quarterly Report on Form 10-Q (SEC File No. 000-27965) filed on November 14, 2001).
10.4*
 
Form of 1999 Stock Plan (incorporated by reference to Exhibit (10.5) to the Registrant’s Registration Statement on Form S-1, (SEC File No. 333-86821) filed on September 9, 1999).
__________________
+ Confidential treatment has been granted with respect to portions of this exhibit.




43


Exhibit No.
 
Description
 
 
 
10.5*
 
Form of 1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit (10.6) to the Registrant’s Registration Statement on Form S-1 (SEC File No. 333-86821) filed on September 9, 1999).
10.6*

Management Agreement, dated as of July 24, 2000, by and between Rudolph Technologies, Inc. and Paul F. McLaughlin as restated and amended on July 29, 2014 (incorporated by reference to exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on August 6, 2014).
10.7*
 
Management Agreement, dated as of July 24, 2000 by and between Rudolph Technologies, Inc. and Steven R. Roth as restated and amended on July 29, 2014 (incorporated by reference to exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 6, 2014).
10.8*
 
Restated and Amended Employment Agreement, dated as of July 29, 2014, by and between Rudolph Technologies, Inc. and Michael Plisinski (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (SEC File No. 000-27965) filed on August 6, 2014). *
10.9*
 
Restated and Amended Employment Agreement, dated as of July 29, 2014, by and between Rudolph Technologies, Inc. and D. Mayson Brooks (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (SEC File No. 000-27965) filed on August 6, 2014). *
10.10*
 
Executive Change of Control Agreement, dated February 7, 2014, by and between Rudolph Technologies, Inc. and Richard Rogoff filed herewith.
10.11*
 
Form of option agreement under 1999 Stock Plan (incorporated by reference to Exhibit 10.12 to the Registrant’s Quarterly Report on Form 10-Q (SEC File No. 000-27965) filed on November 5, 2004).
10.12*
 
Form of Restricted Stock Award pursuant to the Rudolph Technologies, Inc. 1999 Stock Plan (incorporated by reference to the Registrant’s Current Report on Form 8-K (SEC File No. 000-27965), filed on June 21, 2005).
10.13*
 
Rudolph Technologies, Inc. 2009 Stock Plan (incorporated by reference to Appendix A of the Registrant’s revised Proxy Statement on Form DEFR14A, filed on May 8, 2009).
10.14*
 
Rudolph Technologies, Inc. 2009 Employee Stock Purchase Plan, as amended (incorporated by reference to Appendix B of the Registrant’s revised Proxy Statement on Form DEFR14A, filed on May 8, 2009).
10.15*
 
Form of Restricted Stock Unit Agreement pursuant to the Rudolph Technologies, Inc. 2009 Stock Plan (incorporated by reference to exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on November 6, 2014).
10.16
 
Purchase Agreement, dated July 19, 2011, among Rudolph Technologies, Inc. and Credit Suisse Securities (USA) LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-27965) filed on July 25, 2011).
10.17
 
Confirmation of Convertible Note Hedge Transaction dated July 19, 2011, by and between Rudolph Technologies, Inc. and Credit Suisse International (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-27965) filed on July 25, 2011).
10.18
 
Amendment dated July 22, 2011 to Confirmation of Convertible Note Hedge Transaction dated July 19, 2011, by and between Rudolph Technologies, Inc. and Credit Suisse International (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (EC File No. 000-27965) filed on July 25, 2011).
10.19
 
Confirmation of Issuer Warrant Transaction dated July 19, 2011, by and between Rudolph Technologies, Inc. and Credit Suisse International (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-27965) filed on July 25, 2011).
__________________
* Management contract, compensatory plan or arrangement.


44


Exhibit No.
 
