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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 28, 2019

OR

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

For the transition period from to

Commission file number: 000-39110

ONTO INNOVATION INC.

(Exact name of registrant as specified in its charter)

Delaware |  | 94-2276314
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
16 Jonspin Road Wilmington, Massachusetts |  | 01887
(Address of principal executive offices) |  | (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 | ONTO | 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 (§ 232.405 of this chapter) 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 by Rule 12b-2 of the Exchange Act) Yes ☐ No ☒

As of November 1, 2019, there were 50,062,039 shares of common stock, $0.001 par value, issued and outstanding.

ONTO INNOVATION INC.

(formerly known as Nanometrics Incorporated)

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 28, 2019

PART I. FINANCIAL INFORMATION |  |
Item 1. |  | Financial Statements |  | 3
|  | Condensed Consolidated Balance Sheets at September 28, 2019 and December 29, 2018 (Unaudited) |  | 3
|  | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 28, 2019 and September 29, 2018 (Unaudited) |  | 4
|  | Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 28, 2019 and September 29, 2018 (Unaudited) |  | 5
|  | Condensed Consolidated Statement of Stockholders’ Equity for the Three and Nine Months Ended September 28, 2019 and September 29, 2018 (Unaudited) |  | 6
|  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 28, 2019 and September 29, 2018 (Unaudited) |  | 8
|  | Notes to Condensed Consolidated Financial Statements (Unaudited) |  | 9
Item 2. |  | Management’s Discussion and Analysis of Financial Condition and Results of Operations |  | 27
Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk |  | 36
Item 4. |  | Controls and Procedures |  | 37
PART II. OTHER INFORMATION |  |
Item 1. |  | Legal Proceedings |  | 38
Item 1A. |  | Risk Factors |  | 38
Item 6. |  | Exhibits |  | 41
Signatures |  | 42

2

Index

PART I — FINANCIAL INFORMATION

ITEM 1. | FINANCIAL STATEMENTS

ONTO INNOVATION INC.

(formerly known as Nanometrics Incorporated)

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands except share and per share amounts)

(Unaudited)

|  | September 28, 2019 |  |  | December 29, 2018 |
ASSETS |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 51,009 |  |  | $ | 110,951 |
Marketable securities |  |  | 93,101 |  |  |  | 40,841 |
Accounts receivable, net of allowances of $200 and $170, respectively |  |  | 56,969 |  |  |  | 50,854 |
Inventories |  |  | 69,691 |  |  |  | 61,915 |
Inventories-delivered systems |  |  | 117 |  |  |  | 180 |
Prepaid expenses and other |  |  | 7,398 |  |  |  | 6,140 |
Total current assets |  |  | 278,285 |  |  |  | 270,881 |
Property, plant and equipment, net |  |  | 52,449 |  |  |  | 47,900 |
Operating lease - right of use assets, net |  |  | 9,996 |  |  | — |
Goodwill |  |  | 26,310 |  |  |  | 26,372 |
Intangible assets, net |  |  | 25,078 |  |  |  | 27,326 |
Deferred income tax assets |  |  | 3,664 |  |  |  | 2,569 |
Other assets |  |  | 441 |  |  |  | 582 |
Total assets |  | $ | 396,223 |  |  | $ | 375,630 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |
Accounts payable |  | $ | 17,541 |  |  | $ | 16,540 |
Accrued payroll and related expenses |  |  | 12,283 |  |  |  | 21,658 |
Deferred revenue |  |  | 7,370 |  |  |  | 8,990 |
Operating lease liabilities |  |  | 2,773 |  |  | — |
Other current liabilities |  |  | 8,702 |  |  |  | 9,421 |
Income taxes payable |  |  | 1,162 |  |  |  | 3,164 |
Total current liabilities |  |  | 49,831 |  |  |  | 59,773 |
Deferred revenue |  |  | 1,432 |  |  |  | 1,753 |
Income taxes payable |  |  | 1,620 |  |  |  | 871 |
Deferred tax liabilities |  |  | 158 |  |  |  | 162 |
Operating lease liabilities |  |  | 7,193 |  |  | — |
Other long-term liabilities |  |  | 217 |  |  |  | 219 |
Total liabilities |  |  | 60,451 |  |  |  | 62,778 |
Commitments and contingencies (Note 11) |  |  |  |  |  |  |  |
Stockholders’ equity: |  |  |  |  |  |  |  |
Preferred stock, $0.001 par value; 3,000,000 shares authorized; no shares issued or outstanding |  |  | — |  |  |  | — |
Common stock, $0.001 par value, 47,000,000 shares authorized: 24,842,959 and 24,372,193, respectively, issued and outstanding |  |  | 25 |  |  |  | 24 |
Additional paid-in capital |  |  | 259,744 |  |  |  | 247,983 |
Retained earnings |  |  | 78,516 |  |  |  | 67,402 |
Accumulated other comprehensive loss |  |  | (2,513 | ) |  |  | (2,557 | )
Total stockholders’ equity |  |  | 335,772 |  |  |  | 312,852 |
Total liabilities and stockholders’ equity |  | $ | 396,223 |  |  | $ | 375,630 |

See Notes to Condensed Consolidated Financial Statements

3

Index

ONTO INNOVATION INC.

(formerly known as Nanometrics Incorporated)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands except per share amounts)

(Unaudited)

|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 28, 2019 |  |  | September 29, 2018 |  |  | September 28, 2019 |  |  | September 29, 2018 |
Net revenues: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Products |  | $ | 60,102 |  |  | $ | 63,798 |  |  | $ | 166,498 |  |  | $ | 211,521 |
Service |  |  | 13,023 |  |  |  | 12,792 |  |  |  | 41,347 |  |  |  | 35,986 |
Total net revenues |  |  | 73,125 |  |  |  | 76,590 |  |  |  | 207,845 |  |  |  | 247,507 |
Costs of net revenues: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cost of products |  |  | 26,743 |  |  |  | 25,589 |  |  |  | 76,936 |  |  |  | 85,417 |
Cost of service |  |  | 7,257 |  |  |  | 7,332 |  |  |  | 21,888 |  |  |  | 19,929 |
Amortization of intangible assets |  |  | 449 |  |  |  | 35 |  |  |  | 1,385 |  |  |  | 105 |
Total costs of net revenues |  |  | 34,449 |  |  |  | 32,956 |  |  |  | 100,209 |  |  |  | 105,451 |
Gross profit |  |  | 38,676 |  |  |  | 43,634 |  |  |  | 107,636 |  |  |  | 142,056 |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Research and development |  |  | 13,779 |  |  |  | 12,717 |  |  |  | 40,864 |  |  |  | 35,410 |
Selling |  |  | 8,465 |  |  |  | 8,902 |  |  |  | 25,991 |  |  |  | 28,077 |
General and administrative |  |  | 7,784 |  |  |  | 7,744 |  |  |  | 23,574 |  |  |  | 22,950 |
Merger expenses |  |  | 2,424 |  |  |  | — |  |  |  | 3,331 |  |  |  | — |
Amortization of intangible assets |  |  | 289 |  |  |  | — |  |  |  | 867 |  |  |  | — |
Total operating expenses |  |  | 32,741 |  |  |  | 29,363 |  |  |  | 94,627 |  |  |  | 86,437 |
Income from operations |  |  | 5,935 |  |  |  | 14,271 |  |  |  | 13,009 |  |  |  | 55,619 |
Other income (expense): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest expense, net |  |  | (38 | ) |  |  | (104 | ) |  |  | (144 | ) |  |  | (245 | )
Other income, net |  |  | 257 |  |  |  | 322 |  |  |  | 1,355 |  |  |  | 508 |
Total other income, net |  |  | 219 |  |  |  | 218 |  |  |  | 1,211 |  |  |  | 263 |
Income before income taxes |  |  | 6,154 |  |  |  | 14,489 |  |  |  | 14,220 |  |  |  | 55,882 |
Provision for income taxes |  |  | 1,943 |  |  |  | 2,921 |  |  |  | 3,106 |  |  |  | 10,258 |
Net income |  | $ | 4,211 |  |  | $ | 11,568 |  |  | $ | 11,114 |  |  | $ | 45,624 |
Net income per share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 0.17 |  |  | $ | 0.48 |  |  | $ | 0.45 |  |  | $ | 1.90 |
Diluted |  | $ | 0.17 |  |  | $ | 0.47 |  |  | $ | 0.45 |  |  | $ | 1.86 |
Weighted average shares used in per share calculation: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | 24,529 |  |  |  | 24,059 |  |  |  | 24,631 |  |  |  | 24,065 |
Diluted |  |  | 24,783 |  |  |  | 24,466 |  |  |  | 24,952 |  |  |  | 24,551 |

See Notes to Condensed Consolidated Financial Statements

4

Index

ONTO INNOVATION INC.

(formerly known as Nanometrics Incorporated)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 28, 2019 |  |  | September 29, 2018 |  |  | September 28, 2019 |  |  | September 29, 2018 |
Net income |  | $ | 4,211 |  |  | $ | 11,568 |  |  | $ | 11,114 |  |  | $ | 45,624 |
Other comprehensive income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Change in foreign currency translation adjustment |  |  | (671 | ) |  |  | 38 |  |  |  | (68 | ) |  |  | (530 | )
Net change in unrealized gains (losses) on available-for-sale investments |  |  | 11 |  |  |  | 44 |  |  |  | 112 |  |  |  | 7 |
Other comprehensive income |  |  | (660 | ) |  |  | 82 |  |  |  | 44 |  |  |  | (523 | )
Comprehensive income |  | $ | 3,551 |  |  | $ | 11,650 |  |  | $ | 11,158 |  |  | $ | 45,101 |

See Notes to Condensed Consolidated Financial Statements

5

Index

ONTO INNOVATION INC.

(formerly known as Nanometrics Incorporated)

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands except share amounts)

(Unaudited)

|  | Common Stock |  | Additional Paid-In |  | Retained |  | Accumulated Other Comprehensive |  | Total Stockholders’ |
Three Months Ended September 28, 2019 |  | Shares |  | Amount |  | Capital |  | Earnings |  | Loss |  | Equity |
Balance as of June 29, 2019 |  |  | 24,828,384 |  | $ | 25 |  | $ | 256,503 |  | $ | 74,305 |  | $ | (1,853 | ) | $ | 328,980 |
Net income |  |  | — |  |  | — |  |  | — |  |  | 4,211 |  |  | — |  |  | 4,211 |
Foreign currency translation adjustments |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (671 | ) |  | (671 | )
Unrealized gain on investments, net of tax |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 11 |  |  | 11 |
Issuance of common stock under stock-based compensation plans, net of taxes paid |  |  | 14,575 |  |  | — |  |  | (158 | ) |  | — |  |  | — |  |  | (158 | )
Stock-based compensation expense |  |  | — |  |  | — |  |  | 3,399 |  |  | — |  |  | — |  |  | 3,399 |
Balance as of September 28, 2019 |  |  | 24,842,959 |  | $ | 25 |  | $ | 259,744 |  | $ | 78,516 |  | $ | (2,513 | ) | $ | 335,772 |
|  | Common Stock |  | Additional Paid-In |  | Retained |  | Accumulated Other Comprehensive |  | Total Stockholders’ |
Three Months Ended September 29, 2018 |  | Shares |  | Amount |  | Capital |  | Earnings |  | Loss |  | Equity |
Balance as of June 30, 2018 |  |  | 24,066,368 |  | $ | 24 |  | $ | 237,378 |  | $ | 43,812 |  | $ | (2,729 | ) | $ | 278,485 |
Net income |  |  | — |  |  | — |  |  | — |  |  | 11,568 |  |  | — |  |  | 11,568 |
Foreign currency translation adjustments |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 38 |  |  | 38 |
Unrealized gain on investments, net of tax |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 44 |  |  | 44 |
Issuance of common stock under stock-based compensation plans, net of taxes paid |  |  | 149,194 |  |  | — |  |  | 728 |  |  | — |  |  | — |  |  | 728 |
Stock-based compensation expense |  |  | — |  |  | — |  |  | 3,212 |  |  | — |  |  | — |  |  | 3,212 |
Balance as of September 29, 2018 |  |  | 24,215,562 |  | $ | 24 |  | $ | 241,318 |  | $ | 55,380 |  | $ | (2,647 | ) | $ | 294,075 |

See Notes to Condensed Consolidated Financial Statements

6

Index

ONTO INNOVATION INC

(formerly known as Nanometrics Incorporated)

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

(In thousands except share amounts)

(Unaudited)

|  | Common Stock |  | Additional Paid-In |  | Retained |  | Accumulated Other Comprehensive |  | Total Stockholders’ |
Nine Months Ended September 28, 2019 |  | Shares |  | Amount |  | Capital |  | Earnings |  | Loss |  | Equity |
Balance as of December 29, 2018 |  |  | 24,372,193 |  | $ | 24 |  | $ | 247,983 |  | $ | 67,402 |  | $ | (2,557 | ) | $ | 312,852 |
Net income |  |  | — |  |  | — |  |  | — |  |  | 11,114 |  |  | — |  |  | 11,114 |
Foreign currency translation adjustments |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (68 | ) |  | (68 | )
Unrealized gain on investments, net of tax |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 112 |  |  | 112 |
Issuance of common stock under stock-based compensation plans, net of taxes paid |  |  | 470,766 |  |  | 1 |  |  | 2,048 |  |  | — |  |  | — |  |  | 2,049 |
Stock-based compensation expense |  |  | — |  |  | — |  |  | 9,713 |  |  | — |  |  | — |  |  | 9,713 |
Balance as of September 28, 2019 |  |  | 24,842,959 |  | $ | 25 |  | $ | 259,744 |  | $ | 78,516 |  | $ | (2,513 | ) | $ | 335,772 |
|  | Common Stock |  | Additional Paid-In |  | Retained |  | Accumulated Other Comprehensive |  | Total Stockholders’ |
Nine Months Ended September 29, 2018 |  | Shares |  | Amount |  | Capital |  | Earnings |  | Loss |  | Equity |
Balance as of December 30, 2017 |  |  | 24,628,722 |  | $ | 26 |  | $ | 255,368 |  | $ | 9,113 |  | $ | (2,124 | ) | $ | 262,383 |
Net income |  |  | — |  |  | — |  |  | — |  |  | 45,624 |  |  | — |  |  | 45,624 |
Adjustment due to adoption of ASU 2014-09 Revenue from Contracts with Customers, net of tax |  |  | — |  |  | — |  |  | — |  |  | 726 |  |  | — |  |  | 726 |
Restructuring of foreign subsidiaries |  |  | — |  |  | — |  |  | — |  |  | (83 | ) |  | — |  |  | (83 | )
Foreign currency translation adjustments |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (530 | ) |  | (530 | )
Unrealized loss on investments, net of tax |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 7 |  |  | 7 |
Issuance of common stock under stock-based compensation plans, net of taxes paid |  |  | 483,027 |  |  | — |  |  | 706 |  |  | — |  |  | — |  |  | 706 |
Stock-based compensation expense |  |  | — |  |  | — |  |  | 8,229 |  |  | — |  |  | — |  |  | 8,229 |
Repurchases and retirement of common stock under share repurchase plans |  |  | (896,187 | ) |  | (2 | ) |  | (22,985 | ) |  | — |  |  | — |  |  | (22,987 | )
Balance as of September 29, 2018 |  |  | 24,215,562 |  | $ | 24 |  | $ | 241,318 |  | $ | 55,380 |  | $ | (2,647 | ) | $ | 294,075 |

See Notes to Condensed Consolidated Financial Statements

7

Index

ONTO INNOVATION INC.

(formerly known as Nanometrics Incorporated)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

| Nine Months Ended |
| September 28, 2019 |  |  | September 29, 2018 |
Cash flows from operating activities: |  |  |  |  |  |  |
Net income | $ | 11,114 |  |  | $ | 45,624 |
Reconciliation of net income to net cash from operating activities: |  |  |  |  |  |  |
Depreciation and amortization |  | 7,712 |  |  |  | 4,962 |
Stock-based compensation |  | 9,713 |  |  |  | 8,229 |
Disposal of fixed assets |  | (831 | ) |  |  | 38 |
Inventory write-down |  | 4,139 |  |  |  | 870 |
Deferred income taxes |  | (4 | ) |  |  | 4,668 |
Changes in assets and liabilities: |  |  |  |  |  |  |
Accounts receivable |  | (6,251 | ) |  |  | 11,520 |
Inventories |  | (13,130 | ) |  |  | (6,351 | )
Inventories-delivered systems |  | 63 |  |  |  | (324 | )
Prepaid expenses and other |  | (1,461 | ) |  |  | (1,224 | )
Operating lease - right of use assets |  | 1,917 |  |  |  | — |
Accounts payable, accrued and other liabilities |  | (8,053 | ) |  |  | 9,623 |
Deferred revenue |  | (1,941 | ) |  |  | 5,126 |
Operating lease liabilities |  | (1,774 | ) |  |  | — |
Income taxes payable |  | (2,348 | ) |  |  | 647 |
Net cash provided by (used in) operating activities |  | (1,135 | ) |  |  | 83,408 |
Cash flows from investing activities: |  |  |  |  |  |  |
Payments to acquire certain assets |  | — |  |  |  | (2,000 | )
Sales of marketable securities |  | 3,968 |  |  |  | 19,776 |
Maturities of marketable securities |  | 48,753 |  |  |  | 32,195 |
Purchases of marketable securities |  | (104,585 | ) |  |  | (46,604 | )
Purchases of property, plant and equipment |  | (9,943 | ) |  |  | (2,942 | )
Proceeds from sale of property, plant and equipment |  | 896 |  |  |  | — |
Net cash provided by (used in) investing activities |  | (60,911 | ) |  |  | 425 |
Cash flows from financing activities: |  |  |  |  |  |  |
Proceeds from sale of shares under employee stock option plans and purchase plan |  | 4,554 |  |  |  | 3,826 |
Taxes paid on net issuance of stock awards |  | (2,505 | ) |  |  | (3,122 | )
Repurchases of common stock under share repurchase plans |  | — |  |  |  | (22,987 | )
Net cash provided by (used in) financing activities |  | 2,049 |  |  |  | (22,283 | )
Effect of exchange rate changes on cash and cash equivalents |  | 55 |  |  |  | (346 | )
Net increase (decrease) in cash and cash equivalents |  | (59,942 | ) |  |  | 61,204 |
Cash and cash equivalents, beginning of period |  | 110,951 |  |  |  | 34,899 |
Cash and cash equivalents, end of period | $ | 51,009 |  |  | $ | 96,103 |
Supplemental disclosure of non-cash investing activities: |  |  |  |  |  |  |
Transfers between inventory and property, plant and equipment, net | $ | 1,198 |  |  | $ | 602 |
Unpaid property, plant and equipment |  | 1,062 |  |  |  | 1,684 |

See Notes to Condensed Consolidated Financial Statements

8

Index

ONTO INNOVATION INC.

(formerly known as Nanometrics Incorporated)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Nature of Business, Basis of Presentation and Significant Accounting Policies

Description of Business – Onto Innovation Inc. (“Onto” or the “Company”) and its wholly-owned subsidiaries provide advanced, high-performance process control metrology and inspection systems used primarily in the fabrication of semiconductors and other solid-state devices as well as industrial and scientific applications. Onto's metrology systems precisely measure a wide range of film types deposited on substrates during manufacturing to control manufacturing processes and increase production yields in the fabrication of integrated circuits. The Company’s optical critical dimension (“OCD”®) technology is a patented critical dimension measurement technology that is used to precisely determine the dimensions on the semiconductor wafer that directly control the resulting performance of the integrated circuit devices. The thin film metrology systems use a broad spectrum of wavelengths, high-sensitivity optics, proprietary software, and patented technology to measure the thickness and uniformity of films deposited on silicon and other substrates as well as their chemical composition. The overlay metrology systems are used to measure the overlay accuracy of successive layers of semiconductor patterns on wafers in the photolithography process. Onto's inspection systems are used to find defects on patterned and unpatterned wafers at nearly every stage of the semiconductor production flow. The Company’s corporate headquarters are in Wilmington, Massachusetts.

On October 25, 2019, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) among Nanometrics Incorporated (“Nanometrics”), Rudolph Technologies, Inc. (“Rudolph”), and PV Equipment Inc., a wholly-owned subsidiary of Nanometrics (“Merger Sub”), Rudolph merged with Merger Sub with Rudolph surviving the merger as a wholly-owned subsidiary of Nanometrics. The combined company will account for the acquisition pursuant to the Merger Agreement as a reverse acquisition using the acquisition method of accounting in accordance with generally accepted accounting principles, with Rudolph being treated as the acquiring entity for accounting purposes.

In identifying Rudolph as the accounting acquiring entity, Nanometrics and Rudolph reviewed the accounting guidance as provided in Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations”, which takes into account the type of consideration, the structure of the merger and the other transactions contemplated by the merger agreement, relative outstanding share ownership, the composition of the combined company board of directors, designation of certain senior management positions of the combined company, mainly the Chief Executive Officer and the Chief Financial Officer, relative voting rights, relative size as measured by assets, revenue or earnings as well as other metrics an investor would use for evaluating the respective company’s current and future financial performance, which of the combining entities initiated the combination and where the combined company’s headquarters will be located.

Effective with the merger, Nanometrics changed its name to Onto Innovations Inc. References to “the Company” herein with respect to time frames prior to October 25, 2019 refer to Nanometrics, accordingly, the accompanying condensed consolidated financial statements for all periods presented herein are those of Nanometrics prior to the merger (See Note 16).

Basis of Presentation – The accompanying condensed consolidated financial statements (“financial statements”) have been prepared on a consistent basis with the audited consolidated financial statements as of December 29, 2018 and include all normal recurring adjustments necessary to fairly state the information set forth therein. All significant intercompany accounts and transactions have been eliminated in consolidation.

The financial statements have been prepared in accordance with the regulations of the United States Securities and Exchange Commission (“SEC”) for interim periods in accordance with S-X Article 10, and, therefore, omit certain information and footnote disclosure necessary to present the statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The operating results for interim periods are not necessarily indicative of the operating results that may be expected for the entire year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 29, 2018, which were included in the Company’s Annual Report on Form 10-K filed with the SEC on February 25, 2019.

Fiscal Period – The Company uses a 52/53 week fiscal year ending on the last Saturday of the calendar year. All references to the quarter refer to Onto’s fiscal quarter. The fiscal quarters reported herein are 13 week periods.

Use of Estimates – The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could

9

Index

differ materially from those estimates. Estimates are used for, but not limited to, revenue recognition, the provision for doubtful accounts, the provision for excess, obsolete, or slow-moving inventories, valuation of intangible and long-lived assets, warranty accruals, income taxes, valuation of stock-based compensation, and contingencies.

Changes to Significant Accounting Policies

Except for the change below, the Company has consistently applied its accounting policies to all periods presented in these financial statements.

Leases - The Company adopted the new accounting standard Topic 842, Leases and all related amendments, as of December 30, 2018, the first day of its 2019 fiscal year, by electing to use the additional optional transition method permitted under the Topic of applying the new leases standard at the adoption date for all then-active leases and prospectively to leasing arrangements entered after the adoption date. The Company’s reporting for the comparative period presented in the financial statements continues to follow prior U.S. GAAP.

The main impact of Topic 842 was to increase the transparency and comparability of the Company’s financial statements by requiring the recognition of right of use assets (“ROU assets”) and lease liabilities on the Company’s balance sheet for leases classified as operating leases under which the Company is lessee. Under the Topic, disclosures are required to meet the objective of enabling users of the Company’s financial statements to assess the amount, timing, and uncertainty of cash flows arising from such leases.

The Company elected all available practical expedients, adopted an accounting policy to not recognize lease liabilities or ROU assets for short-term leases, and implemented internal controls and system functionality to enable the preparation of financial information upon adoption of Topic 842.

The Company has identified all its leases as operating leases, which primarily comprised leases for office space, data centers, colocation agreements, ISP services, logistics arrangements, equipment rental, and others. The Company’s lease accounting policy can be summarized into 4 categories, namely (1) identifying the lease, (2) classifying the lease, (3) measuring the lease, and (4) accounting for the lease.

Identifying the lease – The Company evaluates each service contract upon inception to determine whether it is, or contains, a lease. Such determination is made by applying judgment in evaluating each service contract within the context of the 5-step decision making process under Topic 842. The key concepts of the 5-step decision making process that the Company must evaluate can be summarized as: (1) is there an identified physical asset, (2) does the Company have the right to substantially all the economic benefits from the asset throughout the contract period, (3) does the Company control how and for what purpose the asset is used, (4) does the Company operate the asset, and (5) did the Company design the asset in a way that predetermines how it will be used.

For the service contract to be identified as a lease there must be an underlying physical asset (step 1) that the Company can obtain substantially all the economic benefits from (step 2) by exercising control over (step 3) throughout the lease term. The Company has been able to identify which of its contracts are leases through its evaluations of steps 1, 2, and 3.

Classifying the lease – Once the Company identifies a lease, it then applies judgment in evaluating the contract to determine how the lease should be classified. If any of the following criteria have been met the lease is classified as a financing lease, otherwise it is classified as an operating lease.

| 1. | The lease transfers ownership of the underlying identified asset to the Company by the end of the lease term.

| 2. | The lease grants the Company an option to purchase the underlying identified asset that it is reasonably certain to exercise.

| 3. | Generally, the lease term is for the major part of the remaining economic useful life of the underlying identified asset.

| 4. | The present value of the sum of the lease payments and any residual value guaranteed by the Company that is not already reflected in the lease payments equals or exceeds substantially all the fair value of the underlying identified asset.

| 5. | The underlying asset is of such a specialized nature that it wouldn’t have an alternative use to the lessor at the end of the lease term.

10

Index

The Company has not entered into any contracts that transfer ownership of the underlying identified asset to the Company by the end of the lease term and there are only a small number of individually insignificant leases that contain a purchase option, none of which the Company intends to exercise. The Company has evaluated its contracts under these criteria and has determined that all such contracts are operating leases.

The Company does not reassess the lease classification after the commencement date unless (a) the contract is modified, and the modification is not accounted for as a separate contract, (b) there is a change in the lease term, or (c) there is a change in the assessment of whether the Company is reasonably certain to exercise an option to purchase the underlying asset.

Measuring the lease – Topic 842 requires the Company to record a ROU Asset and a lease liability at the lease commencement date for all leases. The Company does this by measuring and recording a lease liability equal to the present value of all remaining lease payments. The Company applies judgment in estimating the remaining lease term. For its offices, data centers, colocation agreements, ISP services and logistics it assesses the current life of the lease, defined renewal periods in the contract (if any), the strategic plan for maintaining (or replacing) the asset among other factors in determining the future lease term when measuring the lease. While implementing Topic 842, the Company noted that none of its leases contained residual value guarantees, variable lease payments or any restrictions or covenants imposed by the lessors, outside of standard restrictions on subletting office space.

Under Topic 842, if the interest rate implicit in the lease is or can be known, the Company is required to use such rate. The rate implicit in the lease is not known for any of the Company’s leases, so the Company bases its interest rate on its incremental borrowing rate, using significant judgment to adjust its incremental borrowing rate to align with the term of the lease and the incremental borrowing rates in the countries in which the Company operates.

Once the Company has calculated the initial lease liability, it uses such measurement as the starting point for determining the ROU asset value. Any lease payments made to the lessor at or before the lease commencement date (for which the underlying service period has not expired) are added to the value of the initial lease liability along with any initial direct costs (such as broker’s commissions) incurred by the Company to arrive at the initial ROU asset value.

The Company initially measures the lease as of the lease commencement date, and except as noted below, it does not remeasure the lease. The Company applies significant judgment in considering all relevant factors that create an economic benefit (e.g.; contract-based, asset-based, entity-based, and market-based, among others) as of the commencement date in determining the initial lease term and future lease payments. For example, the Company exercises judgment in determining whether renewal periods will be exercised during the initial measurement process. If the Company believes it will exercise the renewal option, and the lease payments associated with the renewal periods are known or calculable, such renewal lease payments would be included in the initial measurement of the lease liability. Otherwise, even if the Company believes that it will exercise the renewal period, if the renewal payments are unknown or not calculable, they would not be included until they became known or calculable at which time the Company would remeasure the remaining lease payments similar to a lease modification.

At the implementation date, the Company measured its initial lease liability as $11.5 million for all leases in effect at such date. The Company determined it had made $0.1 million of lease payments to lessors at or before the implementation date for which the underlying service period had not expired; consequently, the Company initially recognized $11.6 million as a right to use asset at the implementation date. During the three- and nine-month periods ended September 28, 2019, the Company recognized $0.1 million and $0.8 million of lease liabilities and right of use assets related to contracts entered into during the respective period.

Generally, the Company does not reassess lease terms or purchase options, nor does it remeasure lease payments unless certain circumstances occur. The Company reassesses the lease term or its option to purchase the underlying asset only if and at the point in time that (a) there is a significant event of change in circumstances within the Company’s control that directly impacts the lease, (b) an event occurs that is written into the lease that obliges the Company to exercise an option, (c) the Company elects to exercise an option that it did not previously determine it was going to exercise, or (d) the Company decides to not exercise an option that it previously had determined it was going to exercise. The Company remeasures the lease payments if and at the point in time that (a) the lease is modified and the modification is not accounted for as a separate contract, (b) a contingency is resolved that causes variable lease payments to meet the definition of fixed lease payments, (c) the lease term changes, (d) the Company changes its assessment as to whether it will exercise an option to purchase the leased asset, or (e) there is a change in amounts probable of being owed under a residual guarantee value clause.

Accounting for the lease – Topic 842 requires the Company to recognize a ROU asset and a lease liability, initially measured as set forth above, for each of its operating leases in its statement of financial position. At adoption of Topic 842, any difference in the initial measurement of the ROU asset and the lease liability was charged to opening retained earnings as a cumulative effect adjustment; however, no such adjustment was recorded by the Company as the initial measurement resulted in no such difference. Topic 842 also requires the Company to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a straight-line basis in the statement of operations. The Company uses the effective interest rate method to accrete interest on the lease liability.

