Exhibit 99.1

ORBOTECH LTD.

2018 CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

 

		Page
REPORT OF INDEPENDENT AUDITORS			F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets			F-3
Statements of Operations			F-5
Statements of Comprehensive Income			F-6
Statements of Changes in Equity			F-7
Statements of Cash Flows			F-8
Notes to Consolidated Financial Statements			F-10

 

F-1

Report of Independent Auditors

To the Board of Directors and Management of

Orbotech Ltd.

We have audited the accompanying consolidated financial statements of Orbotech Ltd. and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2018 and 2017 and the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2018.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Orbotech Ltd. and its subsidiaries as of December 31, 2018 and 2017, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2018 in accordance with accounting principles generally accepted in the United States of America.

 

Tel-Aviv, Israel		/s/ Kesselman & Kesselman
March 11, 2019		Certified Public Accountants (lsr.)
		A member firm of PricewaterhouseCoopers International Limited

 

F-2

ORBOTECH LTD.

CONSOLIDATED BALANCE SHEETS

 

						December 31
		Note				2018				2017
						U.S. dollars in thousands
ASSETS
CURRENT ASSETS:
Cash and cash equivalents						$	322,837			$	315,803
Short-term bank deposits							965				4,115
Trade receivables, net							302,426				362,839
Prepaid expenses and other current assets							143,373				56,448
Inventories							215,553				182,152
Total current assets							985,154				921,357
INVESTMENTS AND NON-CURRENT ASSETS:
Marketable securities											7,888
Funds in respect of employee rights upon retirement							11,408				10,622
Deferred income taxes							38,602				43,157
Equity method investees (in 2017) and other receivables							1,103				5,556
							51,113				67,223
PROPERTY, PLANT AND EQUIPMENT, net							76,788				69,612
OTHER INTANGIBLE ASSETS, net							125,327				68,226
GOODWILL							282,776				177,486
Total assets						$	1,521,158			$	1,303,904

 

/s/ Asher Levy
Asher Levy				Chief Executive Officer
/s/ Alon Rozner				Corporate Vice President
Alon Rozner				And Chief Financial Officer

 

F-3

ORBOTECH LTD.

CONSOLIDATED BALANCE SHEETS (continued)

 

		December 31
		2018				2017
		U.S. dollars in thousands
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current maturities of long-term loan		$	16,364			$	16,364
Accounts payable and accruals:
Trade			70,759				96,166
Other			148,250				123,510
Deferred income			52,618				37,445
Total current liabilities			287,991				273,485
LONG-TERM LIABILITIES:
Long-term loan			40,177				56,117
Liability for employee rights upon retirement			28,563				24,997
Deferred income taxes			23,671				14,536
Other tax liabilities			14,917				22,901
Deferred and contingent payment in respect to Frontline acquisition			11,600
Total long-term liabilities			118,928				118,551
COMMITMENTS AND CONTINGENT LIABILITIES
Total liabilities			406,919				392,036
EQUITY:
Orbotech Ltd. equity
Ordinary shares of New Israeli Shekels (“NIS”) 0.14 par value per share (“ Ordinary Shares ”)
Authorized at December 31, 2018 and 2017:
80,000,000 Ordinary Shares
Issued at December 31, 2018 and 2017:
54,307,279 and 53,788,799 Ordinary Shares, respectively
Outstanding at December 31, 2018 and 2017:
48,896,507 and 48,378,026 Ordinary Shares, respectively			2,424				2,404
Additional paid-in capital			450,238				433,922
Retained earnings			760,362				572,544
Accumulated other comprehensive income			172				252
Less treasury shares, at cost at December 31, 2018 and 2017: 5,410,773 Ordinary Shares			(99,539	)			(99,539	)
Total Orbotech Ltd. equity			1,113,657				909,583
Non-controlling interests			582				2,285
Total equity			1,114,239				911,868
Total liabilities and equity		$	1,521,158			$	1,303,904

The accompanying notes are an integral part of the consolidated financial statements.

 

F-4

ORBOTECH LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Year ended December 31
		2018				2017				2016
		U.S. dollars in thousands
REVENUES:
Sales of products		$	779,264			$	674,466			$	588,396
Service rendered			264,285				226,390				218,006
			1,043,549				900,856				806,402
COST OF REVENUES:
Cost of products sold			399,601				337,077				304,455
Cost of service rendered			157,380				138,461				129,540
			556,981				475,538				433,995
GROSS PROFIT			486,568				425,318				372,407
RESEARCH AND DEVELOPMENT COSTS:
Expenses incurred			149,886				132,541				112,425
Less - government participations			4,944				7,107				5,330
NET RESEARCH AND DEVELOPMENT COSTS			144,942				125,434				107,095
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			170,725				143,363				124,356
EQUITY IN EARNINGS OF FRONTLINE			(4,459	)			(4,524	)			(3,445	)
AMORTIZATION OF INTANGIBLE ASSETS			25,894				25,006				27,456
KLA MERGER TRANSACTION COST AND OTHERS			5,587
GAIN FROM RELEASE OF AMST EARN-OUT PAYMENT OBLIGATION							(1,471	)
GAIN ON FRONTLINE STEP ACQUISITION			(91,344	)
OPERATING INCOME			235,223				137,510				116,945
FINANCIAL EXPENSES—net			10,739				5,535				21,042
INCOME BEFORE TAXES ON INCOME			224,484				131,975				95,903
TAXES ON INCOME			38,369				1,088				16,308
SHARE IN LOSSES OF EQUITY METHOD INVESTEE											600
NET INCOME			186,115				130,887				78,995
NET GAIN ATTRIBUTABLE TO NON-CONTROLLING INTERESTS			1,703				1,498				443
NET INCOME ATTRIBUTABLE TO ORBOTECH LTD.		$	187,818			$	132,385			$	79,438

The accompanying notes are an integral part of the consolidated financial statements.

 

F-5

ORBOTECH LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

		Year ended December 31
		2018				2017				2016
		U.S. dollars in thousands
Net income		$	186,115			$	130,887			$	78,995
Other comprehensive income (loss):
Gain (loss) in respect of derivative instruments designated for cash flow hedge, net of taxes			(161	)			9,420				(7,610	)
Net change with respect to available-for-sale securities, net of taxes			81				53				(105	)
Total other comprehensive income (loss)			(80	)			9,473				(7,715	)
Total comprehensive income			186,035				140,360				71,280
Comprehensive gain attributable to non-controlling interests			1,703				1,498				443
Total comprehensive income attributable to Orbotech Ltd.		$	187,738			$	141,858			$	71,723

The accompanying notes are an integral part of the consolidated financial statements.

 

F-6

ORBOTECH LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 

		Share capital
		Number of shares				Amount				Additional paid-in capital				Retained earnings				Accumulated other comprehensive income (loss)				Treasury shares				Non- controlling interest				Total equity
		In thousands				U.S. dollars in thousands
BALANCE AT JANUARY 1, 2016			48,490			$	2,209			$	306,612			$	360,721			$	(1,506	)		$	(99,539	)		$	(741	)		$	567,756
Comprehensive income															79,438				(7,715	)							(443	)			71,280
Issuance of shares, net of issuance expenses in the amount of $1.1 million			3,850				139				99,823																				99,962
Exercise of equity awards			879				33				7,394																				7,427
Compensation relating to equity awards granted											6,356																				6,356
BALANCE AT DECEMBER 31, 2016			53,219			$	2,381			$	420,185			$	440,159			$	(9,221	)		$	(99,539	)		$	(1,184	)		$	752,781
Comprehensive income															132,385				9,473								(1,498	)			140,360
PixCell Medical Technologies, Ltd. (“ PixCell ”) step acquisition																											4,967				4,967
Exercise of equity awards			570				23				3,861																				3,884
Compensation relating to equity awards granted											9,876																				9,876
BALANCE AT DECEMBER 31, 2017			53,789			$	2,404			$	433,922			$	572,544			$	252			$	(99,539	)		$	2,285			$	911,868
Comprehensive income															187,818				(80	)							(1,703	)			186,035
Exercise of equity awards			519				20				2,170																				2,190
Compensation relating to equity awards granted											14,146																				14,146
BALANCE AT DECEMBER 31, 2018			54,308			$	2,424			$	450,238			$	760,362			$	172			$	(99,539	)		$	582			$	1,114,239

The accompanying notes are an integral part of the consolidated financial statements.

 

F-7

ORBOTECH LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

 

		Year ended December 31
		2018				2017				2016
		U.S. dollars in thousands
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	186,115			$	130,887			$	78,995
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			47,490				44,543				44,756
Compensation relating to equity awards granted			14,147				9,876				6,356
Increase in liability for employee rights upon retirement, net			2,189				1,028				943
Long-term loans discount amortization											1,866
Deferred financing costs amortization			463				479				5,692
Impairment of goodwill			410
Deferred income taxes			12,208				(29,241	)			(2,693	)
Amortization of premium and accretion of discount on marketable securities, net			128				167				145
Equity in earnings, net of dividends received			277				(727	)			1,261
Other			(67	)			127				751
Gain on step acquisition			(91,344	)			(478	)
Gain from sale of fixed assets			(71	)
Gain from release of AMST earn-out of payment obligation							(1,471	)
Increase in accounts receivable:
Trade			(35,984	)			(36,496	)			(41,607	)
Other			(8,227	)			(10,568	)			(2,921	)
Increase (decrease) in accounts payable and accruals:
Trade			(25,678	)			24,030				6,898
Other (including other long-term tax liabilities)			11,412				36,845				7,994
Increase (decrease) in deferred income			34,663				8,869				(1,056	)
Decrease (increase) in inventories			(33,401	)			(47,914	)			1,080
Net cash provided by operating activities		$	114,730			$	129,956			$	108,460
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment			(26,199	)			(24,445	)			(23,550	)
Purchase of intellectual property							(700	)
Proceeds from sale of property, plant and equipment			2				157
Consideration received from the sale of the Thermal Products Business											12,000
Withdrawal (deposit) of bank deposits			3,156				(3,326	)			8,761
Purchase of marketable securities							(1,994	)			(5,553	)
Sale of marketable securities			7,680				1,004				4,337
Investment in equity method investee											(1,000	)
Step acquisition, net of cash acquired (a)			(77,935	)			102
Acquisition of AMST											(6,429	)
Withdrawal (deposit) of funds in respect of employee rights upon retirement			(226	)			(1,250	)			249
Net cash used in investing activities		$	(93,522	)		$	(30,452	)		$	(11,185	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term loan											(239,635	)
Repayment of bank loan			(16,364	)			(16,364	)			(20,000	)
Bank loan, net of financing costs											108,031
Issuance of shares, net											99,962
Share options exercised			2,190				3,884				7,427
Net cash used in financing activities		$	(14,174	)		$	(12,480	)		$	(44,215	)
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH			7,034				87,024				53,060
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF YEAR			315,803				228,779				175,719
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF YEAR		$	322,837			$	315,803			$	228,779

The accompanying notes are an integral part of the consolidated financial statements.

 

F-8

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid		$	2,215			$	2,489			$	6,722
Income taxes paid		$	18,112			$	18,395			$	16,451
Income taxes refunded		$	489			$	499			$	385
Purchase of property, plant and equipment on credit		$	1,883			$	1,829			$	399
(a) Step acquisition of subsidiary consolidated for the first time:
Trade receivables & others			(4,093	)
Severance pay fund			(1,394	)
Property, plant and equipment			(1,030	)			(168	)
Deferred tax liability							682
Goodwill			(105,700	)			(1,112	)
In-process research and development (“IPR&D”)			(15,500	)			(8,800	)
Technological intellectual property			(65,000	)
Trade Name			(2,000	)
Trade payables and others			18,578
Accrued severance pay			2,212
			(173,927	)			(9,398	)
Less:
Gain from acquisition of subsidiary consolidated for the first time			91,344				478
Non-controlling interest							4,750
Equity investment			4,648				4,272
Cash obtained (paid) in acquisition of subsidiary consolidated for the first time		$	(77,935	)		$	102

The accompanying notes are an integral part of the consolidated financial statements.

 

F-9

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:

a. General

(i) Nature of operations

Orbotech Ltd. (the “Company” or “Orbotech”) is an Israeli company whose core business lies in enabling electronic device manufacturers to inspect, test and measure printed circuit boards (“ PCB ”s) and flat panel displays (“ FPD ”s) to verify their quality (‘reading’); pattern the desired electronic circuitry on the relevant substrate and perform three-dimensional shaping of metalized circuits on multiple surfaces (‘writing’); and utilize advanced vacuum deposition and etching processes in semiconductor device (“ SD ”) and semiconductor manufacturing and to perform laser drilling of electronic substrates (‘connecting’). Orbotech refers to this ‘reading’, ‘writing’ and ‘connecting’ as enabling the ‘Language of Electronics’.

The products designed, developed, manufactured, marketed and serviced by the Company include: direct imaging (“ DI ”), automated optical inspection (“ AOI ”), automated optical shaping (“ AOS ”), via formation (“ VF ”) laser drilling tools, additive printing solutions (previously known as inkjet printing) and other production systems used in the manufacture of PCBs; AOI, test, repair and process monitoring systems used in the manufacture of FPDs; and etch, physical vapor deposition (“ PVD ”), chemical vapor deposition (“ CVD ”) and molecular vapor deposition (“ MVD ”) equipment for use in the manufacture of SDs, such as micro-electro-mechanical systems (“ MEMS ”), advanced semiconductor packaging (“ Advanced Packaging ”), power and radio frequency (“ RF ”) devices and high brightness light emitting diode (“ HBLED ”) devices.

The Company also markets computer-aided manufacturing (“CAM”) and engineering solutions for PCB production, which are designed and developed by Frontline P.C.B. Solutions Limited Partnership (“ Frontline ”), a consolidated subsidiary of the Company since the Company’s acquisition of remaining equity interest it did not already own in December 2018. In addition, through its subsidiary, Orbotech LT Solar, LLC (“ OLTS ”), the Company is engaged in the research, development and marketing of products for the deposition of thin film coating of various materials on crystalline silicon photovoltaic wafers for solar energy panels through plasma-enhanced chemical vapor deposition (“ PECVD ”); and, through its subsidiary Orbograph Ltd. (“ Orbograph ”), in the development and marketing of character recognition solutions to banks, financial and other payment processing institutions and healthcare providers.

The Company continues to develop technologies for use in other applications both within and outside the electronics industry and also regularly and selectively evaluates opportunities to acquire complementary technologies to further diversify its business. The Company derives a significant portion of its revenues from the service and support of its substantial installed base of products.

(ii) Accounting principles

The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“ GAAP ”).

(iii) Functional currency

The currency of the primary economic environment in which the operations of the Company and its subsidiaries are conducted is the United States dollar (the “ Dollar ”).

Virtually all product revenues of the Company and its subsidiaries and affiliates are derived outside Israel in non-Israeli currencies, mainly the Dollar. Most purchases of materials and components are made in Dollars or in Israeli currency under contracts linked to the Dollar. Thus, the functional currency of the Company and all of its subsidiaries is the Dollar.

Monetary accounts maintained in currencies other than the Dollar are re-measured to the Dollar at the balance sheet date. Operational accounts and non-monetary balance sheet accounts are measured and recorded at the rate in effect at the date of the transaction. The effects of foreign currency re-measurement are recorded in financial expenses - net.

 

F-10

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

 

(iv) Use of estimates in the preparation of financial statements

The preparation of financial statements in conformity with 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 dates of the financial statements and the reported amounts of revenues and expenses during the reporting years. Some of those judgments can be subjective and complex and, consequently, actual results may differ materially from those estimates and assumptions. As applicable to these financial statements, the most significant estimates and assumptions relate to revenue recognition, inventories, deferred tax assets, provision for uncertain tax positions, provision for doubtful accounts, goodwill, intangible assets and contingencies.

b. Principles of consolidation

These consolidated financial statements include the accounts of the Company and its subsidiaries.

Intercompany balances and transactions have been eliminated in consolidation. Profits from intercompany sales not yet realized outside of the Company and its subsidiaries have also been eliminated.

The Company’s holding in OLTS, is currently approximately 80.4% on a fully diluted basis.

Approximately 16% of OLTS’s equity interest as at December 31, 2018 is held by the two developers of certain of OLTS’s technology. Each of these two developers holds a put option to sell his holdings in OLTS to, at the Company’s election, the Company and/or OLTS. These put options became exercisable commencing from 2015, subject to the achievement of a certain financial milestone by OLTS (which was not met in any of 2018, 2017 or 2016). The purchase price to be paid by the Company and/or OLTS upon the exercise of these put options shall be equal to the fair market value of the equity interest being sold, as determined by an external appraiser. There is a limit on the number of equity interest units that the two developers may require the Company to purchase, upon exercise of these put options, each year. The put options shall expire upon the earlier of an initial public offering, merger and acquisition transaction or a third-party investment in OLTS that results in such third party holding at least 5% of OLTS’s equity interest.

c. Cash and cash equivalents

The Company considers all highly liquid investments, including cash and short-term bank deposits that are not restricted as to withdrawal or use and the period to maturity of which does not exceed three months at the time of investment, to be cash equivalents.

d. Restricted cash

The Company may have restricted cash deposited as a guarantee for customers in interest bearing deposits. The Company classifies these amounts as a current asset due to their short maturity. As of December 31, 2018, and 2017 the Company does not hold any restricted cash.

e. Short-term bank deposits

Bank deposits with original maturity dates of more than three months but less than one year are included in short-term bank deposits. As of December 31, 2018, all bank deposits were in Euros and Dollars and bear zero interest and 2.44% respectively.

As of December 31, 2017, short-term deposits were in Dollars, Chinese Renminbi and Euros and bear interest at an average annual rate of 1.55%.

 

F-11

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

 

f. Concentration of credit risks and allowance for doubtful accounts

As of December 31, 2018, and 2017, most of the Company’s cash and cash equivalents were deposited with major Israeli, European, United States and Far Eastern banks. The Company is of the opinion that the credit risk in respect of these balances is not material.

The Company performs ongoing credit evaluations of its customers for the purpose of determining the appropriate allowance for doubtful accounts. In respect of sales to customers in certain economies, the Company generally requires letters of credit from banks.

The allowance for doubtful accounts is determined for specific debts doubtful of collection.

The Company routinely receives letters of credit or promissory notes in connection with sales of products in the Far East and Japan. From time to time, the Company may sell some of these letters of credit and promissory notes to third parties at a discount in return for cash. The resulting costs related to the letters of credit and promissory notes are charged to ‘financial expenses—net’. During the years ended December 31, 2018, 2017 and 2016, the Company sold letters of credit and promissory notes with face amounts of $68.3 million, $89.4 million and $37.8 million, respectively, of these letters of credit and promissory notes.

g. Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined as follows: components, products in process and finished products - on the weighted average basis; and labor and overhead—on the basis of actual manufacturing costs, assuming normal manufacturing capacity. Net realizable value is determined based on estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

The Company periodically assesses inventory for obsolescence and excess balances and reduces the carrying value by an amount equal to the difference between its cost and the net realizable value, when applicable.

The net realizable value is primarily estimated based on future demand forecasts, as well as, historical sales trends, product life cycle status and product development plans.

h. Marketable securities

As of December 31, 2018, all the Company’s investments in marketable securities have been sold.

As of December 31, 2017, securities classified as available-for-sale are reported at fair value with unrealized gains and losses, net of related tax, recorded as a separate component of other comprehensive income (loss) in equity until realized.

Unrealized losses that are considered to be other-than-temporary are charged to income as impairment charge.

 

F-12

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

 

i. Investment in equity method investees

Investments in shares of an entity over which the Company has significant influence or joint control, but owns less than a controlling voting interest, are accounted for using the equity method. Significant influence is presumed to exist when the Company holds between 20%-50% of the voting power in an investee.

j. Property, plant and equipment

These assets are stated at cost and are depreciated by the straight-line method over their estimated useful lives.

Annual rates of depreciation are as follows:

 

		%
Machinery and equipment		10-33
		(mainly 20)
Leasehold improvements		Over the term of the lease (mainly 10)
Buildings		3
Office furniture and equipment		6-33
Computer equipment & Software		10-33
Vehicles		15-25

k. Other intangible assets

Acquired intangible assets are presented at cost, net of accumulated amortization and impairments. Definite life intangible assets consist primarily of intellectual property and customer relations and are being amortized on a straight-line basis over periods of five to eight years and, in some cases, up to 12 years. The Company capitalizes in-process research and development projects acquired as part of a business combination. Upon successful completion of each project, IPR&D assets are reclassified to developed technology and amortized over their estimated useful lives.

l. Impairment of long-lived assets

Long-lived assets, including definite life intangible assets, held and used by an entity are reviewed for potential impairment whenever events or changes in circumstances indicate that the carrying amount of the assets (or asset group) may not be recoverable. In the event that the sum of the expected future cash flows (undiscounted and without interest charges) of the long-lived assets (or asset group) is less than the carrying amount of such assets, an impairment charge would be recognized, and the assets (or asset group) would be written down to their estimated fair values.

Indefinite-life intangible assets are not amortized but rather tested for impairment annually, or whenever events or circumstances present an indication of impairment. The Company applies the Financial Accounting Standards Board (the “ FASB ”) guidance that permits the Company to make a qualitative assessment of whether the indefinite-lived asses is impaired or opt to bypass the qualitative assessment and proceed directly to determine the indefinite-lived intangible asset’s fair value. If the Company determines, based on the qualitative tests, that it is not more likely than not that the indefinite-lived asset is impaired, no further action is required. Otherwise, the Company is required to perform the quantitative impairment test by comparing the fair value of the indefinite-lived asset to its carrying amount. If the indefinite-lived intangible asset is considered to be impaired, an impairment charge is recorded as the amount of which the carrying amount of the asset exceeds its fair value.

No impairment charges were recorded in the years ended December 31, 2018, 2017 and 2016.

 

F-13

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

 

m. Business Combination

The Company’s consolidated financial statements include the operations of an acquired business from the date of the acquisition’s consummation.

Acquired businesses are accounted for using the acquisition method of accounting, which requires, among other things, that most assets acquired, and liabilities assumed be recognized at their estimated fair values as of the acquisition date.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired.

Transaction costs are expensed as incurred. Any excess of the consideration transferred over the assigned values of the net assets acquired is recorded as goodwill. Contingent consideration incurred in a business combination is included as part of the acquisition price and recorded at a probability weighted assessment of its fair value as of the acquisition date.

The fair value of the contingent consideration is re-measured at each reporting period, with any adjustments in fair value recognized in operating income under gain (loss) from remeasurement of contingent earn out payment.

n. Goodwill

Goodwill is not amortized, but rather tested for impairment annually, as of September 30 of each year, or whenever events or circumstances present an indication of impairment, by assessing the fair value of the Company’s various reporting units.

The goodwill impairment test is applied by performing qualitative and/or quantitative assessments before calculating the fair value of the reporting unit. If, on the basis of these factors, it is considered more likely than not that the fair value of the reporting unit is higher than the carrying amount, further testing of goodwill for impairment would not be required. Otherwise, goodwill impairment is tested using a two-step approach.

The first step involves comparing the fair value of a company’s reporting units to their carrying amount. If the fair value of the reporting unit is determined to be greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is determined to be greater than the fair value, the second step must be completed to measure the amount of impairment, if any. The second step involves calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of the goodwill in this step is compared to the carrying value of goodwill. If the implied fair value of the goodwill is less than the carrying value of the goodwill, an impairment loss equivalent to the difference is recorded.

In the years ended December 31, 2018 and 2017, the Company elected to perform qualitative assessments, and in the year ended December 31, 2016, the Company elected to perform a quantitative assessment for the annual goodwill impairment test.

As a result of performing the annual impairment test, on September 30, 2018 the Company impaired $410,000 of goodwill from the Recognition Software business unit (see Note 7a.). The annual tests performed on September 30, 2017 and 2016 determined that there was no impairment with respect to goodwill.

 

F-14

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

 

o. Revenue recognition

The Company primarily derives revenue from technologically advanced, end to end yield enabling solutions to address various manufacturing stages of PCBs, FPDs, SDs and other electronics components, maintenance and support of all these products, installation and the sale of spare parts. The Company’s solutions are generally not sold with a right of return, nor has the Company experienced significant returns from or refunds to its customers. The Company accounts for a contract with a customer when there is approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

The Company’s revenues are measured based on consideration stipulated in the arrangement with each customer, net of any sales incentives and amounts collected on behalf of third parties, such as sales taxes. The revenues are recognized as separate performance obligations that are satisfied by transferring control of the product or service to the customer.

The Company’s arrangements with its customers include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. A product or service is considered distinct if it is separately identifiable from other deliverables in the arrangement and if a customer can benefit from it on its own or with other resources that are readily available to the customer.

The transaction consideration, including any sales incentives, is allocated between separate performance obligations of an arrangement based on the stand-alone selling prices (“SSP”) for each distinct product or service. Management considers a variety of factors to determine the SSP, such as, historical standalone sales of products and services, discounting strategies and other observable data.

Product revenue:

The Company recognizes revenue from product sales at a point in time when the Company has satisfied its performance obligation by transferring control of the product to the customer. Revenue on the majority of the Company’s contracts is recognized upon delivery because this represents the point in time at which control is transferred to the customer.

For products that have not been demonstrated to meet product specifications prior to delivery (such as in case of a new product) revenue is recognized at customer acceptance.

Revenue from software licenses is recognized at a point in time, when the software is made available to the customer. Revenues from maintenance and services of such software are deferred at contract inception and recognized ratably over the service period, or as services are performed.

Services and spare parts revenue

The Company’s revenue arrangements contain multiple elements, as it grants its customers a warranty on products sold, which includes the provision of post-sale service and maintenance, usually for a period of 6 to 12 months and installation service. Upon meeting the revenue recognition criteria of the product, the Company records a portion of the sale price that relates to the value of the service and maintenance expected to be performed during the period as deferred income and recognizes it as service revenue ratably over such period. In addition, the Company defers the value of the installation and training and recognizes it upon completion of installation and training.

Additionally, the Company offers product maintenance and service contracts, which the customer may purchase separately from the standard and extended warranty offered as part of the initial product sale. Revenue from separately negotiated maintenance and support service contracts is also recognized over time based on the terms of the applicable service period. Revenue from services performed in the absence of a maintenance contract, including training revenue, is recognized when the related services are performed. The Company also sells spare parts, revenue from which is recognized when control over the spare parts is transferred to the customer.

 

F-15

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

 

Significant Judgments

The Company’s contracts with its customers often include promises to transfer multiple products and services. Each product and service is generally capable of being distinct and represents a separate performance obligation. Upon meeting the revenue recognition criteria of the product, the Company records a portion of the sale price that relates to the value of the services expected to be performed as deferred income. Determining the stand-alone selling prices for each distinct performance obligation and allocation of consideration from an arrangement to the individual performance obligations and the appropriate timing of revenue recognition are significant judgments with respect to these arrangements. The Company typically estimates the SSP of products and services based on observable transactions when the products and services are sold on a standalone basis and those prices fall within a reasonable range. The Company typically has more than one SSP for individual products and services due to the stratification of these products by customers and circumstances. The determination of SSP involves consideration of several factors based on the specific facts and circumstances of the arrangement. Specifically, the Company considers the cost to produce the deliverable, the anticipated margin on that deliverable, the selling price and profit margin similar parts in different geographical regions, its ongoing pricing strategy and policies and other economic conditions and trends. While changes in the allocation of SSP between performance obligations will not affect the amount of total revenue recognized for a particular contract, any material changes could impact the timing of revenue recognition, which could have a material effect on the Company’s financial position and result of operations.

As outlined above, the Company uses judgment to evaluate whether or not the customer has obtained control of the product and considers several indicators in evaluating whether or not control has transferred to the customer. Not all of the indicators need to be met for the Company to conclude that control has transferred to the customer.

Contract Assets/Liabilities

The timing of revenue recognition, billings and cash collections may result in accounts receivable, contract assets, and contract liabilities (deferred revenue) on the Company’s consolidated balance sheet.

A receivable is recorded in the period the Company delivers products or provides services when the Company has an unconditional right to payment. Contract assets primarily relate to the value of products and services transferred to the customer for which the right to payment is not just dependent on the passage of time. Contract assets are transferred to receivable when rights to payment become unconditional.

A contract liability is recognized when the Company receives payment or has an unconditional right to payment in advance of the satisfaction of performance. The contract liabilities represent (1) Deferred product revenue which relates to the value of products that have been shipped and billed to customers and for which control over such products has not been transferred to the customers, and (2) Deferred service revenue, which is recorded when the Company receives consideration, or such consideration is unconditionally due, from a customer prior to transferring services to the customer under the terms of a sales contract. Deferred service revenue typically results from warranty services, maintenance, installation and other service contracts.

Contract assets and liabilities related to rights and obligations in a contract are recorded net in the consolidated balance sheets.

 

p.

Research and development

Research and development costs, which consist mainly of labor costs, materials and subcontractors, are expensed as incurred. Pre-payments for goods or services that will be used or rendered for future research and development activities are deferred and amortized over the period that the goods are delivered, or the related services are performed, subject to an assessment of recoverability. Government funding for development of approved projects is recognized as a reduction of expenses as the related cost is incurred. The Company is not required to pay royalties on sales of products developed using government funding.

 

q.

Shipping and handling costs

Shipping and handling costs are classified as a component of cost of revenues.

 

F-16

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

 

 

r.

Taxes on income

 

(i)

Deferred income taxes

Deferred income taxes are determined utilizing the asset and liability method based on the estimated future tax effects of temporary differences between the financial accounting and tax bases of assets and liabilities and on the tax rates anticipated to be in effect when the deferred taxes are expected to be paid or realized. Valuation allowance is included in respect of deferred tax assets when it is considered more likely than not that such assets will not be realized.

The Company may incur additional tax liability in the event of intercompany dividend distributions by some of its subsidiaries. Such additional tax liability in respect of these non-Israeli subsidiaries has not been provided when the Company intends to reinvest earnings of foreign subsidiaries indefinitely.

Tax liabilities that would apply in the event of disposal of investments in subsidiaries have not been taken into account in computing the deferred taxes, as it is the Company’s intention to hold, and not to realize, these investments.

 

(ii)

Uncertain tax positions

The Company follows a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate resolution. The Company’s policy is to include interest and penalties related to unrecognized tax benefits within taxes on income. Such liabilities are classified as long-term, unless the liability is expected to be resolved within 12 months from the balance sheet date. The Company presents unrecognized tax benefits as a reduction to deferred tax assets where a net operating loss, a similar tax loss, or a tax credit carryforward exists, when settlement in this manner is available under the applicable tax law.

 

s.

Treasury shares

Treasury shares are presented as a reduction of equity, at their cost to the Company.

 

t.

Derivative financial instruments

The Company uses financial instruments and derivatives to hedge existing non-Dollar assets and liabilities as well as certain anticipated transactions which are probable and are expected to be denominated in non-Dollar currencies.

All derivative instruments are recognized in the balance sheet at their fair value. On the date that the Company enters into a derivative contract, it designates the derivative, for accounting purposes, as either a hedging instrument or a non-hedging instrument. For derivative financial instruments that are designated and qualify as a cash flow hedge, the effective portions of changes in fair value of the spot component are recorded in other comprehensive income or loss, as ‘gain (loss) in respect of derivative instruments designated for cash flow hedge, net of taxes’ and are recognized in the statement of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges, if any, and hedge components such as time value, excluded from assessment of effectiveness testing, are recognized immediately in the statement of operations among ‘financial expenses—net’. Changes in the fair value of other derivatives not designated as hedging instruments are recognized in the statement of operations among ‘financial expenses—net’ and amounted to a loss of $601,000 for the year ended December 31, 2018, and gains of $2,702,000 and $294,000 for the years ended December 31, 2017 and 2016, respectively.

Cash flows from derivatives that qualify as a cash flow hedge are recognized in the statement of cash flows in the same category as that of the hedged item. Cash flows from other economic derivatives remain part of cash flows from operating activities.

 

F-17

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

 

u.

Share-based compensation

Equity awards granted to employees and directors are accounted for using the grant date fair value method. The fair value of share-based payment transactions is recognized as an expense over the requisite service period.

The Company elected to recognize compensation cost for awards that have a graded vesting schedule using the accelerated multiple-option approach.

Certain equity awards are subject to forfeiture should the Company fail to attain specified performance goals. The fair value of these awards is estimated on the date of grant using the same option valuation model used by the Company for non-performance equity awards. For so long as the Company assumes that the performance goals will be achieved, compensation cost is recorded with respect thereto. If and when a point in time is reached that the Company believes the performance goals will not be achieved, it will then reverse the share-based compensation expenses recognized through such date.

Equity awards granted to non-employees are re-measured at each reporting period at fair value until they have vested. The fair value of equity awards is charged to the statement of operations over the service period.

 

v.

Comprehensive income or loss

In addition to net income, comprehensive income or loss includes: (i) gains or losses in respect of derivative instruments designated as cash flow hedges, net of taxes (see s. above); and (ii) unrealized gains and losses arising from securities classified as available-for-sale, net of taxes (see h. above).

 

w.

Deferred financing costs

Deferred financing costs related to a recognized debt liability are presented as a direct deduction from the carrying amount of that debt liability.

 

 

F-18

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

 

x.

Impact of recently issued accounting pronouncements

 

(i)

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ ASU 2014-09 ”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09 became effective for the Company beginning in the first quarter of 2018.

Subsequently, the FASB issued the following standards related to ASU 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ ASU 2016-08 ”); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ ASU 2016-10 ”); and ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ ASU 2016-12 ”). The Company must adopt ASU 2016-08, ASU 2016-10 and ASU 2016-12 with ASU 2014-09 (collectively, the “ New Revenue Standards ”) commencing the first quarter of 2018.

The Company adopted the New Revenue Standards in the first quarter of 2018 retrospectively with immaterial effect as of the date of adoption.

The Company analyzed the impact of the New Revenue Standards on its contract portfolio by reviewing its current accounting policies and practices to identify potential differences that would result from applying the requirements of the New Revenue Standards to its revenue contracts. In addition, the Company identified and implemented appropriate changes to its business processes and related policies to support recognition and disclosure under the New Revenue Standards.

The cumulative effect of adopting the New Revenue Standards on the Company’s revenues and operating income is not material, as the analysis of the Company’s contracts under the New Revenue Standards supports the recognition of revenue at a point in time for the majority of its contracts, which is consistent with its current revenue recognition model. Revenue on the majority of the Company’s contracts will continue to be recognized upon delivery because this represents the point in time at which control is transferred to the customer. Revenues derived from performance obligations such as warranty and service contracts will continue to be recognized over the period of the service. In addition, the number of the Company’s performance obligations under the New Revenue Standards is not materially different from the Company’s contract elements under the existing standard. Finally, the accounting for the estimate of variable consideration is not materially different compared to the Company’s current practice.

 

(ii)

In January 2016, the FASB issued ASU No. 2016-01, Recognition and measurement of financial assets and liabilities (“ ASU 2016-01 ”), which relates to certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most prominent among the changes in the standard is the requirement for changes in the fair value of the Company’s equity investments, with certain exceptions, to be recognized through net income rather than other comprehensive income. ASU 2016-01 will be effective for annual reporting periods and interim periods within those years beginning after December 15, 2017. The adoption of this guidance did not have a material impact on the company’s consolidated financial statements.

 

F-19

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

 

(iii)

In February 2016, the FASB issued ASU No. 2016-02 leases (Topic 842) (“ASU 2016-02”), which revises lease accounting guidance. Under ASU 2016-02, lessees will be required to recognize a right-of-use asset and a lease liability for all leases, other than leases that meet the definition of a short-term lease. The liability and the right-of-use asset arising from the lease will be measured at the present value of the lease payments. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. ASU 2016-02 must be adopted using a modified retrospective transition approach. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its consolidated financial statements.

 

(iv)

In June, 2016, the FASB issued ASU No. 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2019. The Company is currently in the process of evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.

 

(v)

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230)—Classification of Certain Cash Receipts and Cash Payments (a Consensus of the FASB Emerging Issues Task Force) (“ ASU 2016-15 ”). ASU 2016-15 provides guidance on eight specific cash flow classification issues: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, corporate and bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The adoption of this guidance did not have a material impact on the company’s consolidated financial statements.

 

(vi)

In October, 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory (“ ASU 2016-16 ”), which eliminates the exception for an intra-entity transfer of an asset other than inventory. ASU 2016-16 requires that the income tax consequences of an intra-entity asset transfer other than inventory be recognized at the time of the transfer, rather than when the transferred asset is sold to a third party or otherwise recovered through use. ASU 2016-16 is effective for annual reporting periods (including interim periods within those annual reporting periods) beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual reporting period (as of the first interim period if an entity issues interim financial statements). The new guidance requires adoption on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted ASU 2016-16 on January 1, 2018 with no significant impact upon the adoption of ASU 2016-15.

 

(vii)

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a Consensus of the FASB Emerging Issues Task Force) (“ ASU 2016-18 ”), which requires entities to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for annual reporting periods (including interim periods within those annual reporting periods) beginning after December 15, 2017. The Company adopted this standard in the year ended December 31, 2017 and reclassified the prior years amounts to conform to the current year presentation. The adoption of this guidance did not have a material impact on the company’s consolidated financial statements.

 

F-20

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

 

(viii)

In January 2017, the FASB issued ASU No. 2017-04, Intangibles- Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ ASU 2017-04 ”), which eliminates step two of the goodwill impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets should be disclosed. ASU 2017-04 is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is in the process of assessing the impact, if any, of ASU 2017-04 on its consolidated financial statements.

 

(ix)

In July 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (“ ASU 2017-09 ”), which provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. An entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. ASU 2017-09 is effective for annual periods beginning after December 15, 2017. The adoption of this guidance did not have a material impact on the company’s consolidated financial statements.

 

(x)

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815) (“ ASU 2017-11 ”) to address complexities in accounting for certain equity-linked financial instruments containing down round features. ASU 2017-11 changes the classification analysis of these financial instruments (or embedded features) so that equity classification is no longer precluded. The amendments in ASU 2017-11 are effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods. Early adoption is permitted. The Company is in the process of assessing the impact, if any, of ASU 2017-11 on its consolidated financial statements.

 

(xi)

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815) (“ASU 2017-12 ”), which targeted improvements to accounting for hedging activities, to simplify certain aspects of hedge accounting for both non-financial and financial risks and better align the recognition and measurement of hedge results with an entity’s risk management activities. ASU 2017-12 also amends certain presentation and disclosure requirements for hedging activities and changes how an entity assesses hedge effectiveness. ASU 2017-12 is effective for fiscal years and interim periods within those years beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact ASU 2017-12 will have on its consolidated financial statements and associated disclosures.

 

(xii)

In February 2018, the FASB issued authoritative guidance ASU No. 2018-02 that allows stranded tax effects of the Tax Cuts and Jobs Act (the “Tax Act”) to be reclassified from accumulated other comprehensive income to retained earnings. The authoritative guidance will be effective for the company after December 15, 2018.

 

Early

adoption is permitted. The company is currently evaluating the effect of this new guidance on the company’s consolidated financial statements.

 

(xiii)

In August 2018, the FASB issued ASU No. 2018- 14 authoritative guidance that adds, removes, and clarifies disclosure requirements for defined benefit and other postretirement plans. This authoritative guidance will be effective for the company in fiscal 2020 on a retrospective basis, with early adoption permitted. The company is currently evaluating the effect of this new guidance on the company’s consolidated financial statements.

 

(xiiii)

In August 2018, the FASB issued authoritative guidance ASU No. 2018-13 that eliminates, amends, and adds disclosure requirements for fair value measurements. While the amended and new disclosure requirements primarily relate to Level 3 fair value measurements, the authoritative guidance also eliminates disclosure requirements related to the amount and reasons for transfer between Level 1 and Level 2 of fair value hierarchy, policy for timing of transfer between levels, and the valuation processes for Level 3 fair value measurements. The authoritative guidance will be effective for the company in the first quarter of fiscal 2020. Early adoption is permitted only for the removal and amendment of certain disclosures, while the new disclosures requirements are to be applied prospectively. The company is currently evaluating the effect of this new guidance on the company’s consolidated financial statements.

 

 

F-21

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

 

NOTE 2 - EQUITY METHOD INVESTEES:

 

a.

Frontline

On December 24, 2018, the Company acquired all outstanding shares of Frontline that it did not already own. Frontline, an Israeli limited partnership was owned equally by the Company and Mentor Graphics Development Services (Israel) Ltd. and combines the former CAM operations of both companies. The Company’s subsidiaries market and provide customer support in respect of Frontline’s products. Because Frontline is integrated into the operations of the Company, the Company’s share in the earnings of Frontline is included in operating income. (see Note 3b).

As of December 24, 2018, and as of December 31, 2017, the Company’s investment in Frontline amounted to $4,648,000 and $4,771,000, respectively.

Summarized financial information for Frontline is presented below:

 

(i)

Balance sheet data:

 

		December 31
		2017
		$ in thousands
Assets:
Current assets			11,572
Non-current assets			2,649
Total assets			14,221
Liabilities:
Current liabilities			2,691
Non-current liabilities			2,356
Total liabilities			5,047

 

(ii)

Operating results data:

 

		Period ended
		December 24				December 31				December 31
		2018				2017				2016
		$ in thousands
Total revenues			29,900				28,862				23,768
Gross profit			24,405				24,045				18,719
Net income			8,918				9,048				6,890

 

F-22

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 2 - EQUITY METHOD INVESTEES (continued):

 

(iii)

Other financial information included in the Company’s financial statements:

 

		Period ended
		December 24				December 31				December 31
		2018				2017				2016
		$ in thousands
Related parties transactions included in:
Cost of products sold			404				304				300
Selling, general and administrative expenses			(2,635	)			(3,264	)			(2,742	)

 

		December 31
		2017
		$ in thousands
Balances with related parties (included in trade payables)			5,419

 

b.

PixCell

From 2011 through 2016, the Company through its wholly-owned venture capital fund, Orbotech Technology Ventures L.P. (“ OTV ”), invested a total of $6.0 million in PixCell and paid other shareholders of PixCell a total of $0.5 million, in consideration for approximately 50% (approximately 45% on a fully diluted basis) of the outstanding share capital of PixCell.

In January 2017, the Company extended a convertible loan to PixCell in an aggregate amount of $1.5 million. On and from the time of extension of the convertible loan, the Company became entitled to appoint the majority of PixCell’s directors. The loan was convertible until December 31, 2018, at the discretion of the Company, into PixCell shares and, if not converted by such time, shall be repaid on that date. In addition, pursuant to the terms of a further amendment to the agreement between the parties from December 2017, at the end of the last quarter of 2017 and at the beginning of the first quarter of 2018, the Company invested a total additional amount of $0.2 million and $1.3 million, respectively, following which the Company holds (assuming the conversion of certain loans extended by other PixCell shareholders who participated in the convertible loan financing and assuming the conversion of the loan by the Company as set forth above) approximately 55.67% (approximately 50.74% on a fully diluted basis), of the outstanding share capital of PixCell.

