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; • the integration of Semilab USA LLC (“Semilab USA”); • 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 anticipated effects of tariffs and trade disputes on our business and financial results; • 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. 17 Table of Contents 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. Actual results may differ materially and adversely from those included in such forward-looking statements as a result of various factors, including risks and uncertainties, many of which are beyond Onto Innovation’s control. Such factors include, but are not limited to, the Company’s ability to leverage its resources to improve its position in its core markets; its ability to weather difficult economic environments; its ability to open new market opportunities and target high-margin markets; the strength/weakness of the back-end and/or front-end semiconductor market segments; fluctuations in customer capital spending; the Company’s ability to effectively manage its supply chain and adequately source components from suppliers to meet customer demand; the effects of political, economic, legal, and regulatory changes or uncertainties, changes in U.S. tariff and trade policy and related retaliatory actions, and geopolitical conflicts, including the ongoing conflict involving Israel, the U.S., Iran and other actors, on the Company’s global operations; the Company’s ability to adequately protect its intellectual property rights and maintain data security; the effects of natural disasters or public health emergencies on the global economy and on the Company’s customers, suppliers, employees, and business; its ability to effectively maneuver global trade issues and changes in trade and export regulations, tariffs and license policies; the Company’s ability to maintain relationships with its customers and manage appropriate levels of inventory to meet customer demands; the Company’s ability to realize the anticipated benefits of the proposed investment in and strategic partnership with Rigaku; the Company’s ability to complete the proposed transaction on the timing expected or at all; the ability to obtain required regulatory approvals for the proposed transaction on the timing expected or at all; the availability of debt financing for the transaction; the Company’s timing and ability to repay its debt; and the Company’s ability to successfully integrate acquired businesses and technologies, including the business of Semilab USA and to realize the anticipated benefits of such acquisitions. Additional information and considerations regarding the risks faced by Onto Innovation are available in our Annual Report on Form 10-K for the fiscal year ended January 3, 2026 (the “2025 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 24, 2026, in Part II, Item 1A. “Risk Factors” and elsewhere in this Form 10-Q, and in the other filings that we make with the SEC from time to time. 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 the 2025 Form 10-K 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 2025 Form 10-K. For more information, please see our critical accounting estimates as previously disclosed in the 2025 Form 10-K and recent accounting pronouncements discussed in Note 1 to the Condensed Consolidated Financial Statements. Executive Summary We are a worldwide leader in the design, development, manufacture and support of process control tools that perform macro-defect inspection and metrology, lithography systems, and process control analytical software used by semiconductor and advanced packaging device manufacturers. We deliver comprehensive solutions throughout the semiconductor fabrication process with our families of proprietary products that provide critical yield-enhancing information, enabling microelectronic device manufacturers to drive down costs and time to market of their devices. We provide process and yield management solutions 18 Table of Contents used in both wafer processing facilities, often referred to as “front-end” manufacturing, and in device packaging and test facilities, commonly referred to as “back-end” manufacturing. Our advanced process control software portfolio includes powerful solutions for standalone tools, groups of tools, or factory-wide suites to enhance productivity and achieve significant cost savings. Our principal market is semiconductor capital equipment. Semiconductors packaged as ICs, or “chips,” are used in consumer electronics, server and enterprise systems, mobile computing (including smart phones and tablets), data storage devices, and embedded automotive and control systems. Our core focus is the measurement and control of the structure, composition, and geometry of semiconductor devices as they are fabricated on silicon wafers to improve device performance and manufacturing yields. Our products and services are used by our customers who manufacture many types of ICs for a multitude of applications, each having unique manufacturing challenges. This includes ICs to enable information processing and management (logic ICs), memory storage (NAND, 3D-NAND, NOR, and DRAM), analog devices (e.g., Wi-Fi and 5G radio ICs, power devices), MEMS sensor devices (accelerometers, pressure sensors, microphones), image sensors, and other end markets including components for AI, hard disk drives, LEDs, and power management. The semiconductor and electronics industries have also been characterized by constant technological innovation. 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: Three Months Ended March 31, 2026 January 3, 2026 (in thousands, except for percentages and per share data) Revenue $ 291,949 $ 266,866 Gross profit $ 146,389 $ 123,792 Gross profit as a percentage of revenue 50.1 % 46.4 % Total operating expenses $ 112,875 $ 109,934 Net income $ 33,750 $ 10,529 Diluted earnings per share $ 0.67 $ 0.21 • In the fiscal quarter ended March 31, 2026 (the “March 2026 quarter”), revenue increased 9.4% compared to the fiscal quarter ended January 3, 2026 (the “January 2026 quarter”), primarily due to revenue attributed to the acquired Semilab USA business of $16.8 million and higher sales to logic and memory customers in advanced nodes. • Gross profit as a percentage of revenue for the March 2026 quarter increased by 3.7% compared to the January 2026 quarter. This margin increase was primarily driven by reductions in inventory write downs, restructuring costs related to infrastructure transition, and reductions in costs related to contract manufacturing set-up. In addition, during the March 2026 quarter $2.2 million of additional inventory step-up amortization was recognized compared to the January 2026 quarter. • Operating expenses for the March 2026 quarter increased by 2.7% compared to the January 2026 quarter. This increase was driven by an increase in intangible amortization expense, offset by reductions in transaction costs related to the acquisition of Semilab USA. Our cash, cash equivalents and marketable securities balance increased to $654.2 million at March 31, 2026, compared to $639.6 million at January 3, 2026. This increase was primarily the result of $26.3 million of cash generated from operating activities partially offset by capital expenditures of $3.6 million and $6.7 million for tax payments related to net share settlement of employee stock-based compensation plans. Employee headcount at March 31, 2026 was approximately 1,790. On April 20, 2026, we entered into a definitive share purchase agreement (the “Transaction”) with Atom Investment, L.P., an affiliate of The Carlyle Group, to acquire 27% of the outstanding common stock of Rigaku Holdings Corporation (“Rigaku”) for approximately $710 million. The Transaction is expected to close in the second half of 2026. Also on April 20, 2026, we entered into a commitment letter with Goldman Sachs Bank USA, which provides for a senior secured 364-day $500 million bridge term loan credit facility. The bridge term loan is intended to be available to the Company to finance, together with other sources of funds, the Transaction and related fees and expenses on or prior to the closing of the Transaction. 19 Table of Contents For a discussion of the risks related to our business and operations, see Part I, Item 1A - Risk Factors of the 2025 Form 10-K and Part II, Item 1A - Risk Factors of this Form 10-Q. Results of Operations for the Three-Months ended March 31, 2026 and March 29, 2025 Revenue. Our revenue is primarily derived from the sale of our systems, software licensing, services and spare parts. Our revenue of $291.9 million increased 9.5% for the three months ended March 31, 2026 as compared to the three months ended March 29, 2025, for which revenue totaled $266.6 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 31, March 29, 2026 2025 (in thousands, except for percentages) Systems and software $ 247,157 84.7 % $ 231,150 86.7 % Parts 26,550 9.1 % 18,176 6.8 % Services 18,242 6.2 % 17,281 6.5 % Total revenue $ 291,949 100.0 % $ 266,607 100.0 % Total systems and software revenue increased $16.0 million for the three months ended March 31, 2026, as compared to the three months ended March 29, 2025. The increase was attributable to Semilab USA revenues of $24.0 million, as well as higher sales to advanced packaging customers, partially offset by a decline in sales to advanced node customers. The increase in total parts and services revenue for the three months ended March 31, 2026, as compared to the three months ended March 29, 2025, was primarily due to increased spending by our customers on system upgrades and repairs of existing systems. 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 31, March 29, 2026 2025 (in thousands, except for percentages) Gross profit $ 146,389 $ 143,233 Gross profit as a percentage of revenue 50.1 % 53.7 % The decrease in gross profit as a percentage of revenue for the three months ended March 31, 2026 as compared to the three months ended March 29, 2025 was primarily due to higher restructuring and other expenses for the write down of excess and obsolete inventory in the 2026 period. In addition, $6.1 million of inventory step-up amortization attributed to Semilab USA was recognized during the three months ended March 31, 2026. 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. These expenditures also include consulting fees, the cost of related supplies and legal costs to defend our patents. Our research and development expenses were $35.1 million for the 20 Table of Contents three-month period ended March 31, 2026, as compared to $28.0 million for the three-month period ended March 29, 2025. The increase in research and development expenses for the three-month period ended March 31, 2026, as compared to the three-month period ended March 29, 2025 was primarily due to increases in headcount, as well as increased materials and supplies expensed. • 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 $21.5 million for the three-month period ended March 31, 2026, compared to $19.7 million for the three-month period ended March 29, 2025. The increase in sales and marketing expenses for the three-month period ended March 31, 2026, as compared to the three-month period ended March 29, 2025, was primarily driven by increases in headcount. • 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 $31.4 million for the three-month period ended March 31, 2026, as compared to $22.8 million for the three-month period ended March 29, 2025. The increase in general and administrative expenses for the three-month period ended March 31, 2026, as compared to the three-month period ended March 29, 2025, was primarily driven by higher headcount-related compensation costs, expenses associated with the Semilab USA integration, ERP integration costs, related outside services and fees and other general corporate expenses. • Amortization of Identifiable Intangible Assets . Amortization of identifiable intangible assets was $19.7 million for the three-month period ended March 31, 2026, compared to $8.4 million for the three-month period ended March 29, 2025. The increase in amortization of identifiable intangible assets for the three months ended March 31, 2026, as compared to the three months ended March 29, 2025, was due to recognition of a full quarter of Semilab USA amortization in the 2026 period. • Restructuring and Other . Restructuring and other expenses were $5.2 million for the three-month period ended March 31, 2026, compared to $1.1 million for the three-month period ended March 29, 2025. The increase in restructuring and other expenses for the three-month period ended March 31, 2026, as compared to the three-month period ended March 29, 2025, was primarily due to an increase in employee severance costs and business transformation projects that includes the streamlining of various operating activities. Total other income, net . Total other income, net was $4.5 million for the three-month period ended March 31, 2026, as compared to $8.5 million for the three-month period ended March 29, 2025. The decrease in total other income, net for the three months ended March 31, 2026, as compared to the three months ended March 29, 2025, was attributable to interest on lower cash and marketable securities balances in the 2026 period following the use of cash for the acquisition of Semilab USA in the fourth quarter of 2025, partially offset by lower foreign currency exchange losses recognized in the 2026 period. Income Taxes . We recorded an income tax provision of $4.3 million for the three-month period ended March 31, 2026, as compared to $7.6 million for the three-month period ended March 29, 2025. Our effective tax rate of 11.3% and 10.6% for the three-month period ended March 31, 2026 and the three-month period ended March 29, 2025, respectively, differed from the statutory rate of 21.0%, primarily due to the tax benefit associated with the Foreign Derived Intangible Income (“FDII”) deductions, federal research and development tax credits, and 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. 21 Table of Contents The Organization for Economic Co-operation and Development (“OECD”) has released guidance covering various topics, including country-by-country reporting, definitional changes to permanent establishment and Base Erosion and Profit Shifting (“BEPS”), an initiative that aims to standardize and modernize global tax policy. The guidance also established a global minimum tax of 15%. This guidance has been implemented by several jurisdictions, including jurisdictions in which we operate, and many other jurisdictions are in the process of implementing it. Depending on the final form of legislation ultimately enacted, there may be significant consequences for us due to our international business activities, including, but not limited to, an increase in our tax uncertainty and adverse effects on our provision for income taxes. On January 5, 2026, the OECD announced that the Inclusive Framework on Base Erosion and Profit Shifting agreed to a new package of administrative guidance under the Pillar Two global minimum tax rules. The new administrative guidance allows for U.S. multinationals to provide for a Side-by-Side Safe Harbor that would exclude U.S.