Attached files

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EX-32.1 - EX-32.1 - NANOMETRICS INCnano-ex321_6.htm
EX-31.2 - EX-31.2 - NANOMETRICS INCnano-ex312_7.htm
EX-31.1 - EX-31.1 - NANOMETRICS INCnano-ex311_8.htm
EX-10.1 (5) - EX-10.1 (5) - NANOMETRICS INCnano-ex1015_86.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to

Commission file number: 000-13470

 

NANOMETRICS INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

94-2276314

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

 

 

1550 Buckeye Drive

Milpitas, California

 

95035

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (408) 545-6000

 

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      No   

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      No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act) Yes      No  

As of July 27, 2018, there were 24,136,582 shares of common stock, $0.001 par value, issued and outstanding.

 

 

 

 

 


 

NANOMETRICS INCORPORATED

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2018

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets at June 30, 2018 and December 30, 2017 (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and July 1, 2017 (Unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2018 and July 1, 2017 (Unaudited)

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and July 1, 2017 (Unaudited)

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

7

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

29

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

30

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

31

 

 

 

 

 

Item 1A.

 

Risk Factors

 

31

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

31

 

 

 

 

 

Item 6.

 

Exhibits

 

32

 

 

 

 

 

Signatures

 

33

 

 

 

2


 

PART I — FINANCIAL INFORMATION

 

 

ITEM 1.

FINANCIAL STATEMENTS

NANOMETRICS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands except share and per share amounts)

(Unaudited)

 

 

 

June 30, 2018

 

 

December 30, 2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

86,201

 

 

$

34,899

 

Marketable securities

 

 

62,501

 

 

 

82,130

 

Accounts receivable, net of allowances of $52 and $126, respectively

 

 

54,623

 

 

 

62,457

 

Inventories

 

 

54,238

 

 

 

52,860

 

Inventories-delivered systems

 

 

1,855

 

 

 

1,534

 

Prepaid expenses and other

 

 

9,851

 

 

 

6,234

 

Total current assets

 

 

269,269

 

 

 

240,114

 

Property, plant and equipment, net

 

 

43,050

 

 

 

44,810

 

Goodwill

 

 

10,611

 

 

 

10,232

 

Intangible assets, net

 

 

4,136

 

 

 

2,206

 

Deferred income tax assets

 

 

7,405

 

 

 

11,924

 

Other assets

 

 

332

 

 

 

413

 

Total assets

 

$

334,803

 

 

$

309,699

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

18,976

 

 

$

13,857

 

Accrued payroll and related expenses

 

 

13,457

 

 

 

12,901

 

Deferred revenue

 

 

8,962

 

 

 

7,408

 

Other current liabilities

 

 

8,508

 

 

 

7,249

 

Income taxes payable

 

 

3,133

 

 

 

2,680

 

Total current liabilities

 

 

53,036

 

 

 

44,095

 

Deferred revenue

 

 

1,649

 

 

 

1,661

 

Income taxes payable

 

 

943

 

 

 

860

 

Deferred tax liability

 

 

179

 

 

 

179

 

Other long-term liabilities

 

 

512

 

 

 

521

 

Total liabilities

 

 

56,319

 

 

 

47,316

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 3,000,000 shares authorized;

   no shares issued or outstanding

 

 

 

 

 

 

Common stock, $0.001 par value, 47,000,000 shares authorized: 24,066,368

   and 24,628,722, respectively, issued and outstanding

 

 

24

 

 

 

26

 

Additional paid-in capital

 

 

237,378

 

 

 

255,368

 

Retained earnings

 

 

43,811

 

 

 

9,113

 

Accumulated other comprehensive loss

 

 

(2,729

)

 

 

(2,124

)

Total stockholders’ equity

 

 

278,484

 

 

 

262,383

 

Total liabilities and stockholders’ equity

 

$

334,803

 

 

$

309,699

 

 

See Notes to Condensed Consolidated Financial Statements

 

 

3


 

NANOMETRICS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2018

 

 

July 1, 2017

 

 

June 30, 2018

 

 

July 1, 2017

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

76,704

 

 

$

53,576

 

 

$

147,723

 

 

$

101,751

 

Service

 

 

11,900

 

 

 

10,851

 

 

 

23,194

 

 

 

21,990

 

Total net revenues

 

 

88,604

 

 

 

64,427

 

 

 

170,917

 

 

 

123,741

 

Costs of net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products

 

 

31,235

 

 

 

25,337

 

 

 

59,828

 

 

 

50,815

 

Cost of service

 

 

6,443

 

 

 

5,417

 

 

 

12,597

 

 

 

10,754

 

Amortization of intangible assets

 

 

35

 

 

 

52

 

 

 

70

 

 

 

104

 

Total costs of net revenues

 

 

37,713

 

 

 

30,806

 

 

 

72,495

 

 

 

61,673

 

Gross profit

 

 

50,891

 

 

 

33,621

 

 

 

98,422

 

 

 

62,068

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

12,491

 

 

 

9,139

 

 

 

22,693

 

 

 

17,833

 

Selling

 

 

10,151

 

 

 

7,239

 

 

 

19,175

 

 

 

15,177

 

General and administrative

 

 

7,465

 

 

 

6,591

 

 

 

15,206

 

 

 

12,898

 

Total operating expenses

 

 

30,107

 

 

 

22,969

 

 

 

57,074

 

 

 

45,908

 

Income from operations

 

 

20,784

 

 

 

10,652

 

 

 

41,348

 

 

 

16,160

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1

 

 

 

3

 

 

 

4

 

 

 

4

 

Interest expense

 

 

(49

)

 

 

(19

)

 

 

(145

)

 

 

(59

)

Other income (expense), net

 

 

(166

)

 

 

274

 

 

 

186

 

 

 

271

 

Total other income (expense), net

 

 

(214

)

 

 

258

 

 

 

45

 

 

 

216

 

Income before income taxes

 

 

20,570

 

 

 

10,910

 

 

 

41,393

 

 

 

16,376

 

Provision for income taxes

 

 

2,895

 

 

 

2,622

 

 

 

7,337

 

 

 

2,736

 

Net income

 

$

17,675

 

 

$

8,288

 

 

$

34,056

 

 

$

13,640

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.74

 

 

$

0.33

 

 

$

1.42

 

 

$

0.54

 

Diluted

 

$

0.72

 

 

$

0.32

 

 

$

1.39

 

 

$

0.53

 

Weighted average shares used in per share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

23,953

 

 

 

25,307

 

 

 

24,008

 

 

 

25,220

 

Diluted

 

 

24,442

 

 

 

25,906

 

 

 

24,488

 

 

 

25,880

 

 

See Notes to Condensed Consolidated Financial Statements

 

 

4


 

NANOMETRICS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2018

 

 

July 1, 2017

 

 

June 30, 2018

 

 

July 1, 2017

 

Net income

 

$

17,675

 

 

$

8,288

 

 

$

34,056

 

 

$

13,640

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

 

(2,555

)

 

 

761

 

 

 

(568

)

 

 

2,706

 

Net change in unrealized gains (losses) on available-for-sale investments

 

 

52

 

 

 

(8

)

 

 

(37

)

 

 

(17

)

Other comprehensive income (loss):

 

 

(2,503

)

 

 

753

 

 

 

(605

)

 

 

2,689

 

Comprehensive income

 

$

15,172

 

 

$

9,041

 

 

$

33,451

 

 

$

16,329

 

 

See Notes to Condensed Consolidated Financial Statements

 

 

5


 

NANOMETRICS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

Six Months Ended

 

 

 

June 30, 2018

 

 

July 1, 2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

34,056

 

 

$

13,640

 

Reconciliation of net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,326

 

 

 

3,552

 

Stock-based compensation

 

 

5,017

 

 

 

4,327

 

Disposal of fixed assets

 

 

51

 

 

 

98

 

Inventory write-down

 

 

269

 

 

 

1,015

 

Deferred income taxes

 

 

4,320

 

 

 

798

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

7,193

 

 

 

(4,720

)

Inventories

 

 

(1,722

)

 

 

(8,726

)

Inventories-delivered systems

 

 

(322

)

 

 

783

 

Prepaid expenses and other

 

 

(3,422

)

 

 

(947

)

Accounts payable, accrued and other liabilities

 

 

7,204

 

 

 

(1,885

)

Deferred revenue

 

 

2,464

 

 

 

1,837

 

Income taxes payable

 

 

537

 

 

 

486

 

Net cash provided by operating activities

 

 

58,971

 

 

 

10,258

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Payments to acquire certain assets

 

 

(2,000

)

 

 

(2,000

)

Sales of marketable securities

 

 

18,507

 

 

 

27,391

 

Maturities of marketable securities

 

 

17,345

 

 

 

40,923

 

Purchases of marketable securities

 

 

(16,320

)

 

 

(78,787

)

Purchases of property, plant and equipment

 

 

(1,761

)

 

 

(1,536

)

Net cash provided by (used in) investing activities

 

 

15,771

 

 

 

(14,009

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from sale of shares under employee stock option

   plans and purchase plan

 

 

2,709

 

 

 

2,865

 

Taxes paid on net issuance of stock awards

 

 

(2,731

)

 

 

(3,392

)

Repurchases of common stock under share repurchase plans

 

 

(22,987

)

 

 

-

 

Net cash used in financing activities

 

 

(23,009

)

 

 

(527

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(431

)

 

 

(430

)

Net increase (decrease) in cash and cash equivalents

 

 

51,302

 

 

 

(4,708

)

Cash and cash equivalents, beginning of period

 

 

34,899

 

 

 

47,062

 

Cash and cash equivalents, end of period

 

$

86,201

 

 

$

42,354

 

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

 

 

 

Transfer of property, plant and equipment to inventory

 

$

218

 

 

$

1,531

 

Transfer of inventory to property, plant and equipment

 

$

291

 

 

$

980

 

Property, plant and equipment included in accounts payable, accrued and other liabilities

 

$

555

 

 

$

355

 

See Notes to Condensed Consolidated Financial Statements

 

 

 

6


 

NANOMETRICS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1. Nature of Business, Basis of Presentation and Significant Accounting Policies

Description of Business – Nanometrics Incorporated (“Nanometrics” or the “Company”) and its wholly-owned subsidiaries design, manufacture, market, sell and support optical critical dimension (“OCD”), thin film and overlay dimension metrology and inspection systems used primarily in the manufacturing of semiconductors, solar photovoltaics (“solar PV”) and high-brightness LEDs (“HB-LED”), as well as by customers in the silicon wafer and data storage industries. Nanometrics’ metrology systems precisely measure a wide range of film types deposited on substrates during manufacturing to control manufacturing processes and increase production yields in the fabrication of integrated circuits. The Company’s OCD technology is a patented critical dimension measurement technology that is used to precisely determine the dimensions on the semiconductor wafer that directly control the resulting performance of the integrated circuit devices. The thin film metrology systems use a broad spectrum of wavelengths, high-sensitivity optics, proprietary software, and patented technology to measure the thickness and uniformity of films deposited on silicon and other substrates as well as their chemical composition. The overlay metrology systems are used to measure the overlay accuracy of successive layers of semiconductor patterns on wafers in the photolithography process. Nanometrics’ inspection systems are used to find defects on patterned and unpatterned wafers at nearly every stage of the semiconductor production flow. The corporate headquarters of Nanometrics is located in Milpitas, California.

Basis of Presentation – The accompanying condensed consolidated financial statements (“financial statements”) have been prepared on a consistent basis with the audited consolidated financial statements as of December 30, 2017, and include all normal recurring adjustments necessary to fairly state the information set forth therein. All significant intercompany accounts and transactions have been eliminated in consolidation.

The financial statements have been prepared in accordance with the regulations of the United States Securities and Exchange Commission (“SEC”) for interim periods in accordance with S-X Article 10, and, therefore, omit certain information and footnote disclosure necessary to present the statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The operating results for interim periods are not necessarily indicative of the operating results that may be expected for the entire year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 30, 2017, which were included in the Company’s Annual Report on Form 10-K filed with the SEC on February 26, 2018.

Fiscal Period – The Company uses a 52/53 week fiscal year ending on the last Saturday of the calendar year. All references to the quarter refer to Nanometrics’ fiscal quarter. The fiscal quarters reported herein are 13 week periods.

Use of Estimates – The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ materially from those estimates. Estimates are used for, but not limited to, revenue recognition, the provision for doubtful accounts, the provision for excess, obsolete, or slow-moving inventories, valuation of intangible and long-lived assets, warranty accruals, income taxes, valuation of stock-based compensation, and contingencies.

Changes to Significant Accounting Policies

Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in these financial statements.

The Company adopted the new accounting standard Topic 606, Revenue from Contracts with Customers and all the related amendments using the modified retrospective method of transition. As a result, the Company has changed its accounting policy for revenue recognition as detailed below. We adopted the new standard during the first quarter of 2018 for all contracts not substantially completed at the date of adoption, and the Company expects all new contracts will be governed by the new standard.

Revenue Recognition –  The Company derives revenue from the sale of process control metrology and inspection systems and related upgrades (“product revenue”) as well as spare part sales, billable service and service contracts (together “service revenue”). Upgrades are system software and hardware performance upgrades that extend the features and functionality of a product. Upgrades are included in product revenue, which consists of sales of complete, advanced process control metrology and inspection systems (the “system(s)”). Nanometrics’ systems consist of hardware and software components that function together to deliver the essential functionality of the system. Arrangements for sales of systems and upgrades often include defined customer-specified acceptance criteria.

7


 

The Company recognizes revenue when control of a good or service has transferred to a customer.  The amount of revenue recognized reflects the amount which Nanometrics expects to be entitled to in exchange for the transfer of the goods or services in a contract with a customer.  Revenue excludes amounts collected on behalf of third parties including taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue producing transaction.  Shipping and handling costs associated with outbound freight both before and after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenues.  Nanometrics records revenue on a gross basis, rather than net, as it acts as the principle in all of its contractual arrangements and not as an agent.

Nanometrics follows a 5-Step process to evaluate its contracts with customers to determine the amount and timing of revenue recognition.

Nanometrics first identifies whether a legally enforceable contract with a customer exists.  A legally enforceable contract creates enforceable rights and obligations on both parties.  Nanometrics evaluates the following criteria in its evaluation and if all criteria are not met, a contract does not exist and any revenue that otherwise would be recorded because a good or service had been transferred to a customer is deferred until such time that a contract exists:  (1)  both Nanometrics and the customer have approved the contract and are committed to perform, (2) Nanometrics can identify each party’s rights regarding the goods or services to be transferred, (3) Nanometrics can identify the payment terms for the goods or services to be delivered, (4) the contract has commercial substance, and (5) it is probable that Nanometrics will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. Historically, the Company has not experienced Customer payment defaults that would lead us to conclude that we don’t have a contract under the new standard. Nanometrics evidences all its contracts in writing and the identification of the contract may include (1) reference to a master agreement that governs for multiple years, (2) a Volume Purchase Agreement that generally governs for 12 months and is negotiated with the larger customers to establish pricing for a committed volume of business, or (3) purchase orders which often govern the purchase of a single system or service item.

Once the contract has been identified, Nanometrics evaluates the promises in the contract to identify performance obligations.  Many of the contracts include more than one performance obligation – for example the delivery of a system generally includes the promise to install the system in the customer’s facility.  Additionally, a contract could include the purchase of multiple systems or the purchase of a system and an upgrade.  Promises in contracts which do not result in the transfer of a good or service are not performance obligations, as well as those promises that are administrative in nature, or are immaterial in the context of the contract.  Generally, Nanometrics performance obligations can be categorized as (1) systems – including refurbished systems, (2) installation obligations, (3) hardware upgrades, (4) non-operating system software options / upgrades, (5) spare parts, (6) service contracts, (7) billable services and (8) other miscellaneous service items.

Once the performance obligations in the contract have been identified, Nanometrics estimates the transaction price of the contract.  The estimate includes amounts that are fixed as well as those that can vary based on contractual terms (eg., performance bonuses/penalties, amounts payable to customers, rebates, prompt payment discounts, etc.) These variable consideration items are rare as most Nanometrics contracts include only fixed amounts.  It is expected that estimates of variable consideration will be immaterial for Nanometrics and would occur if customers did not meet their contractual purchase commitments and Nanometrics is entitled to recover additional contract consideration.

Once the transaction price of the contract has been identified, Nanometrics allocates the transaction price to the identified performance obligations.  This is done on a relative selling price basis using standalone selling prices (“SSP”).  For most performance obligations, Nanometrics does not have observable SSP’s as they are not regularly sold on a standalone basis however if a performance obligation does have an observable SSP it is used for allocation purposes (e.g. spares parts are sold using a standard price list and often sold separately).  Without observable SSP’s, Nanometrics estimates the SSP using a methodology which maximizes the use of observable inputs – namely a cost plus gross margin approach.

Lastly, Nanometrics records the amount allocated to each performance obligation as revenue when control of that good or service has transferred to the customer.  Nanometrics first evaluates whether a good or service is transferred over time, and if it is not, then it is recorded at a point in time.  For service contracts, Nanometrics records revenue based on its measurement of progress, and the best method to determine this is the percentage of the stand-ready obligation that is completed to date as this best reflects the value of the service transferred to the customer. All other items at Nanometrics are recorded at a point in time other than the service contracts with customers. The timing of satisfaction of the performance obligation to payment is dependent upon the negotiated payment terms but generally occurs within 30 to 60 days.  Nanometrics evaluates the following indicators to determine the point in time at which control transfers to the Customer, and may apply judgment in this evaluation: (1) whether Nanometrics has a present right to payment, (2) whether the customer has legal title, (3) whether the customer has physical possession, (4)  whether the customer has significant risks and rewards of ownership, and (5) whether customer acceptance is a formality (i.e., whether customer acceptance of the tool is reasonably assured). Typically, for new product introductions, Nanometrics defers revenue recognition until formal customer acceptance is received from the customer. In almost all other situations, there is little or no significant judgment applied by Nanometrics in determining if control of a good or service has transferred to a customer. Additionally, for system shipments to Japan,

8


 

revenue is deferred because typical contractual terms indicate that payment is not due, and title does not transfer until customer acceptance occurs.

The Company warrants its products against defects in manufacturing. Upon recognition of product revenue, this assurance-type warranty is recorded as a liability for anticipated warranty costs. On occasion, customers request a warranty period longer than the Company's standard warranty. In those instances, in which extended warranty services are separately quoted to the customer or if the warranty includes services beyond just an assurance that the product will work as intended, an additional performance obligation is created, and the associated revenue is deferred and recognized as service revenue ratably over the term of the extended warranty period. The portion of service contracts and extended warranty services agreements that are uncompleted at the end of any reporting period are included in deferred revenue.

Frequently, the Company delivers products and various services in a single transaction. The Company's deliverables consist of tools, installation, upgrades, billable services, spare parts, and service contracts. The Company's typical multi-element arrangements include a sale of one or multiple tools that include installation and standard warranty. Other arrangements consist of a sale of tools bundled with service elements or delivery of different types of services. The Company's tools, upgrades, and spare parts are generally delivered to customers within a period of up to six months from order date. Installation is usually performed soon after delivery of the tool. The portion of revenue associated with installation is deferred based on relative selling price and that revenue is recognized upon completion of the installation and receipt of final acceptance. Billable services are billed on a time and materials basis and performed as requested by customers. Under service contract arrangements, services are provided as needed over the fixed arrangement term, with terms normally up to twelve months. The Company does not grant its customers a general right of return or any refund terms and may impose a penalty on orders cancelled prior to the scheduled shipment date.  Consideration received from customers for cancelled orders is rare as orders are typically not cancelled once placed.

When performance obligations are not transferred to a customer at the end of a reporting period, the amount allocated to those performance obligations is deferred until control of these performance obligations is transferred to the customer. If performance obligations cannot be accounted for as separate units of accounting, the entire arrangement is accounted for as a single unit of accounting and revenue is deferred until all elements are delivered and all revenue recognition requirements are met.  These liabilities arising from contracts with customers are reported as Deferred Revenue in the consolidated balance sheet.  The amount of revenue recognized in the three months ended June 30, 2018 that was included in the contract liability balance as of the beginning of the quarter was $3.3 million. Generally, all contracts have expected durations of one year or less.  Accordingly, Nanometrics applies the practical expedient allowed for in U.S. GAAP and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

Nanometrics incurs costs related to the acquisition of its contract with customers in the form of sales commissions.  Sales commissions are paid to the internal direct sales team as well as to third-party representatives, and distributors.  Contractual agreements with each of these parties outline commissions structures and rates to be paid.  Generally speaking, the contracts are all individual procurement decisions by the customers and are not for significant periods of time, nor do they include renewal provisions.  As such, most of the contracts have an economic life of significantly less than a year, although some volume purchase agreements might extend beyond 12 months (the capitalization and amortization of commission costs for contracts that extend beyond one year is immaterial for Nanometrics).  Accordingly, the Company expense these contract acquisition costs in accordance with the practical expedient outlined in U.S. GAAP when the underlying contract asset is less than one year.

Nanometrics does not incur any costs to fulfill the contracts with customers that is not already reported in compliance with another applicable standard (for example, inventory or plant, property and equipment).  Given the nature of the systems, the Company does not have costs which are separately identifiable to just a particular contract (for example, dedicated labs).

Nanometrics records accounts receivable when revenue has been recorded and the amount due from the customer is reasonably assured and unconditionally due.  In certain situations, Nanometrics may record revenue because goods or services have been transferred to the customer, but the amount is not unconditionally due.  In these situations, a contract asset is reflected in the consolidated balance sheet (Unbilled A/R).  This amount is subsequently reported as accounts receivable when the condition that made the amount conditional is resolved (for example, when the final installation obligation is completed, and Nanometrics has recorded revenue for the delivery of the system in an amount larger than what has been invoiced). The balance of contract assets included in the Accounts Receivable at June 30, 2018 was $4.5 million.  The opening balance of contract assets was $4.4 million and $4.3 million for the three and six month periods ended June 30, 2018, respectively, reflecting no significant change during either period.  

 

9


 

Note 2. New Accounting Pronouncements

Recently Adopted Accounting Standards

In October 2016, the Financial Accounting Standards Board (the “FASB”) issued an accounting standard update which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company adopted this standard in the first quarter of fiscal 2018 using a modified retrospective approach. The adoption did not have a material impact on the financial statements.

In August 2016, the FASB issued an accounting standard which addresses eight specific cash flow classification issues. This update is effective for public companies for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted, including in an interim period. The standard is to be applied through a retrospective transition method to each period presented. If it is impracticable to apply retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The adoption of this guidance did not have an impact on the Company’s consolidated statement of cash flows.

In May 2014, the FASB issued an accounting standard update which requires an entity to recognize the amount of revenue to which it expects to be entitled to for transferring promised goods or services to customers. The Company adopted Topic 606 Revenue from Contracts with Customers with a date of initial application of December 31, 2017.  The Company applied Topic 606 using the modified retrospective method by recognizing the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of equity at December 31, 2017.  This method was chosen due to the Company’s inability to review all necessary contract information to adopt the standard using the full retrospective methods.  Both methods are allowed per U.S. GAAP.  Therefore, the comparative information has not been adjusted and continues to be reported under Topic 605.

The following tables summarize the impacts of Topic 606 adoption on the Company’s financial statements for the three and six months ended June 30, 2018(in thousands, except per share data):

 

 

 

 

Three Months Ended June 30, 2018

 

 

Six Months Ended June 30, 2018

 

 

 

As Reported

 

 

Balances

Without

Adoption of

ASC 606

 

 

Effect of

Change

Higher/(Lower)

 

 

As Reported

 

 

Balances

Without

Adoption of

ASC 606

 

 

Effect of

Change

Higher/(Lower)

 

Net Revenue

 

$

88,604

 

 

$

89,153

 

 

$

(549

)

 

$

170,917

 

 

$

167,190

 

 

$

3,727

 

Net Income

 

$

17,675

 

 

$

18,291

 

 

$

(616

)

 

$

34,056

 

 

$

31,611

 

 

$

2,445

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.74

 

 

$

0.76

 

 

$

(0.03

)

 

$

1.42

 

 

$

1.32

 

 

$

0.10

 

Diluted

 

$

0.72

 

 

$

0.75

 

 

$

(0.03

)

 

$

1.39

 

 

$

1.29

 

 

$

0.10

 

 

Recently Issued Accounting Standards

In June 2018, the FASB issued an accounting standard update which simplifies the accounting for nonemployee share-based payment transactions. The accounting for share-based payments to nonemployees and employees will be substantially aligned because of this update. The standard is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated results of operations or consolidated statement of cash flows.

In January 2017, the FASB issued an accounting standard update which simplifies the subsequent measurement of goodwill and removes step 2 from the goodwill impairment test. Instead, an entity should record an impairment charge based on excess of a reporting unit’s carrying amount over its fair value. The standard is effective for public companies for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial condition and results of operations.

10


 

In June 2016, the FASB issued an accounting standard which requires measurement and timely recognition of expected credit losses for financial assets. The update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The standard is to be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the effect of this update on its consolidated financial condition and results of operations.

In February 2016, the FASB issued an accounting standard update which requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). For lessees, leases will continue to be classified as either operating or financing in the income statement. The standard is effective for public companies for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. This standard is required to be applied with a modified retrospective transition approach. The Company generally does not finance purchases of equipment or other capital, but does lease some equipment and facilities. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures but anticipates most its existing operating lease commitments will be recognized as operating lease liabilities and right-of-use assets.

 

Note 3. Fair Value Measurements and Disclosures

The Company determines the fair values of its financial instruments based on the fair value hierarchy established in FASB Accounting Standards Codification (“ASC”) 820, Fair Value Measurement, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. The fair value hierarchy prioritizes the inputs into the following three levels that may be used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

Level 3 — Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Such unobservable inputs include an estimated discount rate used in the Company’s discounted present value analysis of future cash flows, which reflects the Company’s estimate of debt with similar terms in the current credit markets. As there is currently minimal activity in such markets, the actual rate could be materially different.

Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard assumes that the transaction to sell the asset or transfer the liability occurs in the principal or most advantageous market for the asset or liability and establishes that the fair value of an asset or liability shall be determined based on the assumptions that market participants would use in pricing the asset or liability.

11


 

The following tables present the Company’s assets and liabilities measured at estimated fair value on a recurring basis, excluding accrued interest components, categorized in accordance with the fair value hierarchy (in thousands), as of the following dates:

 

 

 

June 30, 2018

 

 

December 30, 2017

 

 

 

Fair Value Measurements

Using Input Types

 

 

 

 

 

 

Fair Value Measurements

Using Input Types

 

 

 

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

9,563

 

 

$

 

 

$

 

 

$

9,563

 

 

$

256

 

 

$

 

 

$

 

 

$

256

 

Commercial paper and Certificates of deposit

 

 

 

 

 

5,980

 

 

 

 

 

 

5,980

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency debt securities

 

 

 

 

 

1,499

 

 

 

 

 

 

1,499

 

 

 

 

 

 

1,495

 

 

 

 

 

 

1,495

 

Certificates of deposits

 

 

 

 

 

9,000

 

 

 

 

 

 

9,000

 

 

 

 

 

 

14,497

 

 

 

 

 

 

14,497

 

Commercial paper

 

 

 

 

 

4,974

 

 

 

 

 

 

4,974

 

 

 

 

 

 

7,949

 

 

 

 

 

 

7,949

 

Corporate debt securities

 

 

 

 

 

36,677

 

 

 

 

 

 

36,677

 

 

 

 

 

 

47,968

 

 

 

 

 

 

47,968

 

Asset-backed Securities

 

 

 

 

 

10,352

 

 

 

 

 

 

10,352

 

 

 

 

 

 

10,221

 

 

 

 

 

 

10,221

 

Total marketable securities

 

$

 

 

$

62,502

 

 

$

 

 

$

62,502

 

 

$

 

 

$

82,130

 

 

$

 

 

$

82,130

 

Total(1)

 

$

9,563

 

 

$

68,482

 

 

$

 

 

$

78,045

 

 

$

256

 

 

$

82,130

 

 

$

 

 

$

82,386

 

 

(1)

Excludes $70.7 million and $34.6 million held in operating accounts as of June 30, 2018 and December 30, 2017, respectively. See “Note 4. Cash and Investments” of the Notes to Condensed Consolidated Financial Statements for more information.

The fair values of the marketable securities that are classified as Level 1 in the table above were derived from quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access. The fair value of marketable securities that are classified as Level 2 in the table above were derived from non-binding market consensus prices that were corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques with all significant inputs derived from or corroborated by observable market data. There were no transfers of instruments between Level 1, Level 2 and Level 3 during the financial periods presented.

Derivatives

The Company uses foreign currency exchange forward contracts to mitigate variability in gains and losses generated from the re-measurement of certain monetary assets and liabilities denominated in foreign currencies. These derivatives are carried at fair value with changes recorded in other income (expense), net in the condensed consolidated statements of operations. Changes in the fair value of these derivatives are largely offset by re-measurement of the underlying assets and liabilities. The derivatives have maturities of approximately 30 days.

The settlement of forward foreign currency contracts included in the three months ended June 30, 2018 and July 1, 2017 was a loss of $0.7 million and a loss of $0.3 million, respectively. The settlement of forward exchange contracts included in the six months ended June 30, 2018 and July 1, 2017 was a loss of $1.7 million and a gain of $0.7 million, respectively    These are included in other income (expense), net, in the condensed consolidated statements of operations.

The following table presents the notional amounts and fair values of the Company’s outstanding derivative instruments in U.S. Dollar equivalent as of the following dates (in millions):

 

 

 

June 30, 2018

 

 

December 30, 2017

 

 

 

 

 

 

 

Fair Value

 

 

 

 

 

 

Fair Value

 

 

 

Notional

Amount

 

 

Asset

 

 

Liability

 

 

Notional

Amount

 

 

Asset

 

 

Liability

 

Undesignated Hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward Foreign Currency Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase

 

$

13.7

 

 

$

 

 

$

 

 

$

27.5

 

 

$

 

 

$

0.1

 

Sell

 

$

24.9

 

 

$

 

 

$

 

 

$

16.8

 

 

$

0.1

 

 

$

 

 

12


 

 

Note 4. Cash and Investments

The following tables present cash, cash equivalents, and available-for-sale investments as of the following dates (in thousands):

 

 

 

June 30, 2018

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Market

Value

 

Cash

 

$

70,657

 

 

$

 

 

$

 

 

$

70,657

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

9,563

 

 

 

 

 

 

 

 

 

9,563

 

Commerical paper and Certificates of deposit

 

 

5,980

 

 

 

 

 

 

 

 

 

5,980

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency securities

 

 

1,500

 

 

 

 

 

 

(1

)

 

 

1,499

 

Certificates of deposit

 

 

8,999

 

 

 

1

 

 

 

 

 

 

9,000

 

Commercial paper

 

 

4,974

 

 

 

 

 

 

 

 

 

4,974

 

Corporate debt securities

 

 

36,807

 

 

 

 

 

 

(130