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Index

The components of lease expense for the three and nine months ended September 28, 2019 were as follows (in thousands):

|  | Three Months |  |  | Nine Months |
|  | Ended |  |  | Ended |
|  | September 28, 2019 |  |  | September 28, 2019 |
Operating lease expense |  | $ | 925 |  |  | $ | 2,696 |

Other information related to leases as of and for the nine months ended September 28, 2019 was as follows (in thousands, except as indicated):

Supplemental Cash Flows Information |  | Amount |
Cash paid for amounts included in the measurement of lease liabilities: |  |  |  |
Operating cash flows used by operating leases |  | $ | 2,553 |
Right of use assets recognized in exchange for operating lease liabilities |  |  | 779 |
Imputed interest - operating leases |  |  | 381 |
Weighted average remaining lease term - operating leases (months) |  |  | 53 |
Weighted average discount rate - operating leases (per annum) |  |  | 4.91 | %

The following table presents a maturity analysis of the Company’s leases (all of which are operating leases), showing the undiscounted annual cash flows for each of the periods presented with a reconciliation to the operating lease liabilities recognized in the Statement of Financial Position as of September 28, 2019 (in thousands):

Fiscal year |  | Amount |
2019 (remainder) |  | $ | 847 |
2020 |  |  | 2,968 |
2021 |  |  | 2,109 |
2022 |  |  | 1,540 |
2023 |  |  | 1,246 |
Thereafter |  |  | 2,705 |
Total future minimum lease payments |  |  | 11,415 |
Less: future interest |  |  | (1,449 | )
Total |  | $ | 9,966 |
Reported as of September 28, 2019 |  |  |  |
Operating lease liability - short term |  | $ | 2,773 |
Operating lease liability - long term |  |  | 7,193 |
Total |  | $ | 9,966 |

Future minimum lease payments as of December 29, 2018 for the leases then in effect, as reported under previous guidance, was as follows (in thousands):

Fiscal year |  | Amount |
2019 |  | $ | 3,002 |
2020 |  |  | 1,891 |
2021 |  |  | 1,051 |
2022 |  |  | 970 |
2023 |  |  | 750 |
Thereafter |  |  | 696 |
Total |  | $ | 8,360 |

12

Index

Note 2. New Accounting Pronouncements

Recently Adopted Accounting Standards

In June 2018, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update which simplifies the accounting for nonemployee share-based payment transactions. The accounting for share-based payments to nonemployees and employees will be substantially aligned because of this update. The standard is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The adoption of this guidance did not have a significant impact on the Company’s consolidated results of operations or consolidated statement of cash flows.

In February 2018, the FASB issued an accounting standard update that allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (“TCJA”). This accounting standard update eliminates the stranded tax effects from the TCJA and improves the usefulness of information reported to users of the Company’s financial statements. This standard is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of this guidance did not have a significant impact on the Company’s financial statements as an election was not made to reclassify such income tax effects from accumulated other comprehensive income to retained earnings.

Recently Issued Accounting Standards

In August 2018, the FASB issued an accounting standard update to provide additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The amendments in this update should be applied retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the effect of this update on its consolidated financial condition and results of operations.

In August 2018, the FASB issued an accounting standard update which improves the effectiveness of fair value measurement disclosures in the notes to the financial statements. The update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Certain amendments within the update should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. Entities are permitted to early adopt any removed or modified disclosures upon issuance of this update and delay adoption of the additional disclosures until their effective date. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated results of operations or consolidated statement of cash flows.

In January 2017, the FASB issued an accounting standard update which simplifies the subsequent measurement of goodwill and removes step 2 from the goodwill impairment test. Instead, an entity should record an impairment charge based on excess of a reporting unit’s carrying amount over its fair value. The standard is effective for public companies for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial condition and results of operations.

In June 2016, the FASB issued an accounting standard update which requires measurement and timely recognition of expected credit losses for financial assets. The update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The standard is to be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the effect of this update on its consolidated financial condition and results of operations.

Note 3. Acquisition

On October 25, 2019, PV Equipment Inc., a wholly-owned subsidiary of Nanometrics Incorporated (“Nanometrics”), merged with Rudolph Technologies, Inc. (“Rudolph”), with Rudolph surviving the merger as a wholly-owned subsidiary of Nanometrics. The combined company will account for the acquisition pursuant to the merger agreement as a reverse acquisition using the acquisition method of accounting in accordance with generally accepted accounting principles, with Rudolph being treated as the acquiring entity for accounting purposes.

13

Index

In identifying Rudolph as the accounting acquiring entity, Nanometrics and Rudolph reviewed the accounting guidance as provided in Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations”, which takes into account the type of consideration, the structure of the merger and the other transactions contemplated by the merger agreement, relative outstanding share ownership, the composition of the combined company board of directors, designation of certain senior management positions of the combined company, mainly the Chief Executive Officer and the Chief Financial Officer, relative voting rights, relative size as measured by assets, revenue or earnings as well as other metrics an investor would use for evaluating the respective company’s current and future financial performance, which of the combining entities initiated the combination and where the combined company’s headquarters will be located.

Effective with the merger, Nanometrics changed its name to Onto. The accompanying condensed consolidated financial statements for all periods presented are those of Nanometrics prior to the merger (See Note 16).

On November 15, 2018, the Company completed the acquisition of 4D Technology Corporation (“4D”), an Arizona-based supplier of high-performance interferometric measurement inspection systems, for $42.5 million.

4D’s Dynamic Interferometry® solutions are used in a variety of industries to provide accurate shape and surface measurement data, which provides feedback to customers of optical quality, machine finish, and surface defectivity, to improve manufacturing yield and performance. The addition of 4D’s technology added new technology to the Company’s portfolio, expanded its served markets with new applications in the scientific research, aerospace, industrial and optics manufacturing markets.

The following table presents the final purchase price allocation as of November 15, 2018 (in thousands):

| Purchase Price Allocation November 15, 2018 |
Cash and cash equivalents | $ | 1,414 |
Accounts receivable, net |  | 4,156 |
Inventories |  | 4,563 |
Prepaid and other current assets |  | 104 |
Property and equipment |  | 145 |
Accounts payable |  | (702 | )
Accrued liabilities |  | (760 | )
Deferred revenue |  | (197 | )
Deferred tax liabilities |  | (5,408 | )
Total assets acquired/liabilities assumed |  | 3,315 |
Developed technology |  | 15,500 |
In-process research and development |  | 1,400 |
Customer relationships |  | 4,600 |
Order backlog |  | 500 |
Trade name |  | 1,500 |
Total identified intangible assets |  | 23,500 |
Total identifiable net assets |  | 26,815 |
Goodwill |  | 15,700 |
Total purchase consideration | $ | 42,515 |

Note 4. Revenue

The Company disaggregates its revenue from contracts with customers by geographic location. See Note 15 for further information.

Contract assets and liabilities

Contract assets and liabilities consisted of the following (in thousands):

|  | September 28, 2019 |  |  | December 29, 2018 |
Contract assets |  | $ | 6,224 |  |  | $ | 2,189 |
Contract liabilities |  |  | 8,801 |  |  |  | 10,743 |
Net contract liabilities |  | $ | 2,577 |  |  | $ | 8,554 |

14

Index

During the three and nine months ended September 28, 2019 the Company recognized $4.7 million and $7.9 million of revenue related to amounts that had been reported as contract liabilities at December 29, 2018. Net contract liabilities at September 28, 2019 decreased by $6.0 million from December 29, 2018. The Company classifies its contract liabilities as deferred revenue on its condensed consolidated balance sheet.

Most of the Company’s remaining performance obligations on contracts with customers are expected to be recognized as revenue within the next six to twelve months.

Note 5. Fair Value Measurements and Disclosures

The Company determines the fair values of its financial instruments based on the fair value hierarchy established in FASB Accounting Standards Codification (“ASC”) 820, Fair Value Measurement, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. The fair value hierarchy prioritizes the inputs into the following three levels that may be used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

Level 3 — Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Such unobservable inputs include an estimated discount rate used in the Company’s discounted present value analysis of future cash flows, which reflects the Company’s estimate of debt with similar terms in the current credit markets. As there is currently minimal activity in such markets, the actual rate could be materially different.

Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard assumes that the transaction to sell the asset or transfer the liability occurs in the principal or most advantageous market for the asset or liability and establishes that the fair value of an asset or liability shall be determined based on the assumptions that market participants would use in pricing the asset or liability.

The following tables present the Company’s assets and liabilities measured at estimated fair value on a recurring basis, excluding accrued interest components, categorized in accordance with the fair value hierarchy (in thousands), as of the following dates:

|  | September 28, 2019 |  |  | December 29, 2018 |
|  | Fair Value Measurements Using Input Types |  |  |  |  |  |  | Fair Value Measurements Using Input Types |  |  |  |  |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash equivalents: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Money market funds |  | $ | 9,162 |  |  | $ | — |  |  | $ | — |  |  | $ | 9,162 |  |  | $ | 113 |  |  | $ | — |  |  | $ | — |  |  | $ | 113 |
Commercial paper |  |  | — |  |  |  | 5,985 |  |  |  | — |  |  |  | 5,985 |  |  |  | — |  |  |  | 1,993 |  |  |  | — |  |  |  | 1,993 |
Certificates of deposit |  |  | — |  |  |  | 1,000 |  |  |  | — |  |  |  | 1,000 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total cash equivalents |  | $ | 9,162 |  |  | $ | 6,985 |  |  | $ | — |  |  | $ | 16,147 |  |  | $ | 113 |  |  | $ | 1,993 |  |  | $ | — |  |  | $ | 2,106 |
Marketable securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Certificates of deposits |  | $ | — |  |  | $ | 29,007 |  |  | $ | — |  |  | $ | 29,007 |  |  | $ | — |  |  | $ | 9,497 |  |  | $ | — |  |  | $ | 9,497 |
Commercial paper |  |  | — |  |  |  | 16,759 |  |  |  | — |  |  |  | 16,759 |  |  |  | — |  |  |  | 7,932 |  |  |  | — |  |  |  | 7,932 |
Corporate debt securities |  |  | — |  |  |  | 36,927 |  |  |  | — |  |  |  | 36,927 |  |  |  | — |  |  |  | 15,730 |  |  |  | — |  |  |  | 15,730 |
Asset-backed Securities |  |  | — |  |  |  | 10,408 |  |  |  | — |  |  |  | 10,408 |  |  |  | — |  |  |  | 7,682 |  |  |  | — |  |  |  | 7,682 |
Total marketable securities |  | $ | — |  |  | $ | 93,101 |  |  | $ | — |  |  | $ | 93,101 |  |  | $ | — |  |  | $ | 40,841 |  |  | $ | — |  |  | $ | 40,841 |
Total(1) |  | $ | 9,162 |  |  | $ | 100,086 |  |  | $ | — |  |  | $ | 109,248 |  |  | $ | 113 |  |  | $ | 42,834 |  |  | $ | — |  |  | $ | 42,947 |

| (1) | Excludes $34.9 million and $108.8 million held in operating accounts as of September 28, 2019 and December 29, 2018, respectively. See “Note 6. Cash and Investments” of the Notes to Condensed Consolidated Financial Statements for more information.

15

Index

The fair values of the marketable securities that are classified as Level 1 in the table above were derived from quoted market prices for identical assets or liabilities in active markets that the Company can access. The fair value of marketable securities that are classified as Level 2 in the table above were derived from non-binding market consensus prices that were corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques with all significant inputs derived from or corroborated by observable market data. There were no transfers of instruments between Level 1, Level 2 and Level 3 during the financial periods presented.

Derivatives

The Company uses foreign currency exchange forward contracts to mitigate variability in gains and losses generated from the re-measurement of certain monetary assets and liabilities denominated in foreign currencies. These derivatives are carried at fair value with changes recorded in other income (expense), net in the condensed consolidated statements of operations. Changes in the fair value of these derivatives are largely offset by re-measurement of the underlying assets and liabilities. The derivatives have maturities of approximately 30 days.

The settlement result of forward foreign currency contracts included in the three and nine months ended September 28, 2019 was a loss of $0.7 million and a loss of $1.4 million, respectively. For the three and nine months ended September 29, 2018 the settlement of forward foreign currency contracts was not material.

The following table presents the notional amounts and fair values of the Company’s outstanding derivative instruments in U.S. Dollar equivalent as of the following dates (in millions):

|  | September 28, 2019 |  |  | December 29, 2018 |
|  |  |  |  |  | Fair Value |  |  |  |  |  |  | Fair Value |
|  | Notional Amount |  |  | Asset |  |  | Liability |  |  | Notional Amount |  |  | Asset |  |  | Liability |
Undesignated Hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Forward Foreign Currency Contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Purchase |  | $ | 30.9 |  |  | $ | — |  |  | $ | 0.1 |  |  | $ | 25.9 |  |  | $ | — |  |  | $ | — |
Sell |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 21.8 |  |  | $ | — |  |  | $ | 0.2 |

Note 6. Cash and Investments

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

| September 28, 2019 |  |  | December 29, 2018 |
| Amortized Cost |  |  | Gross Unrealized Gains |  |  | Gross Unrealized Losses |  |  | Estimated Fair Market Value |  |  | Amortized Cost |  |  | Gross Unrealized Gains |  |  | Gross Unrealized Losses |  |  | Estimated Fair Market Value |
Cash | $ | 34,862 |  |  | $ | — |  |  | $ | — |  |  | $ | 34,862 |  |  | $ | 108,845 |  |  | $ | — |  |  | $ | — |  |  | $ | 108,845 |
Cash equivalents: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Money market funds |  | 9,162 |  |  |  | — |  |  |  | — |  |  |  | 9,162 |  |  |  | 113 |  |  |  | — |  |  |  | — |  |  |  | 113 |
Commercial paper |  | 5,985 |  |  |  | — |  |  |  | — |  |  |  | 5,985 |  |  |  | 1,993 |  |  |  | — |  |  |  | — |  |  |  | 1,993 |
Certificates of deposit |  | 1,000 |  |  |  | — |  |  |  | — |  |  |  | 1,000 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Marketable securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Certificates of deposit |  | 29,003 |  |  |  | 4 |  |  |  | — |  |  |  | 29,007 |  |  |  | 9,500 |  |  |  | — |  |  |  | (3 | ) |  |  | 9,497 |
Commercial paper |  | 16,760 |  |  |  | — |  |  |  | (1 | ) |  |  | 16,759 |  |  |  | 7,933 |  |  |  | — |  |  |  | (1 | ) |  |  | 7,932 |
Corporate debt securities |  | 36,894 |  |  |  | 33 |  |  |  | — |  |  |  | 36,927 |  |  |  | 15,788 |  |  |  | — |  |  |  | (58 | ) |  |  | 15,730 |
Asset-backed securities |  | 10,393 |  |  |  | 15 |  |  |  | — |  |  |  | 10,408 |  |  |  | 7,706 |  |  |  | — |  |  |  | (24 | ) |  |  | 7,682 |
Total cash, cash equivalents, and marketable securities | $ | 144,059 |  |  | $ | 52 |  |  | $ | (1 | ) |  | $ | 144,110 |  |  | $ | 151,878 |  |  | $ | — |  |  | $ | (86 | ) |  | $ | 151,792 |

16

Index

Available-for-sale marketable securities, readily convertible to cash, with maturity dates of 90 days or less are classified as cash equivalents, while those with maturity dates greater than 90 days are classified as marketable securities within short-term assets. All marketable securities as of September 28, 2019 and December 29, 2018, were available-for-sale and reported at fair value based on the estimated or quoted market prices as of the balance sheet date.

