ONTO INNOVATION INC. Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q (this "Form 10-Q"), or
incorporated by reference in this Form 10-Q, of
• anticipated effects of, and future actions to be taken in response to,
the COVID-19 pandemic;
• our business momentum and future growth;
• technology development, product introduction and acceptance of our
products and services;
• our manufacturing practices and ability to deliver both products and
services consistent with our customers' demands and expectations and to
strengthen our market position, including our ability to source
components, materials, and equipment due to supply chain delays or
shortages;
• our expectations of the semiconductor market outlook;
• future revenue, gross profits, research and development and engineering
expenses, selling, general and administrative expenses, and cash
requirements;
• our dependence on certain significant customers and anticipated trends
and developments in and management plans for our business and the markets
in which we operate; and
• our ability to be successful in managing our cost structure and cash
expenditures and results of litigation.
Statements contained or incorporated by reference in this Form 10-Q that are not purely historical are forward-looking statements and are subject to safe harbors under Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and 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.
Forward-looking statements contained herein reflect our current expectations, assumptions and projections with respect to future events and are subject to certain risks, uncertainties and assumptions, such as those identified in Part II, Item 1A. "Risk Factors" and elsewhere in this Form 10-Q. Actual results may differ materially and adversely from those included in such forward-looking statements. Forward-looking statements reflect our position as of the date of this Form 10-Q and we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Critical Accounting Policies and Estimates
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 Annual Report on Form 10-K
for the fiscal year ended
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of operations. There have been no material changes in our critical accounting policies and estimates from the information presented in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the 2021 Form 10-K.
For more information, please see our critical accounting policies and estimates as previously disclosed in our 2021 Form 10-K and recent accounting pronouncements discussed in Note 1 to the Condensed Consolidated Financial Statements.
Executive Summary
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" manufacturing, and in device packaging and test facilities, commonly referred to as "back-end" manufacturing. 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 principal market is semiconductor capital equipment. Semiconductors packaged as integrated circuits, or "chips," are used in consumer electronics, server and enterprise systems, mobile computing (including smart phones and tablets), data storage devices, and embedded automotive and control systems. Our core focus is the measurement and control of the structure, composition, and geometry of semiconductor devices as they are fabricated on silicon wafers to improve device performance and manufacturing yields.
Our products and services are used by our customers who manufacture many types of integrated circuits for a multitude of applications, each having unique manufacturing challenges. This includes integrated circuits to enable information processing and management (logic integrated circuits), memory storage (NAND, 3D-NAND, NOR, and DRAM), analog devices (e.g., Wi-Fi and 5G radio integrated circuits, power devices), MEMS sensor devices (accelerometers, pressure sensors, microphones), image sensors, and other end markets including components for hard disk drives, LEDs, and power management.
The semiconductor and electronics industries have also been characterized by constant technological innovation. We believe that, over the long term, our customers will continue to invest in advanced technologies and new materials to enable smaller design rules and higher density applications that fuel demand for process control equipment.
The following table summarizes certain key financial information for the periods indicated below (in thousands, except per share and percent data):
Three Months Ended
April 2, January 1, March 27,
2022 2022 2021
Revenue $ 241,350 $ 225,644 $ 169,279
Gross profit $ 131,023 $ 123,803 $ 90,469
Gross profit as a percent of revenue 54 % 55 % 53 %
Total operating expenses $ 72,279 $ 73,948 $ 62,984
Net income $ 53,330 $ 46,737 $ 24,113
Diluted earnings per share $ 1.07 $ 0.94 $ 0.49
• In the fiscal quarter ended April 2, 2022 (the "April 2022 quarter"),
revenue increased 7.0% compared to the fiscal quarter ended January 1,
2022 (the "January 2022 quarter"), primarily due to an increase in
sales to memory customers for advanced nodes applications, partially
offset by a decline in sales to specialty device advanced packaging
customers.
• Gross margin as a percentage of revenue in the April 2022 quarter
compared to the January 2022 quarter decreased primarily due to higher
freight and logistics costs in the April 2022 quarter.
Our cash, cash equivalents and marketable securities balance increased to
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Key Events
Impact of the COVID-19 Pandemic on Our Business. As of
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 facilities
are in
To date, the COVID-19 pandemic has disrupted the way that we conduct business but has not had a material adverse impact on our operations. We have not experienced significant delays in customer deliveries, but we are impacted by the global shortage in electronic components and our supply chain is strained in some cases as the availability of materials, logistics and freight options are challenging in many jurisdictions. Demand for our products was consistent with or exceeded our expectations for the first quarter of fiscal 2022. However, further disruptions to our supply chain in connection with the sourcing of materials, equipment and engineering support, and services from geographic areas that have been impacted by COVID-19 may pose risks to our business, results of operations and financial condition. In this time of uncertainty as a result of the COVID-19 pandemic, we are continuing to serve our customers while taking appropriate precautionary measures to provide a safe work environment for our employees and customers.
The full 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 severity of newly identified
strains of COVID-19, 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, administration, efficacy and
public utilization of treatments and vaccines, and the resumption of widespread
economic activity, and the pace of recovery, including with respect to supply
chain shortage. Trade tensions between
Although the inherent uncertainty of the ongoing 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 risks related to the international nature of our business and our operations and the COVID-19 pandemic, see Part II, Item 1A - Risk Factors of this Form 10-Q, Part I, Item 1A - Risk Factors of our 2021 Form 10-K.
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
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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
April 2, March 27,
2022 2021
Systems and software $ 209,383 87 % $ 141,509 84 %
Parts 19,857 8 % 17,418 10 %
Services 12,110 5 % 10,352 6 %
Total revenue $ 241,350 100 % $ 169,279 100 %
Total systems and software revenue increased
Gross Profit. Our gross profit has been and will likely continue to be affected
by a variety of factors, 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. We believe that it is critical to continue to
make substantial investments in research and development to ensure the
availability of innovative technology that meets the current and
projected requirements of our customers' most advanced designs. We have
maintained and intend to continue our commitment to investing in research
and development in order to continue to offer new products and
technologies. 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 $26.3 million and $22.0 million for the
three months ended April 2, 2022 and March 27, 2021 , respectively. The
year-over-year dollar increase for the three-month period ended April 2,
2022 as compared to the three-month period ended March 27, 2021 was
primarily due to increased compensation costs from additional headcount,
as well as annual merit and promotion increases, and increased
consulting, outside service and material expenses for new product
initiatives.
• Sales and Marketing. Sales and marketing expenses are primarily comprised
of salaries, commissions and related costs for sales and marketing
personnel, as well as other non-personnel related expenses. Our sales and
marketing expenses were $15.6 million and $13.1 million for the three
months ended April 2, 2022 and March 27, 2021 , respectively. The
year-over-year increase in sales and marketing expenses for the
three-month period ended April 2, 2022 as compared to the three-month
period ended March 27, 2021 was primarily due to increased compensation
costs and increased travel related expenses as pandemic travel
restrictions were lifted.
• General and Administrative. General and administrative expenses are
primarily comprised of salaries and related costs for administrative
personnel, as well as other non-personnel related expenses. Our general
and administrative expenses were $16.5 million and $15.6 million for the
three months ended April 2, 2022 and March 27, 2021 , respectively. The
year-over-year increase in general and administrative expenses for the
three-month period ended April 2, 2022 as compared to the three-month
period ended March 27, 2021 was primarily due to increased compensation
costs and increased litigation expenses.
• Amortization of Identifiable Intangible Assets. Amortization of
identifiable intangible assets was $13.8 million and $12.4 million for
the three months ended April 2, 2022 and March 27, 2021 ,
respectively. The year-over-year increase in amortization expense for the
three-month period ended April 2, 2022 as compared to the three-month
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period ended March 27, 2021 was primarily due to in-process research and
development becoming classified as a finite-lived intangible asset and
amortization commencing in the second half of 2021.
Interest income, net. Net interest income was
Other expense, net. Net other expense was
Income Taxes. We recorded an income tax provision of
Our future effective income tax rate depends on various factors, such as possible changes in 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.
Beginning in 2022, the
Liquidity and Capital Resources
At
Net cash and cash equivalents provided by operating activities for the three
months ended
• The net cash and cash equivalents provided by operating activities
during the three months ended April 2, 2022 resulted primarily from net
income, adjusted to exclude the effect of non-cash operating charges of
$70.8 million , partially offset by a decrease in cash provided from
operating assets and liabilities of $25.4 million , primarily due to
increases in inventories and accounts receivable.
• The net cash and cash equivalents provided by operating activities
during the three months ended March 27, 2021 resulted primarily from
net income, adjusted to exclude the effect of non-cash operating
charges, of $49.7 million and an increase in cash provided from
operating assets and liabilities of $1.3 million .
Net cash and cash equivalents used in investing activities for the three months
ended
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• During the three months ended April 2, 2022 , net cash and cash
equivalents used in investing activities included purchases of
marketable securities of $97.5 million and capital expenditures of $2.5
million , partially offset by proceeds from sales of marketable
securities of $66.7 million .
• During the three months ended March 27, 2021 , net cash used in
investing activities included purchases of marketable securities of
$83.7 million , purchase of a business of $26.8 million and capital
expenditures of $3.9 million , partially offset by proceeds from sales
of marketable securities of $54.0 million .
Net cash and cash equivalents used in financing activities for the three months
ended
• During the three months ended April 2, 2022 , financing activities used
cash to primarily pay taxes related to shares withheld for share-based
compensation plans of $5.3 million and pay contingent consideration for
acquired business of $2.3 million , partially offset by proceeds from
sales of shares through share-based compensation plans of $0.6 million .
• During the three months ended March 27, 2021 , financing activities
provided cash from proceeds from sales of shares through share-based
compensation plans of $3.1 million , partially offset by tax payments
related to shares withheld for share-based compensation plans of $2.5
million .
From time to time, we evaluate whether to acquire new or complementary
businesses, products 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. In the first quarter of 2021, the Company acquired
In
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 the ultimate impact of the COVID-19 pandemic and its effects on economic conditions and the global supply chain on our future results remains uncertain, 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 or other factors 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 or other factors. In addition, a reduction in or volatility with respect to our stock price or a 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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