ONTO INNOVATION INC. 10-Q

Item 1. Financial Statements ONTO INNOVATION INC. CONDENSED CONSOLIDATED S TATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Three Months Ended Six Months Ended July 1, July 2, July 1, July 2, 2023 2022 2023 2022 Revenue $ 190,662 $ 256,310 $ 389,827 $ 497,660 Cost of revenue 90,201 124,183 184,391 234,510 Gross profit 100,461 132,127 205,436 263,150 Operating expenses: Research and development 27,043 25,637 54,285 51,978 Sales and marketing 16,024 16,913 31,661 32,545 General and administrative 18,762 18,306 37,999 34,793 Amortization 13,825 13,820 27,649 27,639 Total operating expenses 75,654 74,676 151,594 146,955 Operating income 24,807 57,451 53,842 116,195 Interest income, net 4,758 661 8,206 1,038 Other expense, net ( 1,710 ) ( 859 ) ( 1,991 ) ( 1,063 ) Income before provision for income taxes 27,855 57,253 60,057 116,170 Provision for income taxes 1,959 5,678 5,093 11,265 Net income $ 25,896 $ 51,575 $ 54,964 $ 104,905 Earnings per share: Basic $ 0.53 $ 1.04 $ 1.12 $ 2.12 Diluted $ 0.53 $ 1.03 $ 1.12 $ 2.10 Weighted average number of shares outstanding: Basic 48,976 49,617 48,865 49,525 Diluted 49,274 49,907 49,175 49,909 The accompanying notes are an integral part of these financial statements. 1 Table of Contents ONTO INNOVATION INC. CONDENSED CONSOLIDATED STATEM ENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited) Three Months Ended Six Months Ended July 1, July 2, July 1, July 2, 2023 2022 2023 2022 Net income $ 25,896 $ 51,575 $ 54,964 $ 104,905 Other comprehensive loss, net of tax: Change in net unrealized gains (losses) on available-for-sale marketable securities ( 163 ) 552 1,229 ( 2,449 ) Change in currency translation adjustments ( 2,998 ) ( 5,934 ) ( 1,908 ) ( 9,546 ) Total other comprehensive loss, net of tax ( 3,161 ) ( 5,382 ) ( 679 ) ( 11,995 ) Total comprehensive income $ 22,735 $ 46,193 $ 54,285 $ 92,910 The accompanying notes are an integral part of these financial statements. 2 Table of Contents ONTO INNOVATION INC. CONDENSED CONSOLIDA TED BALANCE SHEETS (In thousands) (Unaudited) July 1, 2023 December 31, 2022 ASSETS Current Assets: Cash and cash equivalents $ 224,257 $ 175,872 Marketable securities 385,346 371,912 Accounts receivable, less allowance of $ 1,311 and $ 1,572 187,852 241,395 Inventories, net 352,073 324,282 Prepaid expenses and other current assets 33,517 21,411 Total current assets 1,183,045 1,134,872 Property, plant and equipment, net 99,883 91,980 Goodwill 315,811 315,811 Identifiable intangible assets, net 194,548 222,197 Deferred income taxes 8,320 4,778 Other assets 19,254 25,225 Total assets $ 1,820,861 $ 1,794,863 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 49,600 $ 54,526 Accrued liabilities 35,967 48,836 Deferred revenue 24,067 30,163 Other current liabilities 27,303 27,033 Total current liabilities 136,937 160,558 Deferred income taxes — 7,366 Other non-current liabilities 27,210 30,513 Total liabilities 164,147 198,437 Commitments and contingencies Stockholders’ equity: Common stock 49 49 Additional paid-in capital 1,251,193 1,243,631 Accumulated other comprehensive loss ( 10,689 ) ( 10,010 ) Accumulated earnings 416,161 362,756 Total stockholders’ equity 1,656,714 1,596,426 Total liabilities and stockholders’ equity $ 1,820,861 $ 1,794,863 The accompanying notes are an integral part of these financial statements. 3 Table of Contents ONTO INNOVATION INC. CONDENSED CONSOLIDATED S TATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Six Months Ended July 1, July 2, 2023 2022 Cash flows from operating activities: Net income $ 54,964 $ 104,905 Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: Amortization of intangibles 27,649 27,639 Depreciation 5,815 4,666 Share-based compensation 13,864 12,815 Provision for inventory valuation 6,386 4,494 Deferred income taxes ( 11,020 ) ( 13,962 ) Other, net 1,136 2,415 Changes in operating assets and liabilities ( 17,039 ) ( 87,584 ) Net cash and cash equivalents provided by operating activities 81,755 55,388 Cash flows from investing activities: Purchases of marketable securities ( 209,154 ) ( 174,730 ) Proceeds from maturities and sales of marketable securities 198,717 148,426 Purchases of property, plant and equipment ( 12,463 ) ( 6,902 ) Net cash and cash equivalents used in investing activities ( 22,900 ) ( 33,206 ) Cash flows from financing activities: Purchases and retirement of common stock ( 3,197 ) — Tax payments related to shares withheld for share-based compensation plans ( 9,949 ) ( 8,337 ) Payment of contingent consideration for acquired business ( 304 ) ( 2,287 ) Issuance of shares through share-based compensation plans 5,285 4,499 Net cash and cash equivalents used in financing activities ( 8,165 ) ( 6,125 ) Effect of exchange rate changes on cash and cash equivalents ( 2,305 ) ( 5,484 ) Net increase in cash and cash equivalents 48,385 10,573 Cash and cash equivalents at beginning of period 175,872 169,602 Cash and cash equivalents at end of period $ 224,257 $ 180,175 Supplemental disclosure of cash flow information: Income taxes paid (net of refunds) $ 18,888 $ 32,945 The accompanying notes are an integral part of these financial statements. 4 Table of Contents ONTO INNOVATION INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) (Unaudited) Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Shares Amount Capital Loss Earnings Total Balance at December 31, 2022 48,684 $ 49 $ 1,243,631 $ ( 10,010 ) $ 362,756 $ 1,596,426 Net income — — — — 29,068 29,068 Share-based compensation — — 6,119 — — 6,119 Issuance of shares through share-based compensation plans 225 — — — — — Purchases of common stock ( 46 ) — ( 1,638 ) — ( 1,559 ) ( 3,197 ) Share-based compensation plan withholdings ( 62 ) — ( 6,273 ) — — ( 6,273 ) Currency translation — — — 1,090 — 1,090 Unrealized gain on investments — — — 1,392 — 1,392 Balance at April 1, 2023 48,801 $ 49 $ 1,241,839 $ ( 7,528 ) $ 390,265 $ 1,624,625 Net income — — — — 25,896 25,896 Share-based compensation — — 7,745 — — 7,745 Issuance of shares through share- based compensation plans, net 227 — 5,285 — — 5,285 Share-based compensation plan withholdings ( 56 ) — ( 3,676 ) — — ( 3,676 ) Currency translation — — — ( 2,998 ) — ( 2,998 ) Unrealized loss on investments — — — ( 163 ) — ( 163 ) Balance at July 1, 2023 48,972 $ 49 $ 1,251,193 $ ( 10,689 ) $ 416,161 $ 1,656,714 Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Shares Amount Capital Income / (Loss) Earnings Total Balance at January 1, 2022 49,300 $ 49 $ 1,256,179 $ 1,316 $ 168,511 $ 1,426,055 Net income — — — — 53,330 53,330 Share-based compensation — — 4,832 — — 4,832 Issuance of shares through share-based compensation plans 184 — 6 — — 6 Share-based compensation plan withholdings ( 46 ) — ( 5,289 ) — — ( 5,289 ) Currency translation — — — ( 3,612 ) — ( 3,612 ) Unrealized loss on investments — — — ( 3,001 ) — ( 3,001 ) Balance at April 2, 2022 49,438 $ 49 $ 1,255,728 $ ( 5,297 ) $ 221,841 $ 1,472,321 Net income — — — — 51,575 51,575 Share-based compensation — — 7,983 — — 7,983 Issuance of shares through share- based compensation plans, net 219 1 4,493 — — 4,494 Share-based compensation plan withholdings ( 53 ) — ( 3,048 ) — — ( 3,048 ) Currency translation — — — ( 5,934 ) — ( 5,934 ) Unrealized gain on investments — — — 552 — 552 Balance at July 2, 2022 49,604 $ 50 $ 1,265,156 $ ( 10,679 ) $ 273,416 $ 1,527,943 The accompanying notes are an integral part of these financial statements. 