SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash Equivalents

Cash equivalents consist of highly liquid investments with an original maturity date at acquisition of three months or less. The carrying value of cash equivalents approximates fair value.

Investments

Management determines the appropriate classification of its investments at the time of purchase and re-evaluates the classification at each balance sheet date. At December 31, 2016 and 2015, all investments and cash equivalents in our portfolio were classified as “available-for-sale” and are stated at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income (loss), as a separate component of stockholders’ equity. The fair value of short-term investments are estimated based on quoted prices in active markets or significant other observable inputs as of December 31, 2016 and 2015.

The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, as well as interest, dividends, realized gains and losses and declines in value judged to be other than temporary are included in interest and other income, net. The cost of securities sold is based on the specific identification method.

Allowance for Bad Debts

We maintain an allowance for uncollectible accounts receivable based upon expected collectability. This reserve is established based upon historical trends, current economic conditions, delinquency status based on contractual terms and an analysis of specific exposures.

Inventories

Inventories are stated at the lower of cost or market using standard costs that generally approximate actual costs on a first-in, first-out basis. We maintain a perpetual inventory system and continuously record the quantity on-hand and standard cost for each product, including purchased components, subassemblies, and finished goods. We maintain the integrity of perpetual inventory records through periodic physical counts of quantities on hand. The semiconductor industry is characterized by rapid technological change, changes in customer requirements and evolving industry standards. We perform a detailed assessment of inventory at each balance sheet date, which includes a review of, among other factors, demand requirements and market conditions. Based on this analysis, we may record adjustments to the value of our inventory. During the years ended December 31, 2016 and 2015 we have recorded zero in reserves and recorded no charges for excess and obsolete inventories and open purchase order commitments.

Long-lived Assets

Equipment and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Equipment is depreciated on a straight-line basis over the estimated useful lives (i.e. three to nine years). Leasehold improvements are amortized on a straight-line basis over the life of the related assets or the lease term, whichever is shorter. Depreciation and amortization expense for the years ended December 31, 2016, 2015 and 2014 was $5.4 million, $6.5 million and $6.4 million, respectively.

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. We assess these assets for impairment based on estimated future cash flows from these assets. No asset impairment charges have been recorded during the years ended December 31, 2016, 2015 and 2014.

Intangible Assets

Purchased technology, patents and other intangible assets are presented at cost, net of accumulated amortization, and are amortized over their estimated useful lives using the straight-line method. Amortization expense for each of the years ended December 31, 2016, 2015 and 2014 was $1.7 million.

We review for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable and the carrying amount exceeds its fair value. No intangible assets impairment charges have been recorded during the years ended December 31, 2016, 2015 and 2014.

Derivative Instruments and Hedging

The majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, we also enter into these transactions in other currencies, primarily Japanese yen. Our policy is to minimize foreign currency denominated transaction and remeasurement exposures with derivative instruments, mainly forward contracts. The gains and losses on these derivatives are intended to at least partially offset the transaction and remeasurement gains and losses recognized in earnings. We do not enter into foreign exchange forward contracts for speculative purposes. Under ASC Topic 815, Derivatives and Hedging (“ASC 815”) all derivatives are recorded on the balance sheet at fair value. The gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting.

The fair value of derivative instruments recorded in our Consolidated Balance Sheets is as follows:



		Fair Value as of
(In thousands)	Balance Sheets Location	December 31, 2016			December 31, 2015
Foreign exchange contracts	Other current assets	$	5		$	43
	Other current liabilities	$	(5	)	$	(4	)
Total derivatives		$	—		$	39

Our derivative financial instruments are subject to both credit and market risk. Credit risk is the risk of loss due to failure of a counter-party to perform its obligations in accordance with contractual terms. Market risk is the potential change in an investment’s value caused by fluctuations in interest and currency exchange rates, credit spreads or other variables. We monitor the credit-worthiness of the financial institutions that are counter-parties to our derivative financial instruments and do not consider the risks of counter-party nonperformance to be material. Credit and market risks, as a result of an offset by the underlying cash flow being hedged, related to derivative instruments were not considered material at December 31, 2016 and 2015.

Cash Flow Hedging

We designate and document as cash flow hedges foreign exchange forward contracts that are used by us to hedge the risk that forecasted revenue may be adversely affected by changes in foreign currency exchange rates. The effective portion of the contracts’ gains or losses is included in accumulated other comprehensive income (loss) (“OCI”) until the period in which the forecasted sale being hedged is recognized, at which time the amount in OCI is reclassified to earnings as a component of revenue. To the extent that any of these contracts are not considered to be effective in offsetting the change in the value of the forecasted sales being hedged, the ineffective portion of these contracts is immediately recognized in income as a component of interest and other income, net. We calculate hedge effectiveness at a minimum each fiscal quarter. We measure hedge effectiveness by comparing the cumulative change in the spot rate of the derivative with the cumulative change in the spot rate of the anticipated sales transactions. The maturity of these instruments is generally nine months or less. We record any excluded components of the hedge in interest and other income, net.

In the event the underlying forecasted transaction does not occur within the designated hedge period or it becomes probable that the forecasted transaction will not occur, the related gains and losses on the cash flow hedge are reclassified from OCI to interest and other income, net on the consolidated statement of operations.

At December 31, 2016, we had two currency forward contracts for the sale of Japanese yen of 697 million. At December 31, 2015, we had one currency forward contract for the sale of Japanese yen of 661 million. During the year ended December 31, 2016, and 2015, we reclassified into earnings an accumulated loss of $0.1 million and $0.1 million, respectively, that was recorded as a component of other comprehensive income (loss).

Balance Sheet Derivatives

We manage the foreign currency risk associated with yen-denominated assets and liabilities using foreign exchange forward contracts with maturities of less than nine months. The change in fair value of these derivatives is recognized as a component of interest and other income, net and is intended to offset the remeasurement gains and losses associated with the non-functional currency denominated assets and liabilities.

At December 31, 2016 and 2015, we had currency sell-forward contracts classified as fair value hedges for the sale of Japanese yen of $0.4 million and $3.2 million, respectively. At December 31, 2016 and 2015, we had buy-forward contracts for the purchase of Japanese yen of $0.4 million and $0.3 million, respectively. The fair value of derivatives at December 31, 2016 and 2015 was insignificant.

The following sets forth the effect of the derivative instruments on our Consolidated Statements of Operations for the years ended:



Location of Gain/(Loss) Recognized in Statement of Operations on Derivatives (In thousands)	December 31, 2016			December 31, 2015
Interest and other income (expense), net		($220	)		$110

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the arrangement consideration is fixed or determinable, and collectability is reasonably assured. We derive revenue from four sources: system sales, spare parts sales, service contracts and license fees.

Provided all other criteria are met, we recognize revenues on system sales when system acceptance provisions have been met in accordance with the terms and conditions of the arrangement. In the event that terms of the sale provide for a lapsing system acceptance period, we recognize revenue upon the expiration of the lapsing acceptance period or system acceptance, whichever occurs first. In these instances, which are infrequent, revenue is recorded only if the product has met product specifications prior to shipment and management deems that no significant uncertainties as to product performance exist.

Our transactions frequently include the sale of systems and services under multiple element arrangements. In transactions with multiple deliverables, revenue is recognized upon the delivery of the separate elements and when system acceptance has occurred or we are otherwise released from our system acceptance obligations.

For multiple element arrangements, the total consideration for an arrangement is allocated among the separate elements in the arrangement based on a selling price hierarchy. The selling price hierarchy for a deliverable is based on (i) vendor specific objective evidence (“VSOE”); if available; (ii) third party evidence of selling price if VSOE is not available; or (iii) an estimated selling price, if neither VSOE nor third party evidence is available. If we have not established VSOE and cannot obtain third party evidence of selling price, we determine our estimate of the relative selling price by considering our production costs and historical margins of similar products or services. We believe this best represents the price at which we would transact a sale if the product or service were sold on a stand-alone basis. We regularly review the method used to determine our relative selling price and update any estimates accordingly. We limit the amount of revenue recognized for delivered elements to the amount that is not contingent on the future delivery of products or services or other future performance obligations.

We generally recognize revenue from spare parts sales upon shipment, as our products are generally sold on terms that transfer title and risk of ownership when it leaves our site. We sell service contracts for which revenue is deferred and recognized ratably over the contract period (for time-based service contracts) or as service hours are delivered (for contracts based on a purchased quantity of hours). We recognize license revenue from transactions in which our systems are re-sold by our customers to third parties, as well as from royalty arrangements.

Costs related to deferred product revenues are capitalized (deferred) and recognized at the time of revenue recognition. Deferred product revenue and costs are netted on our balance sheet, under the caption “deferred product and services income.” The gross amount of deferred revenues and deferred costs at December 31, 2016 was $4.6 million and $0.2 million, respectively. The gross amount of deferred revenues and deferred costs at December 31, 2015 was $5.3 million and $0.8 million, respectively.

Costs incurred for shipping and handling are included in cost of sales.

Warranty Accrual

We generally warrant our products for material and labor to repair the product for a period of 12 months for new products, or three months for refurbished products, from the date of system acceptance. Accordingly, an accrual for the estimated cost of the warranty is recorded at the time the product is shipped and the related charge is recorded in the statement of operations at the time revenue is recognized.

Research, Development and Engineering Expenses

We are actively engaged in basic technology and applied research programs designed to develop new products and product applications. In addition, substantial ongoing product and process improvement engineering and support programs relating to existing products are conducted within engineering departments and elsewhere. Research, development and engineering costs are charged to operations as incurred.

Stock-Based Compensation

Under the fair value recognition provisions of ASC Topic 718, Compensation—Stock Compensation (“ASC 718”), share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating our stock price volatility, employee stock option exercise behaviors and employee option forfeiture rates. As stock-based compensation expense recognized in the Consolidated Statement of Operations is based on awards that ultimately are expected to vest, the amount of the expense has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.

Deferred Income Taxes

Deferred income taxes are provided for the tax effect of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. ASC Topic 740, Income Taxes (“ASC 740”) provides for recognition of deferred tax assets if the realization of such deferred tax assets is more likely than not to occur. Realization of our net deferred tax assets is dependent upon our generation of sufficient taxable income in future years in appropriate tax jurisdictions to obtain the benefit of the reversal of temporary differences, net operating loss carry-forwards, and tax credit carry-forwards. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed. With the exception of certain international jurisdictions (i.e. Japan and Taiwan), we have determined that at this time it is more likely than not that deferred tax assets attributable to the remaining jurisdictions will not be realized, primarily due to uncertainties related to our ability to utilize the net operating loss and tax credit carry-forwards before they expire based on the fact that it is more likely than not we will not generate sufficient taxable income in the relevant jurisdictions. Accordingly, we have established a valuation allowance for such deferred tax assets. Management continues to monitor the relative weight of positive and negative evidence of future profitability in relevant jurisdictions. See Note 14 Income Taxes for further details.

Taxes Collected from Customers

We collect taxes from our customers for sales transactions as assessed by respective governmental authorities. On our consolidated statements of operations these taxes are presented on a net basis and are excluded from revenues and expenses.

Impact of Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by reporting companies under U.S. GAAP. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. On July 9, 2015, the FASB agreed to delay the effective date by one year. As currently issued and amended and in accordance with the agreed upon delay, the new standard is effective for us beginning in the first quarter of 2018. Early adoption is permitted, but not before the original effective date of the standard. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. While we continue to assess all potential impacts of the standard, we currently believe the most significant impact will likely relate to systems revenue. Under the new standard we are evaluating whether our systems revenue would be recognized on shipment. We are planning to adopt the standard on January 1, 2018. We plan to adopt the standard retrospectively with the cumulative effect of initially applying it recognized at the date of initial application ("modified retrospective" approach).

In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842) which supersedes Topic 840, Leases. The update requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. The new standard is effective for us in our first quarter of fiscal 2020 on a modified retrospective basis and earlier adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2016-02 on our condensed consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation” (Topic 718): Improvements to Employee Share-Based Payment Accounting. The update involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. It is effective for annual periods beginning after December 15, 2016. While we are continuing to assess all potential impacts of the standard, we currently believe it will not have a significant impact on our income tax provision, classification of awards and statement of cash flows.