ONTO INNOVATION INC. Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q (this "Form 10-Q") ofOnto Innovation Inc. (referred to in this Form 10-Q, together with its consolidated subsidiaries, unless otherwise specified or suggested by the context, as the "Company," "Onto Innovation ," "we," "our" or "us"), or incorporated by reference in this Form 10-Q, may be considered "forward-looking statements" or may be based on "forward-looking statements," including, but not limited to, those concerning:
• anticipated effects of, and future actions to be taken in response to,
the COVID-19 pandemic;
• the anticipated impact of new export control regulations;
• 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 inthe United States ("U.S. GAAP") requires management to make judgments, assumptions and estimates that affect the amounts reported. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below. 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 endedJanuary 1, 2022 (the "2021 Form 10-K") filed with theSecurities and Exchange Commission onFebruary 25, 2022 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 18 --------------------------------------------------------------------------------
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statements are fairly stated in accordance withU.S. GAAP and provide a fair presentation of our financial position and results 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 innovations. 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
October 1, July 2, September 25,
2022 2022 2021
Revenue $ 254,253 $ 256,310 $ 200,589
Gross profit $ 138,849 $ 132,127 $ 109,358
Gross profit as a percent of revenue 55 % 52 % 55 %
Total operating expenses $ 79,542 $ 74,676 $ 66,232
Net income $ 52,215 $ 51,575 $ 36,448
Diluted earnings per share $ 1.05 $ 1.03 $ 0.73
• In the fiscal quarter ended October 1, 2022 (the "October 2022
quarter"), revenue decreased 0.8% compared to the fiscal quarter ended
July 2, 2022 (the "July 2022 quarter"), primarily due to a decline in
sales to DRAM customers in advanced nodes applications and OSAT
customers in specialty device and advanced packaging applications,
partially offset by an increase in sales to foundry customers for
advanced node applications and MEMS customers in specialty device
advance packaging applications.
• Gross profit as a percentage of revenue in the
compared to the
customer and product mix.
• The increase in operating expenses in the
to the
and development expenses, which includes the write-off of purchased in
process research and development assets.
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Our cash, cash equivalents and marketable securities balance increased to$552.7 million as ofOctober 1, 2022 compared to$511.3 million as ofJanuary 1, 2022 . This increase was primarily the result of$87.2 million of cash generated from operating activities. This source of cash was partially offset by cash of$11.5 million used for purchases of our common stock,$9.8 million used for capital expenditures and$4.6 million used for the purchase of acquired research and development assets. Employee headcount as ofOctober 1, 2022 was approximately 1,600.
Key Events
Expanded
InOctober 2022 , theBureau of Industry and Security ("BIS") of theU.S. Department of Commerce issued an interim final rule to implement new export controls related to the Chinese semiconductor manufacturing, advanced computing, and supercomputer industries (the "New Export Controls"). The New Export Controls include restrictions on certain semiconductor integrated circuits, commodities containing such integrated circuits, and semiconductor manufacturing equipment and restrict the ability ofU.S. persons to support the development or production of integrated circuits at certain semiconductor fabrication facilities inChina . The primary impact of the New Export Controls onOnto Innovation is that we're now required to obtain a license to do business with certain Chinese customers that produce certain advanced computing integrated circuits. The New Export Controls also expanded the scope of foreign-produced items subject to license requirements to entities on the Entity List of the Export Administration Regulations ("EAR") that are located inChina and added new entities to the EAR's Unverified List (which names parties ineligible for license exceptions under the EAR), includingYangtze Memory Technologies Co., Ltd. We may experience a temporary loss of revenues while we apply for licenses to continue doing business with certain customers affected by the new export rules. A failure to obtain required license could result in a reduction of anticipated revenues. We have and will continue to assess the impact of the New Export Controls and the addition of new entities to the Unverified List on our business, financial condition and results of operations. We have estimated these new restrictions will negatively impact our revenue by approximately$10.0 million and$80.0 million for the fiscal quarter endedDecember 31, 2022 and the fiscal year 2023, respectively.
