ONTO INNOVATION INC. 10-Q

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”) are considered “forward-looking statements” or are 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, including tariffs and trade disputes, or conflicts on our global operations; • the effects of natural disasters or public health emergencies 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. 19 Table of Contents 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 28, 2024 (the “2024 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 25, 2025 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 2024 Form 10-K. For more information, please see our critical accounting estimates as previously disclosed in the 2024 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 integrated circuit 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 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: 20 Table of Contents Three Months Ended March 29, 2025 December 28, 2024 (in thousands, except for percentages and per share data) Revenue $ 266,607 $ 263,939 Gross profit $ 143,233 $ 132,408 Gross profit as a percent of revenue 54 % 50 % Total operating expenses $ 80,099 $ 89,948 Net income $ 64,095 $ 48,817 Diluted earnings per share $ 1.30 $ 0.98 • In the fiscal quarter ended March 29, 2025 (the “March 2025 quarter”), revenue increased 1% compared to the fiscal quarter ended December 28, 2024 (the “December 2024 quarter”), primarily due to higher sales of our metrology systems to DRAM and NAND customers, partially offset by lower sales of our inspection systems. • Gross profit as a percentage of revenue for the March 2025 quarter increased by 4% compared to the December 2024 quarter primarily due to increased volume and favorable change in product mix in the 2025 period and inventory write-downs causing comparatively lower margins during the 2024 period. • Operating expenses for the March 2025 quarter decreased by 10.9% compared to the December 2024 quarter primarily due to the write off of in process research and development in the December 2024 quarter. Our cash, cash equivalents and marketable securities balance decreased to $850.6 million at March 29, 2025, compared to $852.3 million at December 28, 2024. This decrease was primarily the result of cash used for purchases of our common stock of $75.0 million, $8.7 million for tax payments related to net share settlement of employee stock-based compensation plans, capital expenditures of $8.2 million and purchases of non-marketable equity securities of $8.0 million, partially offset by $92.0 million of cash generated from operating activities and $4.2 million of cash from issuance of shares through share-based compensation plans. Employee headcount at March 29, 2025 was approximately 1,555. In recent years, 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 export rules. However, the export controls have contributed to lower net sales in China for the first fiscal quarter of 2025 compared to the same period in the prior year. The recent imposition of tariffs by the U.S. government, and countermeasures taken by foreign countries, are likely to have an adverse impact on our business in the near-term. The full extent of the impact is currently uncertain and will depend both on future developments in global trade policy and the extent to which our efforts to mitigate tariffs impacts are successful. We are continuously assessing the impact of tariffs and related governmental actions on our business. 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 29, 2025 and March 30, 2024 Revenue. Our revenue is primarily derived from the sale of our systems, software licensing, services and spare parts. Our revenue of $266.6 million increased 16.5% for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024, for which revenue totaled $228.8 million. The following table lists, for the periods indicated, the different sources of our revenue in dollars and as percentages of our total revenue: Three Months Ended March 29, March 30, 2025 2024 (in thousands, except for percentages) Systems and software $ 231,150 87 % $ 194,836 85 % Parts 18,176 7 % 20,108 9 % Services 17,281 6 % 13,902 6 % Total revenue $ 266,607 100 % $ 228,846 100 % 21 Table of Contents Total systems and software revenue increased $36.3 million for the three months ended March 29, 2025, as compared to the three months ended March 30, 2024. The increase for the three months ended March 29, 2025 was primarily attributed to increased shipments of our metrology product lines to DRAM and NAND customers, partially offset by decline in shipments of our inspection and lithography products to specialty device and advanced packaging customers. The increase in total parts and services revenue for the three months ended March 29, 2025, as compared to the three months ended March 30, 2024, was primarily due to higher service contract and system upgrade revenue, partially offset by lower parts sales. 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. The following table lists, for the periods indicated, our gross profit in dollars and as percentages of our total revenue: Three Months Ended March 29, March 30, 2025 2024 (in thousands, except for percentages) Gross profit $ 143,233 $ 118,285 Gross profit as a percentage of revenue 53.7 % 52.0 % The increase in gross profit as a percentage of revenue for the three months ended March 29, 2025 as compared to the three months ended March 30, 2024 was primarily due to increased volume and change in product mix. 