Realized gains and losses on sale of securities are recorded in other income (expense), net, in the Company’s condensed consolidated statement of operations. For the three and nine months ended September 28, 2019 and September 29, 2018, net realized gains and losses were not material.

Unrealized gains or losses, net of tax effect, are recorded in accumulated other comprehensive income (loss) within stockholders’ equity. Both the gross unrealized gains and gross unrealized losses for the three and nine months ended September 28, 2019 and September 29, 2018 were not material, and no marketable securities had other than temporary impairment.

All marketable securities as of September 28, 2019 and December 29, 2018 had maturity dates of less than 34 months.

Note 7. Accounts Receivable

The Company maintains arrangements under which eligible accounts receivable in Japan are sold without recourse to unrelated third-party financial institutions. These receivables were not included in the condensed consolidated balance sheets as the criteria for sale treatment had been met. The Company pays administrative fees as well as interest, which ranged 0.61% to 1.68% during the nine months ended September 28, 2019, based on the anticipated length of time between the date the sale is consummated, and the expected collection date of the receivables sold.

The Company sold $4.4 million and $12.8 million of receivables during the three months ended September 28, 2019 and September 29, 2018, respectively, and $18.7 million and $47.5 million of receivables during the nine months ended September 28, 2019 and September 29, 2018, respectively. There were no amounts due from such third-party financial institutions at September 28, 2019 and December 29, 2018.

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Index

Note 8. Financial Statement Components

The following tables provide details of selected financial statement components as of the following dates (in thousands):

|  | At |
|  | September 28, 2019 |  |  | December 29, 2018 |
Inventories: |  |  |  |  |  |  |  |
Raw materials and sub-assemblies |  | $ | 38,219 |  |  | $ | 31,434 |
Work in process |  |  | 23,602 |  |  |  | 22,383 |
Finished goods |  |  | 7,870 |  |  |  | 8,098 |
Inventories |  |  | 69,691 |  |  |  | 61,915 |
Inventories-delivered systems |  |  | 117 |  |  |  | 180 |
Total inventories |  | $ | 69,808 |  |  | $ | 62,095 |
Property, plant and equipment, net:(1) |  |  |  |  |  |  |  |
Land |  | $ | 15,568 |  |  | $ | 15,571 |
Machinery and equipment |  |  | 40,027 |  |  |  | 39,898 |
Building and improvements |  |  | 26,717 |  |  |  | 21,354 |
Software |  |  | 10,621 |  |  |  | 10,116 |
Furniture and fixtures |  |  | 2,276 |  |  |  | 2,551 |
Leasehold improvements |  |  | 3,599 |  |  |  | — |
Capital in progress |  |  | 1,354 |  |  |  | 6,027 |
Total property, plant and equipment, gross |  |  | 100,162 |  |  |  | 95,517 |
Accumulated depreciation and amortization |  |  | (47,713 | ) |  |  | (47,617 | )
Total property, plant and equipment, net |  | $ | 52,449 |  |  | $ | 47,900 |
(1) Depreciation and amortization expense of property, plant and equipment was $1.9 million and $1.6 million for the three months ended September 28, 2019 and September 29, 2018, respectively, and $5.5 million and $4.9 million for the nine months ended September 28, 2019 and September 29, 2018, respectively. |
Other Current Liabilities: |  |  |  |  |  |  |  |
Accrued warranty |  | $ | 4,393 |  |  | $ | 4,379 |
Accrued taxes |  |  | 757 |  |  |  | 1,738 |
Customer deposits |  |  | 114 |  |  |  | 293 |
Accrued professional services |  |  | 1,458 |  |  |  | 448 |
Third party commissions |  |  | 452 |  |  |  | 1,382 |
Other |  |  | 1,528 |  |  |  | 1,181 |
Total other current liabilities |  | $ | 8,702 |  |  | $ | 9,421 |

Components of Accumulated Other Comprehensive Income (Loss)

|  | Foreign Currency Translations |  |  | Defined Benefit Pension Plans |  |  | Unrealized Income (Loss) on Investment |  |  | Accumulated Other Comprehensive Income (Loss) |
Balance as of December 29, 2018 |  | $ | (2,129 | ) |  | $ | (646 | ) |  | $ | 218 |  |  | $ | (2,557 | )
Current period change |  |  | (68 | ) |  |  | — |  |  |  | 112 |  |  |  | 44 |
Balance as of September 28, 2019 |  | $ | (2,197 | ) |  | $ | (646 | ) |  | $ | 330 |  |  | $ | (2,513 | )

The items above, except for unrealized income (loss) on investment, did not impact the Company’s income tax provision. The amounts reclassified from each component of accumulated other comprehensive income (loss) into income statement line items were insignificant.

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Index

Note 9. Goodwill and Intangible Assets

Goodwill is recorded at cost and tested for potential impairment at least annually. Goodwill was $26.3 million as of September 28, 2019 and $26.4 million as of December 29, 2018. During the nine-month period ended September 28, 2019 an immaterial purchase price adjustment was recorded resulting in an immaterial decrease to Goodwill for the 4D acquisition in 2018.

Intangible assets are recorded at cost, less accumulated amortization. Certain of the Company’s intangible assets are denominated in foreign currencies. The aggregate $107,000 increase in the adjusted cost basis of the Company’s intangible assets as of September 28, 2019, as compared with December 29, 2018, was due to foreign currency movements. Such foreign currency movements also increased the September 28, 2019 balance of accumulated amortization of intangible assets by $107,000 as compared with December 29, 2018. During the nine months ended September 28, 2019 the Company reclassified $0.5 million of in-process research and development to developed technology as the underlying technology was complete and incorporated into certain products sold. Intangible assets as of September 28, 2019 and December 29, 2018 consisted of the following (in thousands):

|  | September 28, 2019 |
|  | Adjusted cost |  |  | Accumulated amortization |  |  | Net carrying amount |
Developed technology |  | $ | 36,545 |  |  | $ | (18,004 | ) |  | $ | 18,541 |
Customer relationships |  |  | 6,547 |  |  |  | (2,327 | ) |  |  | 4,220 |
Trade name |  |  | 1,500 |  |  |  | (83 | ) |  |  | 1,417 |
In-process research and development |  |  | 900 |  |  |  | — |  |  |  | 900 |
Total |  | $ | 45,492 |  |  | $ | (20,414 | ) |  | $ | 25,078 |

|  | December 29, 2018 |
|  | Adjusted cost |  |  | Accumulated amortization |  |  | Net carrying amount |
Developed technology |  | $ | 35,954 |  |  | $ | (16,532 | ) |  | $ | 19,422 |
Customer relationships |  |  | 6,531 |  |  |  | (1,519 | ) |  |  | 5,012 |
Trade name |  |  | 1,500 |  |  |  | (8 | ) |  |  | 1,492 |
In-process research and development |  |  | 1,400 |  |  |  | — |  |  |  | 1,400 |
Total |  | $ | 45,385 |  |  | $ | (18,059 | ) |  | $ | 27,326 |

The amortization of finite-lived intangibles is computed using the straight-line method. Estimated remaining lives of finite-lived intangibles range from less than one year to fifteen years. The total intangible amortization expense for the three and nine months ended September 28, 2019 was $0.7 million and $2.2 million, respectively, and for the three and nine months ended September 29, 2018 was $35,000 and $105,000, respectively.

There were no impairment charges related to intangible assets recorded during the nine months ended September 28, 2019 and September 29, 2018.

The estimated future amortization expense of finite intangible assets as of September 28, 2019 is as follows (in thousands):

Fiscal Years |  | Amounts |
2019 (remainder) |  | $ | 643 |
2020 |  |  | 2,960 |
2021 |  |  | 2,960 |
2022 |  |  | 2,960 |
2023 |  |  | 2,960 |
Thereafter |  |  | 11,695 |
Total future amortization expense |  | $ | 24,178 |

In-process research and development of $0.9 million has been omitted from the above table as its estimated useful life is indeterminant at September 28, 2019. It will be tested for potential impairment, along with Goodwill, until its estimated useful life becomes finite.

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Index

Note 10. Warranties

The Company generally sells its products with a 12 months repair or replacement warranty from the date of acceptance or shipment date. The Company accrues estimated future warranty costs based upon the historical relationship of warranty costs to the cost of products sold. The estimated future warranty obligations related to product sales are recorded in the period in which the related revenue is recognized. The estimated future warranty obligations are affected by the warranty periods, sales volumes, product failure rates, material usage, and labor and replacement costs incurred in correcting a product failure. If actual product failure rates, material usage, labor or replacement costs were to differ from the Company’s estimates, revisions to the estimated warranty obligations would be required. For new product introductions where limited or no historical information exists, the Company may use warranty information from other previous product introductions to guide it in estimating its warranty accrual.

Components of the warranty accrual, which were included in the accompanying condensed consolidated balance sheets with other current liabilities, were as follows (in thousands):

|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 28, 2019 |  |  | September 29, 2018 |  |  | September 28, 2019 |  |  | September 29, 2018 |
Balance as of beginning of period |  | $ | 3,755 |  |  | $ | 4,906 |  |  | $ | 4,379 |  |  | $ | 4,863 |
Accruals for warranties issued during period |  |  | 1,201 |  |  |  | 1,020 |  |  |  | 3,068 |  |  |  | 3,915 |
Settlements during the period |  |  | (563 | ) |  |  | (1,668 | ) |  |  | (3,054 | ) |  |  | (4,520 | )
Balance as of end of period |  | $ | 4,393 |  |  | $ | 4,258 |  |  | $ | 4,393 |  |  | $ | 4,258 |

Note 11. Commitments and Contingencies

Merger – Rudolph Technologies, Inc. – On June 23, 2019, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with Rudolph Technologies, Inc. (“Rudolph”) and PV Equipment Inc., a wholly-owned subsidiary of the Company to effect the merger (“Merger”) of Rudolph with and into PV Equipment Inc., with Rudolph surviving the Merger as a wholly-owned subsidiary of the Company. Regulatory and stockholder approvals from both the Company’s stockholders and those of Rudolph were obtained and the Merger closed on October 25, 2019. Under the terms set forth in the Merger Agreement, each outstanding share of common stock, par value $0.001 per share, of Rudolph was converted into 0.8042 shares of common stock, par value $0.001, of the Company. Upon closure of the Merger, Rudolph’s common stockholders owned approximately 50% and Nanometrics’ common stockholders prior to the Merger owned approximately 50% of the outstanding shares of common stock of the combined company on a fully diluted basis. The results of the Company’s stockholders’ vote on matters relating to the Merger were included in the Company’s Current Report on Form 8-K filed with the SEC on October 24, 2019, and information regarding the closing of the Merger was included in the Company’s Current Report on Form 8-K filed with the SEC on October 28, 2019.

The combined company will account for the acquisition pursuant to the Merger Agreement as a reverse acquisition using the acquisition method of accounting in accordance with generally accepted accounting principles, with Rudolph being treated as the acquiring entity for accounting purposes.

In identifying Rudolph as the accounting acquiring entity, Nanometrics and Rudolph reviewed the accounting guidance as provided in Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations”, which takes into account the type of consideration, the structure of the Merger and the other transactions contemplated by the Merger Agreement, relative outstanding share ownership, the composition of the combined company board of directors, designation of certain senior management positions of the combined company, mainly the Chief Executive Officer and the Chief Financial Officer, relative voting rights, relative size as measured by assets, revenue or earnings as well as other metrics an investor would use for evaluating the respective company’s current and future financial performance, which of the combining entities initiated the combination and where the combined company’s headquarters will be located.

Intellectual Property Indemnification Obligations – The Company will, from time to time, in the normal course of business, agree to indemnify certain customers, vendors or others against third party claims that the Company’s products, when used for their intended purpose(s), or the Company’s intellectual property, infringe the intellectual property rights of such third parties or other claims made against parties with whom it enters into contractual relationships. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. Historically, the Company has not made payments under these obligations and believes that the estimated fair value of these agreements is immaterial. Accordingly, no liabilities have been recorded for these obligations in the accompanying condensed consolidated balance sheets as of September 28, 2019 and December 29, 2018.

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Index

Legal Proceedings - From time to time, the Company is subject to various legal proceedings or claims arising in the ordinary course of business.

On August 2, 2017, the Company was named as defendant in a complaint filed in New Hampshire Superior Court (“Complaint”). The Complaint, brought by Optical Solutions, Inc. (“OSI”), alleges claims arising from a purported exclusive purchase contract between OSI and the Company pertaining to certain product. On September 18, 2017, the Company removed the action to the United States District Court for the District of New Hampshire. On September 25, 2017, the Company moved to transfer the Complaint to the District Court for the Northern District of California. On December 20, 2017, the Company filed its complaint against OSI in the California Superior Court for the County of Santa Clara alleging claims arising from OSI’s breach of certain purchase orders. The Company’s complaint was later removed by OSI to the Northern District of California. On May 29, 2018, the District Court of New Hampshire issued an order granting the Company’s motion to transfer OSI’s Complaint to the Northern District of California and denying the Company’s motion to dismiss the Complaint without prejudice. On June 14, 2018, OSI’s Complaint was consolidated with the Company’s complaint against OSI. On August 9, 2018, OSI filed an Amended Complaint. On September 19, 2018, the Company filed a motion to dismiss OSI’s Amended Complaint for failure to state a claim. The Company’s motion to dismiss was heard on February 28, 2019. On March 5, 2019 the Court granted the Company’s motion to dismiss with leave to amend. OSI filed a Second Amended Complaint on March 29, 2019. The Company filed a motion to dismiss the Second Amended Complaint on May 31, 2019. The Company’s motion to dismiss OSI’s Second Amended Complaint is now fully briefed. A hearing on the Company’s motion to dismiss the Second Amended Complaint is scheduled for November 14, 2019. Trial has been set for May 16, 2022.

Following the announcement of the Company’s proposed merger transaction with Rudolph, two purported class action complaints and three complaints were filed on behalf of Rudolph’s stockholders against Rudolph and its directors; of those five complaints, three were filed in the United States District Court for the District of Delaware, one in the United States District Court for the District of New Jersey, and one in the United States District Court for the District of Massachusetts. One of those five complaints also names the Company and the subsidiary formed to effectuate the proposed merger transaction as defendants. A sixth complaint was filed on behalf of a Company stockholder against the Company and its directors in the United States District Court for the Northern District of California. The complaints are captioned as follows: Stein v. Rudolph Technologies, Inc., et al. (D. Del.); Rosenblatt v. Rudolph Technologies, Inc., et al. (D. Del.); Stein v. Rudolph Technologies, Inc., et al. (D. Del.); Parikh v. Rudolph Technologies, Inc., et al. (D.N.J.); Roy v. Rudolph Technologies, Inc., et al. (D. Mass.); and Bryden-Moore v. Nanometrics Inc., et al. (N.D. Cal.). The Company refers to these actions collectively as the “Shareholder Actions.” The complaints in the Shareholder Actions generally assert claims under Sections 14(a) and 20(a) of the Exchange Act challenging the adequacy of certain disclosures made in the version of the joint proxy statement/prospectus filed with the SEC on August 15, 2019, or, solely with respect to the complaint captioned Roy v. Rudolph Technologies, Inc., et al. (D. Mass.), the version of the joint proxy statement/prospectus filed with the SEC on September 10, 2019. The complaints seek, among other relief, an injunction preventing Rudolph from holding the Rudolph special meeting or consummating the transaction, an injunction preventing the Company from consummating the transaction, damages in the event that the merger is consummated, and attorneys’ fees. On October 11, 2019, plaintiffs in each of the Shareholder Actions agreed in principle to dismiss their claims in connection with the issuance of certain supplemental disclosures regarding the transaction and reserved the right to seek attorneys’ fees.

The Company records a provision for a loss when it believes that it is both probable that a loss has been incurred and the amount can be reasonably estimated. Based on current information, the Company believes it does not have any probable and reasonably estimable losses related to any current legal proceedings and claims. Although it is difficult to predict the outcome of legal proceedings, the Company believes that any liability that may ultimately arise from the resolution of these ordinary course matters will not have a material adverse effect on the business, financial condition and results of operations.

Note 12. Net Income Per Share

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

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Index

A reconciliation of the share denominator of the basic and diluted net income per share computations for three and nine months ended September 28, 2019 and September 29, 2018 is as follows (in thousands):

|  | Three Month Ended |  |  | Nine Months Ended |
|  | September 28, 2019 |  |  | September 29, 2018 |  |  | September 28, 2019 |  |  | September 29, 2018 |
Weighted average shares of common stock outstanding used in basic net income per share calculation |  |  | 24,529 |  |  |  | 24,059 |  |  |  | 24,631 |  |  |  | 24,065 |
Potential dilutive common stock equivalents, using treasury stock method |  |  | 254 |  |  |  | 407 |  |  |  | 321 |  |  |  | 486 |
Weighted average shares of common stock used in diluted net income per share calculation |  |  | 24,783 |  |  |  | 24,466 |  |  |  | 24,952 |  |  |  | 24,551 |

Note 13. Stockholders’ Equity and Stock-Based Compensation

Options and Employee Stock Purchase Plan (“ESPP”) Awards

The fair value of each option and ESPP award is estimated on the grant date using the Black-Scholes valuation model and the assumptions noted in the following table. The expected lives of options granted were calculated using the simplified method allowed by the Staff Accounting Bulletin No. 107, Share-Based Payment. The risk-free rates were based on the U.S Treasury rates in effect during the corresponding period of grant. The expected volatility was based on the historical volatility of the Company’s stock price. The dividend yield reflects that the Company has not paid any cash dividends since inception and does not intend to pay any cash dividends in the foreseeable future.

|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 28, 2019 |  |  | September 29, 2018 |  |  | September 28, 2019 |  |  | September 29, 2018 |
Employee Stock Purchase Plan: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Expected life |  | 0.5 years |  |  | 0.5 years |  |  | 0.5 |  |  | 0.5 years |
Volatility |  | 44.4% |  |  | 52.5% |  |  | 41.3% - 44.4% |  |  | 39.1% |
Risk free interest rate |  | 2.10% |  |  | 2.14% |  |  | 2.10% - 2.51% |  |  | 1.86% |
Dividends |  | — |  |  | — |  |  | — |  |  | — |

No stock options were awarded during the nine months ended September 28, 2019 and September 29, 2018.

A summary of activity of stock options during the nine months ended September 28, 2019 is as follows:

|  | Number of Shares Outstanding (Options) |  |  | Weighted Average Exercise Price |  |  | Weighted Average Remaining Contractual Term (Years) |  |  | Aggregate Intrinsic Value (in Thousands) |
Options |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Outstanding at December 29, 2018 |  |  | 83,394 |  |  | $ | 15.80 |  |  |  | 1.19 |  |  | $ | 988 |
Exercised |  |  | (71,365 | ) |  |  | 15.72 |  |  |  |  |  |  |  |  |
Cancelled |  |  | (25 | ) |  |  | 14.95 |  |  |  |  |  |  |  |  |
Outstanding at September 28, 2019 |  |  | 12,004 |  |  |  | 16.27 |  |  |  | 0.80 |  |  |  | 198 |
Exercisable at September 28, 2019 |  |  | 12,004 |  |  | $ | 16.27 |  |  |  | 0.80 |  |  | $ | 198 |

The aggregate intrinsic value in the above table represents the total pretax intrinsic value, based on the Company’s closing stock price of $32.38 and $27.65 as of September 28, 2019 and December 29, 2018, respectively, the last trading day of each period, which would have been received by the option holders had all option holders exercised their options as of such date.

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Index

Restricted Stock Units (“RSUs”)

Time-based RSUs are valued using the market value of the Company’s common stock on the date of grant, assuming no expectation of dividends paid.

A summary of activity for RSUs during the nine months ended September 28, 2019 is as follows:

Summary of activity for RSUs |  | Number of RSUs |  |  | Weighted Average Fair Value |
Outstanding RSUs as of December 29, 2018 |  |  | 769,003 |  |  | $ | 31.39 |
Granted |  |  | 352,337 |  |  |  | 28.63 |
Released |  |  | (322,915 | ) |  |  | 28.86 |
Cancelled |  |  | (57,907 | ) |  |  | 32.37 |
Outstanding RSUs as of September 28, 2019 |  |  | 740,518 |  |  | $ | 31.10 |

Market-Based Performance Stock Units (“PSUs”)

In addition to granting RSUs that vest on the passage of time only, the Company granted PSUs to certain executives. The PSUs vest in three tranches over one, two and three years based on the relative performance of the Company’s stock during those periods, compared to a peer group over the same period. If target stock price performance is achieved, 66.7% of the shares of the Company’s stock subject to the PSUs will vest and up to a maximum of 100% of the shares subject to the PSUs will vest if the maximum stock price performance is achieved for each tranche.

A summary of activity for PSUs for the nine months ended September 28, 2019 is as follows:

Summary of activity for PSUs |  | Number of PSUs |  |  | Weighted Average Fair Value |
Outstanding PSUs as of December 29, 2018 |  |  | 112,163 |  |  | $ | 22.37 |
Granted |  |  | 43,429 |  |  |  | 19.09 |
Released |  |  | (16,066 | ) |  |  | 25.09 |
Cancelled |  |  | (1,138 | ) |  |  | 26.75 |
Outstanding PSUs as of September 28, 2019 |  |  | 138,388 |  |  | $ | 20.99 |

The preceding table reflects the maximum awards that can be achieved upon full vesting.

Valuation of PSUs

On the date of grant, the Company estimated the fair value of PSUs using a Monte Carlo simulation model. The assumptions for the valuation of PSUs are summarized as follows:

|  | 2019 Award |  |  | 2018 Award |
Grant Date Fair Value Per Share |  | $13.12-$23.75 |  |  | $20.73-$25.18 |
Weighted-average assumptions/inputs: |  |  |  |  |  |  |  |
Expected Dividend |  |  | — |  |  |  | — |
Range of risk-free interest rates |  | 2.45% |  |  | 2.39%-2.63% |
Range of expected volatilities for peer group |  | 22%-63% |  |  | 22%-66% |

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Index

Stock-based Compensation Expense

Stock-based compensation expense for all share-based payment awards made to the Company’s employees and directors pursuant to the employee stock option and employee stock purchase plans by function were as follows (in thousands):

|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 28, 2019 |  |  | September 29, 2018 |  |  | September 28, 2019 |  |  | September 29, 2018 |
Cost of products |  | $ | 326 |  |  | $ | 224 |  |  | $ | 858 |  |  | $ | 455 |
Cost of service |  |  | 235 |  |  |  | 223 |  |  |  | 629 |  |  |  | 564 |
Research and development |  |  | 813 |  |  |  | 744 |  |  |  | 2,324 |  |  |  | 1,727 |
Selling |  |  | 834 |  |  |  | 779 |  |  |  | 2,378 |  |  |  | 2,049 |
General and administrative |  |  | 1,191 |  |  |  | 1,242 |  |  |  | 3,524 |  |  |  | 3,434 |
Total stock-based compensation expense related to employee stock options and employee stock purchases |  | $ | 3,399 |  |  | $ | 3,212 |  |  | $ | 9,713 |  |  | $ | 8,229 |

Note 14. Income Taxes

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

The 2017 Tax Act created a new requirement that global intangible low-taxed income (“GILTI”) earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFCs’ U.S. shareholder. Under U.S. GAAP, the Company was allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The Company’s selection of an accounting policy in 2018 with respect to the GILTI tax rules was to treat GILTI tax as a current period expense under the period cost method.

The provision for income taxes consists of the following (in thousands):

|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 28, 2019 |  |  | September 29, 2018 |  |  | September 28, 2019 |  |  | September 29, 2018 |
Provision for income taxes |  | $ | 1,943 |  |  | $ | 2,921 |  |  | $ | 3,106 |  |  | $ | 10,258 |

The decrease in the tax provision for 2019 from 2018 was primarily related to the Company’s decreased profitability for the three and nine months ended September 28, 2019, as well as less U.S. tax required on foreign earnings under the Tax Cuts and Jobs Act (“TCJA”).

The Company continues to maintain a valuation allowance against its California, U.K., and Switzerland deferred tax assets as of September 28, 2019 as a result of uncertainties regarding the realization of the assets due to cumulative losses and uncertainty of future taxable income. The Company will continue to assess the realizability of the deferred tax assets in each of the applicable jurisdictions and maintain the valuation allowances until sufficient positive evidence exists to support a reversal. In the event the Company determines that the deferred tax assets are realizable, an adjustment to the valuation allowance will be reflected in the tax provision for the period such determination is made.

The Company is subject to taxation in the U.S. and various states including California, and foreign jurisdictions including Korea, Japan, Taiwan, China, Singapore, Germany, U.K., Ireland, France, and Israel. Due to tax attribute carry-forwards, the Company is subject to examination for tax years 2003 forward for U.S. tax purposes. The Company is also subject to examination in various states for tax years 2002 forward. The Company is subject to examination for tax years 2011 forward for various foreign jurisdictions.

The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The total amount of penalties and interest were not material as of September 28, 2019 and December 29, 2018. During the next twelve months, the Company anticipates increases in its unrecognized tax benefits of approximately $1.2 million.

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Index

Note 15. Segment, Geographic, Product and Significant Customer Information

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

|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 28, 2019 |  |  | September 29, 2018 |  |  | September 28, 2019 |  |  | September 29, 2018 |
Total net revenues: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
United States |  | $ | 14,091 |  |  | $ | 8,414 |  |  | $ | 40,135 |  |  | $ | 22,545 |
China |  |  | 20,357 |  |  |  | 14,486 |  |  |  | 60,590 |  |  |  | 50,861 |
Japan |  |  | 11,189 |  |  |  | 19,693 |  |  |  | 19,720 |  |  |  | 48,090 |
South Korea |  |  | 10,519 |  |  |  | 23,598 |  |  |  | 37,557 |  |  |  | 92,397 |
Taiwan |  |  | 8,590 |  |  |  | 1,883 |  |  |  | 23,529 |  |  |  | 4,918 |
Singapore |  |  | 2,775 |  |  |  | 5,842 |  |  |  | 13,049 |  |  |  | 20,377 |
Other |  |  | 5,604 |  |  |  | 2,674 |  |  |  | 13,265 |  |  |  | 8,319 |
Total net revenues |  | $ | 73,125 |  |  | $ | 76,590 |  |  | $ | 207,845 |  |  | $ | 247,507 |

|  | September 28, 2019 |  |  | December 29, 2018 |
Long-lived tangible assets: |  |  |  |  |  |  |  |
United States |  | $ | 51,152 |  |  | $ | 46,325 |
International |  |  | 1,297 |  |  |  | 1,575 |
Total long-lived tangible assets |  | $ | 52,449 |  |  | $ | 47,900 |

With respect to customer concentration, SK hynix, Intel Corporation, Toshiba Memory Corporation, Taiwan Semiconductor Manufacturing Company, and Samsung Electronics Co. Ltd. each accounted for more than 10% of total sales for the three months ended September 28, 2019, and SK hynix, Intel Corporation, Taiwan Semiconductor Manufacturing Company Limited, and Samsung Electronics Co. Ltd. each accounted for more than 10% of total sales for the nine months ended September 28, 2019. Samsung Electronics Co. Ltd., Yangtze Memory Technologies Co. Ltd., SK hynix, and Toshiba Memory Corporation each accounted for more than 10% of total sales for the three months ended September 29, 2018 and Samsung Electronics Co. Ltd., SK hynix, Toshiba Memory Corporation, Yangtze Memory Technologies Co. Ltd., and Micron Technology, Inc. each accounted for more than 10% of total sales for the nine months ended September 29, 2018.

With respect to accounts receivable concentration, Yangtze Memory Technologies Co. Ltd., Toshiba Memory Corporation, and Taiwan Semiconductor Manufacturing Company each accounted for more than 10% of total accounts receivable as of September 28, 2019. SK hynix and Toshiba Memory Corporation each accounted for more than 10% of total accounts receivable as of December 29, 2018.

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Note 16. Subsequent Event

Subsequent to September 28, 2019, on October 25, 2019, Rudolph merged with and into PV Equipment Inc., a wholly-owned subsidiary of the Company, formed to effect the merger of Rudolph with and into PV Equipment Inc., with Rudolph surviving the merger as a wholly-owned subsidiary of the Company. Under the terms set forth in the Merger Agreement, each outstanding share of common stock, par value $0.001 per share, of Rudolph was converted into 0.8042 shares of common stock, par value $0.001, of the Company. Upon closure of the Merger, Rudolph’s common stockholders own approximately 50% and Nanometrics’ common stockholders prior to the Merger own approximately 50% of the outstanding shares of common stock of the combined company on a fully diluted basis. The combined company will account for the acquisition pursuant to the merger agreement as a reverse acquisition using the acquisition method of accounting in accordance with generally accepted accounting principles, with Rudolph being treated as the acquiring entity for accounting purposes.

In identifying Rudolph as the accounting acquiring entity, the Company and Rudolph reviewed the accounting guidance as provided in Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations”, which takes into account the type of consideration, the structure of the merger and the other transactions contemplated by the merger agreement, relative outstanding share ownership, the composition of the combined company board of directors, designation of certain senior management positions of the combined company, mainly the Chief Executive Officer and the Chief Financial Officer, relative voting rights, relative size as measured by assets, revenue or earnings as well as other metrics an investor would use for evaluating the respective company’s current and future financial performance, which of the combining entities initiated the combination and where the combined company’s headquarters will be located.

The results of Nanometrics’ stockholders’ vote on matters relating to the Merger were included in the Company’s Current Report on Form 8-K filed with the SEC on October 25, 2019, and information regarding the closing of the Merger was included in the Company’s Current Report on Form 8-K filed with the SEC on October 28, 2019. In connection with the Merger, the Company changed its name to Onto Innovation Inc. Its shares of common stock commenced trading on the New York Stock Exchange on October 28, 2019 under the ticker symbol “ONTO.”

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

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements contained in this document that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding future periods, financial results, revenues, margins, growth, customers, tax rates, product performance, and the impact of accounting rules on our business and the future implications of our statements regarding goals, strategy, and similar terms. We may identify these statements by the use of words such as “anticipate,” “believe,” “continue,” “could,” “expect,” “may,” “might,” “project,” “will,” and other similar expressions. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements, except as may otherwise be required by law.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain risks, uncertainties and changes in circumstances, many of which may be difficult to predict or beyond our control, including those factors referenced in this document, including in Part II, Item 1A, Risk Factors below, and in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended December 29, 2018, filed with the Securities and Exchange Commission (“SEC”) on February 25, 2019 (our “Annual Report”) and, as a result of the merger with Rudolph Technologies, Inc. (“Rudolph”) on October 25, 2019, the risks relating to Rudolph’s business, including those factors referenced in this document, including in Part II, Item 1A, Risk Factors below, and in Part I, Item 1A, Risk Factors, in Rudolph’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on February 15, 2019 (“Rudolph’s Annual Report”). In particular, our results could vary significantly based on: changes in customer and industry spending; rate and extent of changes in product mix; adoption of new products; timing of orders, shipments, and acceptance of products; our ability to secure volume supply agreements; uncertainties related to our acquisition of 4D Technology Corporation; uncertainties in the integration of our and Rudolph’s businesses, and general economic conditions. In evaluating our business, investors should carefully consider these factors in addition to any other risks and uncertainties set forth elsewhere. The occurrence of the events described in the risk factors of our Annual Report and Rudolph’s Annual Report and risk factors elsewhere in this report as well as other risks and uncertainties could materially and adversely affect our business, operating results and financial condition. While management believes that the discussion and analysis in this report is adequate for a fair presentation of the information presented, we recommend that you read this discussion and analysis in conjunction with (i) our audited consolidated financial statements and notes thereto for the fiscal year ended December 29, 2018, which were included in our Annual Report, (ii) the section captioned “Risk Factors” in this Quarterly Report and our Annual Report, and (iii) our other filings with the SEC, including prospectus/proxy statement filed with the SEC on September 10, 2019.

Where we use the terms “we”, “our” and “us” in the description below, unless the context otherwise requires, we are referring to Nanometrics as it existed prior to the merger with Rudolph.

Overview

Together with our subsidiaries, we are an innovator in the field of optical metrology systems, optical inspection systems and advanced analytics for semiconductor manufacturing and other industries. Our systems and solutions are designed to precisely monitor optical critical dimensions, film thickness, and other parameters that are necessary to control the manufacturing process, identify defects, and detect manufacturing equipment anomalies that can affect production yields and device performance.

Principal factors that impact our revenue growth include capital expenditures by manufacturers of semiconductors to increase capacity and to enable their development of new technologies, and our ability to improve market share. The increasing complexity of the manufacturing processes for semiconductors is an important factor in the demand for our innovative metrology systems. Our strategy is to continue to innovate organically as well as to evaluate strategic acquisitions to address business challenges and opportunities.

In June 2019, we announced that we had entered into an Agreement and Plan of Merger with Rudolph Technologies, Inc. and PV Equipment Inc., a wholly-owned subsidiary of ours. The Agreement and Plan of Merger, as well as other related documents were included in the Current Report on Form 8-K that we filed with the SEC on June 24, 2019. In October 2019, upon obtaining regulatory and stockholder approval from both our stockholders and Rudolph’s, the merger closed. The results of our stockholders’ vote on matters relating to the merger were included in our Current Report on Form 8-K filed with the SEC on October 24, 2019, and information regarding the closing of the merger was included in our Current Report on Form 8-K filed with the SEC on October 28, 2019. The combined company will account for the acquisition pursuant to the merger agreement as a reverse acquisition using the acquisition method of accounting in accordance with generally accepted accounting principles, with Rudolph being treated as the acquiring entity for accounting purposes.

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In identifying Rudolph as the accounting acquiring entity, we and Rudolph reviewed the accounting guidance as provided in Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations”, which takes into account the type of consideration, the structure of the merger and the other transactions contemplated by the merger agreement, relative outstanding share ownership, the composition of the combined company board of directors, designation of certain senior management positions of the combined company, mainly the Chief Executive Officer and the Chief Financial Officer, relative voting rights, relative size as measured by assets, revenue or earnings as well as other metrics an investor would use for evaluating the respective company’s current and future financial performance, which of the combining entities initiated the combination and where the combined company’s headquarters will be located.

In connection with the merger we changed our name to Onto Innovation Inc. and going forward our combined results will be reported under the Onto Innovation Inc. name. Our shares began trading on the New York Stock Exchange on October 28, 2019 under the ticker symbol “ONTO.”

In November of 2018 we acquired 4D Technology Corporation (“4D”), based in Tucson Arizona. The 4D business unit offers a line of interferometry systems for the measurement and inspection of high precision surfaces. 4D’s solutions are used primarily in the manufacture of advanced aerospace and industrial systems as well as for scientific research and semiconductor applications.

We derive our revenues primarily from product sales but also from customer service and system upgrades for the installed base of our products. For the nine months ended September 28, 2019, we derived 80% of our total net revenues from product, upgrade and software sales, and 20% of our total net revenues from services.

Nanometrics Products

We offer a diverse line of systems to address the broad range of process control requirements of the semiconductor device and industrial manufacturing markets. In addition, we believe that our product development and engineering expertise and strategic acquisitions will enable us to develop and offer advanced process control solutions that, in the future, should address industry advancement and trends.

Automated Systems

Our automated systems primarily consist of fully automated metrology systems that are employed in semiconductor production environments. The Atlas® family of products represent our line of high-performance metrology systems providing optical critical dimension (“OCD”®) technology, thin film metrology and wafer stress metrology for transistor and interconnect metrology applications. The thin film and OCD technology is supported by our NanoCD suite of solutions including our NanoDiffract® software, SpectraProbe™ software and NanoGen™ scalable computing engine that enables visualization, modeling, and analysis of complex structures.

Integrated Systems

Our integrated metrology (“IM”) systems are installed directly onto wafer processing equipment to provide near real-time measurements for improved process control and maximum throughput. Our IM systems are sold directly to end user customers. The IMPULSE family of products include the latest technology for OCD, and thin film metrology, and have been successfully qualified on numerous independent Wafer Fabrication Equipment Suppliers’ platforms. Our NanoCD suite of solutions is sold in conjunction with our IMPULSE systems.

Software

NanoDiffract® is a modeling, visualization and analysis software that takes signals from the metrology systems, providing critical dimension, thickness, and optical properties from in-line measurements. The software has an intuitive three-dimensional modeling interface to provide visualization of today’s advanced and complex semiconductor devices. There are proprietary fitting algorithms in NanoDiffract that enable very accurate and very fast calculations for signal processing for high fidelity model-based measurements. SpectraProbe is a model-less fitting engine that enables fast time to solution for in-line excursion detection and control. SpectraProbe complements the high-fidelity modeling of NanoDiffract with a simple machine learning interface for rapid recipe deployment. The software is supported by NanoGen, an enterprise scale computing hardware system that is deployed to run the computing intensive analysis software. NanoGen utilizes commercial server chips and networking architecture and is optimized to support the workload of NanoDiffract and SpectraProbe analysis.

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Materials Characterization

Our materials characterization products include systems that are used to monitor the physical, optical, electrical and material characteristics of discrete electronic industry, opto-electronic, HB-LED (high brightness LEDs), solar PV (solar photovoltaics), compound semiconductor, strained silicon and silicon-on-insulator (“SOI”) devices, including composition, crystal structure, layer thickness, dopant concentration, contamination and electron mobility.

We have a broad portfolio of products for materials characterization including photoluminescence mapping and Fourier-Transform Infrared (“FTIR”) spectroscope in automated and manual systems for substrate quality and epitaxial thickness metrology. The NanoSpec® line supports thin film measurement across all applications in both low volume production and research applications.

Industrial, Scientific, and Research Markets: 4D Technology

In November of 2018 we acquired 4D Technology Corporation, based in Tucson Arizona. The 4D business unit offers a line of interferometry systems for the measurement and inspection of high precision surfaces. End markets include high precision optics surfaces and components, aerospace and defense components, and unique research and scientific instrumentation that requires the unique high-speed results of the 4D systems.

We are continually working to strengthen our competitive position by developing new technologies and products in our market segment. We have expanded our product offerings to address growing applications within the semiconductor manufacturing and adjacent industries. In pursuit of our goals, we have:

| • | Introduced new products, applications, and upgrades in every core product line and primary market served;

| • | Diversified our product line and served markets through acquisitions; and

| • | Continued development of new measurement and inspection technologies for advanced fabrication processes and packaging.

Rudolph Technologies Business

As described above, on October 25, 2019, we closed a merger in which we combined the businesses of Nanometrics and Rudolph, and Rudolph became a wholly-owned subsidiary of Nanometrics. Rudolph is 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. Rudolph delivers comprehensive solutions throughout the semiconductor fabrication process with its 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. Rudolph provides 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 Rudolph’s systems feature sophisticated software and production-worthy automation. In addition, Rudolph’s 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. Rudolph’s systems are backed by worldwide customer service and applications support.

Important Themes and Significant Trends

The semiconductor equipment industry is characterized by new manufacturing processes (node) coming to market every two to three years. At every new node in the semiconductor industry, our customers drive the need for metrology as a major component of device manufacturing. These trends include:

Proliferation of Optical Critical Dimension Metrology across Fabrication Processes.

Device dimensions must be carefully controlled during each step of processing. These patterned structures are measured at many subsequent production steps including Chemical Mechanical Polishing, Etch, and Thin Film processing, all driving broader OCD adoption. Our proprietary OCD systems can provide the critical process control of these circuit dimensions that is necessary for successful manufacturing of these state-of-the-art devices. Nanometrics OCD technology is broadly adopted across 3D-NAND, DRAM, and logic semiconductor manufacturing processes.

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Proliferation of 3D Transistor Architectures.

Our end customers continue to improve device density and performance by scaling front-end-of-line transistor architectures. Many of these designs, including FinFET transistors, have buried features and high aspect ratio stacked features that enable improved performance and density. The advanced designs require additional process control to manage the complex shapes and materials properties, driving additional applications of our systems.

Proliferation of High-Density 3D-NAND.

Our end customers have migrated to multi (many) layered high aspect ratio 3D-NAND devices. Many stacks of NAND cells are formed in parallel. This 3D-NAND architecture enables cost effective density scaling, removing the burden of density from lithography to deposition and etch processes. These devices require additional process control of deposition stacks, planarization processes, and critical high aspect ratio etch processes. Nanometrics thin films and OCD technologies are adopted across the 3D-NAND process including the periphery CMOS processing, NAND cell formation, and Interconnect of the devices.

Adoption of New Types of Thin Film Materials.

The need for ever increasing device circuit speed coupled with lower power consumption has pushed semiconductor device manufacturers to new materials and processing methods with single atom/sub nanometer control over these processes.

Need for Improved Process Control to Drive Process Efficiencies.

Competitive forces influencing semiconductor device manufacturers, such as price-cutting, shorter product life cycles and time to market, place pressure on manufacturers to rapidly achieve production efficiency. Device manufacturers are using our integrated and automated systems, as well as advanced metrology algorithms and analytics, throughout the fabrication process to ensure that manufacturing processes scale rapidly, are accurate and can be repeated on a consistent basis.

Critical Accounting Policies and Estimates

The preparation of our financial statements conforms to accounting principles generally accepted in the United States of America, which requires management to make estimates and judgments in applying our accounting policies that have an important impact on our reported amounts of assets, liabilities, revenue, expenses and related disclosures at the date of our financial statements. On an ongoing basis, management evaluates its estimates including those related to bad debts, inventory valuations, warranty obligations, impairment and income taxes. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from management’s estimates.

Except for the changes noted below, there were no significant changes in our critical accounting policies during the nine months ended September 28, 2019. Please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K filed with the SEC on February 25, 2019 for a complete discussion of our critical accounting policies.

Change in Accounting for Leases (Adoption of ASU 2016-02 Leases) - We adopted the new accounting standard ASC 842 and related amendments in the first quarter of fiscal 2019 using the alternative optional transition method. As such, we recognized the cumulative effect of initially applying the new lease standard as an adjustment to the opening balance of retained earnings for fiscal 2019. Comparative financial statements for fiscal 2018 have been prepared under the previous accounting standard. Please refer to Note 1. Nature of Business, Basis of Presentation and Significant Accounting Policies for further discussion of this change.

Recent Accounting Pronouncements

See Note 2 of the Unaudited Condensed Consolidated Financial Statements for a description of recent accounting pronouncements, including the respective dates of adoption and effects or anticipated effects on our results of operations and financial condition.

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Results of Operations

Net Revenues

Our net revenues comprised the following (in thousands, except percentages):

| Three Months Ended |  |  |  |  |  |  |  |  |  |  | Nine Months Ended |  |  |  |  |  |  |  |  |
| September 28, 2019 |  |  | September 29, 2018 |  |  | Change |  |  | September 28, 2019 |  |  | September 29, 2018 |  |  | Change |
Product | $ | 60,102 |  |  | $ | 63,798 |  |  | $ | (3,696 | ) |  |  | -5.8 | % |  | $ | 166,498 |  |  | $ | 211,521 |  |  | $ | (45,023 | ) |  |  | -21.3 | %
Service |  | 13,023 |  |  |  | 12,792 |  |  |  | 231 |  |  |  | 1.8 | % |  |  | 41,347 |  |  |  | 35,986 |  |  |  | 5,361 |  |  |  | 14.9 | %
Total net revenues | $ | 73,125 |  |  | $ | 76,590 |  |  | $ | (3,465 | ) |  |  | -4.5 | % |  | $ | 207,845 |  |  | $ | 247,507 |  |  | $ | (39,662 | ) |  |  | -16.0 | %

Capital spending by our customers is dependent on the timing of new semiconductor fabrication plants, capacity expansion within existing plants, and the adoption of modern technology for current and future manufacturing needs. Results may vary significantly based on changes in any of these factors. For the three months ended September 28, 2019, total net revenues decreased by $3.5 million relative to the comparable period in fiscal 2018. The decrease comprised a $3.7 million decrease in product revenue, which was partially offset by a $0.2 million increase in service revenue compared to the same prior year period. For the nine months ended September 28, 2019, total net revenues decreased by $39.7 million relative to the comparable period in fiscal 2018. The decrease comprised a $45.0 million decrease in product revenue, which was partially offset by a $5.4 million increase in service revenue compared to the same prior year period. Product revenue decreased for both the three and nine-month periods ended September 28, 2019, compared to the respective same prior year period, mainly as a result of lower demand in the overall wafer fab equipment market. Service revenue increased for both the three and nine-month periods ended September 28, 2019, compared to the respective same prior year period, mainly as a result of higher installed base and sales of refurbished systems.

A significant portion of the world’s semiconductor manufacturing capacity is in Asia. We generated 76% of our revenues in Asia in each of the three and nine months ended September 28, 2019, compared to 86% and 88% for the three and nine months ended September 29, 2018, respectively. Due to a slowdown in the memory demand, there were fewer fab expansions in Korea and Japan when compared to 2018, which was partially offset by expansion in the foundry business in Taiwan. Although sales to customers within individual countries of that region will vary from time to time, we expect that a substantial portion of our revenues will continue to be generated in Asia.

Gross margin

Our gross margin breakdown was as follows:

| Three Months Ended |  |  | Nine Months Ended |
| September 28, 2019 |  |  | September 29, 2018 |  |  | September 28, 2019 |  |  | September 29, 2018 |
Products | 54.8% |  |  | 59.8% |  |  |  | 53.0 | % |  |  | 59.6 | %
Service | 44.3% |  |  | 42.7% |  |  |  | 47.1 | % |  |  | 44.6 | %

The calculation of products gross margin includes both cost of products and amortization of intangibles.

The gross margin on product revenue decreased to 54.8% in the three months ended September 28, 2019 from 59.8% in the three months ended September 29, 2018. The decrease was primarily due to an unfavorable product and customer mix, lower factory utilization and an increase in amortization of intangibles of $0.4 million. The gross margin on product revenue decreased to 53.0% in the nine months ended September 28, 2019 from 59.6% in the nine months ended September 29, 2018. The decrease was primarily due to an unfavorable product and customer mix, lower factory utilization, an increase in amortization of intangibles of $1.2 million and acquisition-related adjustments of $1.3 million.

The gross margin on services revenue increased to 44.3% in the three months ended September 28, 2019 from 42.7% in the three months ended September 29, 2018, and it increased to 47.1% in the nine months ended September 28, 2019 from 44.6% in the nine months ended September 29, 2018. These increases were due to higher labor utilization rates, and higher revenue from spare parts and refurbishment tools with higher margins.

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Operating expenses

Our operating expenses comprised the following categories (in thousands, except percentages):

| Three Months Ended |  |  |  |  |  |  |  |  |  |  | Nine Months Ended |  |  |  |  |  |  |  |  |
| September 28, 2019 |  |  | September 29, 2018 |  |  | Change |  |  | September 28, 2019 |  |  | September 29, 2018 |  |  | Change |
Research and development | $ | 13,779 |  |  | $ | 12,717 |  |  | $ | 1,062 |  |  |  | 8.4 | % |  | $ | 40,864 |  |  | $ | 35,410 |  |  | $ | 5,454 |  |  |  | 15.4 | %
Selling |  | 8,465 |  |  |  | 8,902 |  |  |  | (437 | ) |  |  | -4.9 | % |  |  | 25,991 |  |  |  | 28,077 |  |  |  | (2,086 | ) |  |  | -7.4 | %
General and administrative |  | 7,784 |  |  |  | 7,744 |  |  |  | 40 |  |  |  | 0.5 | % |  |  | 23,574 |  |  |  | 22,950 |  |  |  | 624 |  |  |  | 2.7 | %
Merger expenses |  | 2,424 |  |  |  | — |  |  |  | 2,424 |  |  | na |  |  |  | 3,331 |  |  |  | — |  |  |  | 3,331 |  |  | na |
Amortization of intangible assets |  | 289 |  |  |  | — |  |  |  | 289 |  |  | na |  |  |  | 867 |  |  |  | — |  |  |  | 867 |  |  | na |
Total operating expenses | $ | 32,741 |  |  | $ | 29,363 |  |  | $ | 3,378 |  |  |  | 11.5 | % |  | $ | 94,627 |  |  | $ | 86,437 |  |  | $ | 8,190 |  |  |  | 9.5 | %

Research and development

Investments in research and development personnel and associated projects are part of our strategy to ensure our products remain competitive and meet customers’ needs. For the three months ended September 28, 2019, research and development costs increased by $1.1 million, or 8.4%, compared to the same period in 2018. The increase was driven by additional headcount, new product development initiatives and costs resulting from the acquisition of 4D subsequent to the same period in 2018. For the nine months ended September 28, 2019, research and development costs increased by $5.5 million, or 15.4%, compared to the same period in 2018. The increase was driven by additional headcount, new product development initiatives and costs resulting from the acquisition of 4D subsequent to the same period in 2018, which were partially offset by lower variable compensation costs.

Selling

Selling expenses for the three months ended September 28, 2019 decreased by $0.4 million, or 4.9%, compared to the same period in 2018. The decrease was driven by lower variable compensation costs and lower sales commission expenses, resulting from lower sales and profitability in 2019, which were partially offset by additional headcount and costs resulting from the acquisition of 4D subsequent to the same period in 2018. Selling expenses for the nine months ended September 28, 2019 decreased by $2.1 million, or 7.4%, compared to the same period in 2018. The decrease was driven by lower variable compensation costs and lower sales commission expenses, resulting from lower sales and profitability in 2019, which were partially offset by additional headcount and costs resulting from the acquisition of 4D subsequent to the same period in 2018.

General and administrative

General and administrative expenses were relatively unchanged in the three months ended September 28, 2019 compared to the same period in 2018. General and administrative expenses increased by $0.6 million, or 2.7%, in the nine months ended September 28, 2019 compared to the same period in 2018. The increase was primarily due to additional headcount, severance costs, higher facility lease expenses, IT infrastructure costs, and costs resulting from the acquisition of 4D subsequent to the same period in 2018, which were partially offset by lower variable compensation costs resulting from lower profitability.

Merger

During the three and nine months ended September 28, 2019, we incurred $2.4 million and $3.3 million of costs, respectively, associated with the Merger with Rudolph Technologies, Inc. and PV Equipment (See Notes 11 and 16 to the Condensed Consolidated Financial Statements). These expenses were mainly related to legal, audit, banker fees, and retention bonus expenses.

Amortization of intangible assets

Amortization of intangible assets was $0.3 million and $0.9 million for the three and nine months ended September 28, 2019, respectively, reflecting amortization expense resulting from the acquisition of 4D subsequent to the same periods in 2018.

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Other income (expense), net.

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

| Three Months Ended |  |  |  |  |  |  |  |  |  |  | Nine Months Ended |  |  |  |
| September 28, 2019 |  |  | September 29, 2018 |  |  | Change |  |  | September 28, 2019 |  |  | September 29, 2018 |  |  | Change |
Interest expense, net | $ | (38 | ) |  | $ | (104 | ) |  | $ | 66 |  |  |  | -63.5 | % |  | $ | (144 | ) |  | $ | (245 | ) |  | $ | 101 |  |  |  | -41.2 | %
Net gains on investments |  | 598 |  |  |  | 455 |  |  |  | 143 |  |  |  | 31.4 | % |  |  | 1,385 |  |  |  | 1,038 |  |  |  | 347 |  |  |  | 33.4 | %
Other gains (losses), net |  | (341 | ) |  |  | (133 | ) |  |  | (208 | ) |  |  | 156.4 | % |  |  | (30 | ) |  |  | (530 | ) |  |  | 500 |  |  |  | -94.3 | %
Other income (expense), net |  | 257 |  |  |  | 322 |  |  |  | (65 | ) |  |  | -20.2 | % |  |  | 1,355 |  |  |  | 508 |  |  |  | 847 |  |  |  | 166.7 | %
Total other income (expense), net | $ | 219 |  |  | $ | 218 |  |  | $ | 1 |  |  |  | 0.5 | % |  | $ | 1,211 |  |  | $ | 263 |  |  | $ | 948 |  |  |  | 360.5 | %

Other income (expense), net, was relatively unchanged in the three months ended September 28, 2019 relative to the comparable period of 2018. Other income (expense), net, increased by $0.9 million in the nine months ended September 28, 2019 relative to the comparable period in 2018 principally due to a $0.8 million gain on the sale of a condominium and higher investment income, which were partially offset by unfavorable foreign exchange net gains and losses. As part of our facilities strategy, we determined that we would no longer house traveling employees in owned condominiums and have divested all such assets.

Provision for income taxes

We recorded a tax provision of $1.9 million and $2.9 million for the three months ended September 28, 2019 and September 29, 2018, respectively, and $3.1 million and $10.3 million for the nine months ended September 28, 2019 and September 29, 2018, respectively. The decrease in the tax provision for 2019 from 2018 was primarily related to our decreased profitability for the three and nine months ended September 28, 2019, as well as less U.S. tax required on foreign earnings under the Tax Credit and Jobs Act (“TCJA”).

Our provision for income taxes for the three months ended September 28, 2019 of $1.9 million reflects an effective tax rate of 31.5%. The tax rate for the three months ended September 28, 2019 differs from the Federal statutory rate of 21.0% primarily due to non-deductible merger costs, foreign income being subject to tax at higher rates, state income taxes, and non-deductible equity compensation, partially offset by foreign tax credits, R&D tax credits, and tax benefits associated with the settlement of equity options/awards.

Our provision for income taxes for the nine months ended September 28, 2019 of $3.1 million reflects an effective tax rate of 21.8%. The tax rate for the nine months ended September 28, 2019 differs from the Federal statutory rate of 21.0% primarily due to non-deductible merger costs, foreign income being subject to tax at higher rates, state income taxes, and non-deductible equity compensation, partially offset by foreign tax credits, R&D tax credits, and tax benefits associated with the settlement of equity options/awards.

The TCJA created a new requirement that global intangible low-taxed income (“GILTI”) earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFCs’ U.S. shareholder. Under U.S. GAAP, we were allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). Our selection of an accounting policy in 2018 with respect to the GILTI tax rules was to treat GILTI tax as a current period expense under the period cost method.

As of September 28, 2019, we continue to maintain a valuation allowance against our California, U.K., and Switzerland deferred tax assets and recorded a valuation allowance against our U.K. deferred tax assets as of September 28, 2019 as a result of uncertainties regarding the realization of the assets due to cumulative losses and uncertainty of future taxable income. We will continue to assess the realizability of the deferred tax assets in each of the applicable jurisdictions and maintain the valuation allowances until sufficient positive evidence exists to support a reversal. In the event we determine that the deferred tax assets are realizable, an adjustment to the valuation allowance will be reflected in the tax provision for the period such determination is made.

We are subject to taxation in the U.S. and various states including California, and foreign jurisdictions including Korea, Japan, Taiwan, China, Singapore, U.K., Ireland, Germany, France, and Israel. Due to tax attribute carry-forwards, we are subject to examination for tax years 2003 forward for U.S. tax purposes. We are also subject to examination in various states for tax years 2002 forward. We are subject to examination for tax years 2011 forward for various foreign jurisdictions.

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We accrue interest and penalties related to unrecognized tax benefits in our provision for income taxes. The total amount of penalties and interest were not material as of September 28, 2019 and December 29, 2018. During the next twelve months, we anticipate increases in our unrecognized tax benefits of approximately $1.2 million.

Liquidity and Capital Resources

Our principal sources of liquidity are cash and cash equivalents, and marketable securities, and cash flow generated from our operations. Our liquidity is affected by many factors, including those that relate to our specific operations and those that relate to the uncertainties of global and regional economies and the sectors of the semiconductor industry in which we operate. Although our cash requirements will fluctuate based on the timing and extent of these factors, we believe our and Rudolph’s existing cash, cash equivalents and marketable securities, combined with cash currently projected to be generated from our and Rudolph’s operations, will be sufficient to satisfy our combined working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with our combined existing operations over the next twelve months.

The following tables present selected financial information and statistics of Nanometrics as of September 28, 2019 and December 29, 2018 and for the nine months ended September 28, 2019 and September 29, 2018 (in thousands):

| As of |
| September 28, 2019 |  |  | December 29, 2018 |
Cash, cash equivalents and marketable securities | $ | 144,110 |  |  | $ | 151,792 |
Working capital |  | 228,454 |  |  |  | 211,108 |

| Nine Months Ended |
| September 28, 2019 |  |  | September 29, 2018 |
Cash provided by (used in) operating activities | $ | (1,135 | ) |  | $ | 83,408 |
Cash provided by (used in) investing activities |  | (60,911 | ) |  |  | 425 |
Cash provided by (used in) financing activities |  | 2,049 |  |  |  | (22,283 | )

Cash, cash equivalents and marketable securities totaled $144.1 million at September 28, 2019, which reflects a decrease of $7.7 million from December 29, 2018. Of our total cash, cash equivalents and marketable securities at September 28, 2019, approximately $13.4 million was held by foreign subsidiaries, a portion of which would have to be repatriated to the United States. We continuously evaluate if there is a need to repatriate these funds. We believe our and Rudolph’s existing cash, cash equivalents and marketable securities will be sufficient to satisfy our combined working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with our and Rudolph’s existing operations over at least the next twelve months. Our working capital was $228.5 million at September 28, 2019, which reflects an increase of $17.4 million when compared to $211.1 million at December 29, 2018.

Cash used in operating activities during the nine months ended September 28, 2019 was $1.1 million, consisting primarily of net income of $11.1 million, adjusted for non-cash items of $20.8 million, and $33.0 million of net cash outflows related to changes in operating assets and liabilities. We expect that cash provided by operating activities may fluctuate in future periods due to several factors, including variations in our operating results, accounts receivable collections performance, inventory and supply chain management, vendor payment initiatives, tax benefits or charges from stock-based compensation, and the timing and amount of compensation and other payments. The non-cash items of $20.8 million related to depreciation, amortization, inventory reserves, stock-based compensation and the disposal of fixed assets. The net cash outflows related to the use of operating assets and liabilities was primarily due to the timing of payments to vendors, timing of variable compensation paid to employees, timing of tax payments and higher inventory purchases.

Cash provided by operating activities during the nine months ended September 29, 2018 was $83.4 million, consisting primarily of net income of $45.6 million, adjusted for non-cash items of $18.8 million, and $19.0 million of net cash inflows related to changes in operating assets and liabilities. The changes in operating assets and liabilities were generally driven by the timing of our customer payments for accounts receivable and vendor payments for accounts payable.

Cash used in investing activities of $60.9 million during the nine months ended September 28, 2019 consisted primarily of $51.9 million of net purchases of marketable securities and payments for acquisition of property, plant and equipment of $9.9 million, partially offset by proceeds from the sale of property, plant and equipment of $0.9 million.

Cash provided by investing activities of $0.4 million during the nine months ended September 29, 2018 consisted primarily of net sales and maturities of marketable securities of $5.4 million, offset in part by payments for acquisition of property, plant and equipment and certain assets of $4.9 million.

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Cash provided by financing activities of $2.0 million during the nine months ended September 28, 2019 consisted primarily of proceeds from the issuance of common stock under employee stock purchase program of $4.5 million, partially offset by payments of $2.5 million for taxes on net issuance of stock awards.

Cash used in financing activities of $22.3 million during the nine months ended September 29, 2018 consisted primarily of $23.0 million of common stock repurchases and proceeds of $0.7 million from the issuance of common stock from the employee stock purchase program, net of taxes on the issuance of such stock awards.

Repurchases of Common Stock

On March 14, 2019 our Board of Directors authorized the repurchase of up to $80.0 million of our common stock. This plan is referred to as the Stock Repurchase Plan. Under the terms of the Stock Repurchase Plan shares may be repurchased through open market or privately negotiated transactions. During the nine months ended September 28, 2019 no shares were repurchased under the Stock Repurchase Plan.

During the nine months ended September 29, 2018, we repurchased 896,187 shares at an average purchase price of $25.65 per share for a total of $23.0 million under the terms of a stock repurchase plan that had been authorized on November 15, 2017 and was completed with such share repurchase.

Off-Balance Sheet Arrangements

As of September 28, 2019, we had no off-balance sheet arrangements or obligations.

Contractual Obligations

There have been no material changes outside the ordinary course of our business from those reported in our Annual Report on Form 10-K for the fiscal year ended December 29, 2018, filed with the SEC on February 25, 2019.

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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk does not differ materially from that discussed in our Annual Report on Form 10-K for the fiscal year ended December 29, 2018, filed with the SEC on February 25, 2019. However, we cannot give any assurance as to the effect that future changes in interest rates or foreign currency rates will have on our consolidated balance sheet, results of operations or cash flows.

Foreign Currency Risk

Our exposure to foreign currency exchange rate fluctuations arises in part from intercompany balances in which costs are charged between our U.S. headquarters and our foreign subsidiaries. On our consolidated balance sheet these intercompany balances are eliminated and thus no consolidated balances are associated with these intercompany balances; however, since each foreign entity's functional currency is generally its respective local currency, there is exposure to foreign exchange risk on a consolidated basis for transactions not denominated in each foreign entity’s functional currencies. Intercompany balances are denominated primarily in U.S. dollars and, to a lesser extent, other local currencies.

To manage the level of exposure to the risk of foreign currency exchange rate fluctuations, we enter into foreign currency forward exchange contracts to protect against currency exchange risks associated with existing assets and liabilities. A foreign currency forward exchange contract acts as a hedge by increasing in value when underlying assets decrease in value or underlying liabilities increase in value due to changes in foreign exchange rates. Conversely, a foreign currency forward exchange contract decreases in value when underlying assets increase in value or underlying liabilities decrease in value due to changes in foreign exchange rates. These forward contracts are not designated as accounting hedges, so the unrealized gains and losses are recognized in other income (expense), net, in advance of the actual foreign currency cash flows with the fair value of these forward contracts being recorded as accrued liabilities or other current assets.

We do not use forward contracts for trading purposes. Our forward contracts generally have maturities of 30 days or less. We enter into foreign currency forward exchange contracts based on estimated future asset and liability exposures, and the effectiveness of our hedging program depends on our ability to estimate these future asset and liability exposures. Recognized gains and losses with respect to our current hedging activities will ultimately depend on how accurately we are able to match the amount of foreign currency forward exchange contracts with actual underlying asset and liability exposures.

We actively monitor our foreign currency risks, but there is no guarantee that our foreign currency hedging activities will substantially offset the impact of fluctuations in currency exchange rates on our results of operations, cash flows and financial position. See “Note 5, Fair Value Measurement and Disclosures” in the Notes to Consolidated Financial Statements for more information regarding our derivatives and hedging activities.

Interest Rate Risk

Our exposure to market risk resulting from changes in interest rates relates primarily to our investment portfolio. As of September 28, 2019 and December 29, 2018, we held $93.1 million and $40.8 million, respectively, in marketable securities. The fair value of our marketable securities could be adversely impacted due to a rise in interest rates. Assuming a hypothetical immediate and consistent increase in interest rates by 100 basis points from levels as of September 28, 2019, the fair value of our marketable securities would have declined by $0.5 million, as compared to $0.2 million as of December 29, 2018. Securities with longer maturities are subject to a greater interest rate risk than those with shorter maturities and as of September 28, 2019 and December 29, 2018, the average duration of our portfolio was less than three months and nine months, respectively. We do not hold securities for trading purposes.

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ITEM 4. | CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer (“CEO”), and our Chief Financial Officer (“CFO”), the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the evaluation, our CEO and CFO concluded that as of September 28, 2019, our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 were (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and reported to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely discussions regarding required disclosures.

Changes in Internal Control over Financial Reporting

During the quarter ended September 28, 2019, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our CEO and CFO, has designed our disclosure controls and procedures and our internal control over financial reporting to provide reasonable assurances that the controls’ objectives will be met. However, management does not expect that disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within Nanometrics have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any system’s design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of a system’s control effectiveness into future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

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PART II — OTHER INFORMATION

ITEM 1 | LEGAL PROCEEDINGS

The information set forth under Note 11. Commitments and Contingencies of Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.

ITEM 1A. | RISK FACTORS

Investing in our securities involves a high degree of risk. In assessing these risks, you should carefully consider the information included in this report, including our financial statements and the related notes thereto. You should carefully review and consider all of the risk factors set forth in Part l, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 29, 2018, filed with the SEC on February 25, 2019, and as a result of the merger with Rudolph on October 25, 2019, the risks relating to Rudolph’s business, including those factors referenced in this document, including in Part II, Item 1A, Risk Factors below, and in Part I, Item 1A, Risk Factors, in Rudolph’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 15, 2019..

The risks described in our Annual Report on Form 10-K are not the only ones we face. Additional risks and uncertainties that are not currently known to us or that we currently believe are immaterial may also impair our business operations. Our business, operating results and financial conditions could be materially harmed by any of these risks. The trading price of our common stock could decline due to any of these risks and investors may lose all or part of their investment.

There have been no material changes in our risk factors from those discussed in our Annual Report on Form 10-K for the fiscal year ended December 29, 2018, except as follows:

We have completed the merger of Nanometrics and Rudolph, and so our combined company is subject to the combined risks of both of Nanometrics and Rudolph that existed prior to the merger.

In addition to the risk factors set forth in Part l, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 29, 2018, filed with the SEC on February 25, 2019, as a result of the merger with Rudolph on October 25, 2019, we are also subject to the risks relating to Rudolph’s business, including those risks set forth in Part I, Item 1A, Risk Factors, in Rudolph’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 15, 2019, which, although substantially similar to the risks facing us, may vary in some aspects given the nature of the business of Rudolph.

Combining the businesses of Nanometrics and Rudolph may be more difficult, costly or time-consuming than expected and the combined company may fail to realize the anticipated benefits of the merger, which may adversely affect the combined company’s business results and negatively affect the value of the common stock of the combined company following the merger.

The success of the merger will depend on, among other things, the ability of Nanometrics and Rudolph to combine their businesses in a manner that realizes cost savings and facilitates growth opportunities.

Nanometrics and Rudolph must successfully combine their respective businesses in a manner that permits these benefits to be realized. In addition, the combined company must achieve the anticipated growth and cost savings without adversely affecting current revenues and investments in future growth. If the combined company is not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully, or at all, or may take longer to realize than expected.

An inability to realize the full extent of the anticipated benefits of the merger and the other transactions contemplated by the merger agreement, as well as any delays encountered in the integration process, could have an adverse effect upon the revenues, level of expenses and operating results of the combined company, which may adversely affect the value of the common stock of the combined company after the completion of the merger.

In addition, the actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized. Actual growth and cost savings, if achieved, may be lower than what Nanometrics and Rudolph expect and may take longer to achieve than anticipated. If Nanometrics and Rudolph are not able to adequately address integration challenges, they may be unable to realize the anticipated benefits of the integration of the two companies.

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The failure to successfully integrate the businesses and operations of Nanometrics and Rudolph in the expected time frame may adversely affect the combined company’s future results.

Nanometrics and Rudolph have in the past operated independently. There can be no assurances that their businesses can be integrated successfully. It is possible that the integration process could result in the loss of key Nanometrics employees or key Rudolph employees, the loss of customers, the disruption of either company’s or both companies’ ongoing businesses, inconsistencies in standards, controls, procedures and policies, unexpected integration issues, higher than expected integration costs and an overall post-completion integration process that takes longer than originally anticipated. Specifically, the following issues, among others, must be addressed in integrating the operations of Nanometrics and Rudolph in order to realize the anticipated benefits of the merger so the combined company performs as expected:

| • | combining the companies’ operations and corporate functions;

| • | combining the businesses of Nanometrics and Rudolph and meeting the capital requirements of the combined company, in a manner that permits the combined company to achieve any cost savings or revenue synergies anticipated to result from the merger, the failure of which would result in the anticipated benefits of the merger not being realized in the time frame currently anticipated or at all;

| • | integrating personnel from the two companies;

| • | integrating and unifying the offerings and services available to customers;

| • | harmonizing the companies’ operating practices, employee development and compensation programs, internal controls and other policies, procedures and processes;

| • | maintaining existing agreements with customers, distributors, providers and vendors and avoiding delays in entering into new agreements with prospective customers, distributors, providers and vendors;

| • | addressing possible differences in business backgrounds, corporate cultures and management philosophies;

| • | consolidating the companies’ administrative and information technology infrastructure;

| • | coordinating distribution and marketing efforts; and

| • | coordinating geographically dispersed organizations.

In addition, at times the attention of certain members of either company’s or both companies’ management and resources may be focused on the integration of the businesses of the two companies and diverted from day-to-day business operations or other opportunities that may have been beneficial to such company, which may disrupt each company’s ongoing business and the business of the combined company.

The combined company may not be able to retain customers or suppliers or customers or suppliers may seek to modify contractual obligations with the combined company, which could have an adverse effect on the combined company’s business and operations. Third parties may terminate or alter existing contracts or relationships with Nanometrics or Rudolph.

As a result of the merger, the combined company may experience impacts on relationships with customers and suppliers that may harm the combined company’s business and results of operations. Certain customers, licensors, business partners or suppliers may seek to terminate or modify contractual obligations following the merger whether or not contractual rights are triggered as a result of the merger. There can be no guarantee that customers and suppliers will remain with or continue to have a relationship with the combined company or do so on the same or similar contractual terms following the merger. If any customers or suppliers seek to terminate or modify contractual obligations or discontinue the relationship with the combined company, then the combined company’s business and results of operations may be harmed. Furthermore, the combined company does not have long-term arrangements with many of its significant suppliers. If the combined company’s suppliers were to seek to terminate or modify an arrangement with the combined company, then the combined company may be unable to procure necessary supplies from other suppliers in a timely and efficient manner and on acceptable terms, or at all. Any of the aforementioned disruptions could limit the combined company’s ability to achieve the anticipated benefits of the merger.

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The combined company may be exposed to increased litigation, which could have an adverse effect on the combined company’s business and operations.

The combined company may be exposed to increased litigation from stockholders, customers, suppliers, consumers and other third parties due to the combination of Nanometrics’ business and Rudolph’s business following the merger. Such litigation may have an adverse impact on the combined company’s business and results of operations or may cause disruptions to the combined company’s operations.

The combined company may be unable to retain Nanometrics and Rudolph personnel successfully after the merger is completed.

The success of the merger will depend in part on the combined company’s ability to retain the talents and dedication of the professionals previously separately employed by Nanometrics and Rudolph. It is possible that these employees may decide not to remain with the combined company. If key employees terminate their employment, or if an insufficient number of employees are retained to maintain effective operations, the combined company’s business activities may be adversely affected and management’s attention may be diverted from successfully integrating Nanometrics and Rudolph to hiring suitable replacements, all of which may cause the combined company’s business to suffer. In addition, Nanometrics and Rudolph may not be able to locate suitable replacements for any key employees that leave either company or offer employment to potential replacements on reasonable terms.

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ITEM 6. | EXHIBITS

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

Exhibit No. | Description | Form | File Number | Date of First Filing | Exhibit Number/ Appendix Reference
2 | Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession |  |  |  |
2.1 | Agreement and Plan of Merger by and among Registrant, Rudolph Technologies, Inc., and PV Equipment, Inc., dated June 23, 2019 | 8-K | 000-13470 | 6/24/2019 | 2.1
3.(i) | Certificate of Incorporation |  |  |  |
3.1 | Amended and Restated Certificate of Incorporation of the Registrant | 8-K | 001-39110 | 10/28/2019 | 3.2
3.(ii) | Bylaws |  |  |  |
3.2 | Bylaws of the Registrant | 8-K | 001-39110 | 10/28/2019 | 3.3
4 | Instruments Defining the Rights of Security Holders, Including Indentures |  |  |  |
4.1 | Reference is made to Exhibits 3.1 and 3.2 | - | - | - | -
10 | Material Contracts |  |  |  |
| Management Contracts, Compensatory Plans, Contracts or Arrangements |  |  |  |
10.1 | Retention Bonus Agreement, dated September 6, 2019, between Nanometrics Incorporated and Greg Swyt | 8-K | 000-13470 | 9/9/2019 | 10.1
10.2 | General Severance Benefits and Change in Control Severance Benefits Agreement, dated July 25, 2019, between Nanometrics Incorporated and Greg Swyt | 8-K | 000-13470 | 7/26/2019 | 10.1
31 | Rule 13a-14(a)/15d-14(a) Certifications |  |  |  |
31.1 | Certification of Michael P. Plisinski, principal executive officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | - | - | - | -
31.2 | Certification of Steven R. Roth, principal financial officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | - | - | - | -
32 | Section 1350 Certifications |  |  |  |
32.1 | Certification of Michael P. Plisinski, principal executive officer of the Registrant, and Steven R. Roth, principal financial officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This Certification accompanies this report and shall, not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed for purposes of §18 of the Securities Exchange Act of 1934, as amended. | - | - | - | -
101 | The following financial statements, formatted in XBRL: (i) Condensed Consolidated Balance Sheets at September 28, 2019 and December 29, 2018, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended September 28, 2019 and September 29, 2018, (iii) Condensed Consolidated Statements of Stockholders' Equity for the three and nine months ended September 28, 2019 and September 29, 2018, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 28, 2019 and September 29, 2018, and (v) Notes to Unaudited Condensed Consolidated Financial Statements. |  |  |  |
101.INS | Inline 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 | Inline XBRL Taxonomy Extension Schema Document |  |  |  |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |  |  |  |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |  |  |  |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |  |  |  |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |  |  |  |
104 | Cover Page Interactive Data File (formatted in inline XBRL and contained in Exhibit 101) |  |  |  |

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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.

| ONTO INNOVATION INC.
| (Registrant)
Date: November 7, 2019 | By: |  | /s/ MICHAEL P. PLISINSKI
|  |  | Michael P. Plisinski
|  |  | Chief Executive Officer
Date: November 7, 2019 | By: |  | /s/ STEVEN R. ROTH
|  |  | Steven R Roth
|  |  | Senior Vice President, Chief Financial Officer and
|  |  | Principal Accounting Officer

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