What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-03 · 61 added, 54 removed, 126 unchanged (48% of the section changed)

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Diluted earnings per share

In the fiscal quarter ended April 2, 2022 (the “April 2022 quarter”), revenue increased 7.0% compared to the fiscal quarter ended January 1, 2022 (the “January 2022 quarter”), primarily due to an increase in sales to memory customers for advanced nodes applications, partially offset by a decline in sales to specialty device advanced packaging customers.

Gross margin as a percentage of revenue in the April 2022 quarter compared to the January 2022 quarter decreased primarily due to higher freight and logistics costs in the April 2022 quarter.

Our cash, cash equivalents and marketable securities balance increased to $541.9 million at the end of the April 2022 quarter compared to $511.3 million at the end of the January 2022 quarter.

In the fiscal quarter ended July 2, 2022 (the “July 2022 quarter”), revenue increased 6.2% compared to the fiscal quarter ended April 2, 2022 (the “April 2022 quarter”), primarily due to an increase in sales to OSAT customers in specialty device advance packaging and flash memory customers for advanced nodes applications, partially offset by a decline in sales DRAM and Foundry customers in advanced nodes applications.

Gross profit as a percentage of revenue in the July 2022 quarter compared to the April 2022 quarter decreased primarily due to sales of lithography systems with lower margins in the July 2022 quarter and increased manufacturing costs to support the growth of our business.

The increase in operating expenses in the July 2022 quarter compared to the April 2022 quarter is primarily due to increases in headcount and variable compensation.

Our cash, cash equivalents and marketable securities balance increased to $545.0 million at the end of the July 2022 quarter compared to $511.3 million at the end of the January 2022 quarter.

This increase was primarily the result of $55.4 million of cash generated from operating activities.

This source of cash was partially offset by net cash of $6.9 million used for capital expenditures.

Employee headcount as of April 2, 2022 was approximately 1,446.

Employee headcount as of July 2, 2022 was approximately 1,500.

Impact of the COVID-19 Pandemic on Our Business .

As of May 3, 2022, our operations have been impacted by our pandemic response, as described below, given the global nature of our workforce and our operations.

As of the filing of this Form 10-Q, our operations have been impacted by our pandemic response, as described below, given the global nature of our workforce and our operations.

The ultimate extent to which COVID-19 will impact our business depends on future developments, which are highly uncertain and very difficult to predict, including the effectiveness and utilization of vaccines for COVID-19 and its variants, new information that may emerge concerning the severity of COVID-19 and its variants, and actions to contain or limit their spread.

We have prioritized the health and safety of our employees and customers in our pandemic response.

As governmental authorities implement restrictions on commercial operations, we have continued to ensure compliance with these directives while also maintaining business continuity for our essential operations.

As governmental authorities continue to implement or modify restrictions on commercial operations, we have continued to ensure compliance with these directives while also maintaining business continuity for our essential operations.

We have a global workforce.

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At this time, we have not experienced any reduction in productivity, though we have incurred certain costs related to the implementation of these policies and practices.

In addition, we have enhanced our email screening and cyber monitoring of our devices to further support our work-from-home policy.

In addition, we have enhanced our email screening and cyber monitoring of our devices to further support our hybrid work environments.

As certain countries have relaxed restrictions over the past few months, we have restarted certain activities in accordance with local guidelines.

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To date, the COVID-19 pandemic has disrupted the way that we conduct business but has not had a material adverse impact on our operations.

We have not experienced significant delays in customer deliveries, but we are impacted by the global shortage in electronic components and our supply chain is strained in some cases as the availability of materials, logistics and freight options are challenging in many jurisdictions.

Demand for our products was consistent with or exceeded our expectations for the first quarter of fiscal 2022.

However, further disruptions to our supply chain in connection with the sourcing of materials, equipment and engineering support, and services from geographic areas that have been impacted by COVID-19 may pose risks to our business, results of operations and financial condition.

We have experienced some delays in customer deliveries.

Additionally, we are impacted by the global shortage in electronic components and inflationary pressures.

Our supply chain is strained in some cases as the availability of materials, logistics and freight options are challenging in many jurisdictions, which have resulted in long lead times, rising prices and supply chain disruptions.

We expect supply chain shortages as well as inflationary cost pressures to persist throughout the remainder of the year.

Demand for our products was consistent with or exceeded our expectations for the first half of fiscal 2022.

However, further disruptions to our supply chain in connection with the sourcing of materials, inflationary pressures, equipment and engineering support, and services from geographic areas that have been impacted by COVID-19 may pose risks to our business, results of operations and financial condition.

In this time of uncertainty as a result of the COVID-19 pandemic, we are continuing to serve our customers while taking appropriate precautionary measures to provide a safe work environment for our employees and customers.

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For a discussion of certain risks related to the international nature of our business and our operations and the COVID-19 pandemic, see Part II, Item 1A – Risk Factors of this Form 10-Q, Part I, Item 1A – Risk Factors of our 2021 Form 10-K.

Results of Operations for the Three Months Ended April 2, 2022 and March 27, 2021

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

Our revenue of $241.3 million increased 42.6% for the three months ended April 2, 2022 as compared to the same period in 2021, in which revenue totaled $169.3 million.

Results of Operations for the Three and Six Months Ended July 2, 2022 and June 26, 2021

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

Our revenue of $256.3 million increased 32.5% for the three months ended July 2, 2022 as compared to the same period in

2021, in which revenue totaled $193.4 million.

For the six-month periods ended July 2, 2022 and June 26, 2021, our revenue totaled $497.7 million and $362.7 million, respectively, representing a year-over-year increase of 37.2%.

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

Three Months Ended

Six Months Ended

Systems and software

Total revenue

Total systems and software revenue increased $67.9 million for the three months ended April 2, 2022 as compared to the three months ended March 27, 2021 primarily due to an increase of units shipped in our metrology and inspection product lines.

The year-over-year increase in parts and services revenue in absolute dollars from the three months ended April 2, 2022 to the three months ended March 27, 2021 was primarily due to servicing a larger installed base.

Total systems and software revenue increased $57.9 million and $125.8 million for the three and six months ended July 2, 2022, respectively, as compared to the three and six months ended June 26, 2021, respectively, primarily due to increases of units shipped in our metrology, inspection and lithography product lines.

The increases in parts and services revenue for the three and six months ended July 2, 2022, as compared to the three and six months ended June 26, 2021, were primarily due to servicing a larger installed base.

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, 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.

Our gross profit was $131.0 million and $90.5 million for the three months ended April 2, 2022 and March 27, 2021, respectively.

Our gross profit represented 54.3% and 53.4% of our revenue for the three months ended April 2, 2022 and March 27, 2021, respectively.

The increase in gross profit as a percentage of revenue for the three months ended April 2, 2022, as compared to the three months ended March 27, 2021, is primarily due to an increase in sales volume and favorable changes in product mix, partially offset by higher freight and logistics costs, and higher personnel cost due to an increase in headcount to provide manufacturing capacity requirements.

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.

Our gross profit was $132.1 million and $263.2 million for the three and six months ended July 2, 2022, respectively, as compared to $105.5 million and $195.9 million for the three and six months ended June 26, 2021, respectively.

Our gross profit represented 51.5% and 52.9% of our revenue for the three and six months ended July 2, 2022, respectively, and 54.5% and 54.0% for the three and six months ended June 26, 2021, respectively.

The decreases in gross profit as a percentage of revenue for both the three and six months ended July 2, 2022, as compared to the three and six months ended June 26, 2021, were primarily due to product mix, h igher freight and logistics costs, and higher personnel cost due to an increase in headcount to provide manufacturing capacity requirements, partially offset by an increase in sales volume.

Operating Expenses.

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

Our research and development expenses were $26.3 million and $22.0 million for the three months ended April 2, 2022 and March 27, 2021, respectively.

The year-over-year dollar increase for the three-month period ended April 2, 2022 as compared to the three-month period ended March 27, 2021 was primarily due to increased compensation costs from additional headcount, as well as annual merit and promotion increases, and increased consulting, outside service and material expenses for new product initiatives.

Our research and development expenses were $25.6 million and $52.0 million for the three and six months ended July 2, 2022, respectively, as compared to $25.5 million and $47.5 million for the three and six months ended June 26, 2021, respectively.

The increases in research and development expenses for both the three and six months ended July 2, 2022, as compared to the three and six months ended June 26, 2021, were primarily due to increased compensation costs from additional headcount, as well as annual merit and promotion increases, and increased consulting, outside service and material expenses for new product initiatives.

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 $15.6 million and $13.1 million for the three months ended April 2, 2022 and March 27, 2021, respectively.

The year-over-year increase in sales and marketing expenses for the three-month period ended April 2, 2022 as compared to the three-month period ended March 27, 2021 was primarily due to increased compensation costs and increased travel related expenses as pandemic travel restrictions were lifted.

Our sales and marketing expenses were $16.9 million and $32.5 million for the three and six months ended July 2, 2022, respectively, as compared to $15.4 million and $28.5 million for the three and six months ended June 26, 2021, respectively.

The increases in sales and marketing expenses for both the three and six months ended July 2, 2022, as compared to the three and six months ended June 26, 2021, were primarily due to increased compensation costs and increased travel related expenses as pandemic travel restrictions were lifted.

General and Administrative .

General and administrative expenses are primarily comprised of salaries and related costs for administrative personnel, as well as other non-personnel related expenses.

Our general and administrative expenses were $16.5 million and $15.6 million for the three months ended April 2, 2022 and March 27, 2021, respectively.

The year-over-year increase in general and administrative expenses for the three-month period ended April 2, 2022 as compared to the three-month period ended March 27, 2021 was primarily due to increased compensation costs and increased litigation expenses.

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 $18.3 million and $34.8 million for the three and six months ended July 2, 2022, respectively, as compared to $16.3 million and $31.8 million for the three and six months ended June 26, 2021, respectively.

The increases in general and administrative expenses for both the three and six months ended July 2, 2022, as compared to the three and six months ended June 26, 2021, were primarily due to increased compensation costs and increased litigation expenses.

Amortization of Identifiable Intangible Assets .

Amortization of identifiable intangible assets was $13.8 million and $12.4 million for the three months ended April 2, 2022 and March 27, 2021, respectively.

The year-over-year increase in amortization expense for the three-month period ended April 2, 2022 as compared to the three-month

period ended March 27, 2021 was primarily due to in-process research and development becoming classified as a finite-lived intangible asset and amortization commencing in the second half of 2021.

Amortization of identifiable intangible assets was $13.8 million and $27.6 million for the three and six months ended July 2, 2022, respectively, as compared to $12.3 million and $24.7 million for the three and six months ended June 26, 2021, respectively.

The increases in amortization expense for both the three and six months ended July 2, 2022, as compared to the three and six months ended June 26, 2021, were primarily due to in-process research and development becoming classified as a finite-lived intangible asset and amortization commencing in the second half of 2021.

Interest income, net .

Net interest income was $0.4 million for both the three months ended April 2, 2022 and March 27, 2021.

Net interest income was $0.7 million and $1.0 million for the three and six months ended July 2, 2022, respectively, as compared to $0.3 million and $0.7 million for the three and six months ended June 26, 2021, respectively.

The increases in net interest income for both the three and six months ended July 2, 2022, as compared to the three and six months ended June 26, 2021, were due to higher interest rates during the 2022 period.

Other expense, net .

Net other expense was $0.2 million and $1.2 million for the three months ended April 2, 2022 and March 27, 2021, respectively.

The decrease in other expense, net for the three months ended April 2, 2022 as compared to the three months ended March 27, 2021 was primarily due to lower foreign exchange losses during the 2022 period.

Net other expense was $0.9 million and $1.1 million for the three and six months ended July 2, 2022, respectively, as compared to $0.3 million and $1.5 million for the three and six months ended June 26, 2021, respectively.

The increase in other expense, net for the three months ended July 2, 2022, as compared to the three months ended June 26, 2021, was primarily due to higher foreign exchange losses during the 2022 period.