Impact of COVID-19 and the Global Semiconductor Supply Shortage
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 experienced some delays in customer deliveries. Additionally, we are impacted by the global shortage in electronic components and inflationary pressures. Our supply chain is strained in some cases as the availability of materials, logistics and freight options are challenging in many jurisdictions, which have resulted in long lead times, rising prices and supply chain disruptions. We expect supply chain shortages as well as inflationary cost pressures to persist throughout the remainder of the year and into fiscal year 2023. While demand for our products has remained strong, further disruptions to our supply chain in connection with the sourcing of materials, inflationary pressures, 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. We are continuing to serve our customers while taking appropriate precautionary measures to provide a safe work environment for our employees and customers For a discussion of certain risks related to the international nature of our business and our operations and the COVID-19 pandemic and the resulting economic impact and supply chain issues, 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 and Nine Months Ended
Revenue. Our revenue is primarily derived from the sale of our systems, software licensing, services and spare parts. Our revenue of$254.3 million increased 26.8% for the three months endedOctober 1, 2022 as compared to the same period in 2021, in which revenue totaled$200.6 million . For the nine-month periods endedOctober 1, 2022 andSeptember 25, 2021 , our revenue totaled$751.9 million and$563.3 million , respectively, representing a year-over-year increase of 33.5%. 20 --------------------------------------------------------------------------------
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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 Nine Months Ended
October 1, September 25, October 1, September 25,
2022 2021 2022 2021
Systems and software $ 216,082 85 % $ 170,937 85 % $ 646,252 86 % $ 475,345 84 %
Parts 21,598 8 % 17,804 9 % 64,211 9 % 53,919 10 %
Services 16,573 7 % 11,848 6 % 41,450 5 % 33,991 6 %
Total revenue $ 254,253 100 % $ 200,589 100 % $ 751,913 100 % $ 563,255 100 %
Total systems and software revenue increased $45.1 million and $170.9 million
for the three and nine months ended October 1, 2022 , respectively, as compared
to the three and nine months ended September 25, 2021 , respectively, primarily
due to increases of units shipped in our metrology, inspection and lithography
product lines. The increases in parts and services revenue for the three and
nine months ended October 1, 2022 , as compared to the three and nine months
ended September 25, 2021 , were primarily due to servicing a larger installed
base. Parts and services revenue is generated from part sales, maintenance
service contracts, and system upgrades, as well as time and material billable
service calls.
Gross Profit. Our gross profit has been and will likely 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 $138.8 million and $402.0 million for
the three and nine months ended October 1, 2022 , respectively, as compared to
$109.4 million and $305.3 million for the three and nine months ended September
25, 2021 , respectively. Our gross profit represented 54.6% and 53.5% of our
revenue for the three and nine months ended October 1, 2022 , respectively, and
54.5% and 54.2% for the three and nine months ended September 25, 2021 ,
respectively. The increase in gross profit as a percentage of revenue for the
three months ended October 1, 2022 as compared to the three months ended
September 25, 2021 was primarily due to higher sales volume. The decrease in
gross profit as a percentage of revenue for the nine months ended October 1,
2022 , as compared to the nine months ended September 25, 2021 , was primarily due
to product mix, higher freight and logistics costs, and higher personnel cost
due to an increase in headcount to provide manufacturing capacity requirements,
partially offset by an increase in sales volume.
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 havemaintained 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 costof related supplies and legal costs to defend our patents. Our research
and development expenses were
three and nine months ended
development expenses for both the three and nine months ended
2022, as compared to the three and nine months ended
were primarily due to the write-off of acquired in-process research and
development expenses, increased compensation costs from additional
headcount 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
nine months ended
million and
25, 2021, respectively. The increases in sales and marketing expenses for
both the three and nine months ended October 1, 2022 , as compared to the
three and nine months ended September 25, 2021 , were primarily due toincreased compensation costs from additional headcount 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 corporate and
administrative personnel, as well as other non-personnel related
expenses. Our general and
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administrative expenses were
three and nine months ended
administrative expenses for both the three and nine months ended October
1, 2022, as compared to the three and nine months ended
2021, were primarily due to increased compensation costs from additional
headcount and increased litigation expenses.
• Amortization of Identifiable Intangible Assets. Amortization of
identifiable intangible assets was $13.8 million and $41.5 million for
the three and nine months ended October 1, 2022 , respectively, as
compared to $13.0 million and $37.7 million for the three and nine months
ended
expense for both the three and nine months ended October 1, 2022 , as
compared to the three and nine months ended September 25, 2021 , wereprimarily 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 $1.5 million and $2.6 million for
the three and nine months ended October 1, 2022 , respectively, as compared to
$0.2 million and $0.9 million for the three and nine months ended September 25,
2021 , respectively. The increases in net interest income for both the three and
nine months ended October 1, 2022 , as compared to the three and nine months
ended September 25, 2021 , were due to higher interest rates during the 2022
period.
Other expense, net. Net other expense was $1.0 million and $2.0 million for the
three and nine months ended October 1, 2022 , respectively, as compared to $0.3
million and $1.8 million for the three and nine months ended September 25, 2021 ,
respectively. The increase in other expense, net for both the three and nine
months ended October 1, 2022 , as compared to the three and nine months ended
September 25, 2021 , was primarily due to higher foreign exchange losses during
the 2022 period.
Income Taxes. We recorded an income tax provision of $7.6 million and $18.9
million for the three and nine months ended October 1, 2022 , respectively, as
compared to income tax provision of $6.6 million and $10.0 million for the same
periods in 2021. Our effective tax rate of 13% and 11% for the three and nine
months ended October 1, 2022 , respectively, differs from the statutory rate of
21%, primarily due to (i) research and development tax credits, (ii) the
deduction related to foreign derived intangible income ("FDII"), and (iii)
excess tax benefits associated with equity compensation. Our effective tax rate
of 15% and 10% for the three and nine months ended September 25, 2021 ,
respectively, differs from the statutory rate of 21%, primarily due to (i)
foreign and research and development tax credits, (ii) the deduction related to
FDII, (iii) excess tax benefits associated with equity compensation, and (iv) a
one-time tax benefit associated with a release of reserves due to the expiration
of the applicable statute of limitations.
