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 Nine Months Ended October 1, September 25, October 1, September 25, 2022 2021 2022 2021 Revenue $ 254,253 $ 200,589 $ 751,913 $ 563,255 Cost of revenue 115,404 91,231 349,914 257,972 Gross profit 138,849 109,358 401,999 305,283 Operating expenses: Research and development 32,150 23,811 84,128 71,282 Sales and marketing 16,769 12,880 49,314 41,413 General and administrative 16,801 16,548 51,594 48,362 Amortization 13,822 12,993 41,461 37,674 Total operating expenses 79,542 66,232 226,497 198,731 Operating income 59,307 43,126 175,502 106,552 Interest income, net 1,516 234 2,554 899 Other expense, net ( 962 ) ( 291 ) ( 2,025 ) ( 1,824 ) Income before provision for income taxes 59,861 43,069 176,031 105,627 Provision for income taxes 7,646 6,621 18,911 10,015 Net income $ 52,215 $ 36,448 $ 157,120 $ 95,612 Earnings per share: Basic $ 1.05 $ 0.74 $ 3.17 $ 1.94 Diluted $ 1.05 $ 0.73 $ 3.15 $ 1.92 Weighted average shares outstanding: Basic 49,680 49,361 49,582 49,190 Diluted 49,949 49,762 49,928 49,684 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 Nine Months Ended October 1, September 25, October 1, September 25, 2022 2021 2022 2021 Net income $ 52,215 $ 36,448 $ 157,120 $ 95,612 Other comprehensive loss, net of tax: Change in net unrealized gains (losses) on available-for-sale marketable securities ( 1,007 ) 461 ( 3,456 ) ( 237 ) Change in currency translation adjustments ( 4,119 ) 55 ( 13,665 ) ( 1,307 ) Total other comprehensive loss, net of tax ( 5,126 ) 516 ( 17,121 ) ( 1,544 ) Total comprehensive income $ 47,089 $ 36,964 $ 139,999 $ 94,068 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) October 1, 2022 January 1, 2022 ASSETS Current Assets: Cash and cash equivalents $ 200,383 $ 169,602 Marketable securities 352,329 341,741 Accounts receivable, less allowance of $ 1,182 and $ 1,303 235,527 177,205 Inventories, net 307,864 243,108 Prepaid expenses and other current assets 26,533 16,433 Total current assets 1,122,636 948,089 Property, plant and equipment, net 84,253 82,094 Goodwill 315,811 315,811 Identifiable intangible assets, net 235,970 277,281 Deferred income taxes 4,287 4,822 Other assets 24,810 21,716 Total assets $ 1,787,767 $ 1,649,813 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 63,951 $ 53,345 Accrued liabilities 45,346 43,042 Deferred revenue 28,778 29,979 Other current liabilities 31,478 28,160 Total current liabilities 169,553 154,526 Deferred income taxes 15,504 40,281 Other non-current liabilities 33,336 28,951 Total liabilities 218,393 223,758 Commitments and contingencies Stockholders’ equity: Common stock 50 49 Additional paid-in capital 1,259,498 1,256,179 Accumulated other comprehensive (loss) income ( 15,805 ) 1,316 Retained earnings 325,631 168,511 Total stockholders’ equity 1,569,374 1,426,055 Total liabilities and stockholders’ equity $ 1,787,767 $ 1,649,813 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) Nine Months Ended October 1, September 25, 2022 2021 Cash flows from operating activities: Net income $ 157,120 $ 95,612 Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: Amortization of intangibles 41,461 37,674 Depreciation 6,980 11,044 Share-based compensation 18,929 15,107 Write-off of acquired in-process research and development 4,406 — Acquired inventory step-up amortization — 253 Provision for inventory valuation 7,175 6,262 Deferred income taxes ( 24,560 ) — Other, net 2,742 893 Changes in operating assets and liabilities, net of effects of business acquired ( 127,045 ) ( 40,565 ) Net cash and cash equivalents provided by operating activities 87,208 126,280 Cash flows from investing activities: Purchases of marketable securities ( 289,504 ) ( 250,486 ) Proceeds from maturities and sales of marketable securities 274,636 177,529 Acquisitions, net of cash acquired ( 4,572 ) ( 26,795 ) Purchases of property, plant and equipment ( 9,786 ) ( 11,176 ) Net cash and cash equivalents used in investing activities ( 29,226 ) ( 110,928 ) Cash flows from financing activities: Purchases and retirement of common stock ( 11,540 ) — Tax payments related to shares withheld for share-based compensation plans ( 8,569 ) ( 6,780 ) Payment of contingent consideration for acquired business ( 2,287 ) — Issuance of shares through share-based compensation plans 4,499 6,409 Net cash and cash equivalents used in financing activities ( 17,897 ) ( 371 ) Effect of exchange rate changes on cash and cash equivalents ( 9,304 ) 506 Net increase in cash and cash equivalents 30,781 15,487 Cash and cash equivalents at beginning of period 169,602 136,720 Cash and cash equivalents at end of period $ 200,383 $ 152,207 Supplemental disclosure of cash flow information: Income taxes paid (net of refunds) $ 47,107 $ 16,524 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 Loss Earnings Total Balance at January 1, 2022 49,300 $ 49 $ 1,256,179 $ 1,316 $ 168,511 $ 1,426,055 Net income — — — — 53,330 53,330 Share-based compensation — — 4,832 — — 4,832 Issuance of shares through share-based compensation plans 184 — 6 — — 6 Share-based compensation plan withholdings ( 46 ) — ( 5,289 ) — — ( 5,289 ) Currency translation — — — ( 3,612 ) — ( 3,612 ) Unrealized loss on investments — — — ( 3,001 ) — ( 3,001 ) Balance at April 2, 2022 49,438 $ 49 $ 1,255,728 $ ( 5,297 ) $ 221,841 $ 1,472,321 Net income — — — — 51,575 51,575 Share-based compensation — — 7,983 — — 7,983 Issuance of shares through share-based compensation plans, net 219 1 4,493 — — 4,494 Share-based compensation plan withholdings ( 53 ) — ( 3,048 ) — — ( 3,048 ) Currency translation — — — ( 5,934 ) — ( 5,934 ) Unrealized gain on investments — — — 552 — 552 Balance at July 2, 2022 49,604 $ 50 $ 1,265,156 $ ( 10,679 ) $ 273,416 $ 1,527,943 Net income — — — — 52,215 52,215 Share-based compensation — — 6,114 — — 6,114 Issuance of shares through share-based compensation plans, net 86 — — — — — Purchases and retirement of common stock ( 172 ) — ( 11,540 ) — — ( 11,540 ) Share-based compensation plan withholdings ( 3 ) — ( 232 ) — — ( 232 ) Currency translation — — — ( 4,119 ) — ( 4,119 ) Unrealized loss on investments — — — ( 1,007 ) — ( 1,007 ) Balance at October 1, 2022 49,515 $ 50 $ 1,259,498 $ ( 15,805 ) $ 325,631 $ 1,569,374 5 Table of Contents 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 Net income — — — — 36,448 36,448 Share-based compensation — — 4,110 — — 4,110 Issuance of shares through share-based compensation plans, net 93 — 3,193 — — 3,193 Share-based compensation plan withholdings ( 4 ) — ( 280 ) — — ( 280 ) Currency translation — — — 55 — 55 Unrealized gain on investments — — — 461 — 461 Balance at September 25, 2021 49,278 $ 49 $ 1,248,703 $ 3,024 $ 121,774 $ 1,373,550 The accompanying notes are an integral part of these financial statements. 6 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 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,” “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 nine months ended October 1, 2022 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 January 1, 2022 (the “2021 Form 10-K”) filed with the Securities and Exchange Commission (“SEC”) on February 25, 2022. The accompanying Condensed Consolidated Balance Sheet at January 1, 2022 has been derived from the audited consolidated financial statements included in the 2021 Form 10-K. The Company operates on a 52- or 53-week fiscal year ending on the Saturday closest to December 31 st . Our fiscal year ending December 31, 2022 (“fiscal year 2022”) is a 52-week fiscal year. The first quarter of the Company’s fiscal year 2022 ended on April 2, 2022, the second quarter ended on July 2, 2022 and the third quarter ended on October 1, 2022. Our fiscal year ended January 1, 2022 was a 53-week fiscal year. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 include the allowance 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, contingencies, including litigation reserves and 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, assets and stock awards associated with various contractual arrangements. 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. Adoption of Accounting Standards There have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended October 1, 2022, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2022, that are of significance, or potential significance to the Company. NOTE 2. Business Combination Inspectrology, LLC During the first quarter of 2021, the Company acquired Inspectrology, LLC (“Inspectrology”), a supplier of overlay metrology for controlling lithography and etch processes in the compound semiconductor market, for $ 24,015 in cash and an earnout subject to achievement of certain revenue targets earned for fiscal year 2021 and fiscal year 2022. The earnout achieved for fiscal 2021 was $ 2.3 million and was paid in the first half of fiscal 2022. 7 Table of Contents There is potential earnout for up to an additional payment of $ 5,000 based on fiscal year 2022 results. As of October 1, 2022, the Company has accrued $ 1,730 for the potential earnout. Certain payments, including the earnout, are subject to the principals remaining with the Company for a period of one to three years . 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. The following tables provide the assets and liabilities carried at fair value measured on a recurring basis at October 1, 2022 and January 1, 2022: 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) October 1, 2022 Assets: Available-for-sale debt securities: Municipal notes and bonds $ 171,350 $ — $ 171,350 $ — Asset-backed securities 1,858 — 1,858 — Certificates of deposit 40,280 — 40,280 — Commercial paper 78,083 — 78,083 — Corporate bonds 60,758 — 60,758 — Foreign currency forward contracts 25 — 25 — Total assets $ 352,354 $ — $ 352,354 $ — Liabilities: Contingent consideration - acquisitions $ 1,730 $ — $ — $ 1,730 Total liabilities $ 1,730 $ — $ — $ 1,730 January 1, 2022 Assets: Available-for-sale debt securities: Municipal notes and bonds $ 170,980 $ — $ 170,980 $ — Asset-backed securities 2,009 — 2,009 — Certificates of deposit 33,192 — 33,192 — Commercial paper 73,113 — 73,113 — Corporate bonds 62,447 — 62,447 — Total assets $ 341,741 $ — $ 341,741 $ — Liabilities: Foreign currency forward contracts $ 26 $ — $ 26 $ — Total liabilities $ 26 $ — $ 26 $ — 8 Table of Contents 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. Level 3 investments consisted of contingent consideration related to an acquisition for which the Company uses revenue projections to value this liability. See Note 4 for additional discussion regarding the fair value of the Company’s marketable securities. NOTE 4. Marketable Securities At October 1, 2022 and January 1, 2022, marketable securities are categorized as follows: Amortized Cost Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value October 1, 2022 Municipal notes and bonds $ 174,570 $ 3 $ 3,223 $ 171,350 Asset-backed securities 1,889 — 31 1,858 Certificates of deposit 40,400 10 130 40,280 Commercial paper 78,253 4 174 78,083 Corporate bonds 62,081 — 1,323 60,758 Total marketable securities $ 357,193 $ 17 $ 4,881 $ 352,329 January 1, 2022 Municipal notes and bonds $ 171,203 $ 38 $ 261 $ 170,980 Asset-backed securities 2,009 — — 2,009 Certificates of deposit 33,200 2 10 33,192 Commercial paper 73,152 2 41 73,113 Corporate bonds 62,634 29 216 62,447 Total marketable securities $ 342,198 $ 71 $ 528 $ 341,741 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 October 1, 2022 and January 1, 2022: October 1, 2022 January 1, 2022 Amortized Cost Fair Value Amortized Cost Fair Value Due within one year $ 276,724 $ 273,654 $ 219,353 $ 219,211 Due after one through five years 80,469 78,675 122,845 122,530 Due after five years — — — — Total marketable securities $ 357,193 $ 352,329 $ 342,198 $ 341,741 The Company has evaluated its investment policies and determined that all of its marketable securities, which are comprised of debt securities, are to be classified as available-for-sale. The Company’s available-for-sale debt securities are carried at fair value, with the unrealized gains and losses reported in Stockholders’ equity under the caption “Accumulated other comprehensive income (loss).” Gross realized gains and losses on available-for-sale securities are included in “Other expense (income)” on the Condensed Consolidated Statements of Operations and were not material during the three and nine months ended October 1, 2022 and January 1, 2022. The Company records credit losses for its available-for-sale debt securities when it intends to sell the securities, it is more-likely-than not that it will be required to sell the securities before a recovery, or when it does not expect to recover the entire amortized cost basis of the securities. The cost of securities sold is based on the specific identification method. The Company has determined that the gross unrealized losses on its marketable securities at October 1, 2022 and January 1, 2022 are temporary in nature. The Company regularly reviews its investment portfolio to identify and evaluate marketable securities that have indications of possible impairment from credit losses or other factors. Factors considered in determining whether an unrealized loss is considered to be a credit loss include the length of time and extent to which fair value has been less than the cost basis, credit quality and the Company’s ability and intent to hold the securities for a period of time sufficient to allow for any anticipated recovery in market value. 9 Table of Contents 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