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 $28.0 million for the three month period ended March 29, 2025, as compared to $26.6 million for the three month period ended March 30, 2024. The increase in research and development expenses of $1.4 million for the three month period ended March 29, 2025, as compared to the three month period ended March 30, 2024 was primarily due to increases in compensation costs of $0.4 million, outside service costs of $0.5 million and depreciation and amortization costs of $0.5 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 $19.7 million for the three month period ended March 29, 2025, compared to $18.3 million for the three month period ended March 30, 2024. The increase in sales and marketing expenses of $1.4 million for the three month period ended March 29, 2025, as compared to the three month period ended March 30, 2024, was primarily due to increases in compensation costs of $1.1 million and travel costs of $0.3 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 $23.9 million for the three month period ended March 29, 2025, as compared to $17.6 million for the three month period ended March 30, 2024. The increase in general and administrative expenses of $6.3 million for the three month period ended March 29, 2025, as compared to the three month period ended March 30, 2024, was primarily due to increases in compensation costs of $4.9 million, outside service costs of $2.7 million, 22 Table of Contents and depreciation and amortization costs of $0.4 million, partially offset by a decrease in other general expenses of $1.7 million. • Amortization of Identifiable Intangible Assets . Amortization of identifiable intangible assets was $8.4 million for the three month period ended March 29, 2025, compared to $13.1 million for the three month period ended March 30, 2024. The decreases in amortization of identifiable intangible assets of $4.7 million for the three month period ended March 29, 2025, as compared to the three month period ended March 30, 2024, was primarily due to certain assets becoming fully amortized. Interest income, net . Net interest income was $9.3 million for the three month period ended March 29, 2025, as compared to $7.4 million for the three month period ended March 30, 2024. The increase in net interest income for the three month period ended March 29, 2025, as compared to the three month period ended March 30, 2024, was due to higher cash and marketable securities balances partially offset by lower interest rates during the 2025 period. Other (expense) income, net . Other expense, net was $0.7 million for the three month period ended March 29, 2025, as compared to other income, net of $0.8 million for the three month period ended March 30, 2024. Foreign exchange losses during the 2025 period versus foreign exchange gains in the 2024 period were the primary drivers contributing to the period over period changes. Income Taxes . We recorded an income tax provision of $7.6 million for the three month period ended March 29, 2025, as compared to $4.0 million for the three month period ended March 30, 2024. Our effective tax rate of 10.6% for the three month period ended March 29, 2025 differed 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 7.9% for the three month period ended March 30, 2024 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. 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. 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. At this point in time, we do not expect any material tax impact associated with Pillar Two rules in the countries where we operate. As these rules continue to evolve with new legislation and guidance, we will continue to monitor and account for the enactment of Pillar Two and the potential impacts such rules may have on our effective tax rate and cash flows in future years. Liquidity and Capital Resources 23 Table of Contents Our cash, cash equivalents and marketable securities consist of the following in dollars for the periods indicated: March 29, 2025 December 28, 2024 (in thousands) Cash and cash equivalents $ 203,727 $ 212,945 Marketable securities 646,884 639,383 Total cash, cash equivalents and marketable securities $ 850,611 $ 852,328 Sources and Uses of Cash A summary of cash provided by (used in) operating, investing, and financing activities is as follows in dollars for the periods indicated: Three Months Ended March 29, March 30, 2025 2024 (in thousands) Cash provided by operating activities $ 91,980 $ 57,131 Cash used in investing activities $ (21,804 ) $ (91,816 ) Cash used in financing activities $ (79,520 ) $ (5,073 ) Operating Activities Net cash and cash equivalents provided by operating activities for the three months ended March 29, 2025 were $92.0 million. The net cash and cash equivalents provided by operating activities during the three months ended March 29, 2025 resulted primarily from net income, adjusted to exclude the effect of non-cash operating charges, of $81.1 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 three months of fiscal 2025 increased compared to the corresponding period in fiscal 2024 primarily due to improved inventory management, higher cash collections and higher investment income. Our working capital was $1,294.8 million at March 29, 2025 and $1.307.4 million at December 28, 2024. Investing Activities Net cash and cash equivalents used in investing activities for the three months ended March 29, 2025 were $21.8 million. During the three months ended March 29, 2025, net cash and cash equivalents used in investing activities included purchases of marketable securities of $208.5 million, capital expenditures of $8.2 million and purchases of non-marketable equity securities of $8.0 million, partially offset by proceeds from maturities and sales of marketable securities of $203.0 million. From time to time, we evaluate whether to acquire new or complementary businesses, products or technologies. We may fund all of or a portion of the price of these investments or acquisitions in cash, stock, or a combination of cash and stock. Financing Activities Net cash and cash equivalents used in financing activities for the three months ended March 29, 2025 were $79.5 million. During the three months ended March 29, 2025, financing activities used cash primarily for purchases of common stock of $75.0 million and tax payments related to shares withheld to satisfy employee tax obligations in connection with the vesting of awards under share-based compensation plans of $8.7 million, partially offset by proceeds from sales of shares through share-based compensation plans of $4.2 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 months ended March 29, 2025, we repurchased 492 thousand shares of common stock under this repurchase authorization. As of March 29, 2025, there was $99.9 million available for future share repurchases under this share repurchase authorization. 24 Table of Contents 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 $100.0 million. As of March 29, 2025, the available line of credit was $100.0 million with an available interest rate of 5.0%. 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 2024 Form 10-K.