-parented multinational groups from the global minimum tax rule’s Income Inclusion Rule and Undertaxed Profits Rule on the grounds that the existing U.S. law is sufficiently robust in its taxation of domestic and foreign profits. Although we will continue to monitor U.S. and international legislative developments in this area, we cannot predict whether such protective measures or legislation will be adopted by non-U.S. countries, if any, and whether the U.S. would have any responsive measures. On July 4, 2025, the United States enacted tax reform legislation through the One Big Beautiful Bill Act. Included in this legislation are provisions that allow for the immediate expensing of domestic U.S. research and development expenses, immediate expensing of certain capital expenditures, and other changes to the U.S. taxation of profits derived from foreign operations. The impact of the Act has been accounted for in the provision for taxes for the quarter ended March 31, 2026. Liquidity and Capital Resources Our cash, cash equivalents and marketable securities consist of the following in dollars for the periods indicated: March 31, 2026 January 3, 2026 (in thousands) Cash and cash equivalents $ 252,247 $ 346,119 Marketable securities 401,917 293,503 Total cash, cash equivalents and marketable securities $ 654,164 $ 639,622 Sources and Uses of Cash A summary of net cash and cash equivalents provided by (used in) operating, investing, and financing activities is as follows in dollars for the periods indicated: Three Months Ended March 31, March 29, 2026 2025 (in thousands) Net cash and cash equivalents provided by operating activities $ 26,322 $ 91,980 Net cash and cash equivalents used in investing activities $ (112,606 ) $ (21,804 ) Net cash and cash equivalents used in financing activities $ (6,701 ) $ (79,520 ) Operating Activities Net cash and cash equivalents provided by operating activities for the three months ended March 31, 2026 was $26.3 million. The net cash and cash equivalents provided by operating activities during the three months ended March 31, 2026 resulted primarily from net income, adjusted to exclude the effect of non-cash operating charges, of $67.9 million. Significant non-cash operating charges included depreciation, amortization, share-based compensation and provision for inventory valuation. Cash provided by operating activities for the first three months of 2026 decreased compared to the corresponding period in fiscal 2025, primarily due to timing of accounts receivable payments and higher inventory levels due to revenue growth. Investing Activities Net cash and cash equivalents used in investing activities for the three months ended March 31, 2026 was $112.6 million. During the three months ended March 31, 2026, net cash and cash equivalents used in investing activities included purchases of 22 Table of Contents marketable securities of $179.5 million and capital expenditures of $3.6 million, partially offset by proceeds from maturities and sales of marketable securities of $70.5 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 31, 2026 was $6.7 million. During the three months ended March 31, 2026, financing activities used cash for tax payments related to shares withheld to satisfy employee tax obligations in connection with the vesting of awards under share-based compensation plans. In February 2024, our 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 31, 2026, the Company repurchased no shares of common stock under this repurchase authorization. As of March 31, 2026, there was $99.9 million available for future share repurchases under this share repurchase authorization. The Company had a credit agreement with a bank that provides for a variable-rate line of credit which was secured by the marketable securities the Company has with the bank. At January 3, 2026 the Company was permitted to borrow up to 70.0% of the value of eligible securities held at the time the line of credit would be accessed, up to a maximum of $100.0 million. The available line of credit as of January 3, 2026 was $100.0 million with an available interest rate of 4.3%. The Company terminated this line of credit during the three months ended March 31, 2026, and did not utilize the line of credit while it was active. 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 and marketable securities 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 2025 Form 10-K.