nano-10q_20160924.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 September 24, 2016

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 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

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

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 October 21, 2016, there were 24,916,470 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 SEPTEMBER 24, 2016

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets at September 24, 2016 and December 26, 2015 (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 24, 2016 and September 26, 2015 (Unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Month Periods Ended September 24, 2016 and September 26, 2015 (Unaudited)

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 24, 2016 and September 26, 2015 (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

 

28

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

30

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

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)

 

 

 

September 24, 2016

 

 

December 26, 2015

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

37,421

 

 

$

38,154

 

Marketable securities

 

 

81,106

 

 

 

44,931

 

Accounts receivable, net of allowances of $92 and $150, respectively

 

 

41,182

 

 

 

37,832

 

Inventories

 

 

39,260

 

 

 

47,749

 

Inventories-delivered systems

 

 

4,416

 

 

 

2,856

 

Prepaid expenses and other

 

 

5,835

 

 

 

6,592

 

Total current assets

 

 

209,220

 

 

 

178,114

 

Property, plant and equipment, net

 

 

44,324

 

 

 

44,493

 

Goodwill

 

 

9,665

 

 

 

9,415

 

Intangible assets, net

 

 

552

 

 

 

1,867

 

Deferred income tax assets

 

 

1,319

 

 

 

1,118

 

Other assets

 

 

526

 

 

 

533

 

Total assets

 

$

265,606

 

 

$

235,540

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

8,562

 

 

$

11,675

 

Accrued payroll and related expenses

 

 

11,631

 

 

 

10,097

 

Deferred revenue

 

 

16,804

 

 

 

12,790

 

Other current liabilities

 

 

8,630

 

 

 

8,878

 

Income taxes payable

 

 

278

 

 

 

1,771

 

Total current liabilities

 

 

45,905

 

 

 

45,211

 

Deferred revenue

 

 

639

 

 

 

827

 

Income taxes payable

 

 

848

 

 

 

775

 

Deferred tax liability

 

 

709

 

 

 

521

 

Other long-term liabilities

 

 

866

 

 

 

878

 

Total liabilities

 

 

48,967

 

 

 

48,212

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

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: 24,897,878

   and 24,224,286, respectively, issued and outstanding

 

 

25

 

 

 

24

 

Additional paid-in capital

 

 

268,553

 

 

 

258,715

 

Accumulated deficit

 

 

(48,828

)

 

 

(66,209

)

Accumulated other comprehensive income

 

 

(3,111

)

 

 

(5,202

)

Total stockholders’ equity

 

 

216,639

 

 

 

187,328

 

Total liabilities and stockholders’ equity

 

$

265,606

 

 

$

235,540

 

 

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

 

 

Nine Months Ended

 

 

 

September 24, 2016

 

 

September 26, 2015

 

 

September 24, 2016

 

 

September 26, 2015

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

49,631

 

 

$

36,414

 

 

$

136,290

 

 

$

113,689

 

Service

 

 

9,083

 

 

 

9,264

 

 

 

25,680

 

 

 

30,993

 

Total net revenues

 

 

58,714

 

 

 

45,678

 

 

 

161,970

 

 

 

144,682

 

Costs of net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products

 

 

22,810

 

 

 

19,242

 

 

 

62,625

 

 

 

59,106

 

Cost of service

 

 

5,066

 

 

 

3,749

 

 

 

14,714

 

 

 

15,158

 

Amortization of intangible assets

 

 

434

 

 

 

468

 

 

 

1,311

 

 

 

1,557

 

Total costs of net revenues

 

 

28,310

 

 

 

23,459

 

 

 

78,650

 

 

 

75,821

 

Gross profit

 

 

30,404

 

 

 

22,219

 

 

 

83,320

 

 

 

68,861

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

7,868

 

 

 

8,579

 

 

 

23,447

 

 

 

24,896

 

Selling

 

 

7,495

 

 

 

6,760

 

 

 

22,567

 

 

 

20,905

 

General and administrative

 

 

5,975

 

 

 

5,590

 

 

 

17,150

 

 

 

16,901

 

Amortization of intangible assets

 

 

 

 

 

26

 

 

 

24

 

 

 

89

 

Restructuring charge

 

 

 

 

 

 

 

 

 

 

 

56

 

Total operating expenses

 

 

21,338

 

 

 

20,955

 

 

 

63,188

 

 

 

62,847

 

Income from operations

 

 

9,066

 

 

 

1,264

 

 

 

20,132

 

 

 

6,014

 

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

12

 

 

 

7

 

 

 

33

 

 

 

63

 

Interest expense

 

 

(92

)

 

 

(86

)

 

 

(276

)

 

 

(252

)

Other income, net

 

 

229

 

 

 

346

 

 

 

60

 

 

 

740

 

Total other income (expense), net

 

 

149

 

 

 

267

 

 

 

(183

)

 

 

551

 

Income before income taxes

 

 

9,215

 

 

 

1,531

 

 

 

19,949

 

 

 

6,565

 

Provision for income taxes

 

 

1,332

 

 

 

713

 

 

 

2,568

 

 

 

1,847

 

Net income

 

$

7,883

 

 

$

818

 

 

$

17,381

 

 

$

4,718

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.32

 

 

$

0.03

 

 

$

0.71

 

 

$

0.20

 

Diluted

 

$

0.31

 

 

$

0.03

 

 

$

0.70

 

 

$

0.19

 

Weighted average shares used in per share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

24,826

 

 

 

24,145

 

 

 

24,550

 

 

 

24,010

 

Diluted

 

 

25,282

 

 

 

24,352

 

 

 

24,979

 

 

 

24,347

 

 

See Notes to Condensed Consolidated Financial Statements

 

 

4


 

NANOMETRICS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 24, 2016

 

 

September 26, 2015

 

 

September 24, 2016

 

 

September 26, 2015

 

Net income

 

$

7,883

 

 

$

818

 

 

$

17,381

 

 

$

4,718

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

 

519

 

 

 

(235

)

 

 

2,018

 

 

 

(1,980

)

Net change on unrealized gains on available-for-sale investments

 

 

1

 

 

 

17

 

 

 

73

 

 

 

42

 

Other comprehensive income (loss):

 

 

520

 

 

 

(218

)

 

 

2,091

 

 

 

(1,938

)

Comprehensive income

 

$

8,403

 

 

$

600

 

 

$

19,472

 

 

$

2,780

 

 

See Notes to Condensed Consolidated Financial Statements

 

 

5


 

NANOMETRICS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 24, 2016

 

 

September 26, 2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

17,381

 

 

$

4,718

 

Reconciliation of net income to net cash provided

   by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,440

 

 

 

6,826

 

Stock-based compensation

 

 

5,432

 

 

 

4,664

 

Disposal of fixed assets

 

 

162

 

 

 

578

 

Inventory write-down

 

 

1,451

 

 

 

1,971

 

Deferred income taxes

 

 

(14

)

 

 

173

 

Changes in fair value of contingent payments to Zygo Corporation

 

 

158

 

 

 

137

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(986

)

 

 

(14,873

)

Inventories

 

 

6,652

 

 

 

(15,893

)

Inventories-delivered systems

 

 

(1,560

)

 

 

370

 

Prepaid expenses and other

 

 

889

 

 

 

4,436

 

Accounts payable, accrued and other liabilities

 

 

(4,310

)

 

 

9,634

 

Deferred revenue

 

 

3,825

 

 

 

(688

)

Income taxes payable

 

 

(1,419

)

 

 

295

 

Net cash provided by operating activities

 

 

34,101

 

 

 

2,348

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Sales of marketable securities

 

 

2,093

 

 

 

2,884

 

Maturities of marketable securities

 

 

25,461

 

 

 

30,279

 

Purchases of marketable securities

 

 

(63,840

)

 

 

(27,298

)

Purchases of property, plant and equipment

 

 

(3,349

)

 

 

(1,365

)

Net cash provided by (used in) investing activities

 

 

(39,635

)