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.
Two recent pieces of tax legislation were passed during the quarter ended
October 1, 2022 . The CHIPS Act of 2022 (the "CHIPS Act"), (H.R. 4346) creates a
new advanced manufacturing investment credit under new Internal Revenue Code
section 48D and was signed into law by President Biden on August 9, 2022 . The
Inflation Reduction Act (the "IRA"), (H.R. 5376), signed into law by President
Biden on August 16, 2022 , has a number of tax-related provisions, including (i)
a 15-percent book minimum tax (corporate AMT) on "adjusted financial statement
income" (AFSI) of applicable corporations; (ii) a plethora of clean energy tax
incentives in the form of tax credits, some of which include a direct-pay option
or transferability provisions; and (iii) a 1-percent excise tax on certain
corporate stock buybacks. Neither of these acts are expected to impact our
financial statements for the current 2022 tax year. Beginning in 2022, the U.S.
Tax Cuts and Jobs Act of 2017 ("TCJA") eliminated the existing option to deduct
research and development expenditures and requires taxpayers to amortize them
over five years pursuant to IRC Section 174. While the capitalization
requirement has a negative impact on our cash flows, there are offsetting
benefits from the enactment of this provision that we have included in our
estimated annual effective tax rate. While it is possible that Congress may
defer, modify, or repeal this provision, potentially with retroactive effect, we
have no assurance that this provision will be deferred, modified, or repealed.
Changes in our tax provisions or an increase in our tax liabilities, whether due
to changes in applicable laws and regulations, the interpretation or application
thereof, or a final determination of
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tax audits or litigation or agreements, could have a material adverse effect on our financial position, results of operations and/or cash flows.
Liquidity and Capital Resources
At
Net cash and cash equivalents provided by operating activities for the nine
months ended
• The net cash and cash equivalents provided by operating activities
during the nine months ended October 1, 2022 resulted primarily from
net income, adjusted to exclude the effect of non-cash operating
charges of $214.2 million , partially offset by a decrease in cash
provided from operating assets and liabilities of $127.0 million ,
primarily due to increases in inventories and accounts
receivable.
• The net cash and cash equivalents provided by operating activities
during the nine months ended September 25, 2021 resulted primarily from
net income, adjusted to exclude the effect of non-cash operating
charges of $166.8 million , partially offset by a decrease in cash
provided from operating assets and liabilities of $40.5 million ,
primarily due to increases in inventories and accountsreceivable.
Net cash and cash equivalents used in investing activities for the nine months
ended
• During the nine months ended October 1, 2022 , net cash and cash
equivalents used in investing activities included purchases of
marketable securities of $289.5 million , capital expenditures of $9.8
million and purchase of intangible assets of $4.6 million , partially
offset by proceeds from sales of marketable securities of $274.6
million .
• During the nine months ended September 25, 2021 , net cash and cash
equivalents used in investing activities included purchases of
marketable securities of $250.4 million , purchase of a business of
$26.8 million and capital expenditures of $11.2 million , partially
offset by proceeds from sales of marketable securities of $177.5
million .
Net cash and cash equivalents used in financing activities for the nine months
ended
• During the nine months ended
cash primarily for repurchases of common stock of $11.5 million , tax
payments related to shares withheld to satisfy employee taxobligations
in connection with the vesting of awards under share-basedcompensation
plans of $8.6 million and payments related to contingent consideration
for acquired business of $2.3 million , partially offset by proceeds
from sales of shares through share-based compensation plans of $4.5
million .
• During the nine months ended
used cash for tax payments related to shares withheld to satisfy
employee tax obligations in connection with the vesting ofawards under
share-based compensation plans of $6.8 million . This use of cash was
primarily offset by proceeds from sales of shares throughshare-based
compensation plans of $6.4 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
Inspectrology, LLC for $24.0 million in cash and an earnout subject to the
achievement of certain revenue targets earned for fiscal years 2021 through
2022. The earnout achieved for fiscal 2021 was $2.3 million and was paid in the
first half of fiscal 2022. There is potential earnout for up to an additional
payment of $5.0 million depending on fiscal 2022 results. As of October 1, 2022 ,
we have accrued $1.7 million for the potential earnout.
In November 2020 , the Onto Innovation Board of Directors approved a share
repurchase authorization, which allows the Company to repurchase up to $100
million worth of shares of its common stock. Repurchases may be made through
both public market and private transactions from time to time with shares
purchased being subsequently retired. During the three and nine months ended
October 1, 2022 , we repurchased 0.2 million shares of common stock under this
repurchase authorization and those shares were subsequently retired. As of
October 1, 2022 , there was $88.5 million available for future share repurchases
under this share repurchase authorization.
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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 ofOctober 1, 2022 , the available line of credit was approximately$138.0 million with an available interest rate of 4.8%. The credit agreement is available to us until such time that either party terminates the arrangement at its discretion. To date, we have not utilized the line of credit. 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. 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. However, the ongoing COVID-19 pandemic has in the past caused disruption in the capital markets and were it to do the same in the future, may have an impact on our ability to access such additional funding. 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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