The decrease in other expense, net for the six months ended July 2, 2022, as compared to the six months ended June 26, 2021, was primarily due to lower foreign exchange losses during the 2022 period.

Income Taxes .

We recorded an income tax provision of $5.6 million and $2.5 million for the three months ended April 2, 2022 and March 27, 2021, respectively.

Our effective tax rate of 9% differs from the statutory rate of 21% for the three months ended April 2, 2022 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 9% differs from the statutory rate of 21% for the three months ended March 27, 2021, primarily due to (i) foreign and research and development tax credits, (ii) the deduction related to FDII, and (iii) excess tax benefits associated with equity compensation.

We recorded an income tax provision of $5.7 million and $11.3 million for the three and six months ended July 2, 2022, respectively, as compared to income tax provision of $0.9 million and $3.4 million for the same period in 2021.

Our effective tax rate of 10% differs from the statutory rate of 21% for both the three and six months ended July 2, 2022, 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 3% and 5% differs from the statutory rate of 21% for the three and six months ended June 26, 2021, respectively, primarily due to (i) foreign and research and development tax credits, (ii) the deduction related to FDII, (iii) excess tax benefits associated with equity compensation, and (iv) a one-time tax benefit associated with a release of reserves due to the expiration of the applicable statute of limitations.

Our future effective income tax rate depends on various factors, such as possible changes in tax legislation, the geographic composition of our pre-tax income, the amount of our pre-tax income as business activities fluctuate, non-deductible expenses incurred in connection with business combinations, and research and development tax credits as a percentage of aggregate pre-tax income.

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While the capitalization requirement has a negative impact on our cash flows, there are offsetting benefits from the enactment of this provision that we have included in our estimated annual effective tax rate.

Although Congress is considering legislation that would defer the amortization requirement to later years, we have no assurance that the provision will be repealed or otherwise modified.

If it is delayed, these effective tax rate benefits will not be realized in the current year.

While it is possible that Congress may defer, modify, or repeal this provision, potentially with retroactive effect, we have no assurance that this provision will be deferred, modified, or repealed.

Changes in our tax provisions or an increase in our tax liabilities, whether due to changes in applicable laws and regulations, the interpretation or application thereof, or a final determination of tax audits or litigation or agreements, could have a material adverse effect on our financial position, results of operations and/or cash flows.

Liquidity and Capital Resources

At April 2, 2022, we had $541.9 million of cash, cash equivalents and marketable securities and $847.6 million in working capital.

At July 2, 2022, we had $545.0 million of cash, cash equivalents and marketable securities and $909.0 million in working capital.

At January 1, 2022, we had $511.3 million of cash, cash equivalents and marketable securities and $793.6 million in working capital.

Net cash and cash equivalents provided by operating activities for the three months ended April 2, 2022 and March 27, 2021 were $45.5 million and $51.0 million, respectively.

The net cash and cash equivalents provided by operating activities during the three months ended April 2, 2022 resulted primarily from net income, adjusted to exclude the effect of non-cash operating charges of $70.8 million, partially offset by a decrease in cash provided from operating assets and liabilities of $25.4 million, primarily due to increases in inventories and accounts receivable.

The net cash and cash equivalents provided by operating activities during the three months ended March 27, 2021 resulted primarily from net income, adjusted to exclude the effect of non-cash operating charges, of $49.7 million and an increase in cash provided from operating assets and liabilities of $1.3 million.

Net cash and cash equivalents used in investing activities for the three months ended April 2, 2022 and March 27, 2021 were $33.3 million and $60.3 million, respectively.

During the three months ended April 2, 2022, net cash and cash equivalents used in investing activities included purchases of marketable securities of $97.5 million and capital expenditures of $2.5 million, partially offset by proceeds from sales of marketable securities of $66.7 million.

During the three months ended March 27, 2021, net cash used in investing activities included purchases of marketable securities of $83.7 million, purchase of a business of $26.8 million and capital expenditures of $3.9 million, partially offset by proceeds from sales of marketable securities of $54.0 million.

Net cash and cash equivalents used in financing activities for the three months ended April 2, 2022 were $7.6 million.

Financing activities provided net cash and cash equivalents during the three months ended March 27, 2021 of $0.6 million.

During the three months ended April 2, 2022, financing activities used cash to primarily pay taxes related to shares withheld for share-based compensation plans of $5.3 million and pay contingent consideration for acquired business of $2.3 million, partially offset by proceeds from sales of shares through share-based compensation plans of $0.6 million.

During the three months ended March 27, 2021, financing activities provided cash from proceeds from sales of shares through share-based compensation plans of $3.1 million, partially offset by tax payments related to shares withheld for share-based compensation plans of $2.5 million.

Net cash and cash equivalents provided by operating activities for the six months ended July 2, 2022 and June 26, 2021 were $55.4 million and $76.4 million, respectively.

The net cash and cash equivalents provided by operating activities during the six months ended July 2, 2022 resulted primarily from net income, adjusted to exclude the effect of non-cash operating charges of $143.0 million, partially offset by a decrease in cash provided from operating assets and liabilities of $87.6 million, primarily due to increases in inventories and accounts receivable.

The net cash and cash equivalents provided by operating activities during the six months ended June 26, 2021 resulted primarily from net income, adjusted to exclude the effect of non-cash operating charges, of $108.1 million, partially offset by a decrease in cash provided from operating assets and liabilities of $31.7 million.

Net cash and cash equivalents used in investing activities for the six months ended July 2, 2022 and June 26, 2021 were $33.2 million and $76.4 million, respectively.

During the six months ended July 2, 2022, net cash and cash equivalents used in investing activities included purchases of marketable securities of $174.7 million and capital expenditures of $6.9 million, partially offset by proceeds from sales of marketable securities of $148.4 million.

During the six months ended June 26, 2021, net cash and cash equivalents used in investing activities included purchases of marketable securities of $142.1 million, purchase of a business of $26.8 million and capital expenditures of $9.6 million, partially offset by proceeds from sales of marketable securities of $102.0 million.

Net cash and cash equivalents used in financing activities for the six months ended July 2, 2022 and June 26, 2021 were $6.1 million and $3.3 million, respectively.

During the six months ended July 2, 2022, financing activities used cash to primarily pay taxes related to shares withheld for share-based compensation plans of $8.3 million and pay contingent consideration for acquired business of $2.3 million, partially offset by proceeds from sales of shares through share-based compensation plans of $4.5 million.

During the six months ended June 26, 2021, financing activities used cash primarily for tax payments related to shares withheld for share-based compensation plans of $3.2 million.

This use of cash was primarily offset by proceeds from sales of shares through share-based compensation plans of $6.5 million.

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

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There is potential earnout for up to an additional payment of $5.0 million depending on fiscal 2022 results.

As of April 2, 2022, we have accrued $1.9 million for the potential earnout.

As of July 2, 2022, we have accrued $2.2 million for the potential earnout.

I n November 2020, the Onto Innovation Board of Directors approved a share repurchase authorization, which allows the Company to repurchase up to $100 million worth of shares of its common stock.

Repurchases may be made through both public market and private transactions from time to time with shares purchased being subsequently retired.

At April 2, 2022, there was $100 million available for future share repurchases.

At July 2, 2022, there was $100 million available for future share repurchases.

We have a credit agreement with a bank that provides for a line of credit that is secured by the marketable securities we have with the bank.

We are permitted to borrow up to 70% of the value of eligible securities held at the time the line of credit is accessed.

As of April 2, 2022, the available line of credit was approximately $128.7 million with an available interest rate of 2.0%.

As of July 2, 2022, the available line of credit was approximately $125.2 million with an available interest rate of 3.3%.

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

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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.

Market conditions due to the COVID-19 pandemic or other factors may have an impact on our ability to access such additional funding.

Our borrowing capacity under our existing line of credit is tied to the value of eligible securities held at the time of borrowing, which may be negatively impacted by market conditions due to COVID-19 and government responses thereto or other factors.

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.

However, the ongoing COVID-19 pandemic has in the past caused disruption in the capital markets and were it to do the same in the future, may have an impact on our ability to access such additional funding.

In addition, 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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis