ONTO INNOVATION INC. 10-Q

Item 1. Financial Statements ONTO INNOVATION INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Three Months Ended Six Months Ended June 26, June 27, June 26, June 27, 2021 2020 2021 2020 Revenue $ 193,387 $ 134,948 $ 362,666 $ 274,876 Cost of revenue 87,931 63,363 166,741 140,660 Gross profit 105,456 71,585 195,925 134,216 Operating expenses: Research and development 25,507 22,167 47,471 43,094 Sales and marketing 15,429 11,869 28,533 24,940 General and administrative 16,255 15,916 31,814 36,063 Amortization 12,324 13,703 24,681 27,435 Total operating expenses 69,515 63,655 132,499 131,532 Operating income 35,941 7,930 63,426 2,684 Interest income, net 304 686 665 1,896 Other expense, net ( 289 ) ( 1,198 ) ( 1,533 ) ( 1,166 ) Income before provision for income taxes 35,956 7,418 62,558 3,414 Provision (benefit) for income taxes 905 ( 6 ) 3,394 394 Net income $ 35,051 $ 7,424 $ 59,164 $ 3,020 Earnings per share: Basic $ 0.71 $ 0.15 $ 1.20 $ 0.06 Diluted $ 0.71 $ 0.15 $ 1.19 $ 0.06 Weighted average shares outstanding: Basic 49,193 48,736 49,105 49,417 Diluted 49,701 49,014 49,645 49,782 The accompanying notes are an integral part of these financial statements. 1 Table of Contents ONTO INNOVATION INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited) Three Months Ended Six Months Ended June 26, June 27, June 26, June 27, 2021 2020 2021 2020 Net income $ 35,051 $ 7,424 $ 59,164 $ 3,020 Other comprehensive (loss) gain, net of tax: Change in net unrealized (losses) gains on available-for-sale marketable securities ( 567 ) 795 ( 698 ) 269 Change in currency translation adjustments 537 2,495 ( 1,362 ) 264 Total other comprehensive (loss) gain, net of tax ( 30 ) 3,290 ( 2,060 ) 533 Total comprehensive income $ 35,021 $ 10,714 $ 57,104 $ 3,553 The accompanying notes are an integral part of these financial statements. 2 Table of Contents ONTO INNOVATION INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) June 26, 2021 December 26, 2020 ASSETS Current Assets: Cash and cash equivalents $ 134,218 $ 136,720 Marketable securities 276,621 237,002 Accounts receivable, less allowance of $ 720 and $ 784 174,662 149,251 Inventories, net 206,981 191,217 Prepaid expenses and other current assets 19,147 17,471 Total current assets 811,629 731,661 Property, plant and equipment, net 88,015 87,950 Goodwill 313,891 306,632 Identifiable intangible assets, net 305,886 318,357 Deferred income taxes 2,263 2,235 Other assets 24,809 21,337 Total assets $ 1,546,493 $ 1,468,172 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 46,685 $ 40,183 Accrued liabilities 40,957 37,075 Deferred revenue 21,190 14,334 Other current liabilities 24,336 28,499 Total current liabilities 133,168 120,091 Deferred and other tax liabilities 55,867 55,623 Other non-current liabilities 27,895 27,712 Total liabilities 216,930 203,426 Commitments and contingencies Stockholders’ equity: Common stock 49 49 Additional paid-in capital 1,241,680 1,233,967 Accumulated other comprehensive income 2,508 4,568 Retained earnings 85,326 26,162 Total stockholders’ equity 1,329,563 1,264,746 Total liabilities and stockholders’ equity $ 1,546,493 $ 1,468,172 The accompanying notes are an integral part of these financial statements. 3 Table of Contents ONTO INNOVATION INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Six Months Ended June 26, June 27, 2021 2020 Cash flows from operating activities: Net income $ 59,164 $ 3,020 Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: Amortization of intangibles 24,681 27,435 Depreciation 7,484 6,240 Share-based compensation 10,997 8,730 Acquired inventory step-up amortization 252 10,173 Provision for inventory valuation 3,706 3,108 Other, net 1,892 1,102 Changes in operating assets and liabilities, net of effects of business acquired ( 31,748 ) ( 12,937 ) Net cash and cash equivalents provided by operating activities 76,428 46,871 Cash flows from investing activities: Purchases of marketable securities ( 142,072 ) ( 140,364 ) Proceeds from sales of marketable securities 102,027 147,473 Cash received from convertible note receivable — 2,848 Purchase of business, net of cash acquired ( 26,795 ) — Purchases of property, plant and equipment ( 9,558 ) ( 2,609 ) Net cash and cash equivalents (used in) provided by investing activities ( 76,398 ) 7,348 Cash flows from financing activities: Purchase of common stock — ( 52,000 ) Tax payments related to shares withheld for share-based compensation plans ( 6,499 ) ( 3,279 ) Payment of contingent consideration for acquired business — ( 435 ) Issuance of shares through share-based compensation plans 3,215 179 Net cash and cash equivalents used in financing activities ( 3,284 ) ( 55,535 ) Effect of exchange rate changes on cash and cash equivalents 752 31 Net decrease in cash and cash equivalents ( 2,502 ) ( 1,285 ) Cash and cash equivalents at beginning of period 136,720 130,673 Cash and cash equivalents at end of period $ 134,218 $ 129,388 Supplemental disclosure of cash flow information: Income taxes paid $ 4,980 $ 3,463 The accompanying notes are an integral part of these financial statements. 4 Table of Contents ONTO INNOVATION INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) (Unaudited) Common Stock Additional Paid-in Accumulated Other Comprehensive Retained Shares Amount Capital Income Earnings Total Balance at December 26, 2020 48,758 $ 49 $ 1,233,967 $ 4,568 $ 26,162 $ 1,264,746 Net income — — — — 24,113 24,113 Share-based compensation — — 4,890 — — 4,890 Issuance of shares through share-based compensation plans 240 — 3,085 — — 3,085 Share-based compensation plan withholdings ( 41 ) — ( 2,492 ) — — ( 2,492 ) Currency translation — — — ( 1,899 ) — ( 1,899 ) Unrealized loss on investments — — — ( 131 ) — ( 131 ) Balance at March 27, 2021 48,957 $ 49 $ 1,239,450 $ 2,538 $ 50,275 $ 1,292,312 Net income — — — — 35,051 35,051 Share-based compensation — — 6,107 — — 6,107 Issuance of shares through share-based compensation plans, net 288 — 130 — — 130 Share-based compensation plan withholdings ( 56 ) — ( 4,007 ) — — ( 4,007 ) Currency translation — — — 537 — 537 Unrealized loss on investments — — — ( 567 ) — ( 567 ) Balance at June 26, 2021 49,189 $ 49 $ 1,241,680 $ 2,508 $ 85,326 $ 1,329,563 Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Shares Amount Capital Loss Deficit Total Balance at December 31, 2019 50,184 $ 50 $ 1,269,437 $ ( 598 ) $ ( 4,863 ) $ 1,264,026 Repurchase of common stock ( 1,250 ) ( 1 ) ( 33,613 ) — — ( 33,614 ) Net loss — — — — ( 4,404 ) ( 4,404 ) Share-based compensation — — 3,955 — — 3,955 Issuance of shares through share-based compensation plans 240 — 164 — — 164 Share-based compensation plan withholdings ( 42 ) — ( 1,565 ) — — ( 1,565 ) Currency translation — — — ( 2,231 ) — ( 2,231 ) Unrealized loss on investments — — — ( 526 ) — ( 526 ) Balance at March 28, 2020 49,132 $ 49 $ 1,238,378 $ ( 3,355 ) $ ( 9,267 ) $ 1,225,805 Issuance of shares through share-based compensation plans, net 279 — 15 — — 15 Repurchase of common stock ( 632 ) — ( 18,385 ) — — ( 18,385 ) Net income — — — — 7,424 7,424 Share-based compensation — — 4,775 — — 4,775 Share-based compensation plan withholdings ( 55 ) — ( 1,715 ) — — ( 1,715 ) Currency translation — — — 2,495 — 2,495 Unrealized gain on investments — — — 795 — 795 Balance at June 27, 2020 48,724 $ 49 $ 1,223,068 $ ( 65 ) $ ( 1,843 ) $ 1,221,209 The accompanying notes are an integral part of these financial statements. 5 Table of Contents ONTO INNOVATION INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) (Unaudited) NOTE 1. Basis of Presentation The Company operates on a 52- or 53-week fiscal year ending on the Saturday closest to December 31 st . Our fiscal year ending January 1, 2022 (“fiscal year 2021”) is a 53-week fiscal year. The first quarter of the Company’s fiscal year 2021 ended on March 27, 2021, the second quarter ended on June 26, 2021 and the third quarter ends on September 25, 2021. Our fiscal year ended December 26, 2020 was a 52-week fiscal year. The accompanying interim unaudited Condensed Consolidated Financial Statements have been prepared by Onto Innovation Inc. (together with its consolidated subsidiaries, unless otherwise specified or suggested by the context, the “Company,” or “Onto Innovation,” “we,” “our” or “us”) and in the opinion of management reflect all adjustments, consisting of normal recurring accruals, necessary for their fair presentation in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual amounts could differ materially from reported amounts. The interim results for the three and six months ended June 26, 2021 are not necessarily indicative of results to be expected for the entire year or any future periods. This interim financial information should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 26, 2020 (the “2020 Form 10-K”) filed with the Securities and Exchange Commission (“SEC”) on February 19, 2021. The accompanying Condensed Consolidated Balance Sheet at December 26, 2020 has been derived from the audited consolidated financial statements included in the 2020 Form 10-K. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates made by management that are evaluated on an ongoing basis include the allowances for credit losses, excess and obsolete inventory, fair value of assets acquired and liabilities assumed in a business combination, recoverability and useful lives of property, plant and equipment and identifiable intangible assets, recoverability of goodwill, recoverability of deferred tax assets, liabilities for product warranty and contingencies, including litigation reserves, share-based payments and liabilities for tax uncertainties. Actual results could differ from those estimates. These estimates and assumptions are based on historical experience and on various other factors which the Company believes to be reasonable under the circumstances. The Company may engage third-party valuation specialists to assist with estimates related to the valuation of financial instruments, fair value of assets acquired and liabilities assumed in a business combination and stock awards. Such estimates often require the selection of appropriate valuation methodologies and significant judgment. Actual results could differ from these estimates under different assumptions or circumstances and such differences could be material. The Company also assessed the impacts of COVID-19 on the above accounting matters as of June 26, 2021 and through the date of this report. While there was not a material impact as of and for the quarter ended June 26, 2021 and through the date of this report, future actual magnitude and duration of the COVID-19 pandemic, as well as other associated factors, could result in material negative impacts to the Company’s condensed consolidated financial statements in future reporting periods. Recent Accounting Pronouncements Recently Adopted Effective December 27, 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This standard simplified the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplified aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarified the accounting for transactions that resulted in a step-up in the tax basis of goodwill and allocating consolidated income taxes to separate financial statements of entities not subject to income tax. The adoption of ASU No. 6 Table of Contents 2019-12 did not have a significant impact on the Company’s consolidated financial position, results of operations, and cash flows. NOTE 2. Business Combination Inspectrology, LLC On December 31, 2020 , the Company acquired Inspectrology, LLC (“Inspectrology”), a leading supplier of overlay metrology for controlling lithography and etch processes in the compound semiconductor market for $ 27,015 in cash and a potential earnout of $ 10,000 , subject to achievement of certain revenue targets earned for fiscal 2021 and 2022. As of June 26, 2021, the Company does not believe the earnout criteria will be met. Certain payments, including the earnout, are subject to the principals remaining with the Company for a period of one to three years . The following table summarizes the preliminary fair values of assets acquired and liabilities assumed at the date of acquisition: Cash and cash equivalents $ 220 Account receivables 4,071 Inventories 2,587 Prepaid expenses and other current assets 104 Property, plant and equipment 86 Identifiable intangible assets 12,210 Other assets 3,000 Total assets acquired 22,278 Accounts payable ( 1,048 ) Payroll and related expenses ( 512 ) Deferred revenue ( 386 ) Other current liabilities ( 576 ) Net assets acquired 19,756 Goodwill 7,259 Total purchase consideration $ 27,015 NOTE 3. Fair Value Measurements Fair Value of Financial Instruments The Company has evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates fair value because of the short-term maturity of these instruments. Fair Value Hierarchy The Company applies a three-level valuation hierarchy for fair value measurements. This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability. Level 3 inputs are unobservable inputs based on management’s assumptions used to measure assets and liabilities at fair value. A financial asset’s or liability’s fair value measurement classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. 7 Table of Contents The following tables provide the assets and liabilities carried at fair value measured on a recurring basis at June 26, 2021 and December 26, 2020: Fair Value Measurements Using Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) June 26, 2021 Assets: Available-for-sale debt securities: Municipal notes and bonds $ 142,931 $ — $ 142,931 $ — Asset-backed securities 4,094 — 4,094 — Certificates of deposit 44,021 — 44,021 — Commercial paper 50,979 — 50,979 — Corporate bonds 34,596 — 34,596 — Foreign currency forward contracts 27 — 27 — Total assets $ 276,648 $ — $ 276,648 $ — December 26, 2020 Assets: Available-for-sale debt securities: Municipal notes and bonds $ 124,640 $ — $ 124,640 $ — Asset-backed securities 11,708 — 11,708 — Certificates of deposit 36,373 — 36,373 — Commercial paper 32,699 — 32,699 — Corporate bonds 31,582 — 31,582 — Total assets $ 237,002 $ — $ 237,002 $ — Liabilities: Foreign currency forward contracts 36 — 36 — Total liabilities $ 36 $ — $ 36 $ — Available-for-sale debt securities classified as Level 2 are valued using observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. The foreign currency forward contracts are primarily measured based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers. Investment prices are obtained from third party pricing providers, which model prices utilizing the above observable inputs, for each asset class. See Note 4 for additional discussion regarding the fair value of the Company’s marketable securities. 8 Table of Contents NOTE 4. Marketable Securities At June 26, 2021 and December 26, 2020, marketable securities are categorized as follows: Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value June 26, 2021 Municipal notes and bonds $ 142,821 $ 128 $ 19 $ 142,930 Asset-backed securities 4,090 4 — 4,094 Certificates of deposit 44,003 19 1 44,021 Commercial paper 50,961 19 — 50,980 Corporate bonds 34,651 6 61 34,596 Total marketable securities $ 276,526 $ 176 $ 81 $ 276,621 December 26, 2020 Municipal notes and bonds $ 124,387 $ 257 $ 4 $ 124,640 Asset-backed securities 11,679 29 — 11,708 Certificates of deposit 36,349 24 — 36,373 Commercial paper 32,690 12 3 32,699 Corporate bonds 31,544 50 12 31,582 Total marketable securities $ 236,649 $ 372 $ 19 $ 237,002 The amortized cost and estimated fair value of marketable securities classified by the maturity date listed on the security, regardless of the Condensed Consolidated Balance Sheets classification, is as follows at June 26, 2021 and December 26, 2020: June 26, 2021 December 26, 2020 Amortized Cost Fair Value Amortized Cost Fair Value Due within one year $ 195,632 $ 195,733 $ 170,099 $ 170,321 Due after one through five years 80,894 80,888 66,550 66,681 Due after five through ten years — — — — Due after ten years — — — — Total marketable securities $ 276,526 $ 276,621 $ 236,649 $ 237,002 The following table summarizes the estimated fair value and gross unrealized holding losses of marketable securities, aggregated by investment instrument and period of time in an unrealized loss position, at June 26, 2021 and December 26, 2020: In Unrealized Loss Position For Less Than 12 Months In Unrealized Loss Position For Greater Than 12 Months Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses June 26, 2021 Municipal notes and bonds $ 30,626 $ 19 $ — $ — Certificate of deposit 4,603 1 — — Corporate bonds 24,485 61 — — Total $ 59,714 $ 81 $ — $ — December 26, 2020 Municipal notes and bonds $ 8,641 $ 4 $ — $ — Commercial paper 8,862 3 — — Corporate bonds 14,947 12 — — Total $ 32,450 $ 19 $ — $ — See Note 3 for additional discussion regarding the fair value of the Company’s marketable securities. NOTE 5. Derivative Instruments and Hedging Activities The Company, when it considers it to be appropriate, enters into forward contracts to hedge the economic exposures arising from foreign currency denominated transactions. At June 26, 2021 and December 26, 2020, these contracts included the 9 Table of Contents future sale of British pound sterling, euro, Israeli shekel, Japanese yen, Korean won, Singapore dollar, Taiwanese dollar, and Chinese renminbi to purchase U.S. dollars. Foreign currency forward contracts are not designated as hedges for accounting purposes and therefore, the change in fair value is recorded in “Other expense, net,” in the Condensed Consolidated Statements of Operations. The Company records its forward contracts at fair value in either prepaid expenses and other current assets or other current liabilities in the Condensed Consolidated Balance Sheets. The dollar equivalent of the U.S. dollar forward contracts and related fair values as of June 26, 2021 and December 26, 2020 were as follows: June 26, 2021 December 26, 2020 Notional amount $ 11,397 $ 37,580 Fair value of asset (liability) $ 27 $ ( 36 ) NOTE 6. Goodwill and Purchased Intangible Assets Goodwill The changes in the carrying amount of goodwill are as follows: Balance at December 26, 2020 $ 306,632 Goodwill acquired during the period (Note 2) 7,259 Balance at June 26, 2021 $ 313,891 Intangible Assets Purchased intangible assets as of June 26, 2021 and December 26, 2020 are as follows: Gross Carrying Amount Accumulated Amortization Net June 26, 2021 Finite-lived intangibles: Developed technology $ 331,747 $ 132,270 $ 199,477 Customer and distributor relationships 74,701 23,267 51,434 Trademarks and trade names 14,361 5,986 8,375 Total finite-lived intangible assets 420,809 161,523 259,286 In-process research and development 46,600 — 46,600 Total identifiable intangible assets $ 467,409 $ 161,523 $ 305,886 December 26, 2020 Finite-lived intangibles: Developed technology $ 326,877 $ 110,851 $ 216,026 Customer and distributor relationships 69,261 20,654 48,607 Trademarks and trade names 12,461 5,337 7,124 Total finite-lived intangible assets 408,599 136,842 271,757 In-process research and development 46,600 — 46,600 Total identifiable intangible assets $ 455,199 $ 136,842 $ 318,357 10 Table of Contents Assuming no change in the gross carrying value of identifiable intangible assets and estimated lives, future estimated amortization expenses are: Expected Amortization Fiscal Year: Expense 2021 (remainder) $ 24,548 2022 48,830 2023 48,355 2024 42,669 2025 26,119 2026 24,926 Thereafter 43,839 Total $ 259,286 NOTE 7. Balance Sheet Details Inventories Inventories, net are comprised of the following: June 26, 2021 December 26, 2020 Materials $ 128,389 $ 124,926 Work-in-process 54,706 44,829 Finished goods 23,886 21,462 Total inventories, net $ 206,981 $ 191,217 Property, Plant and Equipment Property, plant and equipment, net is comprised of the following: June 26, 2021 December 26, 2020 Machinery and equipment $ 57,061 $ 52,833 Land and building 48,188 47,544 Computer equipment and software 15,651 15,549 Leasehold improvements 13,759 12,927 Furniture and fixtures 3,985 4,013 138,644 132,866 Accumulated depreciation and amortization ( 50,629 ) ( 44,916 ) Total property, plant and equipment, net $ 88,015 $ 87,950 Other assets Other assets is comprised of the following: June 26, 2021 December 26, 2020 Operating lease right-of-use assets $ 20,449 $ 19,669 Other 4,360 1,668 Total other assets $ 24,809 $ 21,337 Accrued liabilities Accrued liabilities is comprised of the following: June 26, 2021 December 26, 2020 Payroll and related expenses $ 32,026 $ 30,270 Warranty 7,611 6,062 Other 1,320 743 Total accrued liabilities $ 40,957 $ 37,075 11 Table of Contents Other current liabilities Other current liabilities is comprised of the following: June 26, 2021 December 26, 2020 Customer deposits $ 10,949 $ 15,177 Current operating lease obligations 5,121 4,470 Income tax payable 1,076 4,109 Accrued professional fees 1,259 1,184 Other 5,931 3,559 Total other current liabilities $ 24,336 $ 28,499 Other non-current liabilities Other non-current liabilities is comprised of the following: June 26, 2021 December 26, 2020 Non-current operating lease obligations $ 16,365 $ 16,455 Unrecognized tax benefits (including interest) 2,765 3,812 Deferred revenue 1,716 1,292 Other 7,049 6,153 Total other non-current liabilities $ 27,895 $ 27,712 NOTE 8. Commitments and Contingencies Factoring The Company maintains arrangements under which eligible accounts receivable in Japan are sold without recourse to unrelated third-party financial institutions. The Company sold $ 6,226 of receivables during the six months ended June 26, 2021. These receivables were not included in the condensed consolidated balance sheets as the criteria for sale treatment had been met. There were no material gains or losses on the sale of such receivables. There were no amounts due from such third-party financial institutions at June 26, 2021. Intellectual Property Indemnification Obligations The Company has entered into agreements with customers that include limited intellectual property indemnification obligations that are customary in the industry. These guarantees generally require the Company to compensate the other party for certain damages and costs incurred as a result of third-party intellectual property claims arising from these transactions. The nature of the intellectual property indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its customers. Historically, the Company has not made any indemnification payments under such agreements, and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees. Warranty Reserves The Company generally provides a warranty on its products for a period of 12 to 14 months against defects in material and workmanship. The Company estimates the costs that may be incurred during the warranty period and records a liability in the amount of such costs at the time revenue is recognized. The Company’s estimate is based primarily on historical experience. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Settlements of warranty reserves are generally associated with sales that occurred during the 12 to 14 months prior to the period-end and warranty accruals are related to sales during the same year. Changes in the Company’s warranty reserves are as follows: Six Months Ended June 26, June 27, 2021 2020 Balance, beginning of the period $ 6,485 $ 6,348 Accruals 3,560 2,794 Warranty liability assumed in acquisition 407 — Usage ( 2,229 ) ( 2,327 ) Balance, end of the period $ 8,223 $ 6,815 12 Table of Contents Warranty reserves are reported in the Condensed Consolidated Balance Sheets under the captions “Accrued liabilities” and “Other non-current liabilities.” Legal Matters From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business. The following reflects an overview of the material developments with regard to the Company’s pending material legal proceedings. Optical Solutions Inc. v. Nanometrics Incorporated (Case No. 18-cv-00417-BLF): On August 2, 2017, Nanometrics was named as defendant in a complaint filed in New Hampshire Superior Court (the “Complaint”). The Complaint, brought by Optical Solutions, Inc. (“OSI”), alleges claims arising from a purported exclusive purchase contract between OSI and Nanometrics pertaining to certain products. The relief sought is the award of damages in an amount to be proven at trial, attorney’s fees and cost as well as other relief the court deems just and proper. On September 18, 2017, Nanometrics removed the action to the United States District Court for the District of New Hampshire (the “District of New Hampshire”). On September 25, 2017, Nanometrics moved to transfer the Complaint to the United States District Court for the Northern District of California (the “Northern District of California”). On December 20, 2017, Nanometrics filed its complaint against OSI in the California Superior Court for the County of Santa Clara alleging claims arising from OSI’s breach of certain purchase orders. The relief sought is the award of damages in an amount to be proven at trial including pre- and post-judgment interest, punitive damages, restitution for benefits unjustly received by OSI, attorney’s fees and cost as well as other relief the court deems just and proper. Nanometrics’ complaint was later removed by OSI to the Northern District of California. On May 29, 2018, the District of New Hampshire issued an order granting Nanometrics’ motion to transfer the Complaint to the Northern District of California and denying Nanometrics’ motion to dismiss the Complaint without prejudice. On June 14, 2018, the Complaint was consolidated with Nanometrics’ complaint against OSI. On August 9, 2018, OSI filed an Amended Complaint. On September 19, 2018, Nanometrics filed a motion to dismiss OSI’s Amended Complaint for failure to state a claim. Nanometrics’ motion to dismiss was heard on February 28, 2019. On March 5, 2019, the Northern District of California granted Nanometrics’ motion to dismiss with leave to amend. OSI filed a Second Amended Complaint on March 29, 2019. Nanometrics filed a motion to dismiss OSI’s Second Amended Complaint on May 31, 2019. In October 2019, Nanometrics was renamed Onto Innovation Inc. as a result of the Merger. Thereafter, the Company’s second motion to dismiss was heard on November 14, 2019. On November 26, 2019, the Northern District of California granted the Company’s motion to dismiss with leave to amend. OSI filed a Third Amended Complaint on January 21, 2020. On March 2, 2020, the Company filed a motion to dismiss OSI’s Third Amended Complaint and a hearing on the motion was held on June 11, 2020. On June 23, 2020, the Northern District of California granted the Company’s motion to dismiss with prejudice with regard to two claims asserted by OSI and dismissed two other claims asserted by OSI with leave to amend. Thereafter, on July 7, 2020, OSI filed a Fourth Amended Complaint. On August 14, 2020, the Company filed a motion to dismiss with regard to one of the two remaining claims. On December 1, 2020, the Northern District of California denied this final motion to dismiss and as a result the Company filed its Answer in this matter on December 22, 2020. This matter is currently in discovery. The Northern District of California granted a joint stipulation that discovery cutoff is September 3, 2022 and the trial date is set for December 4, 2023. At this time, the loss contingency in this matter is remote and the Company does not anticipate the outcome of the matter to have a material impact on its financial position, results of operations, or cash flows. Line of Credit The Company has a credit agreement with a bank that provides for a line of credit which is secured by the marketable securities the Company has with the bank. The Company is permitted to borrow up to 70 % of the value of eligible securities held at the time the line of credit is accessed. The available line of credit as of June 26, 2021 was approximately $ 99.4 million with an available interest rate of 1.8 %. The credit agreement is available to the Company until such time that either party terminates the arrangement at their discretion. The Company has not utilized the line of credit to date. NOTE 9. Revenue The following table represents a disaggregation of revenue by timing of revenue: Three Months Ended Six Months Ended June 26, June 27, June 26, June 27, 2021 2020 2021 2020 Point-in-time $ 182,133 $ 131,796 $ 343,294 $ 265,541 Over-time 11,254 3,152 19,372 9,335 Total revenue $ 193,387 $ 134,948 $ 362,666 $ 274,876 13 Table of Contents See Note 15 for additional discussion of the Company’s disaggregated revenue in detail. Contract Liabilities The Company records contract liabilities when the customer has been billed in advance of the Company completing its performance obligations. These amounts are recorded as deferred revenue in the Condensed Consolidated Balance Sheets. Changes in deferred revenue were as follows: Three Months Ended Six Months Ended June 26, June 27, June 26, June 27, 2021 2020 2021 2020 Balance, beginning of the period $ 22,429 $ 18,032 $ 15,626 $ 15,093 Deferred revenue assumed in acquisition — — 386 — Deferral of revenue 15,117 8,818 34,348 23,252 Recognition of deferred revenue ( 14,640 ) ( 8,956 ) ( 27,454 ) ( 20,451 ) Balance, end of the period $ 22,906 $ 17,894 $ 22,906 $ 17,894 NOTE 10. Share-Based Compensation Restricted Stock Unit Activity A summary of the Company’s restricted stock unit activity with respect to the six months ended June 26, 2021 is as follows: Number of Shares Weighted Average Grant Date Fair Value Nonvested at December 26, 2020 964 $ 31.37 Granted 285 $ 69.47 Vested ( 404 ) $ 30.74 Forfeited ( 46 ) $ 37.61 Nonvested at June 26, 2021 799 $ 45.67 As of June 26, 2021 and December 26, 2020, there was $ 27,391 and $ 19,135 of total unrecognized compensation cost related to restricted stock units granted under the Company’s stock plans, respectively. That cost is expected to be recognized over a weighted average period of 1.8 years and 1.7 years for June 26, 2021 and December 26, 2020, respectively. NOTE 11. Other Expense, Net Other expense, net, is comprised of the following: Three Months Ended Six Months Ended June 26, June 27, June 26, June 27, 2021 2020 2021 2020 Foreign currency exchange losses, net $ ( 328 ) $ ( 1,271 ) $ ( 1,599 ) $ ( 1,305 ) Other 39 73 66 139 Total other expense, net $ ( 289 ) $ ( 1,198 ) $ ( 1,533 ) $ ( 1,166 ) 14 Table of Contents NOTE 12. Income Taxes The following table provides details of income taxes: Three Months Ended Six Months Ended June 26, June 27, June 26, June 27, 2021 2020 2021 2020 Income before income taxes $ 35,956 $ 7,418 $ 62,558 $ 3,414 Provision (benefit) for income taxes $ 905 $ ( 6 ) $ 3,394 $ 394 Effective tax rate 3 % 0 % 5 % 12 % The income tax provision for the three and six months ended June 26, 2021 was computed based on the Company’s annual forecast of profit by jurisdiction and forecasted effective tax rate for the year. The increase in the Company’s income tax provision for the three and six months ended June 26, 2021 as compared to the three and six months ended June 27, 2020 is primarily due to an increase in quarterly earnings, offset by (i) an increase in the Foreign Derived Intangible Income (“FDII”) deduction, (ii) an increase in the excess tax benefit associated with equity compensation, and (iii) a release of reserves due to expiration of the applicable statute of limitations. The Company’s recorded effective tax rate is less than the U.S. statutory rate primarily due to projected FDII deductions and federal research and development tax credits. The Company currently has a partial valuation allowance recorded against certain foreign and state net operating loss and credit carryforwards where the realizability of such deferred tax assets is substantially in doubt. Each quarter, the Company assesses the likelihood that it will be able to recover its deferred tax assets. The Company considers available evidence, both positive and negative, including forecasted earnings in assessing its need for a valuation allowance. As a result of the Company’s analysis, it concluded that it is more likely than not that a portion of its deferred tax assets will not be realized. Therefore, the Company continues to provide a valuation allowance against certain deferred tax assets. The Company continues to monitor available evidence and may reverse some or all of its remaining valuation allowance in future periods, if appropriate. The Company has a recorded valuation allowance against a certain portion of its deferred tax assets of $ 14,254 and $ 14,238 as of June 26, 2021 and December 26, 2020, respectively. NOTE 13. Earnings Per Share Basic earnings per share is calculated using the weighted average number of shares of common stock outstanding during the period. Restricted stock units, employee stock purchase grants and stock options are included in the calculation of diluted earnings per share, except when their effect would be anti-dilutive. The Company’s basic and diluted earnings per share amounts are as follows: Three Months Ended Six Months Ended June 26, June 27, June 26, June 27, 2021 2020 2021 2020 Numerator: Net income $ 35,051 $ 7,424 $ 59,164 $ 3,020 Denominator: Basic earnings per share - weighted average shares outstanding 49,193 48,736 49,105 49,417 Effect of potential dilutive securities: Employee stock options, employee stock purchase grants and restricted stock units - dilutive shares 508 278 540 365 Diluted earnings per share - weighted average shares outstanding 49,701 49,014 49,645 49,782 Earnings per share: Basic $ 0.71 $ 0.15 $ 1.20 $ 0.06 Diluted $ 0.71 $ 0.15 $ 1.19 $ 0.06 15 Table of Contents NOTE 14. Accumulated Other Comprehensive Income The components of accumulated other comprehensive income, net of tax, at June 26, 2021, as well as the activity for the six months ended June 26, 2021, were as follows: Foreign currency translation adjustments Net unrealized gains (losses) on available-for-sale marketable securities Accumulated other comprehensive income Balance at December 26, 2020 $ 4,479 $ 89 $ 4,568 Net current period other comprehensive loss ( 1,362 ) ( 698 ) ( 2,060 ) Reclassifications — — — Balance at June 26, 2021 $ 3,117 $ ( 609 ) $ 2,508 NOTE 15. Segment Reporting and Geographic Information The Company is engaged in the design, development, manufacture and support of high-performance control metrology, defect inspection, lithography and data analysis systems used by microelectronics device manufacturers. The Company and its subsidiaries currently operate in a single operating segment: the design, development, manufacture and support of high-performance process control defect inspection and metrology, lithography and process control software systems used by microelectronics device manufacturers. Therefore, the Company has one reportable segment. The Company’s chief operating decision maker is the Chief Executive Officer (the “CEO”). The CEO allocates resources and assesses performance of the business and other activities at the reportable segment level. The following table lists the different sources of revenue: Three Months Ended Six Months Ended June 26, June 27, June 26, June 27, 2021 2020 2021 2020 Systems and software $ 162,898 84 % $ 108,247 80 % $ 304,407 84 % $ 222,577 81 % Parts 18,697 10 % 16,329 12 % 36,115 10 % 29,904 11 % Services 11,792 6 % 10,372 8 % 22,144 6 % 22,395 8 % Total revenue $ 193,387 100 % $ 134,948 100 % $ 362,666 100 % $ 274,876 100 % The Company’s significant operations outside the United States include sales, service and application offices in Asia and Europe. For geographical revenue reporting, revenue is attributed to the geographic location to which the product is shipped. Revenue by geographic region is as follows: Three Months Ended Six Months Ended June 26, June 27, June 26, June 27, 2021 2020 2021 2020 Revenue from third parties: South Korea $ 41,299 $ 22,964 $ 91,828 $ 43,721 Taiwan 48,501 31,997 84,793 67,178 China 42,274 27,001 68,053 58,384 United States 25,700 22,378 51,180 42,026 Europe 14,446 10,089 31,832 25,158 Japan 17,386 13,908 25,251 28,935 Southeast Asia 3,781 6,611 9,729 9,474 Total revenue $ 193,387 $ 134,948 $ 362,666 $ 274,876 The following customers accounted for 10% or more of total revenue for the indicated periods: Six Months Ended June 26, June 27, 2021 2020 Samsung Semiconductor 22 % 18 % Taiwan Semiconductor Manufacturing Co. Ltd. 16 % 17 % 16 Table of Contents NOTE 16. Share Repurchase Authorization In November 2020, the Onto Innovation Board of Directors approved a new share repurchase authorization, which allows the Company to repurchase up to $ 100,000 worth of shares of its common stock. Repurchases may be made through both public market and private transactions from time to time with shares purchased being subsequently retired. At June 26, 2021, there was $ 100,000 available for future share repurchases under this share repurchase authorization. The following table summarizes the Company’s share repurchases for the periods indicated: Three Months Ended Six Months Ended June 26, June 27, June 26, June 27, 2021 2020 2021 2020 Shares of common stock repurchased — 632 — 1,882 Cost of shares repurchased $ — $ 18,385 $ — $ 52,000 Average price paid per share $ — $ 29.08 $ — $ 27.62 17 Table of Contents