 

 

4,500

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments to Zygo Corporation related to acquisition

 

 

(315

)

 

 

(614

)

Proceeds from sale of shares under employee stock option

   plans and purchase plan

 

 

5,984

 

 

 

3,642

 

Taxes paid on net issuance of stock awards

 

 

(1,578

)

 

 

(1,104

)

Repurchases of common stock

 

 

 

 

 

(1,721

)

Net cash provided by financing activities

 

 

4,091

 

 

 

203

 

Effect of exchange rate changes on cash and cash equivalents

 

 

710

 

 

 

(166

)

Net increase (decrease) in cash and cash equivalents

 

 

(733

)

 

 

6,885

 

Cash and cash equivalents, beginning of period

 

 

38,154

 

 

 

34,676

 

Cash and cash equivalents, end of period

 

$

37,421

 

 

$

41,561

 

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

 

 

 

Transfer of inventory to property, plant and equipment, net

 

$

1,699

 

 

$

1,068

 

Transfer of property, plant and equipment to inventory, net

 

$

491

 

 

$

 

 

See Notes to Consolidated Financial Statements

 

 

 

6


NANOMETRICS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1. Nature of Business and Basis of Presentation

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 26, 2015, 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 26, 2015, which were included in the Company’s Annual Report on Form 10-K filed with the SEC on February 24, 2016.

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.

Upgrade Revenue and Related Cost - Beginning the first quarter of 2016, revenues associated with upgrade sales are now included under Products Revenues, and the related costs in Cost of Products Revenue. This change was due to the types of upgrades currently being sold, which are primarily system software and hardware performance upgrades to extend the features and functionality of a product. Previously upgrades consisted of a group of parts and/or software that change the existing configuration of a product. For the three months ended September 26, 2015, $0.8 million related to upgrade sales, and $0.1 million of costs, are included in Service Revenues and Costs of Service Revenues, respectively, in the accompanying Condensed Consolidated Statement of Operations.  For the nine months ended September 26, 2015, $7.6 million related to upgrade sales, and $2.9 million of costs, are included in Service Revenues and Costs of Service Revenues, respectively, in the accompanying Condensed Consolidated Statement of Operations.

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.

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. As discussed above, commencing in the first quarter of 2016, 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 often include defined customer-specified acceptance criteria.

7


NANOMETRICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

In summary, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller's price is fixed or determinable, and collectability is reasonably assured.

For product sales to existing customers, revenue recognition occurs at the time title and risk of loss transfer to the customer, which usually occurs upon shipment from the Company's manufacturing location, if it can be reliably demonstrated that the product has successfully met the defined customer specified acceptance criteria and all other recognition criteria have been met. For initial sales where the product has not previously met the defined customer specified acceptance criteria, product revenues are recognized upon the earlier of receipt of written customer acceptance or expiration of the contractual acceptance period. In Japan, where contractual terms with the customer specify risk of loss and title transfers upon customer acceptance, revenue is recognized upon receipt of written customer acceptance, provided that all other recognition criteria have been met.

The Company warrants its products against defects in manufacturing. Upon recognition of product revenue, a liability is recorded for anticipated warranty costs. On occasion, customers request a warranty period longer than the Company's standard warranty. In those instances, where extended warranty services are separately quoted to the customer, the associated revenue is deferred and recognized as service revenue ratably over the term of the contract. 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.

The Company sells software that is considered to be an upgrade to a customer's existing systems. These standalone software upgrades are not essential to the tangible product's functionality and are accounted for under software revenue recognition rules which require vendor specific objective evidence (“VSOE”) of fair value to allocate revenue in a multiple element arrangement. Revenue from upgrades is recognized when the upgrades are delivered to the customer, provided that all other recognition criteria have been met.

Revenue related to spare parts is recognized upon shipment. Revenue related to billable services is recognized as the services are performed. Service contracts may be purchased by the customer during or after the warranty period and revenue is recognized ratably over the service contract period.