5 Table of Contents ONTO INNOVATION INC. NOTES TO CONDENSED CONSOLI DATED FINANCIAL STATEMENTS (In thousands, except per share data and percentages) (Unaudited) NOTE 1. Basis of Presentation The accompanying interim unaudited Condensed Consolidated Financial Statements have been prepared by Onto Innovation Inc. (together with its consolidated subsidiaries, unless otherwise specified or suggested by the context, the “Company,” “Onto Innovation,” “we,” “our” or “us”) and in the opinion of management reflect all adjustments, consisting of normal recurring accruals, necessary for their fair presentation in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual amounts could differ materially from reported amounts. The interim results for the three and six months ended July 1, 2023 are not necessarily indicative of results to be expected for the entire year or any future periods. This interim financial information should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”) filed with the Securities and Exchange Commission (“SEC”) on February 24, 2023. The accompanying Condensed Consolidated Balance Sheet at December 31, 2022 has been derived from the audited consolidated financial statements included in the 2022 Form 10-K. The Company operates on a 52- or 53-week fiscal year ending on the Saturday closest to December 31. Our fiscal year ending December 30, 2023 (“fiscal year 2023”) is a 52-week fiscal year. The first quarter of the Company’s fiscal year 2023 ended on April 1, 2023, the second quarter ended on July 1, 2023 and the third quarter ends on September 30, 2023. Our fiscal year ended December 31, 2022 was a 52-week fiscal year. The second quarter of the fiscal year ended December 31, 2022 ended on July 2, 2022. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates made by management include excess and obsolete inventory, fair value of assets acquired and liabilities assumed in a business combination, recoverability and useful lives of property, plant and equipment and identifiable intangible assets, recoverability of goodwill, recoverability of deferred tax assets, allowance for credit losses, liabilities for product warranty, contingencies, including litigation reserves and share-based payments and liabilities for tax uncertainties. Actual results could differ from those estimates. These estimates and assumptions are based on historical experience and on various other factors which the Company believes to be reasonable under the circumstances. The Company may engage third-party valuation specialists to assist with estimates related to the valuation of financial instruments, assets and stock awards associated with various contractual arrangements. Such estimates often require the selection of appropriate valuation methodologies and significant judgment. Actual results could differ from these estimates under different assumptions or circumstances and such differences could be material. Adoption of Accounting Standards There have been no recent accounting pronouncements or changes in accounting pronouncements during the three and six months ended July 1, 2023, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, that are of significance, or potential significance to the Company. NOTE 2. Fair Value Measurements Fair Value of Financial Instruments 6 Table of Contents The Company has evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates fair value because of the short-term maturity of these instruments. Fair Value Hierarchy The Company applies a three-level valuation hierarchy for fair value measurements. This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability. Level 3 inputs are unobservable inputs based on management’s assumptions used to measure assets and liabilities at fair value. A financial asset’s or liability’s fair value measurement classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The following tables provide the assets and liabilities carried at fair value measured on a recurring basis at July 1, 2023 and December 31, 2022: Fair Value Measurements Using Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) July 1, 2023 Assets: Available-for-sale debt securities: Government notes and bonds $ 167,963 $ — $ 167,963 $ — Asset-backed securities 694 — 694 — Certificates of deposit 61,921 — 61,921 — Commercial paper 90,786 — 90,786 — Corporate bonds 63,982 — 63,982 — Foreign currency forward contracts 44 — 44 — Total assets $ 385,390 $ — $ 385,390 $ — December 31, 2022 Assets: Available-for-sale debt securities: Government notes and bonds $ 178,868 $ — $ 178,868 $ — Asset-backed securities 1,534 — 1,534 — Certificates of deposit 52,095 — 52,095 — Commercial paper 80,079 — 80,079 — Corporate bonds 59,335 — 59,335 — Total assets $ 371,912 $ — $ 371,912 $ — Liabilities: Foreign currency forward contracts $ 135 $ — $ 135 $ — Total liabilities $ 135 $ — $ 135 $ — Available-for-sale debt securities classified as Level 2 are valued using observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. The foreign currency forward contracts are primarily measured based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers. Investment prices are obtained from third party pricing providers, which model prices utilizing the above observable inputs, for each asset class. Level 3 investments consisted of contingent consideration related to an acquisition for which the Company uses revenue projections to value this liability. See Note 3 for additional discussion regarding the fair value of the Company’s marketable securities. 