ONTO INNOVATION INC. Certain statements in this Quarterly Report on Form 10-Q of
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Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as, but not limited to, "anticipate," "believe," "continue," "estimate," "expect," "intend," "plan," "should," "may," "could," "will," "would," "forecast," "project" and words or phrases of similar meaning, as they relate to our management or us.
The forward-looking statements contained herein reflect our expectations with
respect to future events and are subject to certain risks, uncertainties and
assumptions. Actual results may differ materially from those included in such
forward-looking statements for a number of reasons including, but not limited
to, the following: effects of the COVID-19 pandemic and the measures being taken
to limit the spread of COVID-19, including impact on demand for our products,
reductions in production levels, R&D activities, and qualification activities
with our customers, increased costs, disruptions to our supply chain and a
decrease in availability under our credit agreement; variations in the level of
orders which can be affected by general economic conditions; seasonality and
growth rates in the semiconductor manufacturing industry and in the markets
served by our customers; the global economic and political climates;
difficulties or delays in product functionality or performance; the delivery
performance of sole source vendors; the timing of future product releases;
failure to respond adequately to either changes in technology or customer
preferences; changes in pricing by us or our competitors; our ability to manage
growth; changes in management; risk of nonpayment of accounts receivable;
changes in budgeted costs; our ability to leverage our resources to improve our
position in our core markets, to weather difficult economic environments, to
open new market opportunities and to target high-margin markets; the
strength/weakness of the back-end and/or front-end semiconductor market
segments; the imposition of tariffs or trade restrictions and costs, burdens and
restrictions associated with other governmental actions; the ability to
successfully integrate the businesses of Rudolph and Nanometrics promptly and
effectively and to achieve the anticipated synergies and value-creation
contemplated by the Merger within the expected time frame; unanticipated
difficulties or expenditures relating to the Merger and integration of the
Rudolph and Nanometrics businesses; the response of business partners and
retention as a result of the Merger; the diversion of management time in
connection with the integration; the effect of litigation related to the Merger;
and the "Risk Factors" set forth in Item 1A of the Company's Annual Report on
Form 10-K for the year ended
On
Impact of COVID-19 on our Business
The spread of COVID-19 during the first quarter of 2020 has caused an economic
downturn on a global scale, as well as significant volatility in the financial
markets. In
We have prioritized the health and safety of our employees and customers in our
pandemic response. As governmental authorities implement restrictions on
commercial operations, we have continued to ensure compliance with these
directives while also maintaining business continuity for our essential
operations. We have a global workforce. Although our manufacturing is conducted
solely in the
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also provided our essential employees with appropriate protective equipment and have enhanced and increased cleanings at our facilities. At this time, we have not experienced any reduction in productivity, though we have incurred certain costs related to the implementation of these policies and practices. We may take further actions that we determine to be in the best interests of our employees or as may be required by federal, state, or local authorities.
We cannot at this time predict the impact that the COVID-19 pandemic will have on our financial condition and operations, although we are continuing to monitor our supply chain and orders from customers for COVID-19-related changes. In this time of uncertainty as a result of the COVID-19 pandemic, we are continuing to serve our customers while taking every precaution to provide a safe work environment for our employees and customers.
To date the coronavirus pandemic has disrupted the way that we conduct business, but has not had a material adverse impact on our operations. However, the extent of the pandemic's effect on our operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, such as the extent of restrictions on gatherings and travel, the impact on governmental programs and budgets, the development of treatments or vaccines, and the resumption of widespread economic activity. Although the inherent uncertainty of the unprecedented and rapidly evolving crisis makes it difficult to predict with any confidence the likely impact on our future operations, the COVID-19 pandemic could have a material adverse impact on our consolidated business, results of operations and financial condition. For a discussion of certain COVID-19-related risks, see Part II, Item 1A - Risk Factors of this Form 10-Q.
Critical Accounting Policies
The preparation of condensed consolidated financial statements and related
disclosures in conformity with accounting principles generally accepted in
A critical accounting policy is defined as one that is both material to the presentation of our condensed consolidated financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition or results of operations. Specifically, these policies have the following attributes: (1) we are required to make judgments and assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, could have a material effect on our financial position and results of operations.