Description
 
 
 
10.20
 
Amendment dated July 22, 2011 to Confirmation of Issuer Warrant Transaction dated July 19, 2011, by and between Rudolph Technologies, Inc. and Credit Suisse International (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-27965) filed on July 25, 2011).
21.1
 
Subsidiaries.
23.1
 
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
31.1
 
Certification of Paul F. McLaughlin, Chief Executive Officer, pursuant to Securities Exchange Act Rule 13a-14(a).
31.2
 
Certification of Steven R. Roth, Chief Financial Officer, pursuant to Securities Exchange Act Rule 13a-14(a).
32.1
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Paul F. McLaughlin, Chief Executive Officer of Rudolph Technologies, Inc.
32.2
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Steven R. Roth, Chief Financial Officer of Rudolph Technologies, Inc.
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document




45



RUDOLPH TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE



F-1


Report of Independent Registered Public Accounting Firm


The Board of Directors and Stockholders
of Rudolph Technologies, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Rudolph Technologies, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Rudolph Technologies, Inc. and Subsidiaries at December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Rudolph Technologies, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 20, 2015, expressed an unqualified opinion theron.
                                    

/s/ Ernst & Young LLP


Metropark, New Jersey
February 20, 2015


F-2


Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of
Rudolph Technologies, Inc. and Subsidiaries

We have audited Rudolph Technologies, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Rudolph Technologies, Inc. and Subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Rudolph Technologies, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Rudolph Technologies, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2014 of Rudolph Technologies, Inc. and Subsidiaries and our report dated February 20, 2015 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP
Metropark, New Jersey
February 20, 2015



F-3


RUDOLPH TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 
December 31,
 
2013
 
2014
ASSETS
Current Assets:
 

 
 

Cash and cash equivalents
$
80,790

 
$
43,114

Marketable securities
86,582

 
113,871

Accounts receivable, less allowance of $1,152 in 2013 and $1,279 in 2014
53,437

 
51,603

Inventories
61,351

 
63,344

Income taxes receivable
2,832

 
1,458

Deferred income taxes
8,786

 
8,986

Prepaid expenses and other current assets
3,186

 
7,945

Total current assets
296,964

 
290,321

Property, plant and equipment, net
13,058

 
12,938

Goodwill
22,553

 
22,495

Identifiable intangible assets, net
11,464

 
9,042

Deferred income taxes
25,546

 
30,348

Other assets
1,777

 
1,493

Total assets
$
371,362

 
$
366,637

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 

 
 

Accounts payable
$
3,095

 
$
6,843

Accrued liabilities:
 

 


Payroll and related expenses
7,457

 
8,831

Royalties
669

 
499

Warranty
1,551

 
1,574

Deferred revenue
8,786

 
7,976

Other current liabilities
10,132

 
10,143

Total current liabilities
31,690

 
35,866

Convertible senior notes
51,751

 
54,773

Other non-current liabilities
8,918

 
8,670

Total liabilities
92,359

 
99,309

Commitments and contingencies (Note 9)


 


Stockholders’ equity:
 

 
 

Preferred stock, $0.001 par value, 5,000 shares authorized, no shares issued and outstanding at December 31, 2013 and 2014

 

Common stock, $0.001 par value, 100,000 shares authorized, 32,953 and 32,093 issued and outstanding at December 31, 2013 and 2014, respectively
33

 
32

Additional paid-in capital
415,739

 
409,562

Accumulated other comprehensive loss
(1,795
)
 
(2,652
)
Accumulated deficit
(134,974
)
 
(139,614
)
Total stockholders’ equity
279,003

 
267,328

Total liabilities and stockholders’ equity
$
371,362

 
$
366,637


The accompanying notes are an integral part of these consolidated financial statements.


F-4


RUDOLPH TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

 
Year Ended December 31,
 
2012
 
2013

2014
Revenues
$
218,486

 
$
176,238

 
$
181,218

Cost of revenues
102,811

 
85,506

 
85,730

Gross profit
115,675

 
90,732

 
95,488

Operating expenses:
 
 
 
 
 
Research and development
39,331

 
39,994

 
40,576

Selling, general and administrative
40,225

 
41,542

 
53,799

Amortization
1,853

 
2,592