7 Table of Contents NOTE 3. Marketable Securities At July 1, 2023 and December 31, 2022, marketable securities are categorized as follows: Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value July 1, 2023 Government notes and bonds $ 169,514 $ 1 $ 1,552 $ 167,963 Asset-backed securities 700 — 6 694 Certificates of deposit 61,983 5 67 61,921 Commercial paper 90,902 2 118 90,786 Corporate bonds 64,572 6 596 63,982 Total marketable securities $ 387,671 $ 14 $ 2,339 $ 385,346 December 31, 2022 Government notes and bonds $ 181,196 $ 27 $ 2,355 $ 178,868 Asset-backed securities 1,555 — 21 1,534 Certificates of deposit 52,190 24 118 52,095 Commercial paper 80,199 16 136 80,079 Corporate bonds 60,334 4 1,003 59,335 Total marketable securities $ 375,474 $ 71 $ 3,633 $ 371,912 The amortized cost and estimated fair value of marketable securities classified by the maturity date listed on the security, regardless of the Condensed Consolidated Balance Sheets classification, is as follows at July 1, 2023 and December 31, 2022: July 1, 2023 December 31, 2022 Amortized Cost Fair Value Amortized Cost Fair Value Due within one year $ 290,368 $ 289,094 $ 311,934 $ 309,385 Due after one through five years 97,303 96,252 63,540 62,527 Due after five years — — — — Total marketable securities $ 387,671 $ 385,346 $ 375,474 $ 371,912 The Company has evaluated its investment policies and determined that all of its marketable securities, which are comprised of debt securities, are to be classified as available-for-sale. The Company’s available-for-sale debt securities are carried at fair value, with the unrealized gains and losses reported in Stockholders’ equity under the caption “Accumulated other comprehensive income (loss).” Gross realized gains and losses on available-for-sale securities are included in “Other expense, net” on the Condensed Consolidated Statements of Operations and were not material during the three and six months ended July 1, 2023 and July 2, 2022. The Company records credit losses for its available-for-sale debt securities when it intends to sell the securities, it is more-likely-than not that it will be required to sell the securities before a recovery, or when it does not expect to recover the entire amortized cost basis of the securities. The cost of securities sold is based on the specific identification method. The Company has determined that the gross unrealized losses on its marketable securities at July 1, 2023 and December 31, 2022 are temporary in nature. The Company regularly reviews its investment portfolio to identify and evaluate marketable securities that have indications of possible impairment from credit losses or other factors. Factors considered in determining whether an unrealized loss is considered to be a credit loss include the length of time and extent to which fair value has been less than the cost basis, credit quality and the Company’s ability and intent to hold the securities for a period of time sufficient to allow for any anticipated recovery in market value. 8 Table of Contents The following table summarizes the estimated fair value and gross unrealized holding losses of marketable securities, aggregated by investment instrument and period of time in an unrealized loss position, at July 1, 2023 and December 31, 2022: In Unrealized Loss Position For Less Than 12 Months In Unrealized Loss Position For Greater Than 12 Months Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses July 1, 2023 Government notes and bonds $ 121,171 $ 1,248 $ 47,856 $ 304 Asset-backed securities — — 700 6 Certificates of deposit 33,938 67 — — Commercial paper 83,373 118 — — Corporate bonds 36,854 217 22,229 379 Total $ 275,336 $ 1,650 $ 70,785 $ 689 December 31, 2022 Government notes and bonds $ 96,301 $ 1,273 $ 69,159 $ 1,082 Asset-backed securities 1,555 21 — — Certificates of deposit 22,400 118 — — Commercial paper 50,550 136 — — Corporate bonds 28,975 637 28,769 366 Total $ 199,781 $ 2,185 $ 97,928 $ 1,448 See Note 2 for additional discussion regarding the fair value of the Company’s marketable securities. NOTE 4. Derivative Instruments and Hedging Activities The Company, when it considers it to be appropriate, enters into forward contracts to hedge the economic exposures arising from foreign currency denominated transactions. At July 1, 2023, these contracts included the future sale of euro, Japanese yen, Korean won, Singapore dollar, and Taiwanese dollar to purchase U.S. dollars. At December 31, 2022, these contracts included the future sale of euro, Japanese yen, Korean won, Singapore dollar, Taiwanese dollar, and Chinese renminbi to purchase U.S. dollars. Foreign currency forward contracts are not designated as hedges for accounting purposes, and therefore, the change in fair value is recorded in “Other expense, net,” in the Condensed Consolidated Statements of Operations. The Company records its forward contracts at fair value in either prepaid expenses and other current assets or other current liabilities in the Condensed Consolidated Balance Sheets. The dollar equivalent of the U.S. dollar forward contracts and related fair values as of July 1, 2023 and December 31, 2022 were as follows: July 1, 2023 December 31, 2022 Notional amount $ 21,607 $ 27,923 Fair value of asset (liability) $ 44 $ ( 135 ) 9 Table of Contents NOTE 5. Purchased Intangible Assets Intangible Assets Purchased intangible assets as of July 1, 2023 and December 31, 2022 are as follows: Gross Carrying Amount Accumulated Amortization Net July 1, 2023 Finite-lived intangibles: Developed technology $ 378,197 $ 230,097 $ 148,100 Customer and distributor relationships 73,321 32,489 40,832 Trademarks and trade names 14,171 8,555 5,616 Total identifiable intangible assets $ 465,689 $ 271,141 $ 194,548 December 31, 2022 Finite-lived intangibles: Developed technology $ 378,197 $ 205,386 $ 172,811 Customer and distributor relationships 73,321 30,195 43,126 Trademarks and trade names 14,171 7,911 6,260 Total identifiable intangible assets $ 465,689 $ 243,492 $ 222,197 Assuming no change in the gross carrying value of identifiable intangible assets and estimated lives, future estimated amortization expenses are: Expected Amortization Fiscal Year: Expense 2023 (remainder) $ 27,174 2024 49,137 2025 32,587 2026 31,394 2027 23,173 2028 12,288 Thereafter 18,795 Total $ 194,548 NOTE 6. Balance Sheet Components Inventories Inventories, net are comprised of the following: July 1, 2023 December 31, 2022 Materials $ 250,577 $ 231,029 Work-in-process 70,414 69,072 Finished goods 31,082 24,181 Total inventories, net $ 352,073 $ 324,282 10 Table of Contents Property, Plant and Equipment Property, plant and equipment, net is comprised of the following: July 1, 2023 December 31, 2022 Machinery and equipment $ 66,899 $ 56,924 Land and building 50,340 50,344 Computer equipment and software 16,141 15,415 Leasehold improvements 21,155 18,539 Furniture and fixtures 3,332 2,949 157,867 144,171 Accumulated depreciation ( 57,984 ) ( 52,191 ) Total property, plant and equipment, net $ 99,883 $ 91,980 Other assets Other assets are comprised of the following: July 1, 2023 December 31, 2022 Operating lease right-of-use assets $ 17,806 $ 20,746 Other 1,448 4,479 Total other assets $ 19,254 $ 25,225 Accrued liabilities Accrued liabilities are comprised of the following: July 1, 2023 December 31, 2022 Payroll and related expenses $ 25,323 $ 36,529 Warranty 9,110 10,890 Other 1,534 1,417 Total accrued liabilities $ 35,967 $ 48,836 Other current liabilities Other current liabilities are comprised of the following: July 1, 2023 December 31, 2022 Customer deposits $ 10,325 $ 12,482 Current operating lease obligations 5,966 5,678 Income tax payable 1,899 1,910 Accrued professional fees 1,041 968 Other 8,072 5,995 Total other current liabilities $ 27,303 $ 27,033 Other non-current liabilities Other non-current liabilities are comprised of the following: July 1, 2023 December 31, 2022 Non-current operating lease obligations $ 13,317 $ 16,345 Unrecognized