Estimates and assumptions about future events and their effects cannot be
determined with certainty. We base our estimates on historical experience and on
various other assumptions believed to be applicable and reasonable under the
circumstances. These estimates may change as new events occur, as additional
information is obtained and as our operating environment changes. In addition,
management is periodically faced with uncertainties, the outcomes of which are
not within our control and will not be known for prolonged periods of time.
Certain of these uncertainties are discussed in our 2019 Form 10-K in the Items
entitled "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Based on a critical assessment of our
accounting policies and the underlying judgments and uncertainties affecting the
application of those policies, we believe that our condensed consolidated
financial statements are fairly stated in accordance with
For more information, please see our critical accounting policies as previously disclosed in our 2019 Form 10-K.
Overview
We are a worldwide leader in the design, development, manufacture and support of process control tools that perform macro-defect inspection and metrology, lithography systems, and process control analytical software used by semiconductor and advanced packaging device manufacturers. We deliver comprehensive solutions throughout the semiconductor fabrication process with our families of proprietary products that provide critical yield-enhancing information, enabling microelectronic device manufacturers to drive down costs and time to market of their devices. We provide process and yield management solutions used in both wafer processing facilities, often referred to as "front-end" and device packaging and test facilities, or "back-end" manufacturing, through a portfolio of standalone systems for macro-defect inspection, lithography, probe card test and analysis, and transparent and opaque thin film measurements. All of our systems feature sophisticated software and production-worthy automation. In addition, our advanced process control software portfolio includes powerful solutions for standalone tools, groups of tools, or factory-wide suites to enhance productivity and achieve significant cost savings. Our systems are backed by worldwide customer service and applications support.
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Historically, a significant portion of our revenue in each quarter and year has
been derived from sales to relatively few customers, and we expect this trend to
continue. For the three months ended
Results of Operations for the Three Months Ended
Revenue. Our revenue is primarily derived from the sale of our systems,
services, spare parts and software licensing. Our revenue of
The following table lists, for the periods indicated, the different sources of our revenue in dollars (thousands) and as percentages of our total revenue:
Three Months Ended
March 28, March 31,
2020 2019
Systems and software 114,330 82 % 49,809 82 %
Parts 13,575 10 % 8,077 13 %
Services 12,023 8 % 3,006 5 %
Total revenue $ 139,928 100 % $ 60,892 100 %
Total systems and software revenue increased
Gross Profit. Our gross profit has been and will continue to be affected by a
variety of factors, including manufacturing efficiencies, provision for excess
and obsolete inventory, pricing by competitors or suppliers, new product
introductions, production volume, customization and reconfiguration of systems,
international and domestic sales mix, system and software product mix and parts
and service margins. Our gross profit was
Operating Expenses.
Our operating expenses consist of:
• Research and Development. The process control defect inspection and
metrology, advanced packaging lithography, and data analysis systems and
software market is characterized by continuous technological development
and product innovations. We believe that the rapid and ongoing
development of new products and enhancements of existing products,
including the transition to copper and low-k dielectrics, wafer level
packaging, the continuous shrinkage in critical dimensions, and the
evolution of ultra-thin gate process control is critical to our success.
Accordingly, we devote a significant portion of our technical, management
and financial resources to research and development programs. Research
and development expenditures consist primarily of salaries and related
expenses of employees engaged in research, design and development
activities. They also include consulting fees, the cost of related
supplies and legal costs to defend our patents. Our research and
development expenses were $20.9 million for the three months ended March
28, 2020 , as compared to $10.5 million for the three months ended March
31, 2019 . The year-over-year dollar increase from the 2019 period to the
2020 period was primarily due to the inclusion in the 2020 period of
$11.2 million in research and development expense of legacy Nanometrics
resulting from the Merger. We continue to maintain our commitment to
investing in new product development and enhancement to existing
products.
• Sales and Marketing. Sales and marketing expenses are primarily comprised
of salaries and related costs for sales and marketing personnel, as well
as commissions and other non-personnel related expenses. Our sales and
marketing expenses were $13.1 million for the three months ended March
28, 2020 , as compared to $4.7 million for the three months ended March
31, 2019 . The year-over-year dollar increase in sales and marketing
expenses from the 2019
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period to the 2020 period was primarily due to the inclusion in the 2020
period of $8.6 million in sales and marketing expenses of legacy
Nanometrics resulting from the Merger.
• General and Administrative. General and administrative expenses are
primarily comprised of salaries and related costs for general
administrative personnel, as well as other non-personnel related
expenses. Our general and administrative expenses were $20.1 million for
the three months ended March 28, 2020 , as compared to $8.8 million for
the three months ended March 31, 2019 . The year-over-year dollar increase
in general and administrative expenses from the 2019 period to the 2020
period was primarily due to the inclusion in the 2020 period of $10.0
million in general and administrative expenses of legacy Nanometrics
resulting from the Merger.
• Amortization of Identifiable Intangible Assets. Amortization of
identifiable intangible assets was $13.7 million for the three months
ended March 28, 2020 , as compared to $0.4 million for the same period in
2019. The year-over-year increase in amortization expense from the 2019
period to the 2020 period was due to additional amortization recorded in
the 2020 period associated with additional purchased intangible assets
recorded as a result of the Merger.
Interest income (expense), net. Net interest income was
Income Taxes. We recorded an income tax provision of
Our future effective income tax rate depends on various factors, such as possible further tax legislation, the geographic composition of our pre-tax income, the amount of our pre-tax income as business activities fluctuate, non-deductible expenses incurred in connection with business combinations, and research and development tax credits as a percentage of aggregate pre-tax income.
We currently have a partial valuation allowance recorded for certain foreign and state loss and credit carryforwards where the realizability of such deferred tax assets is substantially in doubt. Each quarter we assess the likelihood that we will be able to recover our deferred tax assets primarily relating to state research and development credits. We consider available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. As a result of our analysis, we concluded that it is more likely than not that a portion of our net deferred tax assets will not be realized. Therefore, we continue to provide a valuation allowance against certain net deferred tax assets. We continue to monitor available evidence and may reverse some or all of the valuation allowance in future periods, if appropriate.
On
Liquidity and Capital Resources
At
Operating activities provided
Investing activities used net cash and cash equivalents of
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from sales of marketable securities of
Net cash and cash equivalents used in financing activities during the three
months ended
From time to time, we evaluate whether to acquire new or complementary businesses, products and/or technologies. We may fund all of or a portion of the price of these investments or acquisitions in cash, stock, or a combination of cash and stock.
Following the Merger, we assumed the share repurchase authorization approved on
We have a credit agreement with a bank that provides for a line of credit that
is secured by the marketable securities we have with the bank. We are permitted
to borrow up to 70% of the value of eligible securities held at the time the
line of credit is accessed. As of
Our future capital requirements will depend on many factors, including the timing and amount of our revenue and our investment decisions, which will affect our ability to generate additional cash. In addition, although there is uncertainty related to the anticipated impact of the recent COVID-19 outbreak on our future results, we believe our business model and our current cash reserves leave us well-positioned to manage our business through this crisis as it continues to unfold. We expect that our existing cash, cash equivalents, marketable securities and availability under our line of credit will be sufficient to meet our anticipated cash requirements for working capital, capital expenditures and other cash needs for the next 12 months following the filing of this Form 10-Q. Thereafter, if cash generated from operations and financing activities is insufficient to satisfy our working capital requirements, we may seek additional funding through bank borrowings, sales of securities or other means. Market conditions due to the COVID-19 pandemic may have an impact on our ability to access such additional funding. Our borrowing capacity under our existing line of credit is tied to the value of eligible securities held at the time of borrowing, which may be negatively impacted by market conditions due to COVID-19 and government responses thereto. In addition, a reduction in or volatility with respect to our stock price or the general market downturn could materially impact our ability to sell securities on favorable terms or at all. There can be no assurance that we will be able to raise any such capital on terms acceptable to us or at all.
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