NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
NOTE 1. Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements have been prepared by Rudolph Technologies, Inc. (the “Company” or “Rudolph”) and in the opinion of management reflect all adjustments, consisting of normal recurring accruals, necessary for their fair presentation in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual amounts could differ materially from reported amounts. The interim results for the
three month period
ended
March 31, 2016
are not necessarily indicative of results to be expected for the entire year or any future periods. This interim financial information should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
(“2015 10-K”) filed with the Securities and Exchange Commission (“SEC”). The accompanying condensed consolidated balance sheet at
December 31, 2015
has been derived from the audited consolidated financial statements included in the 2015 10-K.
Reclassifications
Certain immaterial prior period amounts have been reclassified to conform to the current financial statement presentation.
Debt Issuance Costs:
In the first quarter of 2016, the Company adopted Accounting Standards Update (ASU) No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs,” which requires entities to present debt issuance costs related to a debt liability as a direct deduction from the carrying amount of that debt liability on the balance sheet as opposed to being presented as a deferred charge. For all periods presented in this Form 10-Q for the quarter ended
March 31, 2016
, unamortized debt issuance costs related to the Company’s convertible senior notes are reported on the Consolidated Balance Sheets as a reduction of the carrying value of the related debt. Prior to adoption, the Company reported the unamortized debt issuance costs in “Other Assets” on the Consolidated Balance Sheets. As of
December 31, 2015
, the change in presentation resulted in a reduction of “Other Assets” of
$261
and a corresponding decrease in “Convertible Senior Notes” with no impact on the Company’s Consolidated Statements of Operations.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting”. The standard was issued as part of the Simplification Initiative which involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The standard is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The Company is in the process of determining the adoption methods as well as the effects the adoption of ASU No. 2016-09 will have on its consolidated financial position, results of operations, and cash flows.
In March 2016, the FASB issued ASU No. 2016-07, Investments-Equity Method and Joint Ventures (Topic 323). The standard was issued as part of the Simplification Initiative which eliminates the requirement that when an investment qualifies for use of the equity method as of a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method has been in effect during all previous periods that the investment had been held. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company is in the process of evaluating the effects the adoption of ASU No. 2016-07 will have on its consolidated financial position, results of operations, and cash flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard requires that lessees will be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASU No. 2016-02 also will require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information. The standard will take effect for fiscal years and interim periods within those fiscal years beginning after December 15, 2018 with
earlier adoption permitted. The Company is in the process of evaluating the effects the adoption of ASU No. 2016-02 will have on its consolidated financial position, results of operations, and cash flows.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” The pronouncement requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. These changes become effective for the Company’s fiscal year beginning January 1, 2018. The Company is in the process of evaluating the effects the adoption of ASU No. 2016-01 will have on its consolidated financial position, results of operations, and cash flows.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330), Simplifying the Measurement of Inventory.” This ASU is intended to simplify subsequent measurement of inventory. An entity should measure inventory within the scope of this ASU at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation. The standard is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. The adoption of ASU 2015-11 is not expected to have a material effect on the Company’s consolidated financial position, results of operations, and cash flows.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU No. 2014-09 outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. In July 2015, the FASB deferred for one year the effective date of the new revenue standard, but early adoption will be permitted. The new standard will be effective for the Company on January 1, 2018. ASU No. 2014-09 allows for two methods of adoption: (a) “full retrospective” adoption, meaning the standard is applied to all periods presented, or (b) “modified retrospective” adoption, meaning the cumulative effect of applying ASU No. 2014-09 is recognized as an adjustment to the 2018 opening retained earnings balance. The Company is in the process of determining the adoption method as well as the effects the adoption of ASU No. 2014-09 will have on its consolidated financial position, results of operations, and cash flows.
NOTE 2. Fair Value Measurements
The Company applies a three-level valuation hierarchy for fair value measurements. This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability. Level 3 inputs are unobservable inputs based on management’s assumptions used to measure assets and liabilities at fair value. A financial asset’s or liability’s fair value measurement classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The following tables provide the assets and liabilities carried at fair value measured on a recurring basis at
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
Carrying
Value
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
March 31, 2016
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
Municipal notes and bonds
|
|
$
|
109,217
|
|
|
$
|
—
|
|
|
$
|
109,217
|
|
|
$
|
—
|
|
Corporate bonds
|
|
838
|
|
|
—
|
|
|
838
|
|
|
—
|
|
Total Assets
|
|
$
|
110,055
|
|
|
$
|
—
|
|
|
$
|
110,055
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
289
|
|
|
$
|
—
|
|
|
$
|
289
|
|
|
$
|
—
|
|
Contingent consideration - acquisitions
|
|
3,820
|
|
|
—
|
|
|
—
|
|
|
3,820
|
|
Total Liabilities
|
|
$
|
4,109
|
|
|
$
|
—
|
|
|
$
|
289
|
|
|
$
|
3,820
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
Municipal notes and bonds
|
|
$
|
116,089
|
|
|
$
|
—
|
|
|
$
|
116,089
|
|
|
$
|
—
|
|
Corporate bonds
|
|
835
|
|
|
—
|
|
|
835
|
|
|
—
|
|
Total Assets
|
|
$
|
116,924
|
|
|
$
|
—
|
|
|
$
|
116,924
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
85
|
|
|
$
|
—
|
|
|
$
|
85
|
|
|
$
|
—
|
|
Contingent consideration - acquisitions
|
|
3,703
|
|
|
—
|
|
|
—
|
|
|
3,703
|
|
Total Liabilities
|
|
$
|
3,788
|
|
|
$
|
—
|
|
|
$
|
85
|
|
|
$
|
3,703
|
|
The Company’s investments classified as Level 2 are valued using observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. The foreign currency forward contracts are primarily measured based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers. Available-for-sale debt securities prices are obtained from third party pricing providers, which models prices utilizing the above observable inputs, for each asset class.
Level 3 liabilities consisted of contingent consideration related to an acquisition for which the Company uses a discounted cash flow model to value these liabilities. The Level 3 assumptions used in the discounted cash flow model for the contingent consideration included projected revenues, estimates of discount rates of
9.1%
and timing of cash flows. A significant decrease in the projected revenues or increase in discount rates could result in a significantly lower fair value measurement for the contingent consideration.
This table presents a reconciliation for all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the
three months ended
March 31, 2016
:
|
|
|
|
|
|
|
|
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
|
|
|
|
Balance at December 31, 2015
|
|
$
|
3,703
|
|
Additions
|
|
—
|
|
Total loss included in selling, general and administrative expense
|
|
117
|
|
Payments
|
|
—
|
|
Transfers into (out of) Level 3
|
|
—
|
|
Balance at March 31, 2016
|
|
$
|
3,820
|
|
See Note 3 for additional discussion regarding the fair value of the Company’s marketable securities.
Fair Value of Other Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates fair value because of the short-term maturity of these instruments. The estimated fair value of these obligations is based, primarily, on a market approach, comparing the Company’s interest rates to those rates the Company believes it would reasonably receive upon re-entry into the market. Judgment is required to estimate the fair value, using available market information and appropriate valuation methods.
The Company’s convertible senior notes are not publicly traded. The estimated fair value of the Company’s convertible senior notes was valued using a discounted cash flow model. The Level 3 assumptions, based on data available at the valuation date used in preparing the discounted cash flow model, included estimates of interest rates, timing and amount of cash flows and expected holding periods of the convertible senior notes. The fair value of the contingent interest associated with the convertible senior notes is valued quarterly using the present value under an expected cash flow model incorporating the probabilities of the contingent events occurring.
The following table reflects information pertaining to the Company’s convertible senior notes:
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Net carrying value of convertible senior notes
|
$
|
58,863
|
|
|
$
|
57,846
|
|
Estimated fair value of convertible senior notes
|
$
|
60,240
|
|
|
$
|
60,630
|
|
Estimated interest rate used in discounted cash flow model
|
5.0
|
%
|
|
5.0
|
%
|
Fair value of contingent interest
|
$
|
—
|
|
|
$
|
—
|
|
NOTE 3. Marketable Securities
The Company has evaluated its investment policies and determined that all of its investment securities are to be classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in Stockholders’ Equity under the caption “Accumulated other comprehensive loss.” Realized gains and losses on available-for-sale securities are included in “Other expense” in the Condensed Consolidated Statements of Operations. The Company records other-than-temporary impairment charges for its available-for-sale investments when it intends to sell the securities, it is more-likely-than not that it will be required to sell the securities before a recovery, or when it does not expect to recover the entire amortized cost basis of the securities. The cost of securities sold is based on the specific identification method.
The Company has determined that the gross unrealized losses on its marketable securities at
March 31, 2016
and
December 31, 2015
are temporary in nature. The Company reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, credit quality and the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
At
March 31, 2016
and
December 31, 2015
, marketable securities are categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Gross Unrealized Holding Gains
|
|
Gross Unrealized Holding Losses
|
|
Fair Value
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
Municipal notes and bonds
|
|
$
|
109,223
|
|
|
$
|
14
|
|
|
$
|
20
|
|
|
$
|
109,217
|
|
Corporate bonds
|
|
$
|
838
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
838
|
|
Total marketable securities
|
|
$
|
110,061
|
|
|
$
|
14
|
|
|
$
|
20
|
|
|
$
|
110,055
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Municipal notes and bonds
|
|
$
|
116,086
|
|
|
$
|
18
|
|
|
$
|
15
|
|
|
$
|
116,089
|
|
Corporate bonds
|
|
$
|
838
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
835
|
|
Total marketable securities
|
|
$
|
116,924
|
|
|
$
|
18
|
|
|
$
|
18
|
|
|
$
|
116,924
|
|
The amortized cost and estimated fair value of marketable securities classified by the maturity date listed on the security, regardless of the Condensed Consolidated Balance Sheet classification, is as follows at
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
Amortized Cost
|
|
Fair Value
|
|
Amortized Cost
|
|
Fair Value
|
Due within one year
|
|
$
|
99,920
|
|
|
$
|
99,914
|
|
|
$
|
113,542
|
|
|
$
|
113,549
|
|
Due after one through five years
|
|
10,141
|
|
|
10,141
|
|
|
3,382
|
|
|
3,375
|
|
Due after five through ten years
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Due after ten years
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total marketable securities
|
|
$
|
110,061
|
|
|
$
|
110,055
|
|
|
$
|
116,924
|
|
|
$
|
116,924
|
|
The following table summarizes the estimated fair value and gross unrealized holding losses of marketable securities, aggregated by investment instrument and period of time in an unrealized loss position at
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss Position For Less Than 12 Months
|
|
Unrealized Loss Position For Greater Than 12 Months
|
|
|
Fair Value
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Gross Unrealized Losses
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal notes and bonds
|
|
$
|
57,835
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
|
$
|
57,835
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
—
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal notes and bonds
|
|
$
|
52,638
|
|
|
$
|
15
|
|
|
$
|
305
|
|
|
$
|
1
|
|
Corporate bonds
|
|
835
|
|
|
3
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
53,473
|
|
|
$
|
18
|
|
|
$
|
305
|
|
|
$
|
1
|
|
See Note 2 for additional discussion regarding the fair value of the Company’s marketable securities.
NOTE 4. Derivative Instruments and Hedging Activities
The Company, when it considers it to be appropriate, enters into forward contracts to hedge the economic exposures arising from foreign currency denominated transactions. At
March 31, 2016
and
December 31, 2015
, these contracts included the future sale of Japanese Yen to purchase U.S. dollars. Derivative instruments are recognized as either prepaid expenses and other current assets or other current liabilities in the Condensed Consolidated Balance Sheets and are measured at fair value. The foreign currency forward contracts were entered into by the Company’s Japanese subsidiary to economically hedge a portion of certain intercompany obligations. The forward contracts are not designated as hedges for accounting purposes and decreases in the fair value of
$204
and
$78
for the three month periods ended
March 31, 2016
and 2015, respectively, are recorded within the caption “Other expense” in the Condensed Consolidated Statements of Operations.
The dollar equivalent of the U.S. dollar forward contracts and related fair values as of
March 31, 2016
and
December 31, 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
Notional amount
|
$
|
4,525
|
|
|
$
|
5,423
|
|
Fair value of liability
|
$
|
289
|
|
|
$
|
85
|
|
NOTE 5. Purchased Intangible Assets
Purchased intangible assets as of
March 31, 2016
and
December 31, 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
Finite-lived intangibles:
|
|
|
|
|
|
|
Developed technology
|
|
$
|
65,527
|
|
|
$
|
55,592
|
|
|
$
|
9,935
|
|
Customer and distributor relationships
|
|
9,560
|
|
|
8,258
|
|
|
1,302
|
|
Trade names
|
|
4,361
|
|
|
3,600
|
|
|
761
|
|
Total identifiable intangible assets
|
|
$
|
79,448
|
|
|
$
|
67,450
|
|
|
$
|
11,998
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Finite-lived intangibles:
|
|
|
|
|
|
|
Developed technology
|
|
$
|
65,527
|
|
|
$
|
55,110
|
|
|
$
|
10,417
|
|
Customer and distributor relationships
|
|
9,560
|
|
|
8,170
|
|
|
1,390
|
|
Trade names
|
|
4,361
|
|
|
3,575
|
|
|
786
|
|
Total identifiable intangible assets
|
|
$
|
79,448
|
|
|
$
|
66,855
|
|
|
$
|
12,593
|
|
Intangible asset amortization expense for the
three months ended
March 31, 2016
and
2015
was
$595
and
$515
, respectively. Assuming no change in the gross carrying value of identifiable intangible assets and estimated lives, estimated amortization expense for the remainder of
2016
will be
$1,726
, and for each of the next five years estimated amortization expense amounts to
$1,933
for
2017
,
$1,496
for
2018
,
$1,496
for
2019
,
$1,294
for
2020
, and
$546
for
2021
.
NOTE 6. Balance Sheet Details
Inventories
Inventories are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
Materials
|
|
$
|
39,345
|
|
|
$
|
39,022
|
|
Work-in-process
|
|
23,161
|
|
|
18,918
|
|
Finished goods
|
|
11,637
|
|
|
13,550
|
|
Total inventories
|
|
$
|
74,143
|
|
|
$
|
71,490
|
|
The Company has established reserves of
$9,515
and
$8,896
as of
March 31, 2016
and
December 31, 2015
, respectively, for slow moving and obsolete inventory, which are included in the amounts above.
Prepaid expenses and other current assets
Prepaid expenses and other current assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
Patent litigation judgment
|
|
$
|
14,632
|
|
|
$
|
—
|
|
Other
|
|
6,887
|
|
|
8,137
|
|
Total prepaid expenses and other current assets
|
|
$
|
21,519
|
|
|
$
|
8,137
|
|
Property, Plant and Equipment
Property, plant and equipment, net is comprised of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
Land and building
|
$
|
2,584
|
|
|
$
|
5,024
|
|
Machinery and equipment
|
23,952
|
|
|
21,683
|
|
Furniture and fixtures
|
2,671
|
|
|
3,414
|
|
Computer equipment
|
5,595
|
|
|
5,304
|
|
Leasehold improvements
|
8,089
|
|
|
7,884
|
|
|
42,891
|
|
|
43,309
|
|
Less: Accumulated depreciation
|
28,941
|
|
|
30,963
|
|
Total property, plant and equipment, net
|
$
|
13,950
|
|
|
$
|
12,346
|
|
In February 2016, the Company consolidated its New Jersey locations into its Budd Lake, NJ facility and vacated its corporate offices in Flanders, NJ. The Flanders, NJ corporate office location is classified as an asset held for sale. The Company believes the facility will be sold within the next 12 months and has classified the facility as current assets held for sale in “Prepaid and other assets”. Assets held for sale as of March 31, 2016 consist of land with a cost of
$168
and buildings with a cost and net book value of
$939
and
$51
, respectively.
Other assets
Other assets is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
Deferred income taxes
|
|
$
|
35,047
|
|
|
$
|
34,973
|
|
Other
|
|
569
|
|
|
559
|
|
Total other assets
|
|
$
|
35,616
|
|
|
$
|
35,532
|
|
Other current liabilities
Other current liabilities is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
Litigation accrual
|
|
$
|
3,252
|
|
|
$
|
3,252
|
|
Contingent consideration - acquisitions
|
|
717
|
|
|
1,407
|
|
Other
|
|
6,658
|
|
|
7,756
|
|
Total other current liabilities
|
|
$
|
10,627
|
|
|
$
|
12,415
|
|
Other non-current liabilities
Other non-current liabilities is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
Unrecognized tax benefits (including interest)
|
|
$
|
2,963
|
|
|
$
|
3,152
|
|
Contingent consideration - acquisitions
|
|
3,103
|
|
|
2,296
|
|
Deferred revenue
|
|
1,128
|
|
|
1,206
|
|
Other
|
|
3,075
|
|
|
2,900
|
|
Total other non-current liabilities
|
|
$
|
10,269
|
|
|
$
|
9,554
|
|
NOTE 7. Debt Obligations
On
July 25, 2011
, the Company issued
$60,000
aggregate principal amount of
3.75%
Convertible Senior Notes due
2016
(the “Notes”) at par. The Notes were issued pursuant to an indenture, dated as of
July 25, 2011
, between the Company and Bank
of New York Mellon Trust Company, N.A., as Trustee, which includes a form of Note. The Notes provide for the payment of interest semi-annually in arrears on
January 15
and
July 15
of each year, beginning
January 15, 2012
, at an annual rate of
3.75%
and will mature on
July 15, 2016
, unless earlier converted or repurchased. The Notes may be converted, under certain circumstances, based on an initial conversion rate of
77.241
shares of Company common stock per
$1
principal amount of Notes, which represents an initial conversion price of approximately
$12.95
per share. Concurrently with the issuance of the Notes, the Company purchased a convertible note hedge and sold a warrant. Each of the convertible note hedge and warrant transactions were entered into with an affiliate of the initial purchaser of the Notes. The convertible note hedge is intended to reduce the potential future dilution to the Company’s common stock associated with the conversion of the Notes. However, the warrant transaction will have a dilutive effect on the Company’s earnings per share to the extent that the price of the Company’s common stock exceeds the strike price of the warrant. The strike price of the warrant is
$17.00
per share subject to adjustment in accordance with the terms of the agreement. The net proceeds to the Company from the sale of the Notes, including the convertible note hedge and warrant, were
$50,249
.
The following table reflects the net carrying value of the Notes:
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
Convertible senior notes
|
$
|
60,000
|
|
|
$
|
60,000
|
|
Less: Unamortized interest discount
|
999
|
|
|
1,893
|
|
Less: Unamortized debt issuance costs
|
138
|
|
|
261
|
|
Net carrying value of convertible senior notes
|
$
|
58,863
|
|
|
$
|
57,846
|
|
The following table presents the amount of interest cost recognized relating to the Notes during the
three months ended
March 31, 2016
and
March 31, 2015
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Contractual interest coupon
|
$
|
562
|
|
|
$
|
562
|
|
Amortization of interest discount
|
894
|
|
|
811
|
|
Amortization of debt issuance costs
|
123
|
|
|
103
|
|
Total interest cost recognized
|
$
|
1,579
|
|
|
$
|
1,476
|
|
The remaining bond discount of
$999
and debt issuance costs of
$138
relating to the Notes, as of
March 31, 2016
, will be amortized over the remaining life of the Notes.
NOTE 8. Commitments and Contingencies
Warranty Reserves
The Company generally provides a warranty on its products for a period of twelve to fifteen months against defects in material and workmanship. The Company estimates the costs that may be incurred during the warranty period and records a liability in the amount of such costs at the time revenue is recognized. The Company’s estimate is based primarily on historical experience. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Settlements of warranty reserves are generally associated with sales that occurred during the 12 to 15 months prior to the quarter-end and warranty accruals are related to sales during the year.
Changes in the Company’s warranty reserves are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
Balance, beginning of the period
|
|
$
|
1,894
|
|
|
$
|
1,574
|
|
Accruals
|
|
544
|
|
|
822
|
|
Less: Usage
|
|
665
|
|
|
696
|
|
Balance, end of the period
|
|
$
|
1,773
|
|
|
$
|
1,700
|
|
Warranty reserves are reported in the Condensed Consolidated Balance Sheets within the caption “Accounts payable and accrued liabilities.”
Legal Matters
From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business. The Company’s 2015 10-K reflects the status of the Company’s litigation with Integrated Technology Corporation (“ITC”) and Camtek, Ltd. (“Camtek”). The following reflects the material developments during the three months ended March 31, 2016 with regard to these matters.
Integrated Technology Corporation v. Rudolph Technologies, Inc., No. CV-06-2182 (PHX-ROS)
: This matter is fully resolved with the sole exception of the issue of remanded attorney’s fees which were set by the U.S. District Court for the District of Arizona (the “AZ District Court”) at
$3,252
. A hearing regarding the Company’s appeal of this order was held on October 6, 2015 and the U.S. Federal Court of Appeals (the “Court of Appeals”). The Court of Appeals issued a ruling that the award was improperly established, vacated the amount of the award and remanded the matter back to the AZ District Court for a determination of a proper fee award. The Company believes that it has meritorious defenses regarding this issue and intends to continue to vigorously prosecute the matter. The
$3,252
is held in escrow and is recorded in “Prepaid expenses and other current assets” in the Consolidated Balance Sheet at
March 31, 2016
. The corresponding liability is recorded under the caption “Other current liabilities” in the Condensed Consolidated Balance Sheet at
March 31, 2016
. The Company expects this to be the maximum liability reasonably possible for the attorney’s fees, excluding interest, for this lawsuit with respect to both the pre-August 2007 and the post-August 2007 tools which were the subject of this action.
August Technology Corporation and Rudolph Technologies, Inc. v. Camtek, Ltd., No. 05-CV-01396 (JRT/FLN)
: Subsequent to the ruling by the U.S. District Court for the District of Minnesota (the “MN District Court”) in the Company’s favor that Camtek’s Falcon tools continue to infringe the Company’s patent under the revised claim construction of the patent determined by the Court of Appeals, the MN District Court, on February 9, 2015, issued an Order granting the Company’s Motion for Final Judgment, reinstating the original damages and applying prejudgment interest for a total award of
$14,512
. In addition, the MN District Court issued a permanent injunction against Camtek from “making, using, selling and offering to sell any of its Falcon machines and any machines that are colorable imitations thereof in the United States, intended for sale and use within the United States, until the expiration of the ‘6,298 patent,” which is projected to be in 2020. While, in March of 2015, Camtek filed an appeal with the Court of Appeals challenging the MN District Court’s ruling, the Court of Appeals denied Camtek’s appeal on February 3, 2016, affirming both the infringement ruling and the damages and interest totaling approximately
$14,632
million assessed against Camtek by the MN District Court, the payment of which is guaranteed by a supersedeas bond. All of Camtek’s rights to appeal the final judgment have now expired. On March 14, 2016 the Company filed its request to the MN District Court to release payment under the bond and is currently awaiting a response from the Court. The Company recorded the judgment in “Prepaid expenses and other current assets” in the Consolidate Balance Sheets as of
March 31, 2016
as the gain contingency was realized upon completion of the appeal process.
August Technology Corporation and Rudolph Technologies, Inc. v. Camtek, Ltd., No. 10-CV-2202 (MJD/FLN)
: With regard to the Company’s subsequently filed lawsuit against Camtek in the MN District Court alleging infringement of its U.S. Patent No. 7,729,528, this lawsuit continues to be stayed pending resolution of a re-examination petition filed by Camtek with the U.S. Patent and Trademark Office.
Rudolph Technologies, Inc. v. Camtek, Ltd., No. 15-CV-1246 (ADM/BRT)
: On March 12, 2015, the Company filed and served on Camtek a complaint asserting infringement of Rudolph ‘6,298 patent by Camtek’s Eagle product with the MN District Court. On April 21, 2015, the Company filed a Motion for Preliminary Injunction to enjoin Camtek’s sale of the Eagle device in the United States which is currently pending. On or about April 20, 2015, Camtek filed a complaint in the U.S. District Court for the District of New Jersey (the “NJ District Court”) seeking a declaratory judgment challenging the jurisdiction and venue of the Minnesota court and seeking to have the NJ District Court find that the ‘6,298 patent is not infringed and, in the alternative, that the ‘6,298 patent is invalid. On August 26, 2015, the MN District Court ruled that Minnesota jurisdiction was appropriate for this matter while at the same time denying the Company’s Motion for Preliminary Injunction. Camtek’s complaint filed in the NJ District Court was subsequently dismissed. This matter is currently in discovery phase of the litigation.
Line of Credit
The Company has a credit agreement with Credit Suisse providing for a
$60,000
committed secured revolving line of credit, which will expire on October 31, 2016. The Company has not utilized the credit agreement to date.
