What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-10-31 compared with 2024-08-08 · 70 added, 55 removed, 113 unchanged (53% of the section changed)

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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.

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

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Three Months Ended

September 28,

Gross profit as a percent of revenue

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Diluted earnings per share

• 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 at June 29, 2024 was approximately 1,520.

• In the fiscal quarter ended September 28, 2024 (the “September 2024 quarter”), revenue increased 4.1% compared to the fiscal quarter ended June 29, 2024 (the “June 2024 quarter”), primarily due to increases in sales to NAND and DRAM customers in advanced nodes applications and sales to DRAM customers in specialty devices and advanced packaging.

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

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

• Operating expenses in the September 2024 quarter increased by 4.9% compared to the June 2024 quarter primarily due to an increase in restructuring expenses, research and development project costs, and compensation cost.

Our cash, cash equivalents and marketable securities balance increased to $855.4 million at September 28, 2024, compared to $697.8 million at December 30, 2023.

This increase was primarily the result of $189.7 million of cash generated from operating activities, and $9.2 million of cash from issuance of shares through share-based compensation plans, partially offset by cash used for capital expenditures of $27.3 million and $18.4 million for tax payments related to net share settlement of employee stock-based compensation plans.

Employee headcount at September 28, 2024 was approximately 1,518.

In 2022 and 2023, the United States government implemented additional export regulations for U.S.

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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.

However, the new export controls have continued to negatively impact our net sales in China for the first, second, and third 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 and Six Months Ended June 29, 2024 and July 1, 2023

Results of Operations for the Three and Nine Months Ended September 28, 2024 and September 30, 2023

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

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%

Our revenue of $252.2 million increased 21.7% for the three months ended September 28, 2024 as compared to the three months ended September 30, 2023, in which revenue totaled $207.2 million.

For the nine months ended September 28, 2024 and September 30, 2023, our revenue totaled $723.4 million and $597.0 million, respectively, representing a year-over-year increase of 21.2%

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

Nine Months Ended

September 28,

September 30,

September 28,

September 30,

Systems and software

Total revenue

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.

Total systems and software revenue increased $47.8 million and $126.9 million for the three and nine months ended September 28, 2024, respectively, as compared to the three and nine months ended September 30, 2023, respectively.

The increases for the three months ended September 28, 2024 were primarily due to an increase in shipments of our inspection and metrology product lines to DRAM and NAND customers, which was partially offset by a decrease in shipments of our lithography product lines to OSAT customers.

The increases for the nine months ended September 28, 2024 were primarily due to an increase

in shipments of our inspection product lines to DRAM and foundry customers, which was partially offset by a decrease in shipments of our metrology and lithography product lines.

The decrease in total parts and services revenue for the three and nine months ended September 28, 2024, as compared to the three and nine months ended September 30, 2023, was primarily due to lower demand by several of our customers, resulting in a decline 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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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.

The following table lists, for the periods indicated, our gross profit in dollars (thousands) and as percentages of our total revenue:

Three Months Ended

Six Months Ended

Nine Months Ended

September 28,

September 30,

September 28,

September 30,

Gross profit as a percentage of revenue

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.

The increase in gross profit as a percentage of revenue for the three and nine months ended September 28, 2024 as compared to the three and nine months ended September 30, 2023 was primarily due to increased volume and change in 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 $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.

Our research and development expenses were $28.3 million and $81.9 million for the three and nine month periods ended September 28, 2024, respectively, as compared to $26.1 million and $80.4 million for the three and nine month periods ended September 30, 2023, respectively.

The increase in research and development expenses of $2.2 million for the three month period ended September 28, 2024, as compared to the three month period ended September 30, 2023 was primarily due to increases in compensation costs of $1.7 million, product development costs of $0.2 million, travel costs of $0.2 million and depreciation and amortization costs of $0.1 million.

The increase in research and development expenses of $1.5 million for the nine month period ended September 28, 2024, as compared to the nine month period ended September 30, 2023, was primarily due to increases in compensation costs of $0.7 million, travel costs of $0.5 million and outside service 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 $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.

Our sales and marketing expenses were $19.5 million and $56.7 million for the three and nine month periods ended September 28, 2024, respectively, compared to $14.8 million and $46.4 million for the three and nine month periods ended September 30, 2023, respectively.

The increase in sales and marketing expenses of $4.7 million for the three month period ended September 28, 2024, as compared to the three month period ended September 30, 2023, was primarily due to increases in compensations costs of $4.3 million, travel costs of $0.3 million and freight and duty costs of $0.1 million.

The increase in sales and marketing expenses of $10.3 million for the nine month period ended September 28, 2024, as compared to the nine month period ended September 30, 2023, was primarily due to increases in compensations costs of $9.4 million, travel costs of $0.4 million, sales and marketing costs of $0.3 million, outside services costs of $0.1 million and freight and duty 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 $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.

Our general and administrative expenses were $22.5 million and $60.3 million for the three and nine month periods ended September 28, 2024, respectively, as compared to $18.1 million and $56.1 million for the three and nine month periods ended September 30, 2023, respectively.

The increase in general and administrative expenses of $4.4 million for the three month period ended September 28, 2024, as compared to the three month period ended September 30, 2023, was primarily due to increases in compensation costs of $3.7 million, other office expense costs of $0.6 million, and travel costs of $0.1 million.

The increase in general and administrative expenses of $4.2 million for the nine month period ended September 28, 2024, as compared to the nine month period ended September 30, 2023, was primarily due to increases in compensation costs of $2.6 million, depreciation and amortization of $1.3 million, travel costs of $0.6 million and other office expense costs of $0.4 million, partially offset by an decrease in outside services costs of $0.7 million.

• Amortization of Identifiable Intangible Assets .

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.

Amortization of identifiable intangible assets was $13.1 million and $39.3 million for the three and nine month periods ended September 28, 2024, respectively, compared to $13.8 million and $41.5 million for the three and nine month periods ended September 30, 2023, respectively.

The decreases in amortization of identifiable intangible assets of $0.7 million and $2.2 million for the three and nine month periods ended September 28, 2024, as compared to the three and nine month periods ended September 30, 2023, respectively, were primarily due to certain assets becoming fully amortized.

Interest income, net .

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.

Net interest income was $8.7 million and $24.5 million for the three and nine month periods ended September 28, 2024, respectively, as compared to $5.7 million and $13.9 million for the three and nine month periods ended September 30, 2023, respectively.

The increases in net interest income for both the three and nine month periods ended September 28, 2024, as compared to the three and nine month periods ended September 30, 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.

Other expense, net was $0.7 million for the three month period ended September 28, 2024, as compared to $1.0 million for the same period in the prior year.

Other income, net was $10 thousand for the nine month period ended September 28, 2024, as compared to other expense, net of $3.0 million for the same period in the prior year.

Decreases in foreign exchange losses, net during all of the comparative periods presented were the primary drivers in the period over period changes.

Income Taxes .

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.

We recorded an income tax provision of $8.0 million and $16.3 million for the three and nine month periods ended September 28, 2024, respectively, as compared to $2.8 million and $7.9 million for the three and nine month periods ended September 30, 2023, respectively.

Our effective tax rates of 13% and 10% for the three and nine month periods ended September 28, 2024 respectively, differ 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 nine month periods ended September 30, 2023, respectively, 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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The Organization for Economic Co-operation and Development (“OECD”) has been working on a Base Erosion and Profits Shifting project that, upon implementation, would change various aspects of the existing framework under which our tax obligations are determined in many of the countries in which we operate.

In this regard, the OECD has proposed policies aiming to modernize global tax systems, including a country-by-country 15% minimum effective tax rate (“Pillar Two”) for multinational companies.

In this regard, the OECD has proposed policies aiming

to modernize global tax systems, including a country-by-country 15% minimum effective tax rate (“Pillar Two”) for multinational companies.

Numerous countries have enacted, or are in the process of enacting, legislation to implement the Pillar Two model rules with a subset of the rules becoming effective during the current year, and the remaining rules becoming effective in later periods.

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Liquidity and Capital Resources

Our cash, cash equivalents and marketable securities consist of the following:

Our cash, cash equivalents and marketable securities consist of the following in dollars (thousands) for the periods indicated:

September 28,

Cash and cash equivalents

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Sources and Uses of Cash

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

Six Months Ended

A summary of cash provided by (used in) operating, investing, and financing activities is as follows in dollars (thousands) for the periods indicated:

Nine Months Ended

September 28,

September 30,

Cash provided by operating activities

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Operating Activities

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.

Net cash and cash equivalents provided by operating activities for the nine months ended September 28, 2024 were $189.7 million.

The net cash and cash equivalents provided by operating activities during the nine months ended September 28, 2024 resulted primarily from net income, adjusted to exclude the effect of non-cash operating charges, of $214.7 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 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.

Cash provided by operating activities for the first nine 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 $1,313.2 million at September 28, 2024 and $1,135.5 million at December 30, 2023.

Investing Activities

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.

Net cash and cash equivalents used in investing activities for the nine months ended September 28, 2024 were $222.5 million.

During the nine months ended September 28, 2024, net cash and cash equivalents used in investing activities included purchases of marketable securities of $538.1 million and capital expenditures of $27.3 million, partially offset by proceeds from maturities and sales of marketable securities of $343.0 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 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.

Net cash and cash equivalents used in financing activities for the nine months ended September 28, 2024 were $10 million.

During the nine months ended September 28, 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 $18.4 million, partially offset by proceeds from sales of shares through share-based compensation plans of $9.2 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.

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.

During the three and nine months ended September 28, 2024, we repurchased no shares of common stock under this repurchase authorization.

As of September 28, 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 variable-rate 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, 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%.

As of September 28, 2024, the available line of credit was $100 million with an available interest rate of 6.6%.

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