As a result of the above, the Company has included the results of operations of PixCell in the Company’s consolidated results of operations beginning January 2017. Furthermore, in connection with the extension of the above convertible loan, the Company, PixCell and the remaining shareholders of PixCell amended the terms of the initial 2011 investment agreement between them, with the effect that the right of the Company to invest additional amounts in PixCell’s share capital (beyond the amounts described above) and the undertaking of the Company to acquire the remaining share capital of PixCell (subject to certain terms and conditions), were both cancelled.

In January 2018 PixCell has issued to the company 18,000 shares against a payment of $1.3 million. After the investment the company holdings in PixCell shares has increased to 52%.

In December 2018, the Company extended the maturity date of the convertible loan to PixCell to December 31, 2019.

 

F-23

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

 

NOTE 3 - BUSINESSES ACQUIRED

 

a.

On December 20, 2016, the Company, acquired substantially all of the business and operations of AMST, a company engaged in the design, manufacture and sale of capital equipment for the deposition of anti-stiction and other ultra-thin films using molecular vapor deposition or atomic layer deposition, for an aggregate purchase price of $6,429,000 in cash and a contingent entitlement to an earn-out payment on certain sales of AMST’s products up to $10.5 million over a period of 15 months, which was valued at $1.5 million as was expected to be paid in March 2018 if certain conditions were met.

On March 2018, earn-out was not paid because certain conditions for the earn-out payment were not met.

The Company accounted for this acquisition using the purchase method of accounting and began consolidating the results of AMST on December 20, 2016. Amounts of $0.7 million and $0.7 million, respectively, were allocated to intellectual property and customer relations, and $0.6 million was allocated to other intangible assets. The Company allocated the excess of the purchase price over the fair value of the net tangible and intangible assets acquired ($1.6 million), in the amount of $6.2 million, to goodwill.

 

b.

On December 24, 2018, as part of the Company’s strategy to invest in the high growth area of the software business within the PCB industry, the Company acquired the remaining 50% of shares of Frontline that it did not already own from Mentor Graphics Development Services (Israel) Ltd. The Company acquired such equity for $85 million in cash and will pay an additional $10 million in cash over four years plus a cash earn out of not less than $5 million and up to $20 million. The earn out amount will be based on revenues from a Frontline product currently under development. The estimated fair market values of the four-year cash payment and the earn out are $8.8 million and $5.9 million, respectively.

The above consideration includes an estimated $4.7 million premium for gaining a controlling interest in Frontline. Related acquisition costs expensed by the Company were approximately $0.6 million included in the operating expenses.

The amount of gain on Frontline step acquisition recognized as a result of remeasuring to fair value the equity interest held by the Company in Frontline before the acquisition was approximately $91.3 million.

The gain on Frontline step acquisition is included in operational profit in the income statements.

The Company accounted for this acquisition using the acquisition method of accounting and, accordingly, assets acquired, and liabilities assumed from Frontline were recorded at their estimated fair values, as follows:

 

F-24

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 3 - BUSINESSES ACQUIRED (continued):

 

		$ in thousands
Cash and cash equivalents			7,100
Accounts receivable			3,500
Other current assets			500
Other non-current assets			1,100
Identifiable intangible assets:
In-process research and development (1)			15,500
Technological intellectual property (2)			65,000
Trade name, trademarks, domain name (3)			2,000
Goodwill			105,700
Total assets acquired			200,400
Current liabilities			2,900
Long-term liabilities			800
Total liabilities assumed			3,700
Net assets acquired			196,700

(1) In-process research and development—On successful completion of each project, in-process research and development assets are reclassified to developed technology and amortized over their estimated useful lives.

(2) Technological intellectual property—Amortized over a period of up to 8 years.

(3) Trade name, trademarks, domain name - Amortized over a period of approximately 7 years.

The purchase price allocation for Frontline takes into account the information management believes is reasonable. Nevertheless, the Company has up to one year from the Frontline Closing Date to make a final determination of purchase accounting allocations; and, accordingly, adjustments may be made to the foregoing allocations for Frontline

The results of the acquired business are consolidated as of December 24, 2018, the Frontline Closing Date. The goodwill was allocated to the PCB Division reporting unit.

The goodwill arising from the Frontline Acquisition is a result, among other things, of workforce, sales sources, marketing positioning value, cross-selling opportunities and joint development opportunities for new products in the future.

The goodwill is not tax deductible.

Revenues of Frontline for the period from the Frontline Closing Date to December 31, 2018 were approximately $3.2 million.

Below is the unaudited pro forma, combined statement of operations data for the years ended December 31, 2018 and 2017, presented as if the Frontline Acquisition had occurred on January 1, 2017, after giving effect to: (a) purchase accounting adjustments, including the increase in amortization of identifiable intangible assets based on the estimated fair value thereof; (b) transaction costs; (c) gain on Frontline step acquisition and (d) related tax impact.

The pro forma information for year ended December 2017 does not include: (a) transaction costs (b) gain on Frontline step acquisition.

This unaudited pro forma financial information is not necessarily indicative of the combined results that would have been attained had the Frontline Acquisition actually taken place on January 1, 2017, nor is it necessarily indicative of future results.

 

F-25

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 3 - BUSINESSES ACQUIRED (continued):

 

		Year ended December 31
		2018		2017
		$ in thousands
		(unaudited)
Revenues		1,073,448		929,328
Net income*		93,120		128,498

 

*	Includes amortization of intangible assets (net of tax) in the amount of approximately $8.4 million.

The fair value of the equity interest in Frontline held by the Company immediately before the acquisition was approximately $95.9 million for which the following valuation techniques were utilized to measure the fair value and does not include control premium of $4.7 million.

For equity interest held before the acquisition and for controlling premium the fair value was calculated including management indication that a small amount of premium was factored into the purchase.

The fair value was estimated by applying an income approach and the market approach, while performing a similar transaction search with the following parameters:

 

a.

Greater than 51.0% ownership sought.

 

b.

Closed between January 2012 and the Valuation Date.

 

c.

Target operations within the application software industry.

The 5.0% selected control premium falls between the low and first-quartile indication of the control premium observed by the guideline transactions. The inverse of the control premium was calculated to estimate a discount for lack of control (“DLOC”). A DLOC of 4.8% was then applied to the purchase consideration for the 50.0% interest in the gross-up calculation to estimate the value to Orbotech on a consolidated basis.

For deferred consideration the fair value was calculated based on 4 anniversaries from the SPA date as the present value of installments based on a risk-free interest of 2.7%.

For the Technological Intellectual Property and in-Process Research and Development, the Multi-Period Excess Earnings Method (“MPEEM”) was used. The principle behind the MPEEM is that the value of an intangible asset is equal to the present value of the incremental after-tax cash flows attributable only to the subject intangible asset after deducting contributory asset charges.

For Trade Mark, Trade Names and Domain Names, the Relief-From-Royalty Method was employed, whose basic tenet in this method is that without ownership of the subject intangible asset, the user of that intangible asset has to make a stream of payments to the owner of the asset in return for the rights to use that asset. By acquiring the intangible asset, the user avoids these payments.

The Earnout was calculated using the Monte Carlo Simulation Model which considered three primary sources of risk in estimating the Fair Value of the Earnout:

i) The risk associated with the underlying performance metric (i.e. revenue),

ii) The risk associated with the functional form of the Earnout

iii) The credit risk associated with the ability of the Company to make the Earnout payments.

The earn out fair value is presented as part of Company’s instruments and risk management at level 3 (see note 13).

 

F-26

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 4 - REVENUES

Method and Impact of Adoption

The Company adopted Accounting Standards Codification (“ASC”) 606, Revenue From Contracts With Customers (“ASC 606”) on January 1, 2018. The cumulative effect of adopting the New Revenue Standards on the Company’s revenues and operating income is not material, as the analysis of the Company’s contracts under the new Revenue Standards supports the recognition of revenue at a point in time for the majority of its contracts, which is consistent with its current revenue recognition model. Revenue on the majority of the Company’s contracts will continue to be recognized upon delivery because this represents the point in time at which control is transferred to the customers. Revenues derives from performance obligations such as warranty and service contracts will continue to be recognized over the period of the service.

The following table summarizes the effects of adopting ASC 606 on the Company’s consolidated balance sheet as of December 31, 2018:

 

		December 31, 2018
		As reported under ASC 606				Prior to adoption of ASC 606				Effect of changes
		$ in thousands
ASSETS
Accounts receivable, net		$	302,426			$	401,986			$	(99,559	)
Other current assets			143,373				63,525				79,848
LIABILITIES
Deferred Income		$	52,618			$	72,329			$	19,711

The following table summarizes the effects of adopting ASC 606 on the Company’s consolidated statements of operations for the twelve months ended December 31, 2018:

 

		Twelve months ended December 31, 2018
		As reported under ASC 606				Prior to adoption of ASC 606				Effect of changes
		$ in thousands
Revenues:
Product		$	779,264			$	773,960			$	5,304
Costs and expenses:
Costs of revenues			399,601				399,320				281
Net income		$	187,818			$	182,233			$	5,585

 

F-27

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 4 - REVENUES (Continued):

 

Contract Assets are reclassified under Prepaid expenses and other current assets.

Contract Liabilities are recorded under Deferred income.

Contract Balances

 

(In thousands, except for percentage)		As of December 31, 2018				As of January 1, 2018				$ Change				% Change
Accounts receivable, net		$	302,426			$	277,688			$	24,738				8.9	%
Contract assets		$	79,848			$	65,686			$	14,162				21.6	%
Deferred Income		$	52,618			$	40,059			$	12,559				31.4	%

Accounts receivable are recognized when the right to consideration becomes unconditional based upon contractual billing schedules.

The Company’s payment terms and conditions vary by contract type, although terms generally include a requirement of payment of 70% to 90% of total contract consideration within 30 to 60 days of shipment, with the remainder payable within 30 days of acceptance.

Remaining Performance Obligations

As of December 31, 2018, the Company had $266 millions of remaining performance obligations, which represents its obligation to deliver products and services and consists primarily of sales orders where written customer requests have been received. The Company expects to recognize approximately 2% to 10% of these performance obligations as revenue beyond the next twelve months, subject to risk of delays, and pushouts by the customer, usually with limited or no penalties.

Practical expedients

The Company applies the following practical expedients:

The Company accounts for shipping and handling costs as activities to fulfill the promise to transfer the goods, instead of a promised service to our customer.

The Company generally expenses sales commissions when incurred because the amortization is one year or less. These costs are recorded.

 

F-28

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 4 - REVENUES (Continued):

 

The following tables disaggregates Orbotech’s revenues by major revenue streams.

(i) Revenues by major product lines are as follows:

 

		Year ended December 31
		2018				2017				2016
		$ in thousands
Inspection			231,290				212,859				176,650
Direct imaging			236,900				207,400				171,282
Test and repair			180,300				157,550				133,350
PVD/CVD			211,120				169,390				196,300
Other			183,939				153,657				128,820
Total			1,043,549				900,856				806,402

(ii) Disaggregation of revenues:

 

		Year ended December 31
		2018				2017				2016
		$ in thousands
Sales revenues:
PCB			221,646				208,521				170,328
FPD			266,381				226,868				185,099
SD			277,922				229,270				221,785
Other			13,315				9,807				11,184
Total sales revenues			779,264				674,466				588,396
Service revenues:
PCB			146,558				127,593				116,581
FPD			48,804				44,324				40,798
SD			60,775				46,983				51,739
Other			8,148				7,490				8,888
Total service revenues			264,285				226,390				218,006
Total			1,043,549				900,856				806,402

 

F-29

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 5 - INVENTORIES

 

		December 31
		2018				2017
		$ in thousands
Components:
For manufacturing of systems			84,447				71,017
For service of systems			50,027				44,534
			134,474				115,551
Work in process			21,823				25,539
Finished products			59,256				41,062
Total			215,553				182,152

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT

 

a.

Composition of assets

Composition of assets, grouped by major classifications, is as follows:

 

		December 31
		2018				2017
		$ in thousands
Cost:
Machinery and equipment			57,766				58,555
Leasehold improvements			63,705				57,063
Land and buildings			13,372				11,668
Office furniture and equipment			11,190				14,740
Computer equipment			111,128				73,460
Vehicles			440				469
			257,601				215,955
Less - accumulated depreciation and amortization			180,813				146,343
			76,788				69,612

 

b.

Depreciation

Depreciation expenses totaled $22,006,000, $19,059,000 and $17,300,000 in the years ended December 31, 2018, 2017 and 2016, respectively.

 

F-30

ORBOTECH LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS:

 

a.

Goodwill

Composition of goodwill and changes therein the years ended December 31, 2018 and 2017 are as follows:

 

		December 31
		2018				2017
		$ in thousands
Balance at the beginning of year			177,486				176,374
Acquired during the year			105,700				1,112
Impairment			(410	)
Balance at the end of year			282,776				177,486

Goodwill of $105,700,000 was valued as part of the Frontline step-up acquisition at the end of 2018 as further described in Note 3b.

 

b.

Other intangible assets

Other intangible assets are composed as follows:

 

		December 31
		2018				2017
		$ in thousands
Cost:
Intellectual property			132,650				67,650
Customer relations			97,483				97,483
Trade name			8,008				6,008
IPR&D			24,300				8,800
Other			228				143
			262,669				180,084
Less: accumulated amortization			137,342				111,858
			125,327				68,226

Intellectual property of $65,000,000, IPR&D of $15,500,000 and Trade name of $2,000,000 was valued as part of the Frontline step-up acquisition at the end of 2018 as further described in Note 3b.

IPR&D of $15,500,000 was valued as part of the Frontline step-up acquisition at the end of 2018 as further described in Note 3b.

The IPR&D was valued using the MPEEM. The principle behind MPEEM is that the value of an intangible asset is equal to the present value of the incremental after-tax cash flows attributable only to the subject intangible asset after deducting contributory asset charges.

IPR&D of $8,800,000 was valued as part of the PixCell step-up acquisition in 2017.

The IPR&D was valued using the income approach. The material net cash inflows are expected in 3 years. The key assumption in valuing the IPR&D related to the discount rate, which was 27.5%.

Amortization of other intangible assets totaled $25,484,000, $25,484,000and $27,456,000 in the years ended December 31, 2018, 2017 and 2016, respectively.

 

F-31