ONTO INNOVATION INC. - FORM 10-Q - April 29, 2015

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EX-31.1 - EXHIBIT 31.1 - ONTO INNOVATION INC.q1201532815exhibit311.htm
EX-32.1 - EXHIBIT 32.1 - ONTO INNOVATION INC.q1201532815exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - ONTO INNOVATION INC.q1201532815exhibit312.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_____________________________________
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 2015

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 0-13470
_____________________________________
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  ý    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  ý    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
o
 
Accelerated filer
ý
Non-accelerated filer
o
 
Smaller reporting company
o

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

As of April 23, 2015, there were 23,984,375 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 MARCH 28, 2015
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 6.
 
 
 
 
 



2

PART I — FINANCIAL INFORMATION
 
ITEM 1.     FINANCIAL STATEMENTS

NANOMETRICS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)
(Unaudited)
 
March 28,
2015
 
December 27,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
27,935

 
$
34,676

Marketable securities
49,114

 
49,286

Accounts receivable, net of allowances of $212 and $253, respectively
39,072

 
26,121

Inventories
37,487

 
35,105

Inventories-delivered systems
749

 
1,912

Prepaid expenses and other
9,493

 
9,289

Deferred income tax assets
1,455

 
1,457

Total current assets
165,305

 
157,846

Property, plant and equipment, net
47,800

 
49,633

Goodwill
9,391

 
10,494

Intangible assets, net
3,326

 
4,294

Deferred income tax assets
393

 
410

Other assets
554

 
559

Total assets
$
226,769

 
$
223,236

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
11,913

 
$
10,199

Accrued payroll and related expenses
10,807

 
8,700

Deferred revenue
8,054

 
10,021

Other current liabilities
8,110

 
8,265

Income taxes payable
924

 
1,017

Total current liabilities
39,808

 
38,202

Deferred revenue
2,090

 
2,591

Income taxes payable
723

 
701

Deferred tax liabilities
962

 
926

Other long-term liabilities
1,348

 
1,279

Total liabilities
44,931

 
43,699

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: 23,973,819 and 23,813,729, respectively, issued and outstanding
24

 
24

Additional paid-in capital
252,839

 
251,396

Accumulated deficit
(66,558
)
 
(69,114
)
Accumulated other comprehensive income (loss)
(4,467
)
 
(2,769
)
Total stockholders’ equity
181,838

 
179,537

Total liabilities and stockholders’ equity
$
226,769

 
$
223,236

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
 
March 28,
2015
 
March 29,
2014
Net revenues:
 
 
 
Products
$
38,339

 
$
43,280

Service
12,037

 
8,296

Total net revenues
50,376

 
51,576

Costs of net revenues:
 
 
 
Cost of products
19,992

 
21,639

Cost of service
6,373

 
5,114

Amortization of intangible assets
632

 
674

Total costs of net revenues
26,997

 
27,427

Gross profit
23,379

 
24,149

Operating expenses:
 
 
 
Research and development
8,159

 
8,314

Selling
7,116

 
7,373

General and administrative
5,767

 
6,338

Amortization of intangible assets
38

 
108

Restructuring charge
58

 
—

Total operating expenses
21,138

 
22,133

Income from operations
2,241

 
2,016

Other (income) expense:
 
 
 
Interest income
10

 
14

Interest expense
(82
)
 
(100
)
Other income, net
704

 
252

Total other income, net
632

 
166

Income before income taxes
2,873

 
2,182

Provision for income taxes
317

 
587

Net income
$
2,556

 
$
1,595

 
 
 
 
Net income per share:
 
 
 
Basic
$
0.11

 
$
0.07

Diluted
$
0.11

 
$
0.07

Weighted average shares used in per share calculation:
 
 
 
Basic
23,866

 
23,711

Diluted
24,257

 
24,159

See Notes to Condensed Consolidated Financial Statements

4

NANOMETRICS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited) 

 
Three Months Ended
 
March 28,
2015
 
March 29,
2014
Net income
$
2,556

 
$
1,595

Other comprehensive income (loss):
 
 
 
    Change in foreign currency translation adjustment
(1,727
)
 
104

     Net change on unrealized gains on available-for-sale investments
29

 
107

Other comprehensive income (loss)
(1,698
)
 
211

Comprehensive income
$
858

 
$
1,806

    
See Notes to Condensed Consolidated Financial Statements


5

NANOMETRICS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three Months Ended
 
March 28,
2015
 
March 29,
2014
Cash flows from operating activities:
 
 
 
Net income
$
2,556

 
$
1,595

Reconciliation of net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
2,324

 
2,429

Stock-based compensation
1,571

 
1,634

Loss on disposal of fixed assets
485

 
—

Inventory write-down
403

 
669

Deferred income taxes
55

 
519

Changes in fair value of contingent payments to Zygo Corporation
35

 
(5
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(13,340
)
 
(967
)
Inventories
(2,442
)
 
(3,142
)
Inventories-delivered systems
1,164

 
4,652

Prepaid expenses and other
(94
)
 
1,845

Accounts payable, accrued and other liabilities
3,947

 
(2,536
)
Deferred revenue
(2,468
)
 
(10,619
)
Income taxes payable
(70
)
 
(766
)
Net cash used in operating activities
(5,874
)
 
(4,692
)
Cash flows from investing activities:
 
 
 
Sales of marketable securities
1,082

 
—

Maturities of marketable securities
9,592

 
7,000

Purchases of marketable securities
(10,613
)
 
(8,410
)
Purchases of property, plant and equipment
(502
)
 
(2,193
)
Net cash used in investing activities
(441
)
 
(3,603
)
Cash flows from financing activities:
 
 
 
          Payments to Zygo Corporation related to acquisition
(224
)
 
(100
)
          Proceeds from sale of shares under employee stock option plans and purchase plan
2,357

 
3,115

          Taxes paid on net issuance of stock awards
(764
)
 
(659
)
          Repurchases of common stock
(1,721
)
 
—

Net cash (used in) provided by financing activities
(352
)
 
2,356

Effect of exchange rate changes on cash and cash equivalents
(74
)
 
7

Net decrease in cash and cash equivalents
(6,741
)
 
(5,932
)
Cash and cash equivalents, beginning of period
34,676

 
44,765

Cash and cash equivalents, end of period
$
27,935

 
$
38,833

Supplemental disclosure of non-cash investing activities:
 
 
 
Transfer of inventory to property, plant and equipment, net
$
435

 
$
—

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 27, 2014, 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 27, 2014, which were included in the Company’s Annual Report on Form 10-K filed with the SEC on February 25, 2015.

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 presented herein include 13 weeks.

Reclassifications – Certain prior year amounts have been reclassified to conform to the current year presentation.

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 (“product revenue”) as well as spare part sales, billable service, service contracts, and upgrades (together “service revenue”). Upgrades are a group of parts and/or software that change the existing configuration of a product and are included in service revenue. They are distinguished from product revenue, which consists 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.

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.


7
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


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.

As part of its customer services, 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 January 2015, the Financial Accounting Standards Board ("FASB") issued an accounting standard update which simplifies income statement classification by removing the concept of extraordinary items from the U.S. GAAP. As a result, items that are both unusual and infrequent will no longer be separately reported net of tax after continuing operations. The new standard is effective for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company does not expect any impact on the adoption of this standard on its consolidated financial statements.
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. The standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In April 2015, the FASB tentatively decided to defer for one year the effective date of the new revenue standard as well as tentatively permit early adoption. If deferred, the new 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 is evaluating the effect that the standard will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In July 2013, the FASB issued an accounting standards update which provides that a liability related to an unrecognized tax benefit would be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations in which a net operating loss carryforward, a similar tax loss or a tax credit carryforward is not available at the reporting date under the tax law of the jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be combined with deferred tax assets. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The new standard is effective for fiscal years and interim periods beginning after December 15, 2013. The Company adopted this standard during the three months ended March 29, 2014, resulting in a one-time tax benefit of $0.3 million, a reduction in deferred tax assets of $0.3 million, and a reduction in long-term income taxes payable of $0.6 million.

Note 3. Fair Value Measurements and Disclosures
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 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)


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:
 
 
March 28,
2015
 
December 27,
2014
 
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
$
909

 
$
—

 
$
—

 
$
909

 
$
610

 
$
—

 
$
—

 
$
610

Total cash equivalents
909

 
—

 
—

 
909

 
610

 
—

 
—

 
610

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   U.S. Treasury, U.S. Government and U.S. Government agency debt securities
2,499

 
21,554

 
—

 
24,053

 
2,497

 
20,537

 
—

 
23,034

   Commercial paper, municipal securities and corporate debt securities
—

 
25,061

 
—

 
25,061

 
—

 
26,252

 
—

 
26,252

Total marketable securities
2,499

 
46,615

 
—

 
49,114

 
2,497

 
46,789

 
—

 
49,286

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Total(1)
$
3,408

 
$
46,615

 
$
—

 
$
50,023

 
$
3,107

 
$
46,789

 
$
—

 
$
49,896

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration payable
$
—

 
$
—

 
$
2,208

 
$
2,208

 
$
—

 
$
—

 
$
2,397

 
$
2,397

(1) Excludes $27.0 million and $34.1 million held in operating accounts as of March 28, 2015 and December 27, 2014, 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 27, 2014
2,397

Payments made to Zygo Corporation
(224
)
Change in fair value included in earnings
35

Fair value at March 28, 2015
$
2,208

As of March 28, 2015, the Company had liabilities of $2.2 million resulting from the acquisition of certain assets from Zygo Corporation (“Zygo”), which are measured at fair value on a recurring basis, and changes in fair value recorded in Other income (expense), net. Of the $2.2 million of Zygo liabilities at March 28, 2015, $1.1 million was a current liability and $1.1 million was a long-term liability. As of December 27, 2014, the liabilities totaled $2.4 million of which $1.4 million was a current liability and $1.0 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.

10
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):

 
March 28, 2015
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Market Value
Cash
$
27,026

 
—

 
$
—

 
$
27,026

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
909

 
—

 
—

 
909

Marketable securities:
 
 
 
 
 
 
 
Commercial paper
1,398

 
—

 
—

 
1,398

U.S. Treasury securities
2,499

 
—

 
—

 
2,499

U.S. Government agency securities
21,553

 
6

 
(5
)
 
21,554

Municipal securities
3,020

 
1

 
(2
)
 
3,019

Corporate debt securities
20,647

 
4

 
(7
)
 
20,644

Total cash, cash equivalents, and marketable securities
$
77,052

 
$
11

 
$
(14
)
 
$
77,049

 
 
 
 
 
 
 
 
 
December 27, 2014
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Market Value
Cash
$
34,066

 
$
—

 
$
—

 
$
34,066

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
610

 
—

 
—

 
610

Marketable securities:
 
 
 
 
 
 
 
Commercial paper
805

 
—

 
—

 
805

U.S. Treasury Securities
2,498

 
—

 
(1
)
 
2,497

U.S. Government agency securities
20,556

 
1

 
(19
)
 
20,538

Municipal securities
3,755

 
1

 
(7
)
 
3,749

Corporate debt securities
21,722

 
1

 
(26
)
 
21,697

Total cash, cash equivalents, and marketable securities
$
84,012

 
$
3

 
$
(53
)
 
$
83,962

 
 
 
 
 
 
 
 


11
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Available-for-sale marketable securities, readily convertible to cash, with maturity dates of 90 days or less are classified as cash equivalents, while those with maturity dates greater than 90 days are classified as marketable securities within short-term assets. All marketable securities as of March 28, 2015 and December 27, 2014, were available-for-sale and reported at fair value based on the estimated or quoted market prices as of the balance sheet date. Unrealized gains or losses, net of tax effect, are recorded in accumulated other comprehensive income (loss) within stockholders’ equity. Both the gross unrealized gains and gross unrealized losses for the three months ended March 28, 2015 and March 29, 2014 were insignificant and no marketable securities had other than temporary impairment. All marketable securities as of March 28, 2015 and December 27, 2014, had maturity dates of less than two years and were not invested in foreign entities.

Note 5. Accounts Receivable

The Company maintains arrangements under which eligible accounts receivable in Japan are sold without recourse to unrelated third-party financial institutions. These receivables were not included in the consolidated balance sheets as the criteria for sale treatment had been met. The Company pays administrative fees as well as interest ranging from 1.15% to 1.68% based on the anticipated length of time between the date the sale is consummated and the expected collection date of the receivables sold. The Company sold $1.1 million and $0.6 million of receivables during three months ended March 28, 2015 and March 29, 2014, respectively. There were no material gains or losses on the sale of such receivables. There were no amounts due from such third party financial institutions at March 28, 2015 and December 27, 2014.


12
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Note 6. Financial Statement Components
The following tables provide details of selected financial statement components as of the following dates (in thousands):
Condensed Consolidated Balance Sheets Details
At
 
March 28,
2015
 
December 27,
2014
Inventories:
 
 
 
Raw materials and sub-assemblies
$
20,455

 
$
19,463

Work in process
11,523

 
7,723

Finished goods
5,509

 
7,919

Inventories
37,487

 
35,105

Inventories-delivered systems
749

 
1,912

Total inventories
$
38,236

 
$
37,017

Property, plant and equipment, net(1):
 
 
 
Land
$
15,572

 
$
15,572

Building and improvements
19,679

 
19,641

Machinery and equipment
30,400

 
29,456

Furniture and fixtures
2,241

 
2,225

Software
7,942

 
7,942

Capital in progress
2,770

 
3,512

Total property, plant and equipment, gross
78,604

 
78,348

Accumulated depreciation and amortization
(30,804
)
 
(28,715
)
Total property, plant and equipment, net
$
47,800

 
$
49,633

(1)Total depreciation and amortization expense for the three months ended March 28, 2015 and March 29, 2014 was $1.7 million and $1.6 million, respectively.
 
 
 
Other current liabilities:
 
 
 
Accrued warranty
$
3,440

 
$
2,953

Accrued restructuring
606

 
997

Accrued professional services
875

 
778

Fair value of current portion of contingent payments to Zygo Corporation related to acquisition
1,128

 
1,385

Other
2,061

 
2,152

Total other current liabilities
$
8,110

 
$
8,265

 
 
 
 
Components of Accumulated Other Comprehensive Income (Loss)
 
Foreign
Currency
Translations
 
Defined
Benefit
Pension Plans
 
Unrealized Income (Loss) on Investment
 
Accumulated
Other
Comprehensive
Income
Balance as of December 27, 2014
$
(2,604
)
 
$
(134
)
 
$
(31
)
 
$
(2,769
)
Current period change
(1,727
)
 
—

 
29

 
(1,698
)
Balance as of March 28, 2015
$
(4,331
)
 
$
(134
)
 
$
(2
)
 
$
(4,467
)
The items above, except for unrealized income (loss) on investment, did not impact the Company’s income tax provision. The amounts reclassified from each component of accumulated other comprehensive income into income statement line items were insignificant.