tax benefits (including interest) 8,764 7,693 Deferred revenue 3,189 2,852 Other 1,940 3,623 Total other non-current liabilities $ 27,210 $ 30,513 11 Table of Contents NOTE 7. Commitments and Contingencies Factoring The Company maintains arrangements under which eligible accounts receivable in Japan are sold without recourse to unrelated third-party financial institutions. The Company sold $ 8,061 of receivables during the six months ended July 1, 2023. These receivables were not included in the Condensed Consolidated Balance Sheets as the criteria for sale treatment had been met. There were no material gains or losses on the sale of such receivables. There were no amounts due from such third-party financial institutions at July 1, 2023. Intellectual Property Indemnification Obligations The Company has entered into agreements with customers that include limited intellectual property indemnification obligations that are customary in the industry. These guarantees generally require the Company to compensate the other party for certain damages and costs incurred as a result of third-party intellectual property claims arising from these transactions. The nature of the intellectual property indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its customers. Historically, the Company has not made any indemnification payments under such agreements and no amount has been accrued in the accompanying Condensed Consolidated Financial Statements with respect to these indemnification guarantees. Warranty Reserves The Company generally provides a warranty on its products for a period of 12 to 14 months against defects in material and workmanship. The Company estimates the costs that may be incurred during the warranty period and records a liability in the amount of such costs at the time revenue is recognized. The Company’s estimate is based primarily on historical experience. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Warranty provisions are generally related to current period sales. Settlements of warranty reserves are generally associated with sales that occurred during the 12 to 14 months prior to the period-end. Changes in the Company’s warranty reserves are as follows: Six Months Ended July 1, July 2, 2023 2022 Balance, beginning of the period $ 11,830 $ 9,682 Accruals 4,659 7,392 Usage ( 6,708 ) ( 5,859 ) Balance, end of the period $ 9,781 $ 11,215 Warranty reserves are reported in the Condensed Consolidated Balance Sheets under the captions “Accrued liabilities” and “Other non-current liabilities.” Legal Matters From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business. The following reflects an overview of the material developments with regard to the Company’s pending material legal proceedings. Optical Solutions Inc. v. Nanometrics Incorporated (Case No. 18-cv-00417-BLF): On August 2, 2017, Nanometrics was named as defendant in a complaint filed by Optical Solutions, Inc. (“OSI”) in New Hampshire Superior Court (the “OSI Action”). OSI’s complaint alleged claims arising from a purchase contract between OSI and Nanometrics. The relief sought was the award of damages in an amount to be proven at trial, attorney’s fees and costs, and such other relief that the court deemed just and proper. The OSI Action was subsequently removed to the United States District Court for the District of New Hampshire and then transferred to the United States District Court for the Northern District of California (the “Northern District of California”). On December 20, 2017, Nanometrics filed its own complaint against OSI in the California Superior Court for the County of Santa Clara alleging claims arising from OSI’s breach of certain purchase orders (the “Nanometrics Action”). The relief sought was the 12 Table of Contents award of damages in an amount to be proven at trial, including pre- and post-judgment interest, punitive damages, restitution for benefits unjustly received by OSI, attorney’s fees and costs, and such other relief the court deemed just and proper. The Nanometrics Action was later removed to the Northern District of California and then consolidated with the OSI Action. On July 7, 2020, after the Northern District of California granted the Company’s motion to dismiss with prejudice with regard to two of OSI’s claims and dismissed two other claims asserted by OSI with leave to amend, OSI filed a Fourth Amended Complaint. On August 14, 2020, the Company filed a motion to dismiss one of the two remaining claims. On December 1, 2020, the Northern District of California denied the Company’s motion and as a result the Company filed its Answer in this matter on December 22, 2020. Discovery is now closed. On March 1, 2023, the Company filed a motion for summary judgment, and the hearing on that motion took place on June 29, 2023. On August 3, 2023, the Northern District of California denied the Company’s motion for summary judgment. The trial date is set for December 4, 2023. At the time of filing of this Quarterly Report on Form 10-Q (this “Form 10-Q”), the loss contingency in this matter is remote and the Company does not anticipate the outcome of the matter to have a material impact on its financial position, results of operations, or cash flows. Line of Credit The Company has a credit agreement with a bank that provides for a line of credit which is secured by the marketable securities the Company has with the bank. The Company is permitted to borrow up to 70 % of the value of eligible securities held at the time the line of credit is accessed. The available line of credit as of July 1, 2023 was approximately $ 100.0 million with an available interest rate of 6.8 %. The credit agreement is available to the Company until such time that either party terminates the arrangement at their discretion. The Company has not utilized the line of credit as of the date of this filing. NOTE 8. Revenue The following table represents a disaggregation of revenue by timing of revenue: Three Months Ended Six Months Ended July 1, July 2, July 1, July 2, 2023 2022 2023 2022 Point-in-time $ 178,325 $ 244,466 $ 364,699 $ 474,436 Over-time 12,337 11,844 25,128 23,224 Total revenue $ 190,662 $ 256,310 $ 389,827 $ 497,660 See Note 14 for additional discussion of the Company’s disaggregated revenue in detail. Contract Liabilities The Company records contract liabilities when the customer has been billed in advance of the Company completing its performance obligations primarily with respect to liabilities related to service contracts and installation. For contracts that have a duration of one year or less, these amounts are recorded as current deferred revenue in the Condensed Consolidated Balance Sheets. As of July 1, 2023 and December 31, 2022, the Company carried a long-term deferred revenue balance of $ 3,189 and $ 2,852 , respectively, in “Other non-current liabilities” on the Condensed Consolidated Balance Sheets. Changes in deferred revenue were as follows: Three Months Ended Six Months Ended July 1, July 2, July 1, July 2, 2023 2022 2023 2022 Balance, beginning of the period $ 30,383 $ 38,599 $ 33,014 $ 31,672 Deferral of revenue 18,214 21,557 34,290 45,057 Recognition of deferred revenue ( 21,341 ) ( 25,725 ) ( 40,048 ) ( 42,298 ) Balance, end of the period $ 27,256 $ 34,431 $ 27,256 $ 34,431 13 Table of Contents NOTE 9. Share-Based Compensation Restricted Stock Unit Activity A summary of the Company’s restricted stock unit activity with respect to the six months ended July 1, 2023 is as follows: Number of Shares Weighted Average Grant Date Fair Value Nonvested at December 31, 2022 743 $ 69.01 Granted 312 $ 88.06 Vested ( 386 ) $ 58.56 Forfeited ( 31 ) $ 81.36 Nonvested at July 1, 2023 638 $ 84.05 Of the 638 nonvested shares outstanding at July 1, 2023, 540 are service-based RSUs and 98 are market-based PRSUs. The fair value of the Company’s service-based RSUs was calculated based on the fair market value of the Company’s stock at the date of grant. The fair value of the Company’s market-based PRSUs granted during fiscal years 2023 and 2022 was calculated using a Monte Carlo simulation model at the date of the grant, resulting in a weighted average grant-date fair value per share of $ 100.79 and $ 85.49 , respectively. As of July 1, 2023 and December 31 2022, there was $ 38,787 and $ 28,653 of total unrecognized compensation cost related to restricted stock units granted under the Company’s stock plans, respectively. That cost is expected to be recognized over a weighted average period of 1.8 years and 1.5 years for July 1, 2023 and December 31, 2022, respectively. NOTE 10. Other Expense, Net Other expense, net, is comprised of the following: Three Months Ended Six Months Ended July 1, July 2, July 1, July 2, 2023 2022 2023 2022 Foreign currency exchange losses, net $ ( 1,800 ) $ ( 811 ) $ ( 2,107 ) $ ( 1,025 ) Other 90 ( 48 ) 116 ( 38 ) Total other expense, net $ ( 1,710 ) $ ( 859 ) $ ( 1,991 ) $ ( 1,063 ) NOTE 11. Income Taxes The following table provides details of income taxes: Three Months Ended Six Months Ended July 1, July 2, July 1, July 2, 2023 2022 2023 2022 Income before income taxes $ 27,855 $ 57,253 $ 60,057 $ 116,170 Provision for income taxes $ 1,959 $ 5,678 $ 5,093 $ 11,265 Effective tax rate 7 % 10 % 8 % 10 % The income tax provision for the three and six months ended July 1, 2023 was computed based on the Company’s annual forecast of profit by jurisdiction and forecasted effective tax rate for the year. The income tax provision for the six months ended July 1, 2023 and July 2, 2022 reflected the impact of a change in U.S. tax law effective January 1, 2022, which requires the capitalization and amortization of research and development expenditures incurred after December 31, 2021. The decrease in the Company’s income tax provision for the three and six months ended July 1, 2023 as compared to the three and six months ended July 2, 2022 was primarily due to a decrease in quarterly and year-to-date earnings and an increase in the federal research and development tax credit, offset by a decrease in the Foreign Derived Intangible Income (“FDII”) deduction. The Company’s 14 Table of Contents recorded effective tax rate for the periods presented is less than the U.S. statutory rate primarily due to projected FDII deductions, federal research and development tax credits, and excess tax benefits associated with equity compensation. The Company currently has a partial valuation allowance recorded against certain foreign and state net operating loss and credit carryforwards where the realizability of such deferred tax assets is substantially in doubt. Each quarter, the Company assesses the likelihood that it will be able to recover its deferred tax assets. The Company considers available evidence, both positive and negative, including forecasted earnings, in assessing its need for a valuation allowance. As a result of the Company’s analysis, it concluded that it is more likely than not that a portion of its deferred tax assets will not be realized. Therefore, the Company continues to provide a valuation allowance against certain deferred tax assets. The Company continues to monitor available evidence and may reverse some or all of its remaining valuation allowance in future periods, if appropriate. The Company has a recorded valuation allowance against a certain portion of its deferred tax assets of $ 11,772 at July 1, 2023 and December 31, 2022. NOTE 12. Earnings Per Share Basic earnings per share is calculated using the weighted average number of shares of common stock outstanding during the period. Restricted stock units, employee stock purchase grants and stock options are included in the calculation of diluted earnings per share, except when their effect would be anti-dilutive. The Company’s basic and diluted earnings per share amounts are as follows: Three Months Ended Six Months Ended July 1, July 2, July 1, July 2, 2023 2022 2023 2022 Numerator: Net income $ 25,896 $ 51,575 $ 54,964 $ 104,905 Denominator: Basic earnings per share - weighted average shares outstanding 48,976 49,617 48,865 49,525 Effect of potential dilutive securities: Employee stock options, employee stock purchase grants and restricted stock units - dilutive shares 298 290 310 384 Diluted earnings per share - weighted average shares outstanding 49,274 49,907 49,175 49,909 Earnings per share: Basic $ 0.53 $ 1.04 $ 1.12 $ 2.12 Diluted $ 0.53 $ 1.03 $ 1.12 $ 2.10 NOTE 13. Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss, net of tax, at July 1, 2023, as well as the activity for the six months ended July 1, 2023, were as follows: Foreign currency translation adjustments Net unrealized losses on available-for-sale marketable securities Accumulated other comprehensive loss Balance at December 31, 2022 $ ( 7,115 ) $ ( 2,895 ) $ ( 10,010 ) Net current period other comprehensive income ( 1,908 ) 1,229 ( 679 ) Reclassifications — — — Balance at July 1, 2023 $ ( 9,023 ) $ ( 1,666 ) $ ( 10,689 ) For the six months ended July 1, 2023, tax effects on net income of amounts recorded in other comprehensive loss for net unrealized gains on available-for-sale marketable securities and foreign currency translation adjustments was $ 264. 15 Table of Contents NOTE 14. Segment Reporting and Geographic Information The Company is engaged in the design, development, manufacture and support of high-performance control metrology, defect inspection, lithography and data analysis systems used by microelectronics device manufacturers. The Company and its subsidiaries currently operate in a single operating segment: the design, development, manufacture and support of high-performance process control defect inspection and metrology, lithography and process control software systems used by microelectronics device manufacturers. Therefore, the Company has one reportable segment. The Company’s chief operating decision maker is the Chief Executive Officer (the “CEO”). The CEO allocates resources and assesses performance of the business and other activities at the reportable segment level. The following table lists the different sources of revenue: Three Months Ended Six Months Ended July 1, July 2, July 1, July 2, 2023 2022 2023 2022 Systems and software $ 159,353 83 % $ 220,786 86 % $ 326,177 84 % $ 430,170 86 % Parts 18,142 10 % 22,756 9 % 38,565 10 % 42,613 9 % Services 13,167 7 % 12,768 5 % 25,085 6 % 24,877 5 % Total revenue $ 190,662 100 % $ 256,310 100 % $ 389,827 100 % $ 497,660 100 % The Company’s significant operations outside the United States include sales, service and application offices in Asia and Europe. For geographical revenue reporting, revenue is attributed to the geographic location to which the product is shipped. Revenue by geographic region is as follows: Three Months Ended Six Months Ended July 1, July 2, July 1, July 2, 2023 2022 2023 2022 Revenue from third parties: South Korea $ 37,840 $ 68,881 $ 83,313 $ 130,016 China 41,957 67,619 78,509 131,013 United States 33,237 31,073 73,951 57,874 Taiwan 31,013 48,456 57,718 101,848 Southeast Asia 25,680 10,444 42,980 19,669 Japan 13,732 10,789 28,235 19,764 Europe 7,203 19,048 25,121 37,476 Total revenue $ 190,662 $ 256,310 $ 389,827 $ 497,660 The following customers accounted for 10% or more of total revenue for the indicated periods: Six Months Ended July 1, July 2, 2023 2022 Samsung Semiconductor 21 % 11 % Taiwan Semiconductor Manufacturing Co. Ltd. 13 % 15 % SK Hynix Inc. 2 % 17 % NOTE 15. Share Repurchase Authorization In November 2020, the Onto Innovation Board of Directors approved a share repurchase authorization, which allows the Company to repurchase up to $ 100,000 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 six month periods ended July 1, 2023, the Company repurchased 0 and 46 shares of its common stock, respectively. The amount paid to repurchase the shares in excess of par value, including transaction costs, is recorded directly as a decrease to additional paid-in capital and accumulated earnings. At July 1, 2023, there was $ 31,577 available for future share repurchases under this share repurchase authorization. 16 Table of Contents NOTE 16. Restructuring The Company initiated a restructuring plan to streamline operations and align the Company’s cost structure with its business outlook for 2023. During the three and six months ended July 1, 2023, restructuring costs of $ 1,192 and $ 3,226 were recorded in operating expense for employee severance and $ 0 and $ 2,279 were recorded in cost of goods sold for inventory write-downs. All employee severance costs were paid during the six-month period. The Company anticipates that these activities will continue into subsequent quarters of 2023 and anticipates recording additional restructuring charges. 17 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Certain statements in this Form 10-Q, or incorporated by reference in this Form 10-Q, of Onto 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”) may be considered “forward-looking statements” or may be based on “forward-looking statements,” including, but not limited to, those concerning: • 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; • the effects of political, economic, legal, and regulatory changes or conflicts on our global operations; • the effects of natural disasters or public health emergencies, such as the current COVID-19 pandemic, on the global economy and on our customers, suppliers, employees, and business; • 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, including, but not limited to, 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 Estimates The preparation of condensed consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make judgments, assumptions and estimates that affect the amounts reported. 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 December 31, 2022 (the “2022 Form 10-K”) filed with the Securities and Exchange Commission on February 24, 2023 in the Items entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” There have been no material changes in our critical accounting estimates from the information presented in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the 2022 Form 10-K. 18 Table of Contents For more information, please see our critical accounting estimates as previously disclosed in our 2022 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 metrology and inspection tools for the semiconductor industry, including process control tools that perform optical metrology on patterned and unpatterned wafers, wafer macro-defect inspection, including macro-inspection of both 2D and 3D wafer features, wafer substrate and panel substrate lithography systems, and process control analytical software. Our products are primarily used by silicon wafer manufacturers, semiconductor device fabricators, and advanced packaging manufacturers operating in the semiconductor market. Our products are also used for process control in a number of other specialty device manufacturing markets, including light emitting diodes (“LED”), vertical-cavity surface-emitting lasers (“VCSEL”), micro-electromechanical systems (“MEMS”), CMOS image sensors (“CIS”), silicon and compound semiconductor (SiC and GaN) power devices, analog devices, RF filters, data storage, and certain industrial and scientific applications. We provide process and yield management solutions used in bare silicon wafer production and wafer processing facilities, often referred to as “front-end” manufacturing, and advanced packaging of chips and test facilities, or “back-end” manufacturing, through a portfolio of standalone systems for optical metrology, macro-defect inspection, packaging lithography, as well as transparent and opaque thin film measurements. Our automated and integrated metrology systems measure critical dimensions, device structures, topography, shape, and various thin film compositions, including three-dimensional features and film thickness, as well as optical, electrical and material properties. Our primary areas of focus include products that provide critical yield-enhancing and actionable information, which is used by microelectronic device manufacturers to improve yield and time to market of their next-generation devices. 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, and factory-wide and enterprise-wide suites to enhance productivity and achieve significant cost savings. Our systems are backed by worldwide customer service and applications support. The semiconductor and electronics industries have 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 July 1, April 1, 2023 2023 Revenue $ 190,662 $ 199,165 Gross profit $ 100,461 $ 104,975 Gross profit as a percent of revenue 53 % 53 % Total operating expenses $ 75,654 $ 75,940 Net income $ 25,896 $ 29,068 Diluted earnings per share $ 0.53 $ 0.59 • In the fiscal quarter ended July 1, 2023 (the “July 2023 quarter”), revenue decreased 4% compared to the fiscal quarter ended April 1, 2023 (the “April 2023 quarter”), primarily due to a decline in sales to foundry and memory customers in advanced nodes applications, partially offset by an increase in sales to power customers in specialty device and advanced packaging applications. • Gross profit as a percentage of revenue in the July 2023 quarter compared to the April 2023 quarter was relatively flat primarily due to reduced volume offset by product mix. • Operating expenses in the July 2023 quarter compared to the April 2023 quarter were slightly lower primarily due to lower restructuring charges related to employee severance. • Customer demand further weakened due to a reduction in wafer fabrication equipment spending in the July 2023 quarter. As a result, we continued with the restructuring plan initiated in the April 2023 quarter. We incurred $1.2 million for employee severance costs due to additional workforce reductions in the July 2023 quarter. 19 Table of Contents Our cash, cash equivalents and marketable securities balance increased to $609.6 million as of July 1, 2023 compared to $547.8 million as of December 31, 2022. This increase was primarily the result of $81.8 million of cash generated from operating activities and $5.3 million of cash from sales of shares through share-based compensation plans for the first half of 2023. These sources of cash were partially offset by cash used for the purchase of our common stock of $3.2 million, cash used for capital expenditures of $12.5 million and $10.0 million of cash used for tax payments related to shares withheld to satisfy employee tax obligations in connection with the vesting of awards under share-based compensation plans. Employee headcount as of July 1, 2023 was approximately 1,533. We experienced supply chain constraints and inflationary pressures in 2022 and the first six months of 2023, and although there have been improvements in supply chain performance, we expect supply chain shortages as well as inflationary cost pressures to persist throughout fiscal 2023. In 2022, the United States government implemented additional export regulations for U.S. semiconductor technology sold in China. We have applied for export licenses to continue doing business with our customers that are affected by the new export rules. However, the new export controls have resulted in lower net sales in China for the first half of fiscal 2023 compared to the same period last year. For a discussion of the risks related to our business and operations, see Part II, Item 1A – Risk Factors of this Form 10-Q. Results of Operations for the Three and Six Months Ended July 1, 2023 and July 2, 2022 Revenue. Our revenue is primarily derived from the sale of our systems, software licensing, services and spare parts. Our revenue of $190.7 million decreased 25.6% for the three months ended July 1, 2023 as compared to the same period in 2022, in which revenue totaled $256.3 million. For the six-month periods ended July 1, 2023 and July 2, 2022, our revenue totaled $389.8 million and $497.7 million, respectively, representing a year-over-year decrease of 21.7% 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 Six Months Ended July 1, July 2, July 1, July 2, 2023 2022 2023 2022 Systems and software $ 159,353 83 % $ 220,786 86 % $ 326,177 84 % $ 430,170 86 % Parts 18,142 10 % 22,756 9 % 38,565 10 % 42,613 9 % Services 13,167 7 % 12,768 5 % 25,085 6 % 24,877 5 % Total revenue $ 190,662 100 % $ 256,310 100 % $ 389,827 100 % $ 497,660 100 % Total systems and software revenue decreased $61.4 million and $104.0 million for the three and six months ended July 1, 2023, respectively, as compared to the three and six months ended July 2, 2022. These decreases were primarily due to lower numbers of units shipped in our metrology, inspection and lithography product lines. The decrease in total parts and services revenue for the three and six months ended July 1, 2023, as compared to the three and six months ended July 2, 2022, was primarily due to lower factory utilization by several of our customers resulting in a decline in their spare parts usage. 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. Three Months Ended Six Months Ended July 1, July 2, July 1, July 2, 2023 2022 2023 2022 Gross profit $ 100,461 $ 132,127 $ 205,436 $ 263,150 Gross profit as a percentage of revenue 52.7 % 51.5 % 52.7 % 52.9 % 20 Table of Contents The increase in gross profit as a percentage of revenue for the three month period ended July 1, 2023 as compared to the three month period ended July 2, 2022 was primarily due to product mix and lower production costs. The decrease in gross profit as a percentage of revenue for the six month period ended July 1, 2023 as compared to the six month period ended July 2, 2022 was primarily due to an increase of $1.9 million related to excess and obsolete inventory for older product lines. 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 $27.0 million and $54.3 million for the three and six month periods ended July 1, 2023, respectively, as compared to $25.6 million and $52.0 million for the three and six month periods ended July 2, 2022, respectively. The increase in research and development expenses of $1.4 million for the three month period ended July 1, 2023, as compared to the three month period ended July 2, 2022, was primarily due to increased compensation costs of $1.1 million, a $0.2 million increase for travel expenses and material expenses for new product initiatives of $0.1 million. The increase in research and development expenses of $2.3 million for the six month period ended July 1, 2023, as compared to the six month period ended July 2, 2022, was primarily due to increased compensation costs of $2.2 million. • 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 $16.0 million and $31.7 million for the three and six month periods ended July 1, 2023, respectively, compared to $16.9 million and $32.5 million for the three and six month periods ended July 2, 2022, respectively. The decrease in sales and marketing expenses of $0.9 million for the three month period ended July 1, 2023, as compared to the three month period ended July 2, 2022, was primarily due to a $0.3 million decrease in depreciation expense and a $0.3 million decrease in outside services expense. The decrease in sales and marketing expenses of $0.8 million for the six month period ended July 1, 2023, as compared to the six month period ended July 2, 2022, was primarily due to a $0.6 million decrease in outside services expense and a $0.3 million decrease in depreciation expense. • 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 administrative expenses were $18.8 million and $38.0 million for the three and six month periods ended July 1, 2023, respectively, as compared to $18.3 million and $34.8 million for the three and six month periods ended July 2, 2022, respectively. The increase in general and administrative expenses of $0.5 million for the three month period ended July 1, 2023, as compared to the three month period ended July 2, 2022, was