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Item 2. Management’s Discussion and Analysis

2024-08-08 compared with 2024-05-09 · 55 added, 48 removed, 113 unchanged (48% of the section changed)

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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 30, 2023 (the “2023 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 26, 2024 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 2023 Form 10-K.

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Diluted earnings per share

• In the fiscal quarter ended March 30, 2024 (the “March 2024 quarter”), revenue increased 5% compared to the fiscal quarter ended December 30, 2023 (the “December 2023 quarter”), primarily due to an increase in sales to foundry and DRAM customers in both advanced nodes applications and specialty devices and advanced packaging.

These increases are partially offset by a decrease in sales to wafer manufacturing and power customers in specialty devices and advanced packaging.

• Gross profit as a percentage of revenue in the March 2024 quarter compared to the December 2023 quarter was primarily due to restructuring costs related the exit of older product lines in the December 2023 quarter.

• Operating expenses in the March 2024 quarter decreased by 5% compared to the December 2023 quarter primarily due to a litigation settlement in the December 2023 quarter, partially offset by cost containment initiatives implemented in the year.

Our cash, cash equivalents and marketable securities balance increased to $741 million as of March 30, 2024 compared to $698 million as of December 30, 2023.

• In the fiscal quarter ended June 29, 2024 (the “June 2024 quarter”), revenue increased 6.0% compared to the fiscal quarter ended March 30, 2024 (the “March 2024 quarter”), primarily due to increases in sales to NAND customers in advanced nodes applications and sales to power and logic customers in specialty devices and advanced packaging.

These increases were partially offset by decline in sales to foundry and DRAM customers during the June 2024 quarter.

• Gross profit as a percentage of revenue in the June 2024 quarter increased by 1% compared to the March 2024 quarter primarily due to increased volume and change in product mix.

• Operating expenses in the June 2024 quarter increased by 5% compared to the March 2024 quarter primarily due to an increase in compensation cost and restructuring expenses.

Our cash, cash equivalents and marketable securities balance increased to $786.0 million at June 29, 2024, compared to $697.8 million at December 30, 2023.

This increase was primarily the result of $122.4 million of cash generated from operating activities, partially offset by cash used for capital expenditures of $19.2 million and $18.0 million for tax payments related to net share settlement of employee stock-based compensation plans.

Employee headcount as of March 30, 2024 was approximately 1500.

Employee headcount at June 29, 2024 was approximately 1,520.

In 2022 and 2023, 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 continued to negatively impact our net sales in China for the first quarter 2024.

We have applied for, and in some cases received, export licenses to continue doing business with our customers that are affected by the new export rules.

However, the new export controls have continued to negatively impact our net sales in China for the first and second fiscal quarters of 2024.

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 Months Ended March 30, 2024 and April 1, 2023

Results of Operations for the Three and Six Months Ended June 29, 2024 and July 1, 2023

Our revenue is primarily derived from the sale of our systems, software licensing, services and spare parts.

Our revenue of $228.8 million increased 14.9% for the three months ended March 30, 2024 as compared to the three months ended April 1, 2023, in which revenue totaled $199.2 million.

Our revenue of $242.3 million increased 27.1% for the three months ended June 29, 2024 as compared to the three months ended July 1, 2023, in which revenue totaled $190.7 million.

For the six-month periods ended June 29, 2024 and July 1, 2023, our revenue totaled $471.1 million and $389.8 million, respectively, representing a year-over-year increase of 20.9%

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

Systems and software

Total revenue

Total systems and software revenue increased $28 million for the three months ended March 30, 2024, as compared to the three months ended April 1, 2023.

These increases were primarily due to an increase in shipments of our inspection product lines to foundry and DRAM customers, which was partially offset by a decrease in in shipments of our metrology product lines to wafer manufacturing and foundry customers.

The increase in total parts and services revenue for the three months ended March 30, 2024, as compared to the three months ended April 1, 2023, was primarily due to higher factory utilization by several of our customers, resulting in an increase in their spare parts requirements.

Total systems and software revenue increased $51.1 million and $79.1 million for the three and six months ended June 29, 2024, respectively, as compared to the three and six months ended July 1, 2023, respectively.

These increases were primarily due to an increase in shipments of our inspection product lines to foundry and DRAM customers, which was partially offset by a decrease in shipments of our metrology product lines to wafer manufacturing and foundry customers.

The increase in total parts and services revenue for the three and six months ended June 29, 2024, as compared to the three and six months ended July 1, 2023, was primarily due to higher factory utilization by several of our customers, resulting in an increase in their spare parts requirements.

Parts and services revenue is generated from part sales, maintenance service contracts, and system upgrades, as well as time and material billable service calls.

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Three Months Ended

Six Months Ended

Gross profit as a percentage of revenue

The decrease in gross profit as a percentage of revenue for the three month period ended March 30, 2024 as compared to the three month period ended April 1, 2023 was primarily due to product mix and higher production costs.

The increase in gross profit as a percentage of revenue for the three month period ended June 29, 2024 as compared to the three month period ended July 1, 2023 was primarily due to increased volume and change in product mix.