13
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)



Note 7. Goodwill and Intangible Assets
The following table summarizes the activity in the Company’s goodwill during the three months ended March 28, 2015 (in thousands):
Balance as of December 27, 2014
$
10,494

      Foreign currency movements
(1,103
)
Balance as of March 28, 2015
$
9,391

 
 
Finite-lived intangible assets are recorded at cost, less accumulated amortization. Finite-lived intangible assets as of March 28, 2015 and December 27, 2014 consisted of the following (in thousands):
 
 
March 28, 2015
 
Adjusted cost
 
Accumulated amortization
 
Net carrying amount
Developed technology
$
16,063

 
$
(13,018
)
 
$
3,045

Customer relationships
9,362

 
(9,362
)
 
—

Brand names
1,927

 
(1,827
)
 
100

Patented technology
2,252

 
(2,071
)
 
181

Trademark
80

 
(80
)
 
—

Total
$
29,684

 
$
(26,358
)
 
$
3,326

 
 
December 27, 2014
 
Adjusted cost
 
Accumulated amortization
 
Net carrying amount
Developed technology
$
16,950

 
$
(12,991
)
 
$
3,959

Customer relationships
9,461

 
(9,449
)
 
12

Brand names
1,927

 
(1,802
)
 
125

Patented technology
2,252

 
(2,054
)
 
198

Trademark
80

 
(80
)
 
—

Total
$
30,670

 
$
(26,376
)
 
$
4,294

The amortization of finite-lived intangibles is computed using the straight-line method. Estimated lives of finite-lived intangibles range from two to ten years. Total amortization expense for the three months ended March 28, 2015 and March 29, 2014 was $0.7 million and $0.8 million, respectively.
There were no impairment charges related to intangible assets recorded during the three months ended March 28, 2015 and March 29, 2014.
The estimated future amortization expense of finite intangible assets as of March 28, 2015 is as follows (in thousands):
 
 
Fiscal Years
Amounts
2015 (remaining nine months)
$
1,258

2016
1,656

2017
206

2018
140

2019
66

Total future amortization expense
$
3,326



14
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Note 8. Warranties
The Company sells the majority of its products with a 12 months repair or replacement warranty from the date of acceptance or shipment date. The Company provides an accrual for estimated future warranty costs based upon the historical relationship of warranty costs to the cost of products sold. The estimated future warranty obligations related to product sales are recorded in the period in which the related revenue is recognized. The estimated future warranty obligations are affected by the warranty periods, sales volumes, product failure rates, material usage, and labor and replacement costs incurred in correcting a product failure. If actual product failure rates, material usage, labor or replacement costs were to differ from the Company’s estimates, revisions to the estimated warranty obligations would be required. For new product introductions where limited or no historical information exists, the Company may use warranty information from other previous product introductions to guide it in estimating its warranty accrual.
Components of the warranty accrual, which were included in the accompanying condensed consolidated balance sheets with other current liabilities, were as follows (in thousands):
 
 
Three Months Ended
 
March 28,
2015
 
March 29,
2014
Balance as of beginning of period
$
2,953

 
$
3,426

Accruals for warranties issued during period
1,702

 
1,317

Settlements during the period
(1,215
)
 
(1,168
)
Balance as of end of period
$
3,440

 
$
3,575


Note. 9. Restructuring

The Company recorded a restructuring charge of approximately $0.1 million during the three months ended March 28, 2015 as a result of its decision to consolidate and reorganize certain of its operations, primarily in the U.K. The Company completed this restructuring plan in March 2015. Other related costs will be recognized as incurred.

As of March 28, 2015, the components of the Company’s restructuring reserves were included in other current liabilities and were as follows (in thousands):
 
 
 
 
 
Employee severance and benefits
 
Facility termination costs
 
Other
 
Total
Balance as of December 27, 2014
$
383

 
$
583

 
$
31

 
$
997

Charges
45

 
—

 
13

 
58

Cash Payments
(308
)
 
(106
)
 
(35
)
 
(449
)
Balance as of March 28, 2015
$
120

 
$
477

 
$
9

 
$
606


As of March 29, 2014, the balance of the Company’s restructuring reserves was zero.


Note 10. Line of Credit and Debt Obligations
 
Line of Credit - On May 30, 2014, the Company amended its revolving line of credit facility (i) to extend the maturity date of such facility by two years to May 30, 2016, and (ii) to increase the minimum amount available to borrow to $12.0 million. The instrument governing the line of credit facility includes certain financial covenants regarding tangible net worth. The revolving line of credit agreement includes a provision for the issuance of commercial or standby letters of credit by the bank on behalf of the Company. The value of all letters of credit outstanding reduces the total line of credit available. The revolving line of credit is collateralized by a blanket lien on all of the Company’s domestic assets excluding intellectual property and real estate. The minimum borrowing interest rate is 3.00% per annum. Borrowing is limited to the lesser of (a) $12.0 million plus the borrowing base, or (b) $20.0 million. The total borrowing base available as of March 28, 2015 was $16.0 million. As of March 28, 2015, the Company was not in breach of any restrictive covenants in connection with this line

15
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


of credit. There were no outstanding amounts drawn on this facility as of March 28, 2015. Although management has no current plans to request advances under this credit facility, the Company may use the proceeds of any future borrowing for general corporate purposes, future acquisitions or expansion of the Company’s business.
  
Note 11. Commitments and Contingencies

Intellectual Property Indemnification Obligations – The Company will, from time to time, in the normal course of business, agree to indemnify certain customers, vendors or others against third party claims that the Company’s products, when used for their intended purpose(s), or the Company’s intellectual property, infringe the intellectual property rights of such third parties or other claims made against parties with whom it enters into contractual relationships. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. Historically, the Company has not made payments under these obligations and believes that the estimated fair value of these agreements is immaterial. Accordingly, no liabilities have been recorded for these obligations in the accompanying condensed consolidated balance sheets as of March 28, 2015 and December 27, 2014.

Note 12. Net Income Per Share
    
The Company presents both basic and diluted net income per share on the face of its condensed consolidated statements of operations. Basic net income per share excludes the effect of potentially dilutive shares and is computed by dividing net income by the weighted-average number of shares of common stock outstanding for the period. Diluted net income per share is computed using the weighted-average number of shares of common stock outstanding for the period plus the effect of all dilutive securities representing potential shares of common stock outstanding during the period.

A reconciliation of the share denominator of the basic and diluted net income per share computations for three months ended March 28, 2015 and March 29, 2014 is as follows (in thousands):

Three Months Ended
 
March 28,
2015
 
March 29,
2014
Weighted average common shares outstanding used in basic net income (loss) per share calculation
23,866

 
23,711

Potential dilutive common stock equivalents, using treasury stock method
391

 
448

Weighted average shares used in diluted net income per share calculation
24,257

 
24,159



16
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)



Note 13. Stockholders’ Equity and Stock-Based Compensation
Options and ESPP Awards
The fair value of each option award is estimated on the grant date using the Black-Scholes valuation model and the assumptions noted in the following table. The expected lives of options granted were calculated using the simplified method allowed by the SAB 107. The risk-free rates were based on the U.S Treasury rates in effect during the corresponding period of grant. The expected volatility was based on the historical volatility of the Company’s stock price. The dividend yield reflects that the Company has not paid any cash dividends since inception and does not intend to pay any cash dividends in the foreseeable future.
 
March 28,
2015
 
March 29,
2014
Stock Options:
 
 
 
Expected life
—

 
4.6 years
Volatility
—

 
56.8%
Risk free interest rate
—

 
1.53%
Dividends
—

 
—
Employee Stock Purchase Plan:
 
 
 
Expected life
0.5 years
 
0.5 years
Volatility
37.2%
 
32.6%
Risk free interest rate
0.11%
 
1.00%
Dividends
—
 
—

No stock options were awarded during the three months ended March 28, 2015. The weighted average fair value per share of the stock options awarded in three month period ended March 29, 2014 was $8.69.
A summary of activity of stock options during the three months ended March 28, 2015 is as follows:
 
 
Number of
Shares
Outstanding
(Options)
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual Term (Years)
 
Aggregate Intrinsic Value (in Thousands)
Options
 
 
 
 
 
 
 
Outstanding at December 27, 2014
1,382,993

 
$
13.92

 
3.41
 
$
4,108

Exercised
(127,814
)
 
11.82

 
 
 
 
Granted
—

 
—

 
 
 
 
Cancelled
(3,263
)
 
15.57

 
 
 
 
Outstanding at March 28, 2015
1,251,916

 
$
14.14

 
3.17
 
$
4,069

Exercisable at March 28, 2015
992,179

 
$
13.57

 
2.72
 
$
3,757

The aggregate intrinsic value in the above table represents the total pretax intrinsic value, based on the Company’s closing stock price of $17.19 as of March 27, 2015, the last trading day of the quarter, which would have been received by the option holders had all option holders exercised their options as of that date. The total intrinsic value of options exercised during the three months ended March 28, 2015 and March 29, 2014 was $0.8 million and $1.7 million, respectively. 

17
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Restricted Stock Units (“RSUs”)
Time-based RSUs are valued using the market value of the Company’s common stock on the date of grant, assuming no expectation of dividends paid.
A summary of activity for RSUs is as follows:
 
RSUs
Number
of RSUs
 
Weighted
Average Fair
Value
Outstanding RSUs as of December 27, 2014
563,337

 
$
17.90

Granted
71,533

 
17.92

Released
(127,096
)
 
17.78

Cancelled
(8,399
)
 
16.56

Outstanding RSUs as of March 28, 2015
499,375

 
$
17.96

 
Market-Based Performance Stock Units (“PSUs”)
During the three months ended March 28, 2015, in addition to granting RSUs that vest on the passage of time only, the Company granted PSUs to an executive. The PSUs will vest in three equal tranches over one, two and three years based on the relative performance of the Company’s stock during those periods, compared to a peer group over the same period. If target stock price performance is achieved, 40,000 shares of the Company’s common stock will vest, and up to a maximum of 60,000 shares will vest if the maximum stock price performance is achieved for each tranche.
    
Valuation of PSUs
On the date of grant, the Company estimated the fair value of PSUs using a Monte Carlo simulation model. The assumptions for the valuation of PSUs are summarized as follows:
PSUs
2015 Awards
Number of PSUs granted and outstanding as of March 28, 2015
40,000

Weighted-average assumptions/inputs:
 
Expected Dividend
—
Range of risk-free interest rates
0.25%-1.1%
Range of expected volatilities for peer group
23%-65%

Stock-based Compensation Expense
Stock-based compensation expense for all share-based payment awards made to the Company’s employees and directors pursuant to the employee stock option and employee stock purchase plans by function were as follows (in thousands): 
 
March 28,
2015
 
March 29,
2014
Cost of products
$
73

 
$
61

Cost of service
46

 
84

Research and development
280

 
340

Selling
500

 
427

General and administrative
672

 
722

Total stock-based compensation expense related to employee stock options and employee stock purchases
$
1,571

 
$
1,634



18
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)



Note 14. Income Taxes

The Company accounts for income taxes under the provisions of ASC 740, Accounting for Income Taxes. The Company adjusts its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. The Company also records the tax effect of unusual or infrequently occurring discrete items, including changes in judgment about valuation allowances and effects of changes in tax laws or tax rates, in the interim period in which they occur. The Company's effective tax rate reflects the impact of a portion of its earnings being taxed in foreign jurisdictions as well as a valuation allowance maintained on certain deferred tax assets.
The provision for income taxes consists of the following (in thousands):
 
Three Months Ended
 
March 28,
2015
 
March 29,
2014
Provision for income taxes
$
317

 
$
587

The Company recorded a tax provision of $0.3 million and $0.6 million for the three months ended March 28, 2015 and March 29, 2014, respectively. The decrease in the tax provision for 2015 from 2014 was primarily related to no tax being provided on U.S. income as the Company has a full valuation allowance against its U.S. deferred tax assets for the three months ended March 28, 2015.
The change during the three months ended March 28, 2015 compared to the corresponding period in 2014, was primarily related to a change in the geographical mix of income of the Company during the three months ended March 28, 2015.
As of March 28, 2015, the Company continues to maintain a valuation allowance against its U.S. and certain foreign deferred tax assets as a result of uncertainties regarding the realization of the asset due to cumulative losses and uncertainty of future taxable income. The Company will continue to assess the realizability of the deferred tax assets in each of the applicable jurisdictions and maintain the valuation allowances until sufficient positive evidence exists to support a reversal. In the event the Company determines that the deferred tax assets are realizable, an adjustment to the valuation allowance will be reflected in the tax provision for the period such determination is made.
The Company is subject to taxation in the U.S. and various states including California, and foreign jurisdictions including Korea, Japan, Taiwan, and China. Due to tax attribute carry-forwards, the Company is subject to examination for tax years 2003 forward for U.S. tax purposes. The Company is also subject to examination in various states for tax years 2002 forward. The Company is subject to examination for tax years 2007 forward for various foreign jurisdictions.
The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The total amount of penalties and interest were not material as of March 28, 2015 and March 29, 2014. During the next twelve months, the Company anticipates increases in its unrecognized tax benefits of approximately $0.1 million.

Note 15. Segment, Geographic, Product and Significant Customer Information
The Company has one operating segment, which is the sale, design, manufacture, marketing and support of optical critical dimension and thin film systems. The following tables summarize total net revenues and long-lived assets (excluding intangible assets) attributed to significant countries (in thousands):


19
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


 
Three Months Ended
 
March 28,
2015
 
March 29,
2014
Total net revenues:
 
 
 
United States
$
9,078

 
6,741

South Korea
14,643

 
15,889

China
4,001

 
15,488

Taiwan
14,428

 
4,416

Other
8,226

 
9,042

Total net revenues
$
50,376

 
$
51,576


Long-lived tangible assets:
March 28,
2015
 
December 27,
2014
United States
$
46,011

 
$
47,729

Japan
65

 
71

South Korea
249

 
284

All Other
1,475

 
1,549

Total long-lived tangible assets
$
47,800

 
$
49,633

 
The following customers accounted for 10% or more of total accounts receivable, net:
 
At
 
March 28,
2015
 
December 27,
2014
Samsung Electronics Co. Ltd.
17.3
%
 
10.0
%
Taiwan Semiconductor Manufacturing Company Limited
27.8
%
 
20.2
%
SK Hynix
17.5
%
 
***

Micron
***

 
23.7
%
GLOBALFOUNDRIES
***

 
10.2
%
    
*** The customer accounted for less than 10% of total accounts receivable, net, as of that period end.

The following customers accounted for 10% or more of total net revenues:
 
 
 
March 28,
2015
 
March 29,
2014
Samsung Electronics Co. Ltd.
30.3
%
 
51.7
%
Intel Corporation
***

 
13.1
%
SK Hynix
13.4
%
 
***

Taiwan Semiconductor Manufacturing Company Limited
22.3
%
 
***

 
*** The customer accounted for less than 10% of total net revenues during the period.
            

20


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements contained in this document that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding future periods, financial results, revenues, margins, growth, customers, tax rates, product performance, and the impact of accounting rules on our business and the future implications of our statements regarding goals, strategy, and similar terms. We may identify these statements by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “may,” “might,” “plan,” “project,” “will,” and other similar expressions. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements, except as may otherwise be required by law.
Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain risks, uncertainties and changes in circumstances, many of which may be difficult to predict or beyond our control, including those factors referenced in Part II, Item 1A, Risk Factors, and elsewhere in this document, and in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended December 27, 2014. In particular our results could vary significantly based on: changes in customer and industry spending; rate and extent of changes in product mix; adoption of new products; timing of orders, shipments, and acceptance of products; our ability to secure volume supply agreements; and general economic conditions. In evaluating our business, investors should carefully consider these factors in addition to any other risks and uncertainties set forth elsewhere. The occurrence of the events described in the risk factors and elsewhere in this report as well as other risks and uncertainties could materially and adversely affect our business, operating results and financial condition. While management believes that the discussion and analysis in this report is adequate for a fair presentation of the information presented, we recommend that you read this discussion and analysis in conjunction with (i) our audited consolidated financial statements and notes thereto for the fiscal year ended December 27, 2014, which were included in our 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 25, 2015, and (ii) our other filings with the SEC.
We are an innovator in the field of metrology and inspection systems for semiconductor manufacturing and other industries. Our systems are designed to precisely monitor optical critical dimensions and film thickness that are necessary to control the manufacturing process and to identify defects that can affect production yields and performance.
Principal factors that impact our revenue growth include capital expenditures by manufacturers of semiconductors to increase capacity and to enable their development of new technologies, and our ability to improve market share. The increasing complexity of the manufacturing processes for semiconductors is an important factor in the demand for our innovative metrology systems, as are the adoption of optical critical dimension (“OCD”) metrology across fabrication processes, immersion lithography and multiple patterning, new types of thin film materials, advanced packaging strategies and wafer backside inspection, and the need for improved process control to drive process efficiencies. Our strategy is to continue to innovate organically as well as to evaluate strategic acquisitions to address business challenges and opportunities.
Our revenues are primarily derived from product sales but are also derived from customer service and system upgrades for the installed base of our products. For the three months ended March 28, 2015, we derived 76% of our total net revenues from product sales and 24% of our total net revenues from services and upgrades.
Overview

Together with our subsidiaries, we are a leading provider of advanced, high-performance process control metrology and inspection systems used primarily in the fabrication of integrated circuits, high-brightness LEDs (“HB-LED”), discrete components and hard disk drive components. Our automated and integrated systems address numerous process control applications, including critical dimension and film thickness measurement, device topography, defect inspection, and analysis of various other film properties such as optical, electrical and material characteristics. Our process control solutions are deployed throughout the fabrication process, from front-end-of-line substrate manufacturing, to high-volume production of semiconductors and other devices, to advanced wafer-scale packaging applications. Our systems enable device manufacturers to improve yields, increase productivity and lower their manufacturing costs.


21

Nanometrics Products
We offer a diverse line of systems to address the broad range of process control requirements of the semiconductor manufacturing industry. In addition, we believe that our engineering expertise, strategic acquisitions, supplier alliances and short-cycle production strategies enable us to develop and offer advanced process control solutions that, in the future, should address industry advancement and trends.
Automated Systems
Our automated systems primarily consist of fully automated metrology systems that are employed in high-volume semiconductor production environments, as well as in research and development ("R&D") and pilot production. The Atlas® II, Atlas II+, Atlas XP/Atlas XP+ and Atlas-M represent our line of high-performance metrology systems providing optical critical dimension (“OCD”), thin film metrology and wafer stress for transistor and interconnect metrology applications. The OCD technology is supported by our NanoCD® suite of solutions including our NanoDiffract® software and NanoGenTM scalable computing engine that enables visualization, modeling, and analysis of complex structures. The UniFireTM system enables users to measure multiple parameters at any given process step in the advanced packaging process flow for critical dimension, overlay, and topography applications. Our SPARKTM defect inspection system, offers ultra-fast inspection of patterned and unpatterned semiconductor wafers.
Integrated Systems
Our integrated metrology (“IM”) systems are installed directly onto wafer processing equipment to provide near real-time measurements for improved process control and maximum throughput. Our IM systems are sold directly to end customers and through OEM channels. The IMPULSE® system is our latest metrology platform for OCD, and thin film metrology, and has been successfully qualified on numerous OEM platforms. Our 90x0 system is qualified for OEM and direct sales supporting thin film and OCD applications. Our NanoCD suite of solutions is sold in conjunction with our IMPULSE® and legacy 90x0 systems. Our Trajectory® system provides in-line measurement of layers in thin film thickness and composition in semiconductor applications.
System Platform
The Lynx® platform enables cluster metrology factory automation for improved cost of ownership to our customers by combining our Atlas® II+ and IMPULSE®, UniFire metrology and SPARK inspection systems in configurations to provide high throughput, reduced footprint systems for leading 300mm wafer metrology applications including OCD and thin film process control.
Materials Characterization
Our materials characterization products include systems that are used to monitor the physical, optical, electrical and material characteristics of discrete electronic industry, HB-LED, solar PV, compound semiconductor, strained silicon and silicon-on-insulator (“SOI”) devices, including composition, crystal structure, layer thickness, dopant concentration, contamination and electron mobility.
Our Imperia™ is a photoluminescence (“PL”) full wafer imaging and mapping system designed for high-volume compound semiconductor metrology applications including power control and photonics applications adding significant inspection and substrate metrology capability to the established PL fleet. The RPMBlue™ is our latest PL mapping system designed specifically for the HB-LED market, and is complemented by the RPMBlue-FS, enabling a breadth of research and development configurability. We sell Fourier-Transform Infrared (“FTIR”) automated and manual systems in the QS2200/3300 and QS1200 respectively. The FTIR systems are spectrometers designed for non-destructive wafer analysis for various applications. The NanoSpec® line, including the NanoSpec II, supports thin film measurement across all applications in both low volume production and research applications.
We are continually working to strengthen our competitive position by developing new technologies and products in our market segment. We have expanded our product offerings to address growing applications within the semiconductor manufacturing and adjacent industries. In continuance of our goals, we have:
•
Introduced new products, applications, and upgrades in every core product line and primary market served;

•
Diversified our product line and served markets through acquisitions, such as: the 2006 acquisition of Accent Optical Technologies, Inc., a supplier of overlay and thin film metrology and process control systems; the 2008 acquisition of Tevet Process Control Technologies (“Tevet”), an integrated metrology supplier; the 2009 acquisition of the UniFire™

22

product line from Zygo Corporation; and the 2011 acquisition of Nanda Technologies GmbH, a supplier of high sensitivity, high throughput defect inspection systems;

•
Continued development of new measurement and inspection technologies for advanced fabrication processes; and

•
Researched and developed innovative applications of existing technology to new market opportunities within the solar PV, HB-LED, discrete device, and data storage industries.
Important Themes and Significant Trends
The semiconductor equipment industry is characterized by cyclical growth. Changing trends in the semiconductor industry continue to drive the need for metrology as a major component of device manufacturing. These trends include:

•
Proliferation of Optical Critical Dimension Metrology across Fabrication Processes. Our customers use photolithographic processes to create patterns on wafers. Critical dimensions must be carefully controlled during this process. In advanced node device definition, additional monitoring of thickness and profile dimensions on these patterned structures at CMP, Etch, and Thin Film processing is driving broader OCD adoption. Our proprietary OCD systems can provide the critical process control of these circuit dimensions that is necessary for successful manufacturing of these state-of-the-art devices. Nanometrics OCD technology is broadly adopted across NAND, DRAM, and logic semiconductor manufacturing processes.
•
Development of 3D Transistor Architectures. Our end customers continue to improve device density and performance by scaling front-end-of-line transistor architectures. Many of these designs, including FinFET transistors and 3D-NAND, have buried features and high aspect ratio stacked features that enable improved performance and density. The advanced designs require additional process control to manage the complex shapes and materials properties, driving additional applications for both OCD and our UniFire systems.
•
Adoption of Advanced Packaging Processes. Our customers use photolithography, etching, metallization and wafer thinning to enable next generation advanced packaging solutions for semiconductor devices. These new packaging techniques lead to increased functionality in smaller, less expensive form factors.  Advanced packages can be broken down into high density flip chip or bump packages that increase pin density allowing for more complex I/O on advanced CPU parts. Similar or different devices can be stacked at the wafer level using a Through Silicon Via (“TSV”) process. The TSV process enables high density small form factor parts, being primarily driven by mobile consumer products (e.g. cellular telephones with integrated CMOS camera sensors). Increasingly advanced packaging technologies are being adopted by our end customers.
•
Adoption of New Types of Thin Film Materials. The need for ever increasing device circuit speed coupled with lower power consumption has pushed semiconductor device manufacturers to begin the replacement of traditional aluminum etch back interconnect flows, as well as conventional gate dielectric materials, with new materials and processes that are driving broader adoption of thin film and OCD metrology systems. To achieve greater semiconductor device speed, manufacturers have adopted copper in Logic/IDM and it is now proliferating in next generation DRAM and Flash nodes. Additionally, to achieve improved transistor performance in logic devices and higher cell densities in memory devices, new materials including high dielectric constant (or high-k) gate materials are increasingly being substituted for traditional silicon-oxide gate dielectric materials. High-k materials comprise complex thin films including layers of hafnium oxide and a bi-layer of thin film metals. Our advanced metrology and inspection solutions are required for control of process steps, which are critical to enable the device performance improvements that these new materials allow.
•
Need for Improved Process Control to Drive Process Efficiencies. Competitive forces influencing semiconductor device manufacturers, such as price-cutting and shorter product life cycles, place pressure on manufacturers to rapidly achieve production efficiency. Device manufacturers are using our integrated and automated systems throughout the fabrication process to ensure that manufacturing processes scale rapidly, are accurate and can be repeated on a consistent basis.
•
Increased Customer Concentration. Our market is characterized by continued consolidation in the customer base. Our largest customer accounted for 30% and 52% of our total net revenues in the three months ended March 28, 2015 and March 29, 2014, respectively.
Critical Accounting Policies
The preparation of our financial statements conforms to accounting principles generally accepted in the United States of America, which requires management to make estimates and judgments in applying our accounting policies that have an important impact on our reported amounts of assets, liabilities, revenue, expenses and related disclosures at the date of our financial statements. On an ongoing basis, management evaluates its estimates including those related to bad debts, inventory valuations, warranty obligations, impairment and income taxes. Management bases its estimates and judgments on historical

23

experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from management’s estimates. There were no significant changes in our critical accounting policies during the three months ended March 28, 2015. Please refer to Please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended December 27, 2014 for a complete discussion of our critical accounting policies.
Recent Accounting Pronouncements
See Note 2 of the Unaudited Condensed Consolidated Financial Statements for a description of recent accounting pronouncements, including the respective dates of adoption and effects or anticipated effects on our results of operations and financial condition.

Results of Operations
Net Revenues
Our net revenues comprised the following product lines (in thousands, except percentages):
 
 
Three Months Ended
 
 
 
 
 
March 28,
2015
 
March 29,
2014
 
Change
Automated systems
$
30,506

 
$
33,883

 
$
(3,377
)
 
(10.0
)%
Integrated systems
4,725

 
6,922

 
(2,197
)
 
(31.7
)%
Materials characterization systems
3,108

 
2,475

 
633

 
25.6
 %
Total product revenue
38,339

 
43,280

 
(4,941
)
 
(11.4
)%
Service
12,037

 
8,296

 
3,741

 
45.1
 %
Total net revenues
$
50,376

 
$
51,576

 
$
(1,200
)
 
(2.3
)%
For the three months ended March 28, 2015, total net revenues decreased by $1.2 million relative to the comparable 2014 period.
The decrease was due to an 11.4% decline in product revenue. Approximately $4.9 million of the decrease in product revenues was attributable to sales of our Automated Systems (principally UniFire™ ) which declined by $3.4 million. Integrated Systems accounted for $2.2 million of the decrease (principally IMPULSE®) and was partially offset by Materials Characterization sales which increased by $0.6 million. Service revenue increased by $3.7 million in the three months ended March 28, 2015 principally due to an increase in upgrade revenue as a result of higher demand for upgrades of installed tools during the first quarter of 2015. Upgrades tend to fluctuate from quarter to quarter based on availability of new functionality from upgrades and customer production cycles, which determine when customers purchase available upgrades.
With a significant portion of the world’s semiconductor manufacturing capacity located in Asia, a substantial portion of our revenues continue to be generated in that region. Although sales to customers within individual countries of that region will vary from time to time, we expect that a substantial portion of our revenues will continue to be generated in Asia.
    
Gross margin
Our gross margin breakdown was as follows:
 
 
Three Months Ended
 
March 28,
2015
 
March 29,
2014
Products
46.2
%
 
48.4
%
Service
47.1
%
 
38.4
%

The calculation of product gross margin includes both cost of products and amortization of intangibles. The gross margin on product revenue decreased to 46.2% in the three months ended March 28, 2015 from 48.4% in the three months ended March 29, 2014, reflecting a decrease of 2.2 percentage points from the comparable 2014 period. The decrease was due primarily to lower factory overhead absorption and a change in product mix to lower margin products during the three months

24

ended March 28, 2015. The gross margin on our services business increased to 47.1% in the three months ended March 28, 2015 from 38.4% in the three months ended March 29, 2014, reflecting an increase of 8.7 percentage points, due principally to an increase in upgrade revenues, which typically have higher margins than core service revenue.

Operating expenses. 
    
Our operating expenses comprised the following categories (in thousands, except percentages):
 
 
Three Months Ended
 
 
 
 
 
March 28,
2015
 
March 29,
2014
 
Change
Research and development
$
8,159

 
$
8,314

 
$
(155
)
 
(1.9
)%
Selling
7,116

 
7,373

 
(257
)
 
(3.5
)%
General and administrative
5,767

 
6,338

 
(571
)
 
(9.0
)%
Amortization of intangible assets
38

 
108

 
(70
)
 
(64.8
)%
Restructuring charge
58

 
—

 
58

 
NM*

Total operating expenses
$
21,138

 
$
22,133

 
$
(995
)
 
(4.5
)%
*
NM = not meaningful
Research and development.
Research and development costs decreased by $0.2 million or 1.9% in the three months ended March 28, 2015 compared to the three months ended March 29, 2014 related primarily to the decrease in headcount resulting from the shutdown of Nanda and UK operations partially offset by increased R&D headcount in the U.S, and reduced outside service costs. Together these expenses were partially offset by increased material expenses associated with R&D investments associated with our next generation Automated and Integrated systems.
Investments in research and development personnel and associated projects are part of our strategy to ensure our products remain competitive and meet customers’ needs.

Selling.

Selling expenses decreased by $0.3 million in the three months ended March 28, 2015 compared to the three months ended March 29, 2014 due to an increased utilization of sales application personnel for installation and warranty, which is included in cost of net revenues, partially offset by increased labor and benefits expenses due to headcount additions year over year.

General and administrative.

General and administrative expenses decreased by $0.6 million or 9.0% in the three months ended March 28, 2015 compared to the three months ended March 29, 2014. The decrease was primarily due to the decrease in consulting expenditures from the comparable 2014 period when our new ERP system had just been implemented.

Amortization of intangible assets.

Amortization of intangible assets included in operating expenses in the three months ended March 28, 2015 compared to the three months ended March 29, 2014 decreased as a result of the reduction in amortization due to intangible assets that became fully amortized in the prior year.

Restructuring charge.
    
We recorded a restructuring charge of $0.1 million in the three months ended March 28, 2015 related to our efforts to improve operating efficiencies. We completed the restructuring plan in March 2015. Other related costs are expected to be recognized as incurred.


25

Other income (expense), net. 

Our other income (expense), net, consisted of the following items (in thousands, except percentages):

 
Three Months Ended
 
 
 
 
 
 
March 28,
2015
 
March 29,
2014
 
Change
 
Interest income
$
10

 
$
14

 
$
(4
)
 
(28.6
)%
 
Interest expense
(82
)
 
(100
)
 
18

 
(18.0
)%
 
Other income (expense)
704

 
252

 
452

 
179.4
 %
 
Total other income (expense), net
$
632

 
$
166

 
$
466

 
280.7
 %
 

Interest income declined minimally in the three months ended March 28, 2015 relative to the comparable 2014 period as the average balances of cash, cash equivalents, and marketable securities remained relatively flat. Other income increased by $0.5 million principally due to fluctuations in foreign exchange rates, primarily the Euro, which were favorable relative to the U.S. dollar.
Provision for income taxes.
We recorded a tax provision of $0.3 million and $0.6 million in three months ended March 28, 2015 and March 29, 2014, respectively. The decrease in the tax provision for 2015 from 2014 was primarily related to no tax being provided on our U.S. income as we maintain a full valuation allowance against our U.S. deferred tax assets for the three months ended March 28, 2015.
Our provision for income taxes for 2015 of $0.3 million reflects an effective tax rate of 11.0%. This rate differs from the Federal statutory rate of 35.0% primarily due to all our foreign income being subject to tax at lower rates and valuation allowances against any expense (benefit) that would be recorded at the U.S. statutory rates.
As of March 28, 2015, we continue to maintain a valuation allowance against our U.S. and certain foreign deferred tax assets as a result of uncertainties regarding the realization of the asset due to cumulative losses and uncertainty of future taxable income. We will continue to assess the realizability of the deferred tax assets in each of the applicable jurisdictions and maintain the valuation allowances until sufficient positive evidence exists to support a reversal. In the event we determine that the deferred tax assets are realizable, an adjustment to the valuation allowance will be reflected in the tax provision for the period such determination is made.
We are subject to taxation in the U.S. and various states including California, and foreign jurisdictions including Korea, Japan, Taiwan, and China. Due to tax attribute carry-forwards, we are subject to examination for tax years 2003 forward for U.S. tax purposes. We are also subject to examination in various states for tax years 2002 forward. We are subject to examination for tax years 2007 forward for various foreign jurisdictions.
We accrue interest and penalties related to unrecognized tax benefits in our provision for income taxes. The total amount of penalties and interest were not material as of March 28, 2015 and March 29, 2014. During the next twelve months, we anticipate increases in its unrecognized tax benefits of approximately $0.1 million.

26

 
Liquidity and Capital Resources
The following tables present selected financial information and statistics as of March 28, 2015 and December 27, 2014 and for the three months ended March 28, 2015 and March 29, 2014 (in millions):
 
As of
 
March 28,
2015
 
December 27,
2014
Cash, cash equivalents and marketable securities
$
77.0

 
$
84.0

Working capital
$
125.5

 
$
119.6

 
Three Months Ended
 
March 28,
2015
 
March 29,
2014
Cash used in operating activities
$
(5.9
)
 
$
(4.7
)
Cash used in investing activities
$
(0.4
)
 
$
(3.6
)
Cash (used in) provided by financing activities
$
(0.4
)
 
$
2.4

We believe our existing balances of cash, cash equivalents and marketable securities will be sufficient to satisfy our working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with our existing operations over the next twelve months.
During the three months ended March 28, 2015, cash used in operating activities of $5.9 million was a result of $2.6 million of net income, non-cash adjustments to net income of $4.9 million and a net change in operating assets and liabilities of $13.3 million. Cash used in investing activities of $0.4 million during the three months ended March 28, 2015 consisted primarily of cash used to acquire property, plant and equipment of $0.5 million, partially offset by cash provided by maturities of marketable securities, net of purchases, of $0.1 million. Cash used in financing activities of $0.4 million during the three months ended March 28, 2015 consisted primarily of cash used to repurchase common stock of $1.7 million, royalty and other payments to Zygo of $0.2 million, and cash paid for taxes on net issuance of stock awards of $0.8 million, partially offset by $2.4 million in proceeds from the issuance of common stock from the employee stock purchase program and the exercise of stock options.
During the three months ended March 29, 2014, cash used in operating activities of $4.7 million was a result of $1.6 million of net income, non-cash adjustments to net income of $5.2 million and a net change in operating assets and liabilities of $11.5 million. Cash used in investing activities of $3.6 million during the three months ended March 29, 2014 consisted primarily of cash used for purchases of marketable securities, net of maturities, of $1.4 million, and cash used to acquire property, plant and equipment of $2.2 million. Cash provided by financing activities of $2.4 million during the three months ended March 29, 2014 consisted primarily of $3.1 million in proceeds from the issuance of common stock from the employee stock purchase program and the exercise of stock options, partially offset by cash paid for taxes on net issuance of stock awards of $0.7 million, and other payments to Zygo of $0.1 million.
Debt and Repurchases of Common Stock
Line of Credit - On May 30, 2014, we amended our revolving line of credit facility with Comerica Bank principally (i) to extend the maturity date of such facility by two years to May 30, 2016, and (ii) to increase the minimum amount available to borrow to $12.0 million.
The instrument governing the line of credit facility includes certain financial covenants regarding tangible net worth. The revolving line of credit agreement includes a provision for the issuance of commercial or standby letters of credit by the bank on our behalf. The value of all letters of credit outstanding reduces the total line of credit available. The revolving line of credit is collateralized by a blanket lien on all of our domestic assets excluding intellectual property and real estate. The minimum borrowing interest rate is 3.00% per annum. Borrowing is limited to the lesser of (a) $12.0 million plus the borrowing base, or (b) $20.0 million. The total borrowing available as of March 28, 2015 was $16.0 million. As of March 28, 2015, we were not in breach of any restrictive covenants in connection with this line of credit. There were no borrowings against the line of credit during the three months ended March 28, 2015 and March 29, 2014 and there were no outstanding

27

amounts drawn on this facility as of March 28, 2015. Although we have no current plans to request advances under this credit facility, we may use the proceeds of any future borrowing for general corporate purposes, future acquisitions or expansion of our business.
Repurchases of Common Stock - On May 29, 2012, our Board of Directors approved a program to repurchase up to $20.0 million of our common stock, referred to as the 2012 program.
Stock repurchases under this program may be made through open market and privately negotiated transactions, at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased is dependent on a variety of factors including price, corporate and regulatory requirements and other market conditions.
Shares repurchased and retired for the indicated periods of the applicable repurchase programs with the associated cost of repurchase and amount available for repurchase at the end of the respective periods are as follows (in thousands, except number of shares and weighted average price per share):
 
Three Months Ended
 
March 28,
2015
Number of shares of common stock repurchased
111,050

Weighted average price per share
$
15.49

Total cost of repurchase
$
1,721

Amount available for repurchase at end of period
$
4,397

During the three months ended March 28, 2015 we repurchased 111,050 shares at an average purchase price of $15.49 per share for a total of $1.7 million. After these purchases, $4.4 million remained available for the future repurchase of our common stock under the 2012 program.

Business Partnership - On June 17, 2009, we announced a strategic business partnership with Zygo Corporation whereby we have purchased inventory and certain other assets from Zygo Corporation, and the two companies entered into a supply agreement. We will make payments to Zygo Corporation (with an estimated present value of $2.2 million as of March 28, 2015 and $2.4 million as of December 27, 2014) over a period of time as acquired inventory is sold and other aspects of the supply agreement are executed. We made royalty and sustaining engineering payments of $0.2 million and $0.1 million to Zygo in three months ended March 28, 2015 and March 29, 2014, respectively.
We have evaluated and will continue to evaluate the acquisitions of products, technologies or businesses that are complementary to our business. These activities may result in product and business investments, which may affect our cash position and working capital balances. Some of these activities might require significant cash outlays.
Our principal sources of liquidity are cash and cash equivalents, and marketable securities, cash flow generated from our operations, and, to a lesser extent, borrowings from a line of credit. Our liquidity is affected by many factors, including those that relate to our specific operations and those that relate to the uncertainties of global and regional economies and the sectors of the semiconductor industry which we operate in. Although our cash requirements will fluctuate based on the timing and extent of these factors, we believe our existing cash, cash equivalents and marketable securities and borrowing availability, combined with cash currently projected to be generated from our operations, will be sufficient to meet our liquidity needs through at least the next twelve months.
Off-Balance Sheet Arrangements
As of March 28, 2015, we had no off-balance sheet arrangements or obligations.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk does not differ materially from that discussed in our Annual Report on Form 10-K for the fiscal year ended December 27, 2014, filed with the SEC on February 25, 2015. However, we cannot give any assurance as to the effect that future changes in interest rates or foreign currency rates will have on our consolidated financial position, results of operations or cash flows.


28


ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer, Timothy J. Stultz, and our Chief Financial Officer, Jeffrey Andreson, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 28, 2015, our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 were (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (ii) accumulated and reported to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely discussions regarding required disclosures.
Changes in Internal Control over Financial Reporting
During the quarter ended March 28, 2015, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, has designed our disclosure controls and procedures and our internal control over financial reporting to provide reasonable assurances that the controls’ objectives will be met. However, management does not expect that disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within Nanometrics have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any system’s design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of a system’s control effectiveness into future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.




29


PART II — OTHER INFORMATION

ITEM 1A.
RISK FACTORS

Investing in our securities involves a high degree of risk. In assessing these risks, you should carefully consider the information included in or incorporated by reference into this report, including our financial statements and the related notes thereto. You should carefully review and consider all of the risk factors set forth in Part l, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 27, 2014, filed with the SEC on February 25, 2015. The risks described in our Annual Report on Form 10-K are not the only ones we face. Additional risks and uncertainties that are not presently known to us or that we currently believe are immaterial may also impair our business operations. Our business, operating results and financial conditions could be materially harmed by any of these risks. The trading price of our common stock could decline due to any of these risks and investors may lose all or part of their investment. There have been no material changes in our risk factors from those discussed in our Annual Report on Form 10-K for the fiscal year ended December 27, 2014.

ITEM 2.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Recent Sales of Unregistered Securities
None.

Issuer Purchases of Equity Securities

Pursuant to repurchase programs approved by the Board of Directors and described below, we repurchased shares of our common stock in the three months ended March 28, 2015 as follows (in thousands, except shares and per share data):

Plan
 
Period(a)
 
Number of
shares
repurchased
 
Average price
paid per share
 
Total shares
repurchased
under the plan
 
Amount
remaining for
repurchase
May 2012
 
Dec. 28, 2014 - Jan. 24, 2015
 
96,807

 
$
15.49

 
96,807

 
$
4,618

May 2012
 
Jan. 25, 2014 - Feb. 21, 2015
 
14,243

 
$
15.50

 
14,243

 
$
4,397

May 2012
 
Feb. 22, 2015 - Mar. 28, 2015
 
—

 
$
—

 
—

 
$
4,397


On May 29, 2012, our Board of Directors approved a program to repurchase up to $20.0 million of our common stock, referred to as the 2012 program. Stock repurchases under this program may be made through open market and privately negotiated transactions, at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased is dependent on a variety of factors including price, corporate and regulatory requirements and other market conditions. During three months ended March 28, 2015, we repurchased and retired 111,050 shares of our common stock under this approved plan at the weighted average price of $15.49 per share.

ITEM 6.
EXHIBITS

The following exhibits are filed, furnished or incorporated by reference with this Quarterly Report on Form 10-Q:




30


Exhibit No.
  
Description
3.(i)
  
Certificate of Incorporation
 
 
 
3.1(1)
  
Certificate of Incorporation of the Registrant
 
 
 
3.(ii)
  
Bylaws
 
 
 
3.2(2)
  
Bylaws of the Registrant
 
 
 
 
 
 
10
  
Material Contracts
 
 
 
10.1(5)
  
Compensation Arrangements with Principal Executive Officer and Principal Financial Officer
 
 
 
10.2(6)
 
Form of Performance-Based Restricted Stock Unit Agreement
 
 
 
31
  
Rule 13a-14(a)/15d-14(a) Certifications
 
 
 
31.1(3)
  
Certification of Timothy J. Stultz, principal executive officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2(3)
  
Certification of Jeffrey Andreson, principal financial officer and principal accounting officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32
  
Section 1350 Certifications
 
 
 
32.1(3)
  
Certification of Timothy J. Stultz, principal executive officer of the Registrant, and Jeffrey Andreson, principal financial officer and principal accounting officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101(4)
 
The following financial statements, formatted in XBRL: (i) Condensed Consolidated Balance Sheets at March 28, 2015, and December 27, 2014, (ii) Condensed Consolidated Statements of Operations for the three months ended March 28, 2015 and March 29, 2014, (iii) Condensed Consolidated Statements of Cash Flows for the three months March 28, 2015 and March 29, 2014, and (v) Notes to Unaudited Condensed Consolidated Financial Statements, tagged as blocks of text. The information is Exhibit 101 is “furnished” and not “filed”, as provided in Rule 402 of Regulation S-T.
101.INS**
 
XBRL Instance Document
 
 
 
101.SCH**
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL**
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF**
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB**
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE**
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 

(1)
Incorporated by reference to Exhibit 3.1 filed with the Registrant’s Current Report on Form 8-K (File
No. 000-13470) filed on October 5, 2006.
(2)
Incorporated by reference to Exhibit 3.1 filed with the Registrant’s Current Report on Form 8-K (File
No. 000-13470) filed on April 12, 2012.
(3)
Filed herewith.
(4)
Furnished herewith.
(5)
Incorporated by reference to Item 5.02 in the Registrant’s Current Report on Form 8-K (File No. 000-13470) filed on March 2, 2015.
(6)
Incorporated by reference to Exhibit 99.1 filed with the Registrant’s Current Report on Form 8-K (File No. 000-13470) filed on March 24, 2015.


31

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
NANOMETRICS INCORPORATED
 
(Registrant)
 
 
 
 
By:
/S/    JEFFREY ANDRESON      
 
 
Jeffrey Andreson
 
 
Chief Financial Officer
 
 
(Duly Authorized and Principal Financial Officer)
 
 
 
Dated: April 29, 2015
 




32


EXHIBIT INDEX

Exhibit No.
  
Description
3.(i)
  
Certificate of Incorporation
 
 
 
3.1(1)
  
Certificate of Incorporation of the Registrant
 
 
 
3.(ii)
  
Bylaws
 
 
 
3.2(2)
  
Bylaws of the Registrant
 
 
 
 
 
 
10
  
Material Contracts
 
 
 
10.1(5)
  
Compensation Arrangements with Principal Executive Officer and Principal Financial Officer
 
 
 
10.2(6)
 
Form of Performance-Based Restricted Stock Unit Agreement
 
 
 
31
  
Rule 13a-14(a)/15d-14(a) Certifications
 
 
 
31.1(3)
  
Certification of Timothy J. Stultz, principal executive officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2(3)
  
Certification of Jeffrey Andreson, principal financial officer and principal accounting officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32
  
Section 1350 Certifications
 
 
 
32.1(3)
  
Certification of Timothy J. Stultz, principal executive officer of the Registrant, and Jeffrey Andreson, principal financial officer and principal accounting officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101(4)
 
The following financial statements, formatted in XBRL: (i) Condensed Consolidated Balance Sheets at March 28, 2015, and December 27, 2014, (ii) Condensed Consolidated Statements of Operations for the three months ended March 28, 2015 and March 29, 2014, (iii) Condensed Consolidated Statements of Cash Flows for the three months March 28, 2015 and March 29, 2014, and (v) Notes to Unaudited Condensed Consolidated Financial Statements, tagged as blocks of text. The information is Exhibit 101 is “furnished” and not “filed”, as provided in Rule 402 of Regulation S-T.
101.INS**
 
XBRL Instance Document
 
 
 
101.SCH**
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL**
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF**
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB**
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE**
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 

(1)
Incorporated by reference to Exhibit 3.1 filed with the Registrant’s Current Report on Form 8-K (File
No. 000-13470) filed on October 5, 2006.
(2)
Incorporated by reference to Exhibit 3.1 filed with the Registrant’s Current Report on Form 8-K (File
No. 000-13470) filed on April 12, 2012.
(3)
Filed herewith.
(4)
Furnished herewith.
(5)
Incorporated by reference to Item 5.02 in the Registrant’s Current Report on Form 8-K (File No. 000-13470) filed on March 2, 2015.
(6)
Incorporated by reference to Exhibit 99.1 filed with the Registrant’s Current Report on Form 8-K (File No. 000-13470) filed on March 24, 2015.

33

ONTO INNOVATION INC. Reports

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