primarily due to restructuring charges of $1.2 million in the 2023 period, partially offset by lower litigation expenses of $0.9 million. The increase in general and administrative expenses of $3.2 million for the six month period ended July 1, 2023, as compared to the six month period ended July 2, 2022, was primarily due to restructuring charges of $3.2 million for employee severance costs during the 2023 period. • Amortization of Identifiable Intangible Assets . Amortization of identifiable intangible assets remained unchanged period over period. It was $13.8 million and $27.6 million for the three and six month periods ended July 1, 2023 as well as, the three and six month periods ended July 2, 2022, respectively. Interest income, net . Net interest income was $4.8 million and $8.2 million for the three and six month periods ended July 1, 2023, respectively, as compared to $0.7 million and $1.0 million for the three and six month periods ended July 2, 2022, respectively. The increases in net interest income for both the three and six month periods ended July 1, 2023, as compared to the three and six month periods ended July 2, 2022, were due to higher cash and marketable securities balances and higher interest rates during the 2023 period. 21 Table of Contents Other expense, net . Other expense, net was $1.7 million and $2.0 million for the three and six month periods ended July 1, 2023, respectively, as compared to $0.9 million and $1.1 million for the three and six month periods ended July 2, 2022, respectively. The increase in other expense, net of $0.9 million for the six month periods ended July 1, 2023, as compared to the six month periods ended July 2, 2022, was primarily due to higher foreign exchange losses of $1.1 million. Income Taxes . We recorded an income tax provision of $2.0 million and $5.1 million for the three and six month periods ended July 1, 2023, respectively, as compared to $5.7 million and $11.3 million for the three and six month periods ended July 2, 2022, respectively. Our effective tax rate of 7% and 8% for the three and six month periods ended July 1, 2023, 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 10% for both the three and six month periods ended July 2, 2022, differed from the statutory rate of 21%, primarily due to (i) research and development tax credits, (ii) the deduction related to FDII, and (iii) excess tax benefits associated with equity compensation. 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. Liquidity and Capital Resources At July 1, 2023, we had $609.6 million of cash, cash equivalents and marketable securities and $1,046.1 million in working capital. At December 31, 2022, we had $547.8 million of cash, cash equivalents and marketable securities and $974.3 million in working capital. Net cash and cash equivalents provided by operating activities for the six months ended July 1, 2023 and July 2, 2022 were $81.8 million and $55.4 million, respectively. • The net cash and cash equivalents provided by operating activities during the six months ended July 1, 2023 resulted primarily from net income, adjusted to exclude the effect of non-cash operating charges, of $98.8 million, partially offset by a decrease in cash provided from operating assets and liabilities of $17.0 million, primarily due to a $37.1 million increase in inventories, a $17.3 million increase in prepaid expenses and other assets, a $4.9 million decrease in accounts payable and a $10.7 million decrease in accrued and other liabilities, partially offset by a $51.1 million decrease in accounts receivable and a $1.9 million increase in net payable for income taxes. • The net cash and cash equivalents provided by operating activities during the six months ended July 2, 2022 resulted primarily from net income, adjusted to exclude the effect of non-cash operating charges of $143.0 million, partially offset by a decrease in cash provided from operating assets and liabilities of $87.6 million, primarily due to a $57.9 million increase in accounts receivable, a $44.4 million increase in inventories, a $15.6 million increase in prepaid expenses and other assets and a $4.4 million decrease in income taxes payable, partially offset by a $18.8 million increase in accounts payable and a $15.9 million increase in accrued and other liabilities. Net cash and cash equivalents used in investing activities for the six months ended July 1, 2023 and July 2, 2022 were $22.9 million and $33.2 million, respectively. 22 Table of Contents • During the six months ended July 1, 2023, net cash and cash equivalents used in investing activities included purchases of marketable securities of $209.2 million and capital expenditures of $12.4 million, partially offset by proceeds from sales of marketable securities of $198.7 million. • During the six months ended July 2, 2022, net cash and cash equivalents used in investing activities included purchases of marketable securities of $174.7 million and capital expenditures of $6.9 million, partially offset by proceeds from sales of marketable securities of $148.4 million. Net cash and cash equivalents used in financing activities for the six months ended July 1, 2023 and July 2, 2022 were $8.2 million and $6.1 million, respectively. • During the six months ended July 1, 2023, financing activities used cash primarily for tax payments related to shares withheld to satisfy employee tax obligations in connection with the vesting of awards under share-based compensation plans of $10.0 million and repurchases of common stock of $3.2 million and pay contingent consideration for acquired business of $0.3 million, partially offset by proceeds from sales of shares through share-based compensation plans of $5.3 million. • During the six months ended July 2, 2022, financing activities used cash to primarily pay taxes related to shares withheld for share-based compensation plans of $8.3 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 $4.5 million. 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 six months ended July 1, 2023, we repurchased 0 and 46 thousand shares of common stock, respectively, under this repurchase authorization and those shares were subsequently retired. As of July 1, 2023, there was $31.6 million available for future share repurchases under this share repurchase authorization. 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 July 1, 2023, the available line of credit was approximately $100.0 million with an available interest rate of 6.8%. The credit agreement is available to us until such time that either party terminates the arrangement at its discretion. As of the date of this filing, 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. 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. Item 3. Quantitative and Qualitati ve Disclosures About Market Risk There have been no material changes in market risk from the information presented in Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk,” in the 2022 Form 10-K.