Quarterly Report (10-q)

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 2019

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

For the transition period from to

Commission File No. 001-36226

RUDOLPH TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

Delaware

22-3531208

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

16 Jonspin Road, Wilmington, Massachusetts 01887

(Address of principal executive offices, including zip code)

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

Securities registered pursuant to Section 12(b) of the Act


Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, $0.001 par value per share	RTEC	New York Stock Exchange (NYSE)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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

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

The number of outstanding shares of the Registrant’s Common Stock on July 17, 2019 was 31,115,871.

Table of Contents

T ABLE OF CONTENTS


Item No.		Page
	PART I FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018	3
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018	4
	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018	5
	Condensed Consolidated Statements of Stockholders’ Equity for the t hree and six months ended June 30, 2019 and 2018	6
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 4.	Controls and Procedures	26

	PART II OTHER INFORMATION

Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	29

Table of Contents

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

RUDOLPH TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	June 30, 2019			December 31, 2018
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	111,958		$	112,388
Marketable securities		67,892			62,684
Accounts receivable, less allowance of $538 and $691		62,142			64,194
Inventories, net		106,836			96,820
Income taxes receivable		4,499			6,111
Prepaid expenses and other current assets		11,218			8,710
Total current assets		364,545			350,907
Property, plant and equipment, net		18,575			18,874
Operating lease right-of-use assets		13,340			—
Goodwill		22,495			22,495
Identifiable intangible assets, net		6,674			7,448
Other assets		18,354			18,316
Total assets	$	443,983		$	418,040
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	24,501		$	30,681
Deferred revenue		8,187			6,767
Current operating lease obligations		2,532			—
Other current liabilities		9,962			7,543
Total current liabilities		45,182			44,991
Non-current operating lease obligations		12,256			—
Other non-current liabilities		9,045			11,161
Total liabilities		66,483			56,152
Commitments and contingencies
Stockholders’ equity:
Common stock		31			31
Additional paid-in capital		372,396			369,893
Accumulated other comprehensive loss		(1,256	)		(1,263	)
Retained earnings (accumulated deficit)		6,329			(6,773	)
Total stockholders’ equity		377,500			361,888
Total liabilities and stockholders’ equity	$	443,983		$	418,040

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

Table of Contents

RUDOLPH TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Revenue	$	61,511		$	77,476		$	122,403		$	150,572
Cost of revenue		29,600			35,740			58,473			66,415
Gross profit		31,911			41,736			63,930			84,157
Operating expenses:
Research and development		13,056			12,733			25,774			24,516
Selling, general and administrative		13,050			11,946			24,356			24,739
Amortization		387			383			774			763
Total operating expenses		26,493			25,062			50,904			50,018
Operating income		5,418			16,674			13,026			34,139
Interest income, net		(860	)		(476	)		(1,666	)		(867	)
Other expense (income), net		157			(140	)		(224	)		42
Income before income taxes		6,121			17,290			14,916			34,964
Provision for income taxes		595			2,593			1,814			5,137
Net income	$	5,526		$	14,697		$	13,102		$	29,827
Earnings per share:
Basic	$	0.18		$	0.46		$	0.42		$	0.94
Diluted	$	0.18		$	0.45		$	0.42		$	0.92
Weighted average shares outstanding:
Basic		31,126			31,859			31,058			31,760
Diluted		31,398			32,437			31,369			32,377

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

Table of Contents

RUDOLPH TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2019		2018			2019			2018
Net income	$	5,526	$	14,697		$	13,102		$	29,827
Other comprehensive income:
Change in net unrealized gains on marketable securities, net of tax		114		107			209			130
Change in currency translation adjustments		316		(855	)		(202	)		(223	)
Total comprehensive income	$	5,956	$	13,949		$	13,109		$	29,734

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

Table of Contents

RUDOLPH TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

	Common Stock					Additional Paid-in			Accumulated Other Comprehensive			Retained Earnings (Accumulated
	Shares			Amount		Capital			Loss			Deficit)			Total
Balance at December 31, 2018		30,906		$	31	$	369,893		$	(1,263	)	$	(6,773	)	$	361,888
Issuance of shares through share-based compensation plans, net		103			—		—			—			—			—
Repurchase of common stock		(37	)		—		(744	)		—			—			(744	)
Net income		—			—		—			—			7,576			7,576
Share-based compensation		—			—		2,163			—			—			2,163
Share-based compensation plan withholdings		(27	)		—		(598	)		—			—			(598	)
Currency translation		—			—		—			(518	)		—			(518	)
Unrealized gain on investments		—			—		—			95			—			95
Balance at March 31, 2019		30,945		$	31	$	370,714		$	(1,686	)	$	803		$	369,862
Issuance of shares through share-based compensation plans, net		177			—		160			—			—			160
Repurchase of common stock		—			—		—			—			—			—
Net income		—			—		—			—			5,526			5,526
Share-based compensation		—			—		1,673			—			—			1,673
Share-based compensation plan withholdings		(6	)		—		(151	)		—			—			(151	)
Currency translation		—			—		—			316			—			316
Unrealized gain on investments		—			—		—			114			—			114
Balance at June 30, 2019		31,116		$	31	$	372,396		$	(1,256	)	$	6,329		$	377,500

	Common Stock					Additional Paid-in			Accumulated Other Comprehensive			Accumulated
	Shares			Amount		Capital			Loss			Deficit			Total
Balance at December 31, 2017		31,604		$	32	$	386,196		$	(1,205	)	$	(51,869	)	$	333,154
Issuance of shares through share-based compensation plans, net		169			—		122			—			—			122
Net income		—			—		—			—			15,130			15,130
Share-based compensation		—			—		1,507			—			—			1,507
Share-based compensation plan withholdings		(31	)		—		(839	)		—			—			(839	)
Currency translation		—			—		—			632			—			632
Unrealized gain on investments		—			—		—			23			—			23
Balance at March 31, 2018		31,742		$	32	$	386,986		$	(550	)	$	(36,739	)	$	349,729
Issuance of shares through share-based compensation plans, net		164			—		368			—			—			368
Net income		—			—		—			—			14,697			14,697
Share-based compensation		—			—		2,081			—			—			2,081
Share-based compensation plan withholdings		(5	)		—		(137	)		—			—			(137	)
Currency translation		—			—		—			(855	)		—			(855	)
Unrealized gain on investments		—			—		—			107			—			107
Balance at June 30, 2018		31,901		$	32	$	389,298		$	(1,298	)	$	(22,042	)	$	365,990

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

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RUDOLPH TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities:
Net income	$	13,102		$	29,827
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Amortization of intangibles		774			763
Depreciation		2,363			2,426
Foreign currency exchange (gain) loss		(222	)		43
Change in fair value of contingent consideration		—			603
Share-based compensation		3,836			3,588
Provision for doubtful accounts and inventory valuation		1,003			1,875
Changes in operating assets and liabilities		(11,066	)		(29,666	)
Net cash and cash equivalents provided by operating activities		9,790			9,459
Cash flows from investing activities:
Purchases of marketable securities		(38,227	)		(105,721	)
Proceeds from sales of marketable securities		33,186			88,843
Purchases of property, plant and equipment		(2,654	)		(2,178	)
Net cash and cash equivalents used in investing activities		(7,695	)		(19,056	)
Cash flows from financing activities:
Purchase of common stock		(744	)		—
Tax payments related to shares withheld for share-based compensation plans		(749	)		(977	)
Payment of contingent consideration for acquired business		(1,121	)		(1,057	)
Issuance of shares through share-based compensation plans		160			490
Net cash and cash equivalents used in financing activities		(2,454	)		(1,544	)
Effect of exchange rate changes on cash and cash equivalents		(71	)		(138	)
Net decrease in cash and cash equivalents		(430	)		(11,279	)
Cash and cash equivalents at beginning of period		112,388			67,770
Cash and cash equivalents at end of period	$	111,958		$	56,491

Supplemental disclosure of cash flow information:
Income taxes paid	$	209		$	52

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

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RUDOLPH TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(Unaudited)

NOTE 1. Basis of Presentation

The accompanying interim unaudited Condensed Consolidated Financial Statements have been prepared by Rudolph Technologies, Inc. (the “Company” or “Rudolph”) and in the opinion of management reflect all adjustments, consisting of normal recurring accruals, necessary for their fair presentation in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual amounts could differ materially from reported amounts. The interim results for the three and six month periods ended June 30, 2019 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, 2018 (“2018 10-K”) filed with the Securities and Exchange Commission (“SEC”) on February 15, 2019. The accompanying Condensed Consolidated Balance Sheets at December 31, 2018 has been derived from the audited consolidated financial statements included in the 2018 10-K.

Recent Accounting Pronouncements

Recently Adopted

Effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. The ASU is effective for the fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of ASU No. 2018-07 did not have a material impact on the Company’s consolidated financial position, results of operations, and cash flows.

Effective January 1, 2019, the Company adopted ASU No. 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The new guidance allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) from accumulated other comprehensive income to retained earnings. The guidance also requires certain new disclosures regardless of a company’s election. The standard is effective for annual periods beginning after December 15, 2018 and for interim periods within those annual periods, with earlier adoption permitted. The adoption of ASU No. 2018-02 did not have a material impact on the Company’s consolidated financial position, results of operations, and cash flows.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” ASU No. 2016-02 requires that lessees recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and lease liability. On January 1, 2019, the Company adopted ASU No. 2016-02 using the modified retrospective method which applies the provisions of the standard at the effective date without adjusting the comparative periods presented. The Company also elected the package of practical expedients.

There was not a cumulative-effect adjustment to the Company’s beginning retained earnings as a result of adopting ASU No. 2016-02. The Company has recognized additional operating lease assets and obligations of $14.4 million as of January 1, 2019. The Company elected to not reassess prior conclusions related to the identification, classification and accounting for initial direct costs for leases that commenced prior to January 1, 2019. For additional disclosure and detail, see Note 6 of the Notes to the Condensed Consolidated Financial Statements, “Leasing Arrangements.”

Recently Issued

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU is part of the FASB’s larger disclosure framework project intended to improve the effectiveness of financial statement footnote disclosure. ASU No. 2018-13 modifies required fair value disclosures related primarily to level 3 investments. This ASU is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The adoption of ASU No. 2018-13 is not expected to have a material effect on the Company’s consolidated financial position, results of operations, and cash flows.

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In M ay 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” This ASU amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of ch anges to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Accounting Standards Codification (“ASC”) 718. The ASU is effective for the fiscal years beginning after December 15 , 2019 and for interim periods within those fiscal years. The adoption of ASU No. 2017-09 is not expected to have a material effect on the Company’s consolidated financial position, results of operations, and cash flows, if any.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This ASU eliminates Step 2 from the goodwill impairment test. Accordingly, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to the excess, limited to the total amount of goodwill allocated to the reporting unit. The ASU is effective for the fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. The Company is currently evaluating the effect the adoption of ASU No. 2017-04 will have on its consolidated financial position, results of operations, and cash flows, if any.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which represents a new credit loss standard that will change the impairment model for most financial assets and certain other financial instruments. Specifically, this guidance will require entities to utilize a new “expected loss” model as it relates to trade receivables, notes receivable and other commitments to extend credit held by a reporting entity . In addition, entities will be required to recognize an allowance for estimated credit losses on available-for-sale debt securities, regardless of the length of time that a security has been in an unrealized loss position. This guidance will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods, and early adoption is permitted. The Company is currently evaluating the potential impact that the adoption of this guidance may have on its consolidated financial position, results of operations, and cash flows.

Recently issued accounting guidance not discussed above is not applicable.

NOTE 2. Business Combinations

On June 23, 2019, the Company entered into an agreement and plan of merger to combine in an all-stock merger of equals transaction with Nanometrics Incorporated (“Nanometrics”), a provider of advanced process control metrology and software analytics. The transaction was unanimously approved by the board of directors of both companies and is subject to the satisfaction of customary closing conditions, including receipt of customary regulatory approvals and approval by the shareholders of each company. The Company anticipates the merger to close in the second half of 2019. Under the terms of the agreement, Rudolph stockholders will receive 0.8042 shares of Nanometrics common stock for each share of Rudolph common stock. Upon completion of the merger, current Nanometrics stockholders will own approximately 50% of the combined company and current Rudolph stockholders will own approximately 50% of the combined company. In addition, if the merger agreement is terminated prior to completion of the merger, a termination fee of $26.0 million if the merger agreement is terminated under circumstances specified in the merger agreement. During the three months ended June 30, 2019, the Company accrued $2.5 million of direct costs associated with the merger.

NOTE 3. Fair Value Measurements

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

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The following tables provide the assets and liabilities carried at fair value measured on a recurring basis at June 30, 2019 and December 31, 2018:

			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)
June 30, 2019
Assets:
Available-for-sale debt securities:
Municipal notes and bonds	$	67,892	$	—	$	67,892	$	—
Total assets	$	67,892	$	—	$	67,892	$	—
Liabilities:
Contingent consideration - acquisitions	$	939	$	—	$	—	$	939
Foreign currency forward contracts		38		—		38		—
Total liabilities	$	977	$	—	$	38	$	939

December 31, 2018
Assets:
Available-for-sale debt securities:
Municipal notes and bonds	$	62,684	$	—	$	62,684	$	—
Total assets	$	62,684	$	—	$	62,684	$	—
Liabilities:
Contingent consideration - acquisitions	$	2,060	$	—	$	—	$	2,060
Foreign currency forward contracts		32		—		32		—
Total liabilities	$	2,092	$	—	$	32	$	2,060

Level 1 inputs are based on quoted market prices that are available in active markets. The Company does not have any recurring financial assets and liabilities that are recorded in its Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 that are classified as Level 1 inputs.

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

Level 3 liabilities consisted of contingent consideration related to an acquisition for which the Company uses a discounted cash flow model to value these liabilities. The Level 3 assumptions used in the discounted cash flow model for the contingent consideration included projected revenue, timing of cash flows and estimates of discount rates of 9.2% and 9.4% for the six months ended June 30, 2019 and 2018, respectively. A significant decrease in the projected revenue or increase in discount rates could result in a significantly lower fair value measurement for the contingent consideration.

This table presents a reconciliation of all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2019:

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Balance at December 31, 2018	$	2,060
Additions		—
Payments		(1,121	)
Transfer into (out of) Level 3		—
Balance at June 30, 2019	$	939

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

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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 carrying amount of the convertible notes receivable approximates fair value based on current interest rates for instruments with similar characteristics. Convertible notes receivable are initially recognized at fair value. The Company does not subsequently adjust the fair value of these convertible notes receivable unless it is determined that the convertible notes receivable are impaired. The Company considers the issuer’s financial condition, payment history, and other relevant factors when assessing the collectability of a convertible note and to reserve the portion of such convertible note for which collection does not appear likely. Interest income is recognized as earned.

NOTE 4. Marketable Securities

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

The Company has determined that the gross unrealized losses on its marketable securities at June 30, 2019 and December 31, 2018 are temporary in nature. The Company reviews its investment portfolio to identify and evaluate marketable securities that have indications of possible impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, credit quality and the Company’s ability and intent to hold the securities for a period of time sufficient to allow for any anticipated recovery in market value.

At June 30, 2019 and December 31, 2018, marketable securities are categorized as follows:

	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Fair Value
June 30, 2019
Municipal notes and bonds	$	67,653	$	239	$	—	$	67,892
Total marketable securities	$	67,653	$	239	$	—	$	67,892
December 31, 2018
Municipal notes and bonds	$	62,681	$	43	$	40	$	62,684
Total marketable securities	$	62,681	$	43	$	40	$	62,684

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 Sheets classification, is as follows at June 30, 2019 and December 31, 2018:

	June 30, 2019				December 31, 2018
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due within one year	$	53,277	$	53,366	$	47,767	$	47,732
Due after one through five years		14,376		14,526		14,914		14,952
Due after five through ten years		—		—		—		—
Due after ten years		—		—		—		—
Total marketable securities	$	67,653	$	67,892	$	62,681	$	62,684

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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 June 30, 2019 and December 31, 2018 :

	In Unrealized Loss Position For Less Than 12 Months				In Unrealized Loss Position For Greater Than 12 Months
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
June 30, 2019
Municipal notes and bonds	$	—	$	—	$	—	$	—
Total	$	—	$	—	$	—	$	—
December 31, 2018
Municipal notes and bonds	$	27,952	$	30	$	4,671	$	10
Total	$	27,952	$	30	$	4,671	$	10

See Note 3 for additional discussion regarding the fair value of the Company’s marketable securities.

NOTE 5. Derivative Instruments and Hedging Activities

The Company, when it considers it to be appropriate, enters into forward contracts to hedge the economic exposures arising from foreign currency denominated transactions. At June 30, 2019 and December 31, 2018, these contracts included the future sale of Japanese Yen to purchase U.S. dollars. Derivative instruments are measured at fair value and recognized as either, “Prepaid expenses and other current assets” or “Other current liabilities” in the Condensed Consolidated Balance Sheets with changes in the net derivatives position reflected in operating cash flows. 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 $6 and $55 for the six months ended June 30, 2019 and 2018, respectively, are recorded under the caption “Other expense (income), net” in the Condensed Consolidated Statements of Operations.

The dollar equivalent of the U.S. dollar forward contracts and related fair values as of June 30, 2019 and December 31, 2018 were as follows:

June 30,

2019

December 31,

2018

Notional amount

1,978

6,746

Fair value of liability

(38

)

(32

)

NOTE 6. Leasing Arrangements

The Company leases space for its corporate headquarters, manufacturing, sales and service operations, vehicles and information technology equipment under operating leases. All of the Company’s leases are operating leases. The Company elected not to apply Accounting Standard Codification Topic 842 (“ASC 842”) to arrangements with lease terms of less than 12 months. Operating lease right-of-use assets and obligations are reflected within the captions “Operating lease right-of-use assets,” “Current operating lease obligations,” and “Non-current operating lease obligations,” respectively, on the Condensed Consolidated Balance Sheets.

Operating lease costs were $869 and $1,746 during the three and six months ended June 30, 2019. These costs are primarily related to long-term operating leases, but also include immaterial amounts for short-term leases less than 12 months. Operating lease costs are recognized on a straight-line basis over the terms of the leases.

Additional operating lease right-of-use assets of $222 were recognized as non-cash asset additions that resulted from new operating lease liabilities as of the six months ended June 30, 2019. Cash paid for amounts included in the measurement of operating lease liabilities was $1,656 during the six months ended June 30, 2019 and is included in operating cash flows.

The Company often has the option to renew lease terms for buildings and other assets. The exercise of lease renewal options are generally at the Company’s sole discretion. In addition, certain lease arrangements may be terminated prior to their original expiration date at the Company’s discretion. The Company evaluates renewal and termination options at the lease commencement date to determine if it is reasonably certain to exercise the option on the basis of economic factors. The weighted average of the remaining lease term for operating leases as of June 30, 2019 was 7.9 years.

The discount rate implicit within the Company’s leases is generally not determinable and therefore the Company determines the discount rate based on its incremental borrowing rate. The incremental borrowing rate for our leases is

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determined based on the lease term in which lease payments are made. The weighted average discount rate used to measure operating lease liabilities as of June 30, 2019 was 4.7 %.

The following table presents information about the amount and timing of cash flows arising from the Company’s operating leases as of June 30, 2019:

	June 30, 2019
Maturity of Lease Liabilities	Lease Payments
2019 (remaining)	$	1,636
2020		3,012
2021		2,070
2022		2,011
2023		1,698
Thereafter		7,484
Total undiscounted operating lease payments	$	17,911
Less: Imputed interest		3,123
Present value of operating lease liabilities	$	14,788

NOTE 7. Purchased Intangible Assets

Purchased intangible assets as of June 30, 2019 and December 31, 2018 are as follows:

	Gross Carrying Amount		Accumulated Amortization		Net
June 30, 2019
Finite-lived intangibles:
Developed technology	$	66,177	$	60,283	$	5,894
Customer and distributor relationships		9,560		9,215		345
Trade names		4,361		3,926		435
Total identifiable intangible assets	$	80,098	$	73,424	$	6,674
December 31, 2018
Finite-lived intangibles:
Developed technology	$	66,177	$	59,692	$	6,485
Customer and distributor relationships		9,560		9,082		478
Trade names		4,361		3,876		485
Total identifiable intangible assets	$	80,098	$	72,650	$	7,448

Intangible asset amortization expenses for the three and six months ended June 30, 2019 were $387 and $774, respectively. For the three and six month period ended June 30, 2018, intangible assets amortization expenses were $383 and $763, respectively. Assuming no change in the gross carrying value of identifiable intangible assets and estimated lives, estimated amortization expenses for the remainder of 2019 are $774, and for each of the next five years estimated amortization expenses are $1,346 for 2020, $598 for 2021, $532 for 2022, $515 for 2023, and $431 for 2024.

NOTE 8. Convertible Notes Receivable

The Company entered into a convertible loan agreement with Simax Precision Technologies Limited (“Simax”) on May 31, 2018. Under the agreement, Simax may borrow from the Company up to $15,000 in multiple promissory notes, subject to limitations. The Company expects to be a supplier of lithography modules to Simax which is focused on the manufacture, sale and service of lithography systems.

The convertible notes will bear a rate of interest of 4.25% per annum payable on a semi-annual basis. The convertible notes provide the Company with the option to convert the outstanding indebtedness into equity. If the Company does not elect to exercise its option to convert the notes into equity, Simax will repay the principal amount outstanding and any outstanding interest in equal installments beginning on the fifth anniversary of the loan date and continuing on a quarterly basis over the next three years.

As of June 30, 2019, the convertible notes receivable balance was $5,000 with accrued interest of $105.

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NOTE 9. Balance Sheet Details

Inventories

Inventories are comprised of the following:

	June 30, 2019		December 31, 2018
Materials	$	69,714	$	61,025
Work-in-process		22,361		21,910
Finished goods		14,761		13,885
Total inventories	$	106,836	$	96,820

The Company has established reserves of $11,347 and $11,678 as of June 30, 2019 and December 31, 2018, respectively, for slow moving and obsolete inventory, which are included in the amounts above.

Property, Plant and Equipment

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

	June 30, 2019			December 31, 2018
Land and building	$	2,584		$	2,584
Machinery and equipment		27,979			29,097
Furniture and fixtures		3,236			3,226
Computer equipment and software		10,489			7,906
Leasehold improvements		9,456			9,448
		53,744			52,261
Accumulated depreciation		(35,169	)		(33,387	)
Total property, plant and equipment, net	$	18,575		$	18,874

Other assets

Other assets is comprised of the following:

	June 30, 2019		December 31, 2018
Convertible notes receivable	$	5,000	$	5,000
Deferred income taxes		12,842		12,810
Other		512		506
Total other assets	$	18,354	$	18,316

Other current liabilities

Other current liabilities is comprised of the following:

	June 30, 2019		December 31, 2018
Contingent consideration - acquisitions	$	939	$	1,422
Customer deposits		610		1,135
Accrued inventory		2,348		1,103
Accrued merger related expenses		2,464		—
Other		3,601		3,883
Total other current liabilities	$	9,962	$	7,543

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Other non-current liabilities

Other non-current liabilities is comprised of the following:

	June 30, 2019		December 31, 2018
Unrecognized tax benefits (including interest)	$	5,529	$	5,409
Contingent consideration - acquisitions		—		638
Deferred revenue		1,162		1,314
Deferred rent		—		1,405
Other		2,354		2,395
Total other non-current liabilities	$	9,045	$	11,161

NOTE 10. Commitments and Contingencies

Intellectual Property Indemnification Obligations

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

Warranty Reserves

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

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

	Six Months Ended June 30,
	2019			2018
Balance, beginning of the period	$	2,441		$	2,427
Accruals		1,390			1,930
Usage		(1,688	)		(1,692	)
Balance, end of the period	$	2,143		$	2,665

Warranty reserves are reported in the Condensed Consolidated Balance Sheets under 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. As of June 30, 2019, there are no legal proceedings pending or threatened against the Company that management believes are likely to have a material adverse effect on the Company’s consolidated financial position or otherwise.

Line of Credit

The Company has a credit agreement with a bank that provides for a line of credit which is secured by the marketable securities the Company has with the bank. The Company is permitted to borrow up to 70% of the value of eligible securities held at the time the line of credit is accessed. The available line of credit as of June 30, 2019 was approximately $93.0 million with an available interest rate of 4.0%. The credit agreement is available to the Company until such time that either party terminates the arrangement at their discretion. The Company has not utilized the line of credit to date.

NOTE 11. Revenue

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

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

Disaggregated Revenue

The following table presents the Company’s revenue disaggregated by revenue source:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Systems	$	44,315	$	60,113	$	87,087	$	116,216
Software licensing, support and maintenance		7,297		7,547		14,334		15,002
Parts		7,073		6,758		15,150		13,742
Services		2,826		3,058		5,832		5,612
Total revenue	$	61,511	$	77,476	$	122,403	$	150,572

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Point-in-time	$	57,308	$	73,283	$	113,899	$	142,679
Over-time		4,203		4,193		8,504		7,893
Total revenue	$	61,511	$	77,476	$	122,403	$	150,572

See Note 17 of the Notes to the Condensed Consolidated Financial Statements for additional discussion of the Company’s disaggregated revenue in detail.

Systems Revenue

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

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

Software Licensing, Support and Maintenance Revenue

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

Parts Revenue

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

Services Revenue

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

Contract Liabilities

The Company records contract liabilities when the customer has been billed in advance of the Company completing its performance obligations. These amounts are recorded as deferred revenue in the Consolidated Balance Sheets.

Changes in deferred revenue were as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Balance, beginning of the period	$	8,687		$	8,773		$	8,080		$	7,206
Deferral of revenue		6,130			1,601			11,631			6,154
Recognition of deferred revenue		(5,468	)		(1,575	)		(10,362	)		(4,561	)
Balance, ending of the period	$	9,349		$	8,799		$	9,349		$	8,799

NOTE 12. Share-Based Compensation

Restricted Stock Unit Activity

A summary of the Company’s restricted stock unit activity with respect to the six months ended June 30, 2019 is as follows:

	Number of Shares			Weighted Average Grant Date Fair Value
Nonvested at December 31, 2018		794		$	19.51
Granted		318		$	23.59
Vested		(274	)	$	16.91
Forfeited		(17	)	$	23.03
Nonvested at June 30, 2019		821		$	21.88

Included in the number of shares granted in the table directly above are 55 market performance-based restricted stock units (“MPRSUs”) granted to executives in 2019. Vesting of these MPRSUs is contingent upon the Company meeting certain total shareholder return (“TSR”) levels as compared to a select peer group over three years from the year granted. The 2019 MPRSUs cliff vest at the end of the three-year period and have a maximum potential to vest at 200% (111 shares) based on TSR performance. The related share-based compensation expense is determined based on the estimated fair value of the underlying shares on the date of grant and is recognized straight-line over the vesting term. The estimated fair value per share of the MPRSUs was $26.72.

As of June 30, 2019 and December 31, 2018, there was $12,787 and $9,517 of total unrecognized compensation cost related to restricted stock units granted under the Company’s stock plans, respectively. That cost is expected to be recognized over a weighted average period of 2.4 years and 2.1 years for each of the respective periods.

NOTE 13. Other Expense (Income), Net

Other expense (income), net is comprised of the following:

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Foreign currency exchange losses (gains), net	$	159		$	(140	)		(222	)		43
Rental income		(1	)		—			(1	)		(1	)
Other		(1	)		—			(1	)		—
Total other expense (income), net	$	157		$	(140	)	$	(224	)	$	42

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NOTE 14. Income Taxes

The following table provides details of income taxes:

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Income before income taxes	$	6,121		$	17,290		$	14,916		$	34,964
Provision for income taxes	$	595		$	2,593		$	1,814		$	5,137
Effective tax rate		9.7	%		15.0	%		12.2	%		14.7	%

The income tax provision for the three and six months ended June 30, 2019 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 and six months ended June 30, 2019 as compared to the same period in 2018 are primarily due to changes in the mix of forecasted earnings by jurisdictions, Section 162 (m) adjustment and the tax-exempt interest. The Company’s recorded effective tax rate is less than the U.S. statutory rate primarily due to a projected Foreign Derived Intangible Income Deduction from the Tax Act and federal research and development tax credits.

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 $3,172 as of June 30, 2019 and December 31, 2018.

NOTE 15. 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 stock equivalent shares outstanding during the period. Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive. In accordance with U.S. GAAP, these shares were not included in calculating diluted earnings per share.

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Restricted stock units		64		11		136		22
Total		64		11		136		22

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The Company’s basic and diluted earnings per share amounts are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Numerator:
Net income	$	5,526	$	14,697	$	13,102	$	29,827
Denominator:
Basic earnings per share - weighted average shares outstanding		31,126		31,859		31,058		31,760
Effect of potential dilutive securities:
Employee stock options and restricted stock units - dilutive shares		272		578		311		617
Diluted earnings per share - weighted average shares outstanding		31,398		32,437		31,369		32,377
Earnings per share:
Basic	$	0.18	$	0.46	$	0.42	$	0.94
Diluted	$	0.18	$	0.45	$	0.42	$	0.92

NOTE 16. Accumulated Other Comprehensive Loss

Comprehensive income includes net income, foreign currency translation adjustments and net unrealized gains and losses on available-for-sale debt securities. See the Condensed 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 gain on marketable securities			Accumulated other comprehensive loss (income)
Balance at December 31, 2018	$	1,273	$	(10	)	$	1,263
Net current period other comprehensive income		202		(209	)		(7	)
Reclassifications		—		—			—
Balance at June 30, 2019	$	1,475	$	(219	)	$	1,256

NOTE 17. 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 and metrology, advanced packaging lithography and process control software systems used by microelectronics device manufacturers. Therefore, the Company has one reportable segment. The Company’s chief operating decision maker is the Chief Executive Officer (the “CEO”). The CEO allocates resources and assesses performance of the business and other activities at the reportable segment level.

The following table lists the different sources of revenue:

	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2019				2018				2019				2018
Systems and Software:
Process control	$	44,253	72	%	$	56,262	72	%	$	83,411	68	%	$	104,295	70	%
Lithography		62	—	%		3,851	5	%		3,676	3	%		11,921	7	%
Software licensing, support and maintenance		7,297	12	%		7,547	10	%		14,334	12	%		15,002	10	%
Parts		7,073	11	%		6,758	9	%		15,150	12	%		13,742	9	%
Services		2,826	5	%		3,058	4	%		5,832	5	%		5,612	4	%
Total revenue	$	61,511	100	%	$	77,476	100	%	$	122,403	100	%	$	150,572	100	%

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The Company’s significant operations outside the United States include sales, service and application offices in Europe and Asia. For geographical revenue reporting, revenue is attributed to the geographic location to which the product is shipped. Revenue by geographic region is as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Revenue from third parties:
United States	$	8,932	$	8,800	$	18,063	$	17,868
Taiwan		7,111		10,943		18,142		25,410
Japan		3,427		5,818		7,367		9,948
China		24,177		23,347		40,221		41,318
South Korea		10,775		16,374		21,546		33,604
Singapore		1,596		3,059		3,612		7,341
Other Asia		1,047		501		2,039		2,418
Germany		674		3,818		2,524		5,142
Other Europe		3,772		4,816		8,889		7,523
Total revenue	$	61,511	$	77,476	$	122,403	$	150,572

The following customer accounted for more than 10% of total revenue for the indicated periods:

	Six Months Ended June 30,
	2019			2018
Customer A		24.6	%		11.6	%

NOTE 18. Shares Repurchase Authorization

In October 2018, the Board of Directors approved a new share repurchase authorization, which allows the Company to repurchase up to $40,000 worth of shares of its common stock. The authorization provides for repurchases to be made in the open market or through negotiated transactions from time to time. The share repurchase authorization has no expiration date and may be discontinued at any time. During the three and six months ended June 30, 2019, the Company repurchased 0 and 37 shares of common stock, respectively, under the share repurchase authorization and those shares were subsequently retired. At June 30, 2019, there was $32,494 available for future share repurchases. Share repurchases under this plan are currently suspended until the completion of the merger with Nanometrics. See Note 2 for additional information regarding the merger with Nanometrics.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements in this Quarterly Report on Form 10-Q (this “Form 10-Q”) are forward-looking statements, including those concerning our business momentum and future growth, acceptance of our products and services, our ability to deliver both products and services consistent with our customers’ demands and expectations and to strengthen our market position, our expectations of the semiconductor market outlook, future revenue, gross profits, research and development and engineering expenses, selling, general and administrative expenses, product introductions, technology development, manufacturing practices, cash requirements, our dependence on certain significant customers and anticipated trends and developments in and management plans for our business and the markets in which we operate, our proposed merger with Nanometrics Incorporated (“Nanometrics”), our anticipated revenue as a result of acquisitions, and our ability to be successful in managing our cost structure and cash expenditures and results of litigation. The statements contained in this Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as, but not limited to, “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “plan,” “should,” “may,” “could,” “will” and words or phrases of similar meaning, as they relate to our management or us.

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The forward-looking statements contained herein reflect our expec tations with respect to future events and are subject to certain risks, uncertainties and assumptions. Actual results may differ materially from those included in such forward-looking statements for a number of reasons including, but not limited to, the f ollowing: variations in the level of orders which can be affected by general economic conditions; seasonality and growth rates in the semiconductor manufacturing industry and in the markets served by our customers; the global economic and political climate s; difficulties or delays in product functionality or performance; the delivery performance of sole source vendors; the timing of future product releases; failure to respond adequately to either changes in technology or customer preferences; changes in pri cing by us or our competitors; our ability to manage growth; changes in management; risk of nonpayment of accounts receivable; changes in budgeted costs; our ability to leverage our resources to improve our position in our core markets, to weather difficul t economic environments, to open new market opportunities and to target high-margin markets; the strength/weakness of the back-end and/or front-end semiconductor market segments; our ability to successfully integrate acquired businesses into our business a nd fully realize, or realize within the expected time frame, the expected combination benefits from the acquisitions; the imposition of tariffs or trade restrictions and costs, burdens and restrictions associated with other governmental actions; our abilit y to integrate our business promptly and effectively with the business of Nanometrics following completion of our proposed merger with Nanometrics and to achieve the anticipated synergies and value-creation contemplated by the proposed merger; the parties’ ability to obtain the approval of the proposed merger by their respective stockholders and the timing of the closing of the proposed merger, including the risk that the conditions to the merger are not satisfied on a timely basis or at all and the failure of the proposed merger to close for any other reason; the risk that a consent or authorization that may be required for the proposed merger is not obtained or is obtained subject to conditions that are not anticipated; unanticipated difficulties or expend itures relating to the proposed merger; the response of business partners and employees as a result of the announcement and pendency of the proposed merger; the diversion of management time in connection with the proposed merger; and the “Risk Factors” set forth in Item 1A in our 2018 Form 10-K, as supplemented by Item 1A of Part II of this Quarterly Report on Form 10-K, and any subsequently filed Quarterly Reports on Form 10-Q. The forward-looking statements reflect our position as of the date of this rep ort and we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Critical Accounting Policies

The preparation of condensed consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make judgments, assumptions and estimates that affect the amounts reported. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.

A critical accounting policy is defined as one that is both material to the presentation of our condensed consolidated financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition or results of operations. Specifically, these policies have the following attributes: (1) we are required to make judgments and assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, could have a material effect on our financial position and results of operations.

Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. In addition, management is periodically faced with uncertainties, the outcomes of which are not within our control and will not be known for prolonged periods of time. Certain of these uncertainties are discussed in our 2018 10-K in the Items entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our condensed consolidated financial statements are fairly stated in accordance with U.S. GAAP and provide a fair presentation of our financial position and results of operations.

For more information, please see our critical accounting policies as previously disclosed in our 2018 10-K.

Effective January 1, 2019, we adopted the provisions of ASC 842, “Leases.” See Note 1 to the Condensed Consolidated Financial Statements included in this Form 10-Q regarding the impact of recent accounting pronouncements on our financial position and results of operations and Note 6, “Leasing Arrangements,” to the Condensed Consolidated Financial Statements included in this Form 10-Q for a discussion of the impact of the adoption of ASC 842 on our financial statements and accounting policies.

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Recent Developments

On June 23, 2019, we entered into an agreement and plan of merger to combine in an all-stock merger of equals transaction with Nanometrics, a provider of advanced process control metrology and software analytics. The transaction was unanimously approved by the board of directors of both companies and is subject to the satisfaction of customary closing conditions, including receipt of customary regulatory approvals and approval by the shareholders of each company. We anticipate the merger to close in the second half of 2019. Under the terms of the agreement, our stockholders will receive 0.8042 shares of Nanometrics common stock for each share of our common stock. Upon completion of the merger, current Nanometrics stockholders will own approximately 50% of the combined company and our current stockholders will own approximately 50%, of the combined company. In addition, each party may be required to pay a termination fee of $26.0 million if the merger agreement is terminated under circumstances specified in the merger agreement. During the three months ended June 30, 2019, we accrued $2.5 million of direct costs associated with the merger.

Overview

We are a worldwide leader in the design, development, manufacture and support of process control tools that perform macro-defect inspections and metrology, lithography systems, and process control analytical software used by semiconductor and advanced packaging device manufacturers. We deliver comprehensive solutions throughout the semiconductor fabrication process with our families of proprietary products that provide critical yield-enhancing information, enabling microelectronic device manufacturers to drive down costs and time to market of their devices. We provide process and yield management solutions used in both wafer processing facilities, often referred to as “front-end” and device packaging and test facilities, or “back-end” manufacturing, through a portfolio of standalone systems for macro-defect inspection, lithography, probe card test and analysis, and transparent and opaque thin film measurements. All of our systems feature sophisticated software and production-worthy automation. In addition, our advanced process control software portfolio includes powerful solutions for standalone tools, groups of tools, or factory-wide suites to enhance productivity and achieve significant cost savings. Our systems are backed by worldwide customer service and applications support.

Our business is affected by the annual spending patterns of our customers on semiconductor capital equipment. The amount that our customers devote to capital equipment spending depends on a number of factors, including general worldwide economic conditions, as well as other economic drivers such as personal computers, mobile devices, data centers, artificial intelligence and automotive sales. Current forecasts by industry analysts for the semiconductor device manufacturing industry project capital equipment spending to be down 16-20% for 2019 as compared to 2018. Our revenue and profitability tend to follow the trends of certain segments within the semiconductor market.

Historically, a significant portion of our revenue in each quarter and year has been derived from sales to relatively few customers, and we expect this trend to continue. For the six months ended June 30, 2019 and for the years ended December 31, 2018, 2017 and 2016, aggregate sales to customers that individually represented at least five percent of our revenue accounted for 43.1%, 18.3%, 27.2%, and 34.5% of our revenue, respectively.

We do not have purchase contracts with any of our customers that obligate them to continue to purchase our products, and they could cease purchasing products from us at any time. A delay in purchase or cancellation by any of our large customers could cause quarterly revenue to vary significantly. In addition, during any given quarter, a significant portion of our revenue may be derived from the sale of a relatively small number of systems. The following table presents the average selling price range for our systems:

System		Average Selling Price Per System
Process control		$250,000 to $2.6 million
Lithography steppers		$2.6 million to $8.5 million

A significant portion of our revenue is derived from customers outside of the United States. A substantial portion of our international sales are denominated in U.S. dollars. We expect that revenue generated from customers outside of the United States will continue to account for a significant percentage of our revenue.

The sales cycle for our systems typically ranges from six to twenty-four months and can be longer when our customers are evaluating new technology. Due to the length of these cycles, we invest significantly in research and development and sales and marketing in advance of generating revenue related to these investments.

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Results of Operations for the Three and Six Month Periods Ended June 30, 2019 and 2018

Revenue. Our revenue is primarily derived from the sale of our systems, services, spare parts and software licensing. Our revenue of $61.5 million decreased 20.6% for the three months ended June 30, 2019 as compared to the same period in 2018, in which revenue totaled $77.5 million. For the six month periods ended June 30, 2019 and 2018, our revenue totaled $122.4 million and $150.6 million, respectively, representing a year-over-year decrease of 18.7%.

The following table lists, for the periods indicated, the different sources of our revenue in dollars (thousands) and as percentages of our total revenue:

	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2019				2018				2019				2018
Systems and Software:
Process control	$	44,253	72	%	$	56,262	72	%	$	83,411	68	%	$	104,295	70	%
Lithography		62	—	%		3,851	5	%		3,676	3	%		11,921	7	%
Software licensing, support and maintenance		7,297	12	%		7,547	10	%		14,334	12	%		15,002	10	%
Parts		7,073	11	%		6,758	9	%		15,150	12	%		13,742	9	%
Services		2,826	5	%		3,058	4	%		5,832	5	%		5,612	4	%
Total revenue	$	61,511	100	%	$	77,476	100	%	$	122,403	100	%	$	150,572	100	%

Total systems and software revenue decreased $29.8 million for the six months ended June 30, 2019, as compared to the six months ended June 30, 2018. Process control system revenue decreased $20.9 million for the six months ended June 30, 2019, as compared to the same period in 2018, primarily due to lower inspection system sales in the 2019 period. Lithography system revenue decreased $8.2 million for the six months ended June 30, 2019, as compared to the same period in 2018, primarily due to the shipment of a JetStep G system during the first half of 2018, which has a higher average selling price. Software revenue decreased $0.7 million for the six months ended June 30, 2019, as compared to the same period in 2018, primarily due to lower process control software sales. Systems revenue generated by our latest product releases and major enhancements in each of our product families amounted to 75% and 74% of total revenue for the three and six months ended June 30, 2019, as compared to 75% of total revenue for both the three and six months ended June 30, 2018. The year-over-year increase in total parts and services revenue for the six months ended June 30, 2019 is primarily due to increased spending by our customers on system upgrades and repairs of existing systems. Parts and services revenue are generated from parts sales, maintenance service contracts, system upgrades, as well as from time and material billable service calls.

Deferred revenue of $8.2 million was recorded in the Condensed Consolidated Balance Sheets under the caption “Deferred revenue” and $1.2 million was recorded under the caption “Other non-current liabilities” at June 30, 2019. Deferred revenue primarily consisted of $7.7 million for deferred maintenance agreements and $1.7 million for outstanding deliverables.

Gross Profit. Our gross profit has been and will continue to be affected by a variety of factors, including manufacturing efficiencies, provision for excess and obsolete inventory, pricing by competitors or suppliers, new product introductions, production volume, customization and reconfiguration of systems, international and domestic sales mix, system and software product mix and parts and service margins. Our gross profit was $31.9 million and $63.9 million for the three and six months ended June 30, 2019, as compared to $41.7 million and $84.2 million for the same period in 2018. Our gross profit represented 51.9% and 52.2% of our revenue for the three and six months ended June 30, 2019 and 53.9% and 55.9% for the same periods in 2018. The decrease in gross profit as a percentage of revenue for the six months ended June 30, 2019, as compared to the same period in 2018, is primarily due to lower volume of system and software sales as well as product mix.

Operating Expenses. Major components of operating expenses include research and development, as well as selling, general and administrative expenses.

Research and Development . Our research and development expenses were $13.1 million and $25.8 million for the three and six months ended June 30, 2019, as compared to $12.7 million and $24.5 million for the same periods in 2018. Research and development expenses represented 21.2% and 21.1% of our revenue for the three and six months ended June 30, 2019, respectively, as compared to 16.4% and 16.3% of revenue for the prior year periods. Research and development expenses increased for the year-over-year periods due to increases in new product initiatives.

Selling, General and Administrative . Our selling, general and administrative expenses were $13.1 million and $24.4 for the three and six months ended June 30, 2019, as compared to $11.9 million and $24.7 million for the same periods in 2018. Selling, general and administrative expenses represented 21.2% and 19.9% of our revenue for the three and six months ended June 30, 2019, respectively, as compared to 15.4% and 16.4% of our revenue for the same periods in 2018. The year-over-year dollar decrease for the six months ended June 30, 2019 in selling, general and

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administrative expenses was primarily due to a decrease in sales commissions and a loss recorded for the misappropriation of payroll taxes by a third-party accou ntant recorded in 2018, partially offset by accrued merger related expenses in 2019.

Income Taxes . We recorded an income tax provision of $0.6 million and $1.8 million for the three and six months ended June 30, 2019, respectively. Our effective tax rate of 12.2% differs from the statutory rate of 21% for the six months ended June 30, 2019 primarily due to a projected Foreign Derived Intangible Income Deduction from the Tax Act and federal research and development tax credits. For the three and six months ended June 30, 2018, we recorded an income tax provision of $2.6 million and $5.1 million, respectively.

Our future effective income tax rate depends on various factors, such as impacts of the Tax Act, possible further tax legislation, the geographic composition of our pre-tax income, the amount of our pre-tax income as business activities fluctuate, non-deductible expenses incurred in connection with business combinations, and research and development tax credits as a percentage of aggregate pre-tax income.

We currently have a partial valuation allowance recorded for certain foreign and state loss and credit carryforwards where the realizability of such deferred tax assets is substantially in doubt. Each quarter we assess the likelihood that we will be able to recover our deferred tax assets primarily relating to state research and development credits. We consider available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. As a result of our analysis, we concluded that it is more likely than not that a portion of our net deferred tax assets will not be realized. Therefore, we continue to provide a valuation allowance against certain net deferred tax assets. We continue to monitor available evidence and may reverse some or all of the valuation allowance in future periods, if appropriate.

Liquidity and Capital Resources

At June 30, 2019, we had $179.9 million of cash, cash equivalents and marketable securities and $319.4 million in working capital. At December 31, 2018, we had $175.1 million of cash, cash equivalents and marketable securities and $305.9 million in working capital.

Operating activities provided $9.8 million in net cash and cash equivalents for the six months ended June 30, 2019. The net cash and cash equivalents provided by operating activities during the six months ended June 30, 2019 resulted primarily from net income, adjusted to exclude the effect of non-cash operating charges of $20.9 million, partially offset by a decrease in cash provided from operating assets and liabilities of $11.1 million. Operating activities provided $9.5 million in net cash and cash equivalents for the six months ended June 30, 2018. The net cash and cash equivalents provided by operating activities during the six months ended June 30, 2018 resulted primarily from net income, adjusted to exclude the effect of non-cash operating charges of $39.1 million, partially offset by a decrease in cash provided from operating assets and liabilities of $29.6 million.

Net cash and cash equivalents of $7.7 million were used in investing activities during the six months ended June 30, 2019 primarily for the purchase of marketable securities of $38.2 million and capital expenditures of $2.7 million, offset by proceeds from sales of marketable securities of $33.2 million. Net cash and cash equivalents used in investing activities of $19.1 million during the six months ended June 30, 2018 resulted from the purchase of marketable securities of $105.7 million and capital expenditures of $2.2 million, offset by proceeds from sales of marketable securities of $88.8 million.

Net cash and cash equivalents used in financing activities during the six months ended June 30, 2019 of $2.5 million, which resulted from payment of contingent consideration for acquired business of $1.1 million, the purchase of shares of our common stock under share repurchase authorizations of $0.7 million and tax payments related to shares withheld for share-based compensation plans of $0.7 million, partially offset by proceeds from sales of shares through share-based compensation plans of $0.2 million. For the six months ended June 30, 2018, financing activities used $1.5 million, which resulted from payment of contingent consideration for acquired business of $1.0 million, and tax payments related to shares withheld for share-based compensation plans of $1.0 million, partially offset by proceeds from sales of shares through share-based compensation plans of $0.5 million.

From time to time, we evaluate whether to acquire new or complementary businesses, products and/or technologies. We may fund all of or a portion of the price of these investments or acquisitions in cash, stock, or a combination of cash and stock.

We entered into a convertible loan agreement with Simax Precision Technologies Limited (“Simax”) on May 31, 2018. Simax may borrow up to $15 million in multiple promissory notes from us, subject to limitations. We expect to be a supplier of lithography modules to Simax which is focused on the manufacture, sale and service of lithography systems. As of

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June 30, 2019, Si max has borrowed $5 million from us under the convertible loan agreement. See Note 8 in the accompanying Notes to the Condensed Consolidated Financial Statements included in this Form 10-Q for further information.

In October 2018, the Board of Directors approved a new share repurchase authorization, which allows us to repurchase up to $40 million worth of shares of our common stock. The authorization provides for repurchases to be made in the open market or through negotiated transactions from time to time. The share repurchase authorization has no expiration date and may be discontinued at any time. During the three and six months ended June 30, 2019, we repurchased no shares and 37 thousand shares of common stock under our share repurchase authorization and those shares were subsequently retired. At June 30, 2019, there was $32,494 available for future share repurchases. Share repurchases under this plan are currently suspended until the completion of the merger with Nanometrics. For further information, see Note 18. Shares Repurchase Authorization and Note 2. Business Combinations in the accompanying Notes to the Condensed Consolidated Financial Statements included in this Form 10-Q.

We have a credit agreement with a bank that provides for a line of credit that is secured by the marketable securities we have with the bank. We are permitted to borrow up to 70% of the value of eligible securities held at the time the line of credit is accessed. As of June 30, 2019, the available line of credit was approximately $93.0 million with an available interest rate of 4.0%. The credit agreement is available to us until such time that either party terminates the arrangement at its discretion. To date, we have not utilized this line of credit.

Our future capital requirements will depend on many factors, including the timing and amount of our revenue and our investment decisions, which will affect our ability to generate additional cash. We expect that our existing cash, cash equivalents, marketable securities and availability under our line of credit will be sufficient to meet our anticipated cash requirements for working capital, capital expenditures and other cash needs for the next 12 months following the filing of this Form 10-Q. Thereafter, if cash generated from operations and financing activities is insufficient to satisfy our working capital requirements, we may seek additional funding through bank borrowings, sales of securities or other means. There can be no assurance that we will be able to raise any such capital on terms acceptable to us or at all.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate and Credit Market Risk

We are exposed to changes in interest rates and market liquidity including our investments in certain available-for-sale debt securities. Our available-for-sale securities consist of fixed and variable rate income investments, such as municipal notes, municipal bonds and corporate bonds. We continually monitor our exposure to changes in interest rates, market liquidity and credit ratings of issuers for our available-for-sale securities. It is possible that we are at risk if interest rates, market liquidity or credit ratings of issuers change in an unfavorable direction. The magnitude of any gain or loss will be a function of the difference between the fixed or variable rate of the financial instrument and the market rate, and our financial condition and results of operations could be materially affected. Based on a sensitivity analysis performed on our financial investments held as of June 30, 2019, an immediate adverse change of 10% in interest rates (e.g., a change from 3.00% to 3.30%) would result in an immaterial decrease in the fair value of our available-for-sale debt securities and would not have a material impact on our consolidated financial position, results of operations or cash flows.

Foreign Currency Risk

A substantial portion of our systems and software sales are denominated in U.S. dollars with the exception of Japan. As a result, we have relatively little exposure to foreign currency exchange risk with respect to these sales. Substantially all of our sales in Japan are denominated in Japanese yen. From time to time, we may enter into forward exchange contracts to economically hedge a portion, but not all, of the existing and anticipated foreign currency denominated transactions expected to occur within 12 months. The change in fair value of the forward exchange contracts is recognized under the caption “Other (income) expense” in the Condensed Consolidated Statements of Operations for each reporting period. As of June 30, 2019, we had eleven forward exchange contracts outstanding with a total notional contract value of $2.0 million. We do not use derivative financial instruments for trading or speculative purposes.

We have branch operations in Taiwan, Singapore and South Korea and wholly-owned subsidiaries in Europe, Japan and China. Our international subsidiaries and branches operate primarily using local functional currencies. Our exposure to foreign currency exchange rate fluctuations arise from intercompany balances between our U.S. headquarters and that of our foreign owned entities. Our intercompany balances are denominated in U.S. dollars. Since each foreign entity’s functional currency is generally denominated in its local currency, there is exposure to foreign exchange risk when the foreign entity’s intercompany balance is remeasured at a reporting date, resulting in transaction gains or losses. The intercompany balance, exposed to foreign currency risk, as of June 30, 2019 was approximately $25.9 million. A hypothetical change of 10% in the relative value of the U.S. dollar versus local functional currencies could result in approximately $1.3 million in foreign

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currency e xchange losses / (gains) which would be recorded as non-operating expense in other expense (income) in our Condensed Consolidated Statements of Operations. We cannot accurately predict future exchange rates or the overall impact of future exchange rate fl uctuations on our business, results of operations and financial condition.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in SEC rules and forms. These controls are procedures are also designed to ensure that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, we have recognized that any control and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is required to exercise judgment in evaluating its controls and procedures.

Scope of the Controls Evaluation

The evaluation of our disclosure controls and procedures included a review of the controls’ objectives and design, our implementation of the controls and the effect of the controls on the information generated for use in this Form 10-Q. In the course of the evaluation, we sought to identify data errors, control problems or acts of fraud and confirm that appropriate corrective actions, if any, including process improvements, were being undertaken. This type of evaluation is performed on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of the controls can be reported in our Quarterly Reports on Form 10-Q and in our Annual Reports on Form 10-K. Many of the components of our disclosure controls and procedures are also evaluated on an ongoing basis by other personnel in our accounting, finance, internal audit and legal functions. The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures and to modify them on an ongoing basis as necessary. A control system can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Conclusions

As of June 30, 2019, an evaluation of our disclosure controls and procedures was carried out under the supervision and with the participation of our management, including the CEO and CFO. Based on this evaluation, the CEO and CFO have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this Form 10-Q.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company’s quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

For a description of our previously reported legal proceedings refer to Part I, Item 3, “Legal Proceedings” in our 2018 10-K.

From time to time we are subject to ordinary routine litigation incidental to our business. As of June 30, 2019, there are no legal proceedings pending or threatened against the Company that management believes are likely to have a material adverse effect on the Company’s consolidated financial position or otherwise.

Item 1A. Risk Factors

Except as set forth below, there have been no material changes to our risk factors as discussed in Part I, Item 1A, “Risk Factors” in our 2018 10-K.

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There are risks and u ncertainties associated with our proposed merger with Nanometrics.

On June 23, 2019, the Company entered into an agreement and plan of merger (the “Merger Agreement”) with Nanometrics. Completion of the proposed merger is subject to various conditions, and the proposed merger may not occur even if we obtain stockholder approval.

Completion of the merger is subject to certain closing conditions, including, among other things, the (1) approval by the stockholders of Nanometrics of the issuance of the shares of Nanometrics common stock pursuant to the Merger Agreement, (2) approval by the stockholders of Nanometrics of an amendment and restatement of Nanometrics’ certificate of incorporation to increase the number of authorized shares of Nanometrics common stock, (3) the adoption by our stockholders of the Merger Agreement, (4) authorization for listing on the New York Stock Exchange of the shares of Nanometrics common stock (including the shares to be issued in the proposed merger), subject to official notice of issuance, (5) the receipt of required regulatory approvals, (6) effectiveness of a registration statement on Form S-4 with respect to the shares of Nanometrics common stock to be issued in connection with the proposed merger and (7) the absence of any order, injunction, decree or other legal restraint preventing, or any proceeding brought by a governmental authority challenging, the completion of the proposed merger or making the completion of the proposed merger illegal. Each party’s obligation to consummate the proposed merger is also subject to other specified customary conditions, including (1) the representations and warranties of the other party being true and correct as of the date of the Merger Agreement and as of the closing date of the proposed merger, generally subject to an overall material adverse effect qualification, (2) the performance in all material respects by the other party of its obligations under the Merger Agreement required to be performed on or prior to the date of the closing of the proposed merger, (3) receipt by such party of an opinion from its counsel of its obligations to the effect that the proposed merger will qualify as a reorganization within the meaning of Section 368(a) of the Code and (4) the absence of a continuing material adverse effect with respect to the other party. We cannot provide any assurance that these conditions will be met or waived, or that we will be able to successfully consummate the proposed merger as provided for under the Merger Agreement, or at all.

If the proposed merger is not completed, our stock price likely will fall to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. In addition, we may be required to pay a termination fee of $26 million if the Merger Agreement is terminated under circumstances specified in the Merger Agreement.

In this regard, we face risks and uncertainties due both to the pendency of the proposed merger, as well as the potential failure to consummate the proposed merger, including:

•

diversion of management time and resources in connection with the proposed merger;

•

the occurrence of any event, change or other circumstances that could give us or Nanometrics the right to terminate the Merger Agreement;

•

the outcome of any legal proceedings that may be instituted against us, Nanometrics or our respective directors and officers with respect to the proposed merger;

•

the risk that we or Nanometrics may not obtain the required stockholder approvals on the expected schedule or at all;

•

the ability to obtain regulatory approvals and satisfy other closing conditions to the proposed merger in a timely manner or at all, including the risk that regulatory approvals required for the proposed merger are not obtained or are obtained subject to conditions that are not anticipated;

•

delay in closing the proposed merger;

•

difficulties and delays in integrating our business with Nanometrics’ business or fully realizing any anticipated cost savings or other benefits expected from the proposed merger;

•

business disruptions from the proposed merger that may harm our business or Nanometrics’ business, including current plans and operations;

•

any announcement relating to the proposed transaction could have adverse effects on our ability or the ability of Nanometrics to retain and hire key personnel or maintain relationships with suppliers and customers, or on our or Nanometrics’ operating results and businesses generally;

•

the risk that the announcement of the proposed transaction could have adverse effects on the market price of our common stock or Nanometrics’ common stock and the uncertainty as to the long-term value of the common stock of the combined company following the proposed merger; and

•

certain restrictions during the pendency of the proposed merger that may impact our ability or the ability of Nanometrics to pursue certain business opportunities or strategic transactions.

In addition, we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed merger, and these fees and costs are payable by us regardless of whether the proposed merger is consummated.

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Item 2. Unregistered Sales of Equi ty Securities and Use of Proceeds

In October 2018, the Board of Directors approved a new share repurchase authorization, which allows us to repurchase up to $40 million worth of shares of our common stock. The authorization provides for repurchases to be made in the open market or through negotiated transactions from time to time. The share repurchase authorization has no expiration date and may be discontinued at any time. During the three and six months ended June 30, 2019, we repurchased 0 and 37 thousand shares of common stock under our share repurchase authorization and those shares were subsequently retired. At June 30, 2019, there was $32.5 million available for future share repurchases. Share repurchases under this plan are currently suspended until the completion of the merger with Nanometrics. For further information, see Note 18. Shares Repurchase Authorization and Note 2. Business Combinations in the accompanying Notes to the Condensed Consolidated Financial Statements.

In addition to our share repurchase program, we withhold common stock shares associated with net share settlements to cover tax withholding obligations upon the vesting of restricted stock unit awards and stock option exercises under the Company’s equity incentive program. During the three and six months ended June 30, 2019, we withheld 6.3 thousand and 33.6 thousand shares through net share settlements. For the three and six month periods ended June 30, 2019, net share settlements cost $0.2 million and $0.7 million, respectively. Please refer to Note 12 of the Notes to the Condensed Consolidated Financial Statements for further discussion regarding our equity incentive plan.

The following table provides details of common stock purchased during the three month period ended June 30, 2019 (in thousands, except per share data):

Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program		Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Program
April 1, 2019 - April 30, 2019		6.2	$	23.78		—	$	32,494
May 1, 2019 - May 31, 2019		—		—		—	$	32,494
June 1, 2019 - June 30, 2019		0.1		27.28		—	$	32,494
Three months ended June 30, 2019		6.3	$	23.81		—	$	32,494

¹ Includes Shares withheld through net share settlements.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibit No.	Description

2.1	Agreement and Plan of Merger, dated June 23, 2019, by and among Rudolph Technologies, Inc., Nanometrics Incorporated, and PV Equipment, Inc. (incorporated by reference to Exhibit 2.1 to the Registrant’s Registration Statement on Form 425, (SEC File No. 001-36226) filed on June 24, 2019.
3.1	Amendment to Restated Bylaws of Rudolph Technologies, Inc., effective June 23, 2019 (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form 425, (SEC File No. 001-36226) filed on June 24, 2019 .
10.1	Form of Indemnity Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form 425, (SEC File No. 001-36226) filed on June 24, 2019 .
31.1	Certification of Michael P. Plisinski, Chief Executive Officer, pursuant to Securities Exchange Act Rule 13a-14(a) .

31.2	Certification of Steven R. Roth, Chief Financial Officer, pursuant to Securities Exchange Act Rule 13a-14(a) .

32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Michael P. Plisinski, Chief Executive Officer of Rudolph Technologies, Inc .

32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Steven R. Roth, Chief Financial Officer of Rudolph Technologies, Inc .

101.INS	XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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

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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.


		Rudolph Technologies, Inc.

Date:	July 30, 2019	By:	/s/ Michael P. Plisinski
		Michael P. Plisinski
		Chief Executive Officer

Date:	July 30, 2019	By:	/s/ Steven R. Roth
		Steven R. Roth
		Senior Vice President, Chief Financial Officer and Principal Accounting Officer

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