10-Q 1 rtec-10q_20180331.htm 10-Q rtec-10q_20180331.htm

 

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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 March 31, 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 No. 001-36226

 

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)

 

16 Jonspin Road, Wilmington, Massachusetts 01887

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (978) 253-6200

 

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.

 

 

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 in Rule 12b-2 of the Exchange Act).     Yes      No  

The number of outstanding shares of the Registrant’s Common Stock on April 18, 2018 was 31,806,084.

 

 


 

Table of Contents

TABLE OF CONTENTS

 

Item No.

 

Page

 

PART I    FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (unaudited)

3

 

Condensed Consolidated Balance Sheets at March 31, 2018 and December 31, 2017

3

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017

4

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018 and 2017

5

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

19

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

23

Item 4.

Controls and Procedures

23

 

 

 

 

PART II    OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

24

Item 1A.

Risk Factors

24

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

Item 3.

Defaults Upon Senior Securities

25

Item 4.

Mine Safety Disclosures

25

Item 5.

Other Information

25

Item 6.

Exhibits

25

 

 

 

 


 

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PART I FINANCIAL INFORMATION

Item 1. Financial Statements

RUDOLPH TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

March 31,

2018

 

 

December 31,

2017

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

68,055

 

 

$

67,770

 

Marketable securities

 

 

112,266

 

 

 

109,589

 

Accounts receivable, less allowance of $523 and $460

 

 

74,672

 

 

 

65,283

 

Inventories, net

 

 

79,763

 

 

 

67,521

 

Income taxes receivable

 

 

4,971

 

 

 

7,220

 

Prepaid expenses and other current assets

 

 

6,045

 

 

 

4,699

 

Total current assets

 

 

345,772

 

 

 

322,082

 

Property, plant and equipment, net

 

 

17,498

 

 

 

17,342

 

Goodwill

 

 

22,495

 

 

 

22,495

 

Identifiable intangible assets, net

 

 

8,352

 

 

 

8,632

 

Other assets

 

 

15,385

 

 

 

15,371

 

Total assets

 

$

409,502

 

 

$

385,922

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

31,966

 

 

$

26,800

 

Deferred revenue

 

 

7,897

 

 

 

6,223

 

Other current liabilities

 

 

9,016

 

 

 

9,284

 

Total current liabilities

 

 

48,879

 

 

 

42,307

 

Other non-current liabilities

 

 

10,894

 

 

 

10,461

 

Total liabilities

 

 

59,773

 

 

 

52,768

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock

 

 

32

 

 

 

32

 

Additional paid-in capital

 

 

386,986

 

 

 

386,196

 

Accumulated other comprehensive loss

 

 

(550

)

 

 

(1,205

)

Accumulated deficit

 

 

(36,739

)

 

 

(51,869

)

Total stockholders’ equity

 

 

349,729

 

 

 

333,154

 

Total liabilities and stockholders’ equity

 

$

409,502

 

 

$

385,922

 

 

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

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RUDOLPH TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Revenue

 

$

73,096

 

 

$

60,679

 

Cost of revenue

 

 

30,675

 

 

 

28,811

 

Gross profit

 

 

42,421

 

 

 

31,868

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

11,783

 

 

 

12,010

 

Selling, general and administrative

 

 

12,793

 

 

 

9,668

 

Amortization

 

 

380

 

 

 

505

 

Total operating expenses

 

 

24,956

 

 

 

22,183

 

Operating income

 

 

17,465

 

 

 

9,685

 

Interest income, net

 

 

(391

)

 

 

(191

)

Other expense

 

 

182

 

 

 

269

 

Income before income taxes

 

 

17,674

 

 

 

9,607

 

Provision for income taxes

 

 

2,544

 

 

 

2,456

 

Net income

 

$

15,130

 

 

$

7,151

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.48

 

 

$

0.23

 

Diluted

 

$

0.47

 

 

$

0.22

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

31,662

 

 

 

31,290

 

Diluted

 

 

32,317

 

 

 

32,058

 

 

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

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RUDOLPH TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Net income

 

$

15,130

 

 

$

7,151

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Change in net unrealized gains on marketable securities, net of tax

 

 

23

 

 

 

44

 

Change in currency translation adjustments

 

 

632

 

 

 

1,120

 

Total comprehensive income

 

$

15,785

 

 

$

8,315

 

 

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

 


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RUDOLPH TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

15,130

 

 

$

7,151

 

Adjustments to reconcile net income to net cash and cash equivalents provided by

   operating activities:

 

 

 

 

 

 

 

 

Amortization of intangibles

 

 

380

 

 

 

505

 

Depreciation

 

 

1,310

 

 

 

924

 

Foreign currency exchange loss

 

 

183

 

 

 

269

 

Change in fair value of contingent consideration

 

 

318

 

 

 

132

 

Share-based compensation

 

 

1,507

 

 

 

1,148

 

Provision for doubtful accounts and inventory valuation

 

 

705

 

 

 

951

 

Changes in operating assets and liabilities

 

 

(14,894

)

 

 

3,144

 

Net cash and cash equivalents provided by operating activities

 

 

4,639

 

 

 

14,224

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(57,134

)

 

 

(22,449

)

Proceeds from sales of marketable securities

 

 

54,404

 

 

 

25,355

 

Purchases of property, plant and equipment

 

 

(1,442

)

 

 

(1,724

)

Net cash and cash equivalents (used in) provided by investing activities

 

 

(4,172

)

 

 

1,182

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Redemption of stock warrants

 

 

 

 

 

(1,025

)

Tax payments related to shares withheld for share-based compensation plans

 

 

(839

)

 

 

(803

)

Issuance of shares through share-based compensation plans

 

 

122

 

 

 

107

 

Net cash and cash equivalents used in financing activities

 

 

(717

)

 

 

(1,721

)

Effect of exchange rate changes on cash and cash equivalents

 

 

535

 

 

 

701

 

Net increase in cash and cash equivalents

 

 

285

 

 

 

14,386

 

Cash and cash equivalents at beginning of period

 

 

67,770

 

 

 

37,859

 

Cash and cash equivalents at end of period

 

$

68,055

 

 

$

52,245

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

249

 

 

$

208

 

 

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

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RUDOLPH TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(Unaudited)

 

NOTE 1. Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements have been prepared by Rudolph Technologies, Inc. (the “Company” or “Rudolph”) and in the opinion of management reflect all adjustments, consisting of normal recurring accruals, necessary for their fair presentation in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).  Preparing financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes.  Actual amounts could differ materially from reported amounts.  The interim results for the three month period ended March 31, 2018 are not necessarily indicative of results to be expected for the entire year or any future periods.  This interim financial information should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 10-K”) filed with the Securities and Exchange Commission (“SEC”).  The accompanying condensed consolidated balance sheet at December 31, 2017 has been derived from the audited consolidated financial statements included in the 2017 10-K.

 

Recent Accounting Pronouncements

Recently Adopted

Effective January 1, 2018, the Company adopted ASU No. 2016-16, “Income Tax (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.”  This ASU, which is part of the Board’s simplification initiative, is intended to reduce the complexity of U.S. GAAP and diversity in practice related to the tax consequences of certain types of intra-entity asset transfers, particularly those involving intellectual property.  The adoption of ASU No. 2016-16 did not have any impact on the Company’s consolidated financial position, results of operations, and cash flows.

Effective January 1, 2018, the Company adopted ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This ASU provides guidance on statement of cash flows presentation for eight specific cash flow issues where diversity in practice exists.  The adoption of ASU No. 2016-15 did not have a material impact on the Company’s consolidated financial position, results of operations, and cash flows.

Effective January 1, 2018, the Company adopted ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes nearly all existing revenue recognition guidance. The core principle of Topic 606 is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. As a result of the adoption of ASC 606, the Company changed its accounting policy for revenue recognition. Refer to Note 2, “Revenue” for further information.

Recently Issued

In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”  The new guidance allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act (the “2017 Tax Act”) from accumulated other comprehensive income to retained earnings.  The guidance also requires certain new disclosures regardless of a company’s election.  The standard is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018, with earlier adoption permitted.  The adoption of ASU 2018-02 is not expected to have a material effect on the Company’s consolidated financial position, results of operations, and cash flows.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic718): Scope of Modification Accounting.”  This ASU amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718.  The ASU is effective for the fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years.  The Company is currently evaluating the effect the adoption of ASU No. 2017-09 will have on its consolidated financial position, results of operations, and cash flows.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.”  This ASU eliminates Step 2 from the goodwill impairment test.   Accordingly, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to the excess,

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limited to the total amount of goodwill allocated to the reporting unit.  The ASU is effective for the fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years.  The Company is currently evaluating the effect the adoption of ASU No. 2017-04 will have on its consolidated financial position, results of operations, and cash flows.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326),” which introduces new guidance for the accounting for credit losses on instruments within its scope.  Given the breadth of that scope, the new ASU will impact both financial services and non-financial services entities.  The standard is effective for fiscal years beginning after December 15, 2020.  The Company is currently evaluating the effect the adoption of ASU No. 2016-13 will have on its consolidated financial position, results of operations, and cash flows.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The standard requires that lessees recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months.  ASU No. 2016-02 also requires disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases.  These disclosures include qualitative and quantitative information.  The standard is effective for annual periods beginning after December 15, 2018 and for interim periods within those annual periods, with earlier adoption permitted.  The adoption of this ASU will result in an increase in right-of-use assets and corresponding liabilities.  The Company is evaluating the timing and other effects of its adoption of this ASU on its consolidated financial position, results of operations, and cash flows.

Recently issued accounting guidance not discussed above is not applicable or did not have, or is not expected to have, a material impact to the Company.

NOTE 2. Revenue

Adoption of Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers”

On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018.   Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.  The Company did not record a cumulative impact due to the adoption of Topic 606.

Revenue Recognition

Revenue is recognized when control of the promised goods or services are transferred to the Company’s customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

The Company has elected to account for shipping and handling activities as the fulfillment of a promise to transfer goods to the customer and therefore records these activities in Cost of revenue.  Sales tax and any other taxes collected concurrent with revenue producing activities are excluded from revenue.  Incidental items that are immaterial in the context of the contract are recognized as expense.  These accounting policy elections are consistent with the manner in which the Company historically recorded these items.  

Contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on the prices charged to customers or using expected cost plus margin.

Disaggregated Revenue

 

The following table presents the Company’s revenue disaggregated by revenue source (in thousands, unaudited):

 

Three Months Ended

 

 

March 31,

 

 

2018

 

 

2017

 

Systems

$

56,102

 

 

$

43,893

 

Software licensing, support and maintenance

 

7,455

 

 

 

7,498

 

Parts

 

6,985

 

 

 

6,330

 

Services

 

2,554

 

 

 

2,958

 

Total revenue

$

73,096

 

 

$

60,679

 

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The following table represents a disaggregation of revenue by timing of revenue:

 

 

Three Months Ended

 

 

March 31,

 

 

2018

 

Point in time

$

69,396

 

Over time

 

3,700

 

Total revenue

$

73,096

 

See Note 14 for additional discussion of the Company’s disaggregated revenue detail.

Systems Revenue

Revenue from systems is recognized when the Company transfers control of the product to the customer.  To indicate transfer of control, the Company must have a present right to payment, legal title must have passed to the customer and the customer must have the significant risks and rewards of ownership.  The Company generally transfers control for system sales when the customer or the customer’s agent picks up the system at the Company’s facility.  Payment for the majority of the Company’s systems have 80-90% of the invoice amount due within 30 days and the remaining amount due upon customer acceptance, which includes installation, recalibration and qualification by the customer.  Customer acceptance is generally based on the Company’s products meeting published performance specifications, which have been demonstrated prior to shipment.  The Company provides an assurance warranty on its systems for a period of twelve to fifteen months against defects in material and workmanship.  The Company provides for the estimated cost of product warranties at the time revenue is recognized.

Depending on the terms of the systems arrangement, the Company may also defer the recognition of a portion of the consideration expected to be received because the Company has to satisfy a future obligation (e.g., installation, training and extended warranties). The Company uses an observable price to determine the standalone selling price for separate performance obligations or a cost plus margin approach when one is not available.

Software Licensing, Support and Maintenance Revenue

Revenue from software licenses provides the customer with a right to use the software as it exists when made available to the customer.  Revenue from software licenses are recognized upfront at the point in time when the software is made available to the customer.  Licensing support and maintenance is recognized as the support and maintenance is provided, which is over the contract period.  Payment for software licensing, support and maintenance is generally due in 30 days.  

Parts Revenue

Revenue from parts is recognized when the Company transfers control of the product, which typically occurs when the Company ships the product from its facilities to the customer.  Payment for parts is generally due in 30 days.  

Services Revenue

Revenue from services primarily consists of service contracts, which provide additional maintenance coverage beyond the Company’s assurance warranty on its products, service labor, consulting and training.  Revenue from service contracts is recognized ratably over the term of the service contract.  Revenue from service labor, consulting and training is recognized as services are performed.  Payment for services is generally due in 30 days.  

Contract Liabilities

The Company records contract liabilities when the customer has been billed in advance of the Company completing its performance obligations. These amounts are recorded as deferred revenue in the Consolidated Balance Sheets.  The opening balance in deferred revenue was $7,206 as of January 1, 2018.

Changes in deferred revenue were as follows:

 

 

Three Months Ended

 

 

March 31,

 

 

2018

 

Beginning Balance, December 31, 2017

$

7,206

 

Deferral of revenue

 

4,553

 

Recognition of deferred revenue

 

(2,986

)

Ending Balance, March 31, 2018

$

8,773

 

 

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Practical Expedients

The Company generally expenses sales commissions when incurred because the amortization period is one year or less. These costs are recorded within selling, general and administrative expenses.

The Company does not adjust the amount of consideration for the effects of a significant financing component as the payment terms are generally one year or less.

The Company does not disclose the value of remaining performance obligations for contracts with an original expected length of one year or less and contracts for which the Company recognizes revenue at the amount to which it has the right to invoice.

NOTE 3. Fair Value Measurements

The Company applies a three-level valuation hierarchy for fair value measurements.  This hierarchy prioritizes the inputs into three broad levels.  Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.  Level 2 inputs are 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 asset or liability.  Level 3 inputs are unobservable inputs based on management’s assumptions used to measure assets and liabilities at fair value.  A financial asset’s or liability’s fair value measurement classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following tables provide the assets and liabilities carried at fair value measured on a recurring basis at March 31, 2018 and December 31, 2017:

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

Carrying

Value

 

 

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable Inputs

(Level 3)

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal notes and bonds

 

$

110,074

 

 

$

 

 

$

110,074

 

 

$

 

Corporate bonds

 

 

2,192

 

 

 

 

 

 

2,192

 

 

 

 

Total assets

 

$

112,266

 

 

$

 

 

$

112,266

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration - acquisitions

 

$

2,911

 

 

$

 

 

$

 

 

$

2,911

 

Foreign currency forward exchange contracts

 

 

388

 

 

 

 

 

 

388

 

 

 

 

Total liabilities

 

$

3,299

 

 

$

 

 

$

388

 

 

$

2,911

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal notes and bonds

 

$

109,589

 

 

$

 

 

$

109,589

 

 

$

 

Foreign currency forward exchange contracts

 

 

45

 

 

 

 

 

 

45

 

 

 

 

Total assets

 

$

109,634

 

 

$

 

 

$

109,634

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration - acquisitions

 

$

2,593

 

 

$

 

 

$

 

 

$

2,593

 

Total liabilities

 

$

2,593

 

 

$

 

 

$

 

 

$

2,593

 

 

The Company’s available-for-sale debt securities classified as Level 1 are based on quoted market prices that are available in active markets.

The Company’s available-for-sale debt securities classified as Level 2 are valued using observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency.  The foreign currency forward exchange contracts are primarily measured based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers.  Investment prices are obtained from third party pricing providers, which model prices utilizing the above observable inputs, for each asset class.

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Level 3 liabilities consisted of contingent consideration related to an acquisition for which the Company uses a discounted cash flow model to value these liabilities.  The Level 3 assumptions used in the discounted cash flow model for the contingent consideration included projected revenue, timing of cash flows and estimates of discount rates of 9.4% and 8.6% for the three months ended March 31, 2018 and 2017, respectively.  A significant decrease in the projected revenue or increase in discount rates could result in a significantly lower fair value measurement for the contingent consideration.  

This table presents a reconciliation of all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2018:

 

 

 

Fair Value Measurements Using

Significant Unobservable Inputs

(Level 3)

 

Balance at December 31, 2017

 

$

2,593

 

Additions

 

 

 

Total loss included in selling, general and administrative expense

 

 

318

 

Payments

 

 

 

Transfers into (out of) Level 3

 

 

 

Balance at March 31, 2018

 

$

2,911

 

 

See Note 4 for additional discussion regarding the fair value of the Company’s marketable securities.

Fair Value of Other Financial Instruments

The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates fair value because of the short-term maturity of these instruments.  The estimated fair value of these obligations is based, primarily, on a market approach, comparing the Company’s interest rates to those rates the Company believes it would reasonably receive upon re-entry into the market.  Judgment is required to estimate the fair value, using available market information and appropriate valuation methods.

NOTE 4. Marketable Securities

The Company has evaluated its investment policies and has determined that all of its marketable securities, which is comprised of debt securities, are to be classified as available-for-sale.  The Company’s available-for-sale debt securities are carried at fair value, with the unrealized gains and losses reported in Stockholders’ equity under the caption “Accumulated other comprehensive loss.”  Realized gains and losses on available-for-sale debt securities are included in “Other expense” in the Condensed Consolidated Statements of Operations.  The Company records other-than-temporary impairment charges for its available-for-sale debt securities when it intends to sell the securities, it is more-likely-than not that it will be required to sell the securities before a recovery, or when it does not expect to recover the entire amortized cost basis of the securities.  The cost of securities sold is based on the specific identification method.

The Company has determined that the gross unrealized losses on its marketable securities at March 31, 2018 and December 31, 2017 are temporary in nature.  The Company reviews its investment portfolio to identify and evaluate marketable securities that have indications of possible impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, credit quality and the Company’s ability and intent to hold the securities for a period of time sufficient to allow for any anticipated recovery in market value.

At March 31, 2018 and December 31, 2017, marketable securities are categorized as follows:

 

 

 

Amortized Cost

 

 

Gross Unrealized Holding Gains

 

 

Gross Unrealized Holding Losses

 

 

Fair Value

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal notes and bonds

 

$

110,211

 

 

$

1

 

 

$

138

 

 

$

110,074

 

Corporate bond

 

 

2,192

 

 

 

 

 

 

 

 

 

2,192

 

Total marketable securities

 

$

112,403

 

 

$

1

 

 

$

138

 

 

$

112,266

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal notes and bonds

 

$

109,750

 

 

$

 

 

$

161

 

 

$

109,589

 

Total marketable securities

 

$

109,750

 

 

$

 

 

$

161

 

 

$

109,589

 

 

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The amortized cost and estimated fair value of marketable securities classified by the maturity date listed on the security, regardless of the Condensed Consolidated Balance Sheet classification, is as follows at March 31, 2018 and December 31, 2017:

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

Amortized Cost

 

 

Fair Value

 

 

Amortized Cost

 

 

Fair Value

 

Due within one year

 

$

99,714

 

 

$

99,609

 

 

$

104,742

 

 

$

104,605

 

Due after one through five years

 

 

12,689

 

 

 

12,657

 

 

 

5,008

 

 

 

4,984

 

Due after five through ten years

 

 

 

 

 

 

 

 

 

 

 

 

Due after ten years

 

 

 

 

 

 

 

 

 

 

 

 

Total marketable securities

 

$

112,403

 

 

$

112,266

 

 

$

109,750

 

 

$

109,589

 

 

The following table summarizes the estimated fair value and gross unrealized holding losses of marketable securities, aggregated by investment instrument and period of time in an unrealized loss position at March 31, 2018 and December 31, 2017:

 

 

 

Unrealized Loss Position For

Less Than 12 Months

 

 

Unrealized Loss Position For

Greater Than 12 Months

 

 

 

Fair Value

 

 

Gross Unrealized Losses

 

 

Fair Value

 

 

Gross Unrealized Losses

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal notes and bonds

 

$

98,376

 

 

$

138

 

 

$

 

 

$

 

Total

 

$

98,376

 

 

$

138

 

 

$

 

 

$

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal notes and bonds

 

$

98,805

 

 

$

161

 

 

$

 

 

$

 

Total

 

$

98,805

 

 

$

161

 

 

$

 

 

$

 

 

See Note 2 for additional discussion regarding the fair value of the Company’s marketable securities.

NOTE 5. Derivative Instruments and Hedging Activities

The Company, when it considers it to be appropriate, enters into forward exchange contracts to hedge the economic exposures arising from foreign currency denominated transactions. At March 31, 2018 and December 31, 2017, these contracts included the future sale of Japanese Yen to purchase U.S. dollars.  Derivative instruments are recognized as either, “Prepaid expenses and other current assets” or “Other current liabilities” in the Condensed Consolidated Balance Sheets and are measured at fair value.  The foreign currency forward exchange contracts were entered into by the Company’s Japanese subsidiary to economically hedge a portion of certain intercompany obligations.  The forward exchange contracts are not designated as hedges for accounting purposes and decreases in the fair value of $433 and $250 for the three months ended March 31, 2018 and 2017, respectively, are recorded within the caption “Other expense (income)” in the Condensed Consolidated Statements of Operations.

The dollar equivalent of the U.S. dollar forward exchange contracts and related fair values as of March 31, 2018 and December 31, 2017 were as follows:

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Notional amount

 

$

8,181

 

 

$

8,417

 

Fair value of asset (liability)

 

$

(388

)

 

$

45

 

 

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NOTE 6. Purchased Intangible Assets

Purchased intangible assets as of March 31, 2018 and December 31, 2017 are as follows:

 

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Net

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Finite-lived intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

Developed technology

 

$

65,927

 

 

$

58,812

 

 

$

7,115

 

Customer and distributor relationships

 

 

9,560

 

 

 

8,883

 

 

 

677

 

Trade names

 

 

4,361

 

 

 

3,801

 

 

 

560

 

Total identifiable intangible assets

 

$

79,848

 

 

$

71,496

 

 

$

8,352

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Finite-lived intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

Developed technology

 

$

65,827

 

 

$

58,522

 

 

$

7,305

 

Customer and distributor relationships

 

 

9,560

 

 

 

8,818

 

 

 

742

 

Trade names

 

 

4,361

 

 

 

3,776

 

 

 

585

 

Total identifiable intangible assets

 

$

79,748

 

 

$

71,116

 

 

$

8,632

 

 

Intangible asset amortization expenses for the three months ended March 31, 2018 and 2017 were $380 and $505, respectively.  Assuming no change in the gross carrying value of identifiable intangible assets and estimated lives, estimated amortization expense for the remainder of 2018 will be $1,146, and for each of the next five years estimated amortization expense amounts to $1,527 for 2019, $1,325 for 2020, $577 for 2021, $511 for 2022, and $494 for 2023.

NOTE 7. Balance Sheet Details

Inventories

Inventories are comprised of the following:

 

 

 

March 31, 2018

 

 

December 31, 2017

 

Materials

 

$

47,404

 

 

$

39,765

 

Work-in-process

 

 

23,612

 

 

 

20,923

 

Finished goods

 

 

8,747

 

 

 

6,833

 

Total inventories

 

$

79,763

 

 

$

67,521

 

 

The Company has established reserves of $13,161 and $13,035 as of March 31, 2018 and December 31, 2017, respectively, for slow moving and obsolete inventory, which are included in the amounts above.

 

Property, Plant and Equipment

Property, plant and equipment, net is comprised of the following:

 

 

 

March 31, 2018

 

 

December 31, 2017

 

Land and building

 

$

2,584

 

 

$

2,584

 

Machinery and equipment

 

 

29,789

 

 

 

29,870

 

Furniture and fixtures

 

 

3,143

 

 

 

3,201

 

Computer equipment and software

 

 

5,846

 

 

 

5,444

 

Leasehold improvements

 

 

9,346

 

 

 

9,472

 

 

 

 

50,708

 

 

 

50,571

 

Accumulated depreciation

 

 

(33,210

)

 

 

(33,229

)

Total property, plant and equipment, net

 

$

17,498

 

 

$

17,342

 

 

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Other assets

Other assets is comprised of the following:

 

 

 

March 31, 2018

 

 

December 31, 2017

 

Deferred income taxes

 

$

14,879

 

 

$

14,879

 

Other

 

 

506

 

 

 

492

 

Total other assets

 

$

15,385

 

 

$

15,371

 

 

Other current liabilities

Other current liabilities is comprised of the following:

 

 

 

March 31, 2018

 

 

December 31, 2017

 

Intangible asset acquisition - Stella Alliance

 

$

200

 

 

$

100

 

Contingent consideration - acquisitions

 

 

794

 

 

 

634

 

Customer deposits

 

 

2,347

 

 

 

5,561

 

Other

 

 

5,675

 

 

 

2,989

 

Total other current liabilities

 

$

9,016

 

 

$

9,284

 

 

Other non-current liabilities

Other non-current liabilities is comprised of the following:

 

 

 

March 31, 2018

 

 

December 31, 2017

 

Unrecognized tax benefits (including interest)

 

$

4,694

 

 

$

4,660

 

Contingent consideration - acquisitions

 

 

2,117

 

 

 

1,959

 

Deferred revenue

 

 

876

 

 

 

983

 

Other

 

 

3,207

 

 

 

2,859

 

Total other non-current liabilities

 

$

10,894

 

 

$

10,461

 

 

NOTE 8. Commitments and Contingencies

Intellectual Property Indemnification Obligations

The Company has entered into agreements with customers that include limited intellectual property indemnification obligations that are customary in the industry.  These guarantees generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party intellectual property claims arising from these transactions.  The nature of the intellectual property indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its customers.  Historically, the Company has not made any indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees.

Warranty Reserves

The Company generally provides a warranty on its products for a period of 12 to 15 months against defects in material and workmanship.  The Company estimates the costs that may be incurred during the warranty period and records a liability in the amount of such costs at the time revenue is recognized.  The Company’s estimate is based primarily on historical experience.  The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.  Settlements of warranty reserves are generally associated with sales that occurred during the 12 to 15 months prior to the quarter-end and warranty accruals are related to sales during the same year.

Changes in the Company’s warranty reserves are as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Balance, beginning of the period

 

$

2,427

 

 

$

1,788

 

Accruals

 

 

959

 

 

 

855

 

Usage

 

 

(820

)

 

 

(648

)

Balance, end of the period

 

$

2,566

 

 

$

1,995

 

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Warranty reserves are reported in the Condensed Consolidated Balance Sheets within the caption “Accounts payable and accrued liabilities.”

Legal Matters

From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business.  There are no legal proceedings pending or threatened against the Company that management believes are likely to have a material adverse effect on the Company’s consolidated financial position or otherwise.

Line of Credit

The Company has a credit agreement with a bank that provides for a line of credit which is secured by the marketable securities the Company has with the bank.  The Company is permitted to borrow up to 70% of the value of eligible securities held at the time the line of credit is accessed.  The available line of credit as of March 31, 2018 was approximately $99 million with an available interest rate of 3.3%.  The credit agreement is available to the Company until such time that either party terminates the arrangement at their discretion.  The Company has not utilized the line of credit to date.

NOTE 9. Share-Based Compensation

Restricted Stock Unit Activity

A summary of the activity with respect to the Company’s nonvested restricted stock units during the three months ended March 31, 2018 is as follows:

 

 

 

Number of Shares

 

 

Weighted Average

Grant Date Fair Value

 

Nonvested at December 31, 2017

 

 

1,014

 

 

$

14.88

 

Granted

 

 

109

 

 

$

27.36

 

Vested

 

 

(159

)

 

$

12.52

 

Forfeited

 

 

(7

)

 

$

13.37

 

Nonvested at March 31, 2018

 

 

957

 

 

$

16.71

 

 

Included in the number of shares granted in the table directly above are 53 market performance-based restricted stock units (MPRSUs) granted to executives for 2018.  Vesting of these MPRSUs is contingent upon the Company meeting certain total shareholder return (TSR) levels as compared to a select peer group over three years from the year granted.  The 2018 MPRSUs cliff vest at the end of the three-year period and have a maximum potential to vest at 200% (105 shares) based on TSR performance.  The related share-based compensation expense is determined based on the estimated fair value of the underlying shares on the date of grant and is recognized straight-line over the vesting term.  The estimated fair value per share of the MPRSUs was $30.76.

As of March 31, 2018 and December 31, 2017, there was $10,791 and $9,420 of total unrecognized compensation cost related to restricted stock units granted under the Company’s stock plans, respectively.  That cost is expected to be recognized over a weighted average period of 2.2 years for each of the respective periods.

NOTE 10. Other Expense

Other expense is comprised of the following:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Foreign currency exchange losses (gains), net

 

$

183

 

 

$

269

 

Rental income

 

 

(1

)

 

 

 

Total other expense

 

$

182

 

 

$

269

 

 

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NOTE 11. Income Taxes

The following table provides details of income taxes:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Income before income taxes

 

$

17,674

 

 

$

9,607

 

Provision for income taxes

 

$

2,544

 

 

$

2,456

 

Effective tax rate

 

 

14.4

%

 

 

25.6

%

 

The income tax provision for the three months ended March 31, 2018 was computed based on the Company’s annual forecast of profit by jurisdiction and forecasted effective tax rate for the year.  The changes in the Company’s effective tax rate for the three months ended March 31, 2018 as compared to the same period in 2017 are primarily due to enactment of U.S. tax reform, which provides for a change in the corporate tax rate from 35% to 21%, changes in the mix of forecasted earnings by jurisdictions and the Foreign Derived Intangible Income Deduction.

The 2017 Tax Act was enacted on December 22, 2017.  The 2017 Tax Act reduces the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings.  The Company is applying the guidance in SAB 118 when accounting for the enactment-date effects of the 2017 Tax Act.  At March 31, 2018, the Company has not completed its accounting for all of the tax effects of the 2017 Tax Act.  In all cases, the Company will continue to make and refine its calculations as additional analysis is completed.  The Company’s estimates may also be affected as it gains a more thorough understanding of the 2017 Tax Act.  These changes could be material to income tax expense.

Foreign-Derived Intangible Income:  The 2017 Tax Act provides tax incentives to U.S. companies to earn income from the sale, lease or license of goods and services abroad in the form of a deduction for foreign-derived intangible income (“FDII”).  FDII is taxed at an effective rate of 13.1% for taxable years beginning after December 31, 2017 and at an effective rate of 16.4% for taxable years beginning after December 31, 2025. The accounting for the deduction for FDII is similar to a special deduction and should be accounted for based on the guidance in ASC 740-10-25-37.  The tax benefits for special deductions ordinarily are recognized no earlier than the year in which they are deductible on the tax return.  As of March 31, 2018, the Company has made sufficient progress in its calculations to reasonably estimate the effect on its estimated annual effective tax rate.  Due to the large portions of its sales being made to non-U.S. customers this adjustment decreased its effective tax rate by 4.8%.  The Company will continue to refine its calculations, which may result in changes to this amount.

The Company does not expect other provisions of the 2017 Tax Act, including global intangible low-taxed income (“GILTI”), the new interest expense limitations and base erosion anti-abuse tax (“BEAT”) to have a material impact on the Company’s effective tax rate.

Deferred Tax Assets and Liabilities: The Company remeasured certain deferred tax assets and liabilities based on the rate to which they are expected to reverse to in the future, which is anticipated to be 21%.  The Company recorded a provisional amount of $8.0 million as of December 31, 2017 related to the remeasurement of certain deferred tax balances. Due to the continued refinement of its transition tax calculation, discussed further below, and the effect it may have on the measurement of NOLs and other carryforwards, it will continue to analyze and refine its calculations related to the measurement of these balances.

One-Time Transition Tax: The one-time transition tax is based on its total post-1986 earnings and profits (“E&P”), which it has deferred from U.S. income taxes under previous U.S. law.  The Company originally recorded a provisional amount for its one-time transition tax liability for all of its foreign subsidiaries, resulting in a transition tax benefit (net of foreign tax credits) of $0.1 million being recorded at December 31, 2017.  As it continues to refine its E&P analysis, the Company will refine its calculations of the one-time transition tax, which could affect the measurement of this liability.  No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.

The Company currently has a partial valuation allowance recorded against certain foreign and state net operating loss and credit carryforwards where the realizability of such deferred tax assets is substantially in doubt.  Each quarter, the Company assesses the likelihood that it will be able to recover its deferred tax assets. The Company considers available evidence, both positive and negative, including forecasted earnings in assessing the need for a valuation allowance.  As a result of the Company’s analysis, it concluded that it is more likely than not that a portion of its deferred tax assets will not be realized. Therefore, the Company continues to provide a valuation allowance against certain deferred tax assets.  The Company continues to monitor available evidence and may reverse some or all of the remaining valuation allowance in future periods, if appropriate.  The Company has a recorded valuation allowance against certain of its deferred tax assets of $2,447 as of March 31, 2018 and December 31, 2017.

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NOTE 12. Earnings Per Share

Basic earnings per share is calculated using the weighted average number of shares of common stock outstanding during the period.  Diluted earnings per share is computed in the same manner and also gives effect to all dilutive common equivalent shares outstanding during the period.  Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive.  In accordance with U.S. GAAP, these shares were not included in calculating diluted earnings per share.

The following table sets forth the weighted average number of stock options and restricted stock units that have been excluded from the calculation of diluted earnings per share as their effect would have been antidilutive:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Stock options