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. 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, which terms can be up to twelve months. The Company does not grant its customers a general right of return or any refund terms and imposes a penalty on orders cancelled prior to the scheduled shipment date.

The Company regularly evaluates its revenue arrangements to identify deliverables and to determine whether these deliverables are separable into multiple units of accounting.  The Company allocates the arrangement consideration among the deliverables based on relative selling prices.  The Company has established VSOE for some of its products and services when a substantial majority of selling prices falls within a narrow range when sold separately.  For deliverables with no established VSOE, the Company uses best estimate of selling price to determine standalone selling price for such deliverable.  The Company does not use third party evidence to determine standalone selling price since this information is not widely available in the market as the Company's products contain a significant element of proprietary technology and the solutions offered differ substantially from competitors. The Company has established a process for developing estimated selling prices, which incorporates historical selling prices, the effect of market conditions, gross margin objectives, pricing practices, as well as entity-specific factors.  The Company monitors and evaluates estimated selling price on a regular basis to ensure that changes in circumstances are accounted for in a timely manner.

When certain elements in multiple-element arrangements are not delivered or accepted at the end of a reporting period, the relative selling prices of undelivered elements are deferred until these elements are delivered and/or accepted. If deliverables 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.

 

 

8


NANOMETRICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 2. Recent Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board (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. If early adopted in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period, and all the amendments must be adopted in the same 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 Company is currently evaluating the impact of adopting this update on its consolidated statements of cash flows.

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 statements.

In March 2016, the FASB issued an accounting standards update that simplifies several aspects of the accounting for share-based payment award transactions, including income tax consequences, classification of awards as equity or liability, and classification on the statement of cash flows.  The standard is effective for public companies for annual reporting periods beginning after December 16, 2016, and interim periods within those annual periods.  Early adoption is permitted.  The Company is currently evaluating the timing and effects of the adoption of this standard on its consolidated financial statements.

In February 2016, the FASB issued an accounting standards 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.  This standard is required to be applied with a modified retrospective transition approach.  Early adoption is permitted. The Company is currently evaluating the effect of this standard on its Consolidated Financial Statements and related disclosures.

In May 2014, the FASB issued an accounting standards update which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance clarifies the principles of revenue recognition to improve operability and understandability of the guidance. The standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the FASB deferred for one year the effective date of the revenue standard update, but early adoption will be permitted.  The standard will be effective for the Company on January 1, 2018.  The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is currently evaluating the timing and effects of the adoption of this standard and related updates on its consolidated financial statements and related disclosures.

   

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.

9


NANOMETRICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

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.

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:

 

 

 

September 24, 2016

 

 

December 26, 2015

 

 

 

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

 

$

840

 

 

$

 

 

$

 

 

$

840

 

 

$

590

 

 

$

 

 

$

 

 

$

590

 

Commercial paper and corporate debt

   securities

 

 

 

 

 

4,244

 

 

 

 

 

 

4,244

 

 

 

 

 

 

4,568

 

 

 

 

 

 

4,568

 

Total cash equivalents

 

$

840

 

 

$

4,244

 

 

$

 

 

$

5,084

 

 

$

590

 

 

$

4,568

 

 

$

 

 

$

5,158

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and U.S. Government agency debt securities

 

 

 

 

 

21,256

 

 

 

 

 

 

21,256

 

 

 

4,401

 

 

 

20,164

 

 

 

 

 

 

24,565

 

Certificates of deposits

 

 

 

 

 

16,008

 

 

 

 

 

 

16,008

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

 

 

 

23,848

 

 

 

 

 

 

23,848

 

 

 

 

 

 

1,884

 

 

 

 

 

 

1,884

 

Municipal securities and corporate debt securities

 

 

 

 

 

12,526

 

 

 

 

 

 

12,526

 

 

 

 

 

 

18,482

 

 

 

 

 

 

18,482

 

Asset-backed Securities

 

 

 

 

 

7,468

 

 

 

 

 

 

7,468

 

 

 

 

 

 

 

 

 

 

 

 

 

Total marketable securities

 

$

 

 

$

81,106

 

 

$

 

 

$

81,106

 

 

$

4,401

 

 

$

40,530

 

 

$

 

 

$

44,931

 

Total(1)

 

$

840

 

 

$

85,350

 

 

$

 

 

$

86,190

 

 

$

4,991

 

 

$

45,098

 

 

$

 

 

$

50,089

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration payable

 

$

 

 

$

 

 

$

1,333

 

 

$

1,333

 

 

$

 

 

$

 

 

$

1,490

 

 

$

1,490

 

 

(1)

Excludes $32.3 million and $33.0 million held in operating accounts as of September 24, 2016 and December 26, 2015, respectively.

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.

 

Changes in Level 3 liabilities

 

(in thousands)

 

Fair value at December 26, 2015

 

$

1,490

 

Payments made to Zygo Corporation

 

 

(315

)

Change in fair value included in earnings

 

 

158

 

Fair value at September 24, 2016

 

$

1,333

 

 

As of September 24, 2016, the Company had liabilities of $1.3 million resulting from the acquisition of certain assets from Zygo Corporation, a wholly-owned subsidiary of AMETEK, Inc. (“Zygo”), which are measured at fair value on a recurring basis, and changes in fair value recorded in other income (expense), net. Of the $1.3 million of Zygo liabilities at September 24, 2016, $0.8 million was a current liability and $0.5 million was a long-term liability. As of December 26, 2015, the liabilities totaled $1.5 million

10


NANOMETRICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

of which $0.9 million was a current liability and $0.6 million was a long-term liability. The fair values of these liabilities were determined using Level 3 inputs applying a discounted cash flow model incorporating assumptions that market participants would use in their estimates of fair value. Some of these assumptions included estimates for discount rate, and timing and the amount of cash flows.

Derivatives

The Company uses foreign currency 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 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 September 24, 2016 and September 26, 2015 was a gain of $0.1 million and a loss of $0.3 million, respectively.  The loss on settlement of forward foreign currency contracts included in the nine months ended September 24, 2016 and September 26, 2015 was $1.2 million and $0.3 million respectively.  These are included in other income (expense), net, in the consolidated statements of operations.

The following table summarizes the Company’s outstanding derivative instruments on a gross basis as of September 24, 2016:

 

 

 

Notional Principal

 

 

 

(in millions)

 

Undesignated Hedges:

 

 

 

 

Forward Foreign Currency Contracts

 

$

15.9

 

 

 

11


NANOMETRICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 4. Cash and Investments

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

 

 

 

September 24, 2016

 

 

 

Amortized Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Market

Value

 

Cash

 

$

32,337

 

 

$

 

 

$

 

 

 

32,337

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

840

 

 

 

 

 

 

 

 

 

840

 

Commercial paper and corporate debt securities

 

 

4,245

 

 

 

 

 

 

(1

)

 

 

4,244

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

 

6,935

 

 

 

9

 

 

 

 

 

 

6,944

 

U.S. Government agency securities

 

 

14,301

 

 

 

11

 

 

 

 

 

 

14,312

 

Certificate of deposits

 

 

15,997

 

 

 

11

 

 

 

 

 

 

16,008

 

Commercial paper

 

 

23,845

 

 

 

3

 

 

 

 

 

 

23,848

 

Municipal securities

 

 

765

 

 

 

 

 

 

 

 

 

765

 

Corporate debt securities

 

 

11,762

 

 

 

 

 

 

(1

)

 

 

11,761

 

Asset-backed securities

 

 

7,470

 

 

 

 

 

 

(2

)

 

 

7,468

 

Total cash, cash equivalents, and marketable securities

 

$

118,497

 

 

$

34

 

 

$

(4

)

 

$

118,527

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 26, 2015

 

 

 

Amortized Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Market

Value

 

Cash

 

$

32,996

 

 

$

 

 

$

 

 

$

32,996

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

590

 

 

 

 

 

 

 

 

 

590

 

Commercial paper and corporate debt securities

 

 

4,568

 

 

 

 

 

 

 

 

 

4,568

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

 

4,411