NOTE 9. Share-Based Compensation
Restricted Stock Unit Activity
A summary of the Company’s nonvested restricted stock unit activity with respect to the
three months ended March 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Grant Date Fair Value
|
Nonvested at December 31, 2015
|
|
1,169
|
|
|
$
|
11.40
|
|
Granted
|
|
162
|
|
|
$
|
12.31
|
|
Less: Vested
|
|
268
|
|
|
$
|
10.51
|
|
Less: Forfeited
|
|
7
|
|
|
$
|
11.16
|
|
Nonvested at March 31, 2016
|
|
1,056
|
|
|
$
|
11.76
|
|
As of
March 31, 2016
and
December 31, 2015
, there was
$8,930
and
$8,221
of total unrecognized compensation cost related to restricted stock units granted under the Company’s stock plans, respectively. That cost is expected to be recognized over a weighted average period of
3.0
years and
2.6
years for the respective periods.
NOTE 10. Other Expense
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2016
|
|
2015
|
Foreign currency exchange losses, net
|
$
|
107
|
|
|
$
|
638
|
|
Total other expense
|
$
|
107
|
|
|
$
|
638
|
|
NOTE 11. Income Taxes
The following table provides details of income taxes:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2016
|
|
2015
|
Income before income taxes
|
$
|
19,561
|
|
|
$
|
3,097
|
|
Provision for income taxes
|
$
|
5,622
|
|
|
$
|
1,249
|
|
Effective tax rate
|
28.7
|
%
|
|
40.3
|
%
|
The income tax provision for the
three months ended
March 31, 2016
was computed based on the Company’s annual forecast of profit by jurisdiction and forecasted effective tax rate for the year. The changes in the Company’s effective tax rate for the
three months ended
March 31, 2016
compared to the same period for the prior year are primarily due to the mix of forecasted earnings by jurisdictions, additional foreign tax credits generated and the availability of the research and development credit in 2016.
The Company currently has a partial valuation allowance recorded against certain foreign and state net operating loss and credit carryforwards where the realizability of such deferred tax assets is substantially in doubt. Each quarter, the Company assesses the likelihood that it will be able to recover its deferred tax assets. The Company considers available evidence, both positive and negative, including forecasted earnings in assessing the need for a valuation allowance. As a result of the Company’s analysis, it concluded that it is more likely than not that a portion of its deferred tax assets will not be realized. Therefore, the Company continues to provide a valuation allowance against certain deferred tax assets. The Company continues to monitor available evidence and may reverse some or all of the remaining valuation allowance in future periods, if appropriate. The Company has a recorded valuation allowance against certain of its deferred tax assets of
$2,205
as of
March 31, 2016
and December 31, 2015.
NOTE 12. Earnings Per Share
Basic earnings per share is calculated using the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in the same manner and also gives effect to all dilutive common equivalent
shares outstanding during the period. Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive. In accordance with U.S. GAAP, these shares were not included in calculating diluted earnings per share. For the
three months ended
March 31, 2016
, the weighted average number of stock options and restricted stock units excluded from the computation of diluted earnings per share were
151
and
0
, respectively. For the
three months ended
March 31, 2015
, all outstanding stock options and restricted stock units totaling
299
and
0
, respectively, were excluded from the computation of diluted loss per share because the effect in the periods would be anti-dilutive. Diluted earnings per share-weighted average shares outstanding do not include any effect resulting from assumed conversion of the Notes and warrants as their impact would be anti-dilutive.
The Company’s basic and diluted earnings per share amounts are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
Net income
|
$
|
13,939
|
|
|
$
|
1,848
|
|
Denominator:
|
|
|
|
|
|
Basic earnings per share - weighted average shares outstanding
|
30,957
|
|
|
31,928
|
|
Effect of potential dilutive securities:
|
|
|
|
Employee stock options and restricted stock units - dilutive shares
|
697
|
|
|
621
|
|
Diluted earnings per share - weighted average shares outstanding
|
31,654
|
|
|
32,549
|
|
Earnings per share:
|
|
|
|
|
|
Basic
|
$
|
0.45
|
|
|
$
|
0.06
|
|
Diluted
|
$
|
0.44
|
|
|
$
|
0.06
|
|
NOTE 13. Accumulated Other Comprehensive Loss
Comprehensive income includes net income, foreign currency translation adjustments, and net unrealized gains and losses on available-for-sale investments. See the Consolidated Statements of Comprehensive Income for the effect of the components of comprehensive income on the Company’s net income.
The components of accumulated other comprehensive loss, net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
Net unrealized losses on available-for-sale investments
|
|
Accumulated other comprehensive loss (income)
|
Beginning Balance, December 31, 2015
|
|
$
|
2,623
|
|
|
$
|
—
|
|
|
$
|
2,623
|
|
Net current period other comprehensive loss (income)
|
|
(638
|
)
|
|
6
|
|
|
(632
|
)
|
Reclassifications
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending balance, March 31, 2016
|
|
$
|
1,985
|
|
|
$
|
6
|
|
|
$
|
1,991
|
|
NOTE 14. Segment Reporting and Geographic Information
The Company is engaged in the design, development, manufacture and support of high-performance control metrology, defect inspection, advanced packaging lithography and data analysis systems used by microelectronics device manufacturers. The Company and its subsidiaries currently operate in a single operating segment: the design, development, manufacture and support of high-performance process control defect inspection, metrology, advanced packaging lithography, and process control software systems used by microelectronics device manufacturers, and therefore the Company has one reportable segment. The Company’s chief operating decision maker is the Chief Executive Officer. The chief operating decision maker allocates resources and assesses performance of the business and other activities at the reporting segment level.
The following table lists the different sources of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2016
|
|
2015
|
Systems and Software:
|
|
|
|
|
Process Control
|
|
$
|
36,459
|
|
|
67
|
%
|
|
$
|
36,061
|
|
|
69
|
%
|
Lithography
|
|
170
|
|
|
—
|
%
|
|
21
|
|
|
—
|
%
|
Software
|
|
7,422
|
|
|
14
|
%
|
|
7,794
|
|
|
15
|
%
|
Parts
|
|
7,160
|
|
|
13
|
%
|
|
5,655
|
|
|
10
|
%
|
Services
|
|
3,151
|
|
|
6
|
%
|
|
3,039
|
|
|
6
|
%
|
Total revenue
|
|
$
|
54,362
|
|
|
100
|
%
|
|
$
|
52,570
|
|
|
100
|
%
|
For geographical revenue reporting, revenues are attributed to the geographic location in which the product is shipped. Revenue by geographic region is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2016
|
|
2015
|
United States
|
$
|
7,388
|
|
|
$
|
17,648
|
|
Taiwan
|
22,035
|
|
|
13,329
|
|
Japan
|
2,937
|
|
|
1,314
|
|
China
|
8,825
|
|
|
6,088
|
|
South Korea
|
1,623
|
|
|
3,531
|
|
Singapore
|
7,047
|
|
|
1,738
|
|
Other Asia
|
871
|
|
|
39
|
|
Germany
|
697
|
|
|
7,055
|
|
Other Europe
|
2,939
|
|
|
1,828
|
|
Total revenue
|
$
|
54,362
|
|
|
$
|
52,570
|
|
The following customers each accounted for more than 10% of total revenues for the indicated periods.
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2016
|
|
2015
|
Customer A
|
26.9
|
%
|
|
11.1
|
%
|
Customer B
|
4.3
|
%
|
|
10.2
|
%
|
NOTE 15. Share Repurchase Authorization
In January 2015, the Board of Directors authorized the Company to repurchase up to
3,000
shares of the Company’s common stock with no established end date. The authorization allows for repurchases to be made in the open market or through negotiated transactions from time to time. During the three months ended March 31, 2016, the Company repurchased
370
shares of common stock. At
March 31, 2016
, there were
956
shares available for future stock repurchases under this repurchase authorization. Shares of common stock purchased under the share repurchase authorization are retired.
The following table summarizes the Company’s stock repurchases for the
three month period ended March 31, 2016
and 2015, respectively:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2016
|
|
2015
|
Shares of common stock repurchased
|
370
|
|
|
570
|
|
Cost of stock repurchased
|
|
$4,700
|
|
|
|
$6,786
|
|
Average price paid per share
|
|
$12.70
|
|
|
|
$11.91
|
|