The decrease in gross profit as a percentage of revenue for the six month period ended June 29, 2024 as compared to the six month period ended July 1, 2023 was also primarily due to product mix.

Operating Expenses.

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They also include consulting fees, the cost of related supplies and legal costs to defend our patents.

Our research and development expenses were $26.6 million for the three month period ended March 30, 2024, as compared to $27.2 million for the three month period ended April 1, 2023.

The decrease in research and development expenses of $0.7 million for the three month period ended March 30, 2024, as compared to the three month period ended April 1, 2023, was primarily due to decreases in product development costs of $0.4 million and compensation costs of $0.2 million.

Our research and development expenses were $27.0 million and $53.6 million for the three and six month periods ended June 29, 2024, respectively, as compared to $27.0 million and $54.3 million for the three and six month periods ended July 1, 2023, respectively.

The research and development expenses remained flat for the three month period ended June 29, 2024, as compared to the three month period ended July 1, 2023.

The decrease in research and development expenses of $0.7 million for the six month period ended June 29, 2024, as compared to the six month period ended July 1, 2023, was primarily due to decreases in compensation costs of $1.0 million, product development costs of $0.1 million and depreciation and amortization costs of $0.1 million partially offset by increases in travel costs of $0.3 million and outside services costs of $0.3 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 $18.3 million for the three month period ended March 30, 2024, compared to $15.6 million for the three month period ended April 1, 2023.

The increase in sales and marketing expenses of $2.7 million for the three month period ended March 30, 2024, as compared to the three month period ended April 1, 2023, was primarily due to increases in compensations costs of $2.6 million and outside services of $0.2 million, partially offset by a decrease in depreciation and amortization of $0.1 million.

Our sales and marketing expenses were $19.0 million and $37.3 million for the three and six month periods ended June 29 2024, respectively, compared to $16.0 million and $31.7 million for the three and six month periods ended July 1, 2023, respectively.

The increase in sales and marketing expenses of $3.0 million for the three month period ended June 29, 2024, as compared to the three month period ended July 1, 2023, was primarily due to increases in compensations costs of $2.4 million, outside services costs of $0.1 million, production expenses of $0.2 million and travel costs of $0.2 million.

The increase in sales and marketing expenses of $5.6 million for the six month period ended June 29, 2024, as compared to the six month period ended July 1, 2023, was primarily due to increases in compensations costs of $5.0 million, outside services costs of $0.3 million, production expenses of $0.2 million and travel costs of $0.1 million.

• 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 $17.6 million for the three month period ended March 30, 2024, as compared to $19.2 million for the three month period ended April 1, 2023.

The decrease in general and administrative expenses of $1.6 million for the three month period ended March 30, 2024, as compared to the three month period ended April 1, 2023, was primarily due to decreases in restructuring charges for employee severance costs and merger and acquisition related expenses.

Our general and administrative expenses were $20.3 million and $37.8 million for the three and six month periods ended June 29, 2023, respectively, as compared to $18.8 million and $38.0 million for the three and six month periods ended July 1, 2023, respectively.

The increase in general and administrative expenses of $1.5 million for the three month period ended June 29, 2024, as compared to the three month period ended July 1, 2023, was primarily due to increases in compensation costs of $0.8 million, outside services costs of $0.3 million and travel costs of $0.3 million.

The decrease in general and administrative expenses of $0.2 million for the six month period ended June 29, 2024, as compared to the six month period ended July 1, 2023, was primarily due to decreases in compensation costs of $0.5

million and outside services costs of $0.6 million, partially offset by an increase in depreciation and amortization of $0.9 million.

• Amortization of Identifiable Intangible Assets .

Amortization of identifiable intangible assets was $13.1 million for the three month period ended March 30, 2024, compared to $13.8 million for the three month period ended April 1, 2023.

The decrease in amortization of identifiable intangible assets of $0.7 million for the three month period ended March 30, 2024, as compared to the three month period ended April 1, 2023, was primarily due to certain assets becoming fully amortized.

Amortization of identifiable intangible assets was $13.1 million and $26.2 million for the three and six month periods ended June 29, 2024, respectively, compared to $13.8 million and $27.6 million for the three and six month periods ended July 1, 2023, respectively.

The decreases in amortization of identifiable intangible assets of $0.7 million and $1.4 million for the three and six month periods ended June 29, 2024, as compared to the three and six month periods ended July 1, 2023, respectively, were primarily due to certain assets becoming fully amortized.

Interest income, net .

Net interest income was $7.4 million for the three month period ended March 30, 2024, as compared to $3.4 million for the three period ended April 1, 2023.

The increases in net interest income for the three month period ended March 30, 2024, as compared to the three month period ended April 1, 2023, were due to higher cash and marketable securities balances and higher interest rates during the 2024 period.

Other expense, net .

Other expense, net was $0.8 million for the three month period ended March 30, 2024, as compared to $0.3 million for the three month period ended April 1, 2023.

The increase in other expense, net was primarily due to foreign exchange gains during the 2024 period.

Net interest income was $8.5 million and $15.9 million for the three and six month periods ended June 29, 2024, respectively, as compared to $4.8 million and $8.2 million for the three and six month periods ended July 1, 2023, respectively.

The increases in net interest income for both the three and six month periods ended June 29, 2024, as compared to the three and six month periods ended July 1, 2023, were due to higher cash and marketable securities balances and higher interest rates during the 2024 period.

Other (expense) income, net .

Other expense, net was $0.1 million for the three month period ended June 29, 2024, as compared to $1.7 million for the same period in the prior year.

Other income, net was $0.7 million for the six month period ended June 29, 2024, as compared to other expense, net of $2.0 million for the same period in the prior year.

The decrease in other expense, net for the three months ended June 29, 2024 compared to the three months ended July 1, 2023, and the shift from net income for the six month period ended June 29, 2024 from net other expenses for the corresponding period of 2023, was primarily due to foreign exchange gains during the 2024 periods.

Income Taxes .

We recorded an income tax provision of $4.0 million for the three period ended March 30, 2024, as compared to $3.1 million for the three month period ended April 1, 2023.

Our effective tax rate of 7.9% for the three month period ended March 30, 2024, 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 10.4% for the three month period ended April 1, 2023, 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.

We recorded an income tax provision of $4.3 million and $8.4 million for the three and six month periods ended June 29, 2024, respectively, as compared to $2.0 million and $5.1 million for the three and six month periods ended July 1, 2023, respectively.

Our effective tax rate of 8% for both the three and six month periods ended June 29, 2024 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 7% and 8% for the three and six month periods ended July 1, 2023, 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.

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A summary of cash provided by (used in) operating, investing, and financing activities is as follows:

Three Months Ended

Six Months Ended

Cash provided by operating activities

Cash (used in) provided by investing activities

Cash used in investing activities

Cash used in financing activities

Operating Activities

Net cash and cash equivalents provided by operating activities for the three months ended March 30, 2024 were $57.1 million.

The net cash and cash equivalents provided by operating activities during the three months ended March 30, 2024 resulted primarily from net income, adjusted to exclude the effect of non-cash operating charges, of $65.8 million.

Net cash and cash equivalents provided by operating activities for the six months ended June 29, 2024 were $122.4 million.

The net cash and cash equivalents provided by operating activities during the six months ended June 29, 2024 resulted primarily from net income, adjusted to exclude the effect of non-cash operating charges, of $140.0 million.

Significant non-cash operating charges included depreciation, amortization, share-based compensation, provision for inventory valuation and deferred income taxes.

Cash provided by operating activities for the three months of fiscal 2024 increased compared to fiscal 2023 primarily due to higher cash collections and higher investment income.

Our working capital was $1,185.8 million at March 30, 2024 and $1,135.5 million at December 30, 2023.

Cash provided by operating activities for the first six months of fiscal 2024 increased compared to the corresponding period in fiscal 2023 primarily due to improved inventory management, higher cash collections and higher investment income.

Our working capital was $1,236.8 million at June 29, 2024 and $1,135.5 million at December 30, 2023.

Investing Activities

Net cash and cash equivalents used in investing activities for the three months ended March 30, 2024 were $91.8 million.

During the three months ended March 30, 2024, net cash and cash equivalents used in investing activities included purchases of

marketable securities, net proceeds from maturities and sales of marketable securities of $84.8 million and capital expenditures of $7.0 million.

Net cash and cash equivalents used in investing activities for the six months ended June 29, 2024 were $165.9 million.

During the six months ended June 29, 2024, net cash and cash equivalents used in investing activities included purchases of marketable securities, net proceeds from maturities and sales of marketable securities of $146.7 million and capital expenditures of $19.2 million.

From time to time, we evaluate whether to acquire new or complementary businesses, products or technologies.

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Financing Activities

Net cash and cash equivalents used in financing activities for the three months ended March 30, 2024 were $5.1 million.

During the three months ended March 30, 2024, 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 $9.1 million, partially offset by proceeds from sales of shares through share-based compensation plans of $4.0 million.

Net cash and cash equivalents used in financing activities for the six months ended June 29, 2024 were $13.9 million.

During the six months ended June 29, 2024, 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 $17.9 million, partially offset by proceeds from sales of shares through share-based compensation plans of $4.0 million.

In February 2024, the Onto Innovation Board of Directors approved a share repurchase authorization, which allows the Company to repurchase up to $200 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 months ended March 30, 2024, we repurchased no shares of common stock under this repurchase authorization.

As of March 30, 2024, there was $200 million available for future share repurchases under this share repurchase authorization.

Repurchases may be made through both public market and private transactions from time to time.

During the three and six months ended June 29, 2024, we repurchased no shares of common stock under this repurchase authorization.

As of June 29, 2024, there was $200 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 March 30, 2024, the available line of credit was approximately $100 million with an available interest rate of 7.1%.

We are permitted to borrow up to 70% of the value of eligible securities held at the time the line of credit is accessed, up to a maximum of $100 million.

As of June 29, 2024, the available line of credit was $100 million with an available interest rate of 7.1%.

The credit agreement is available to us until such time that either party terminates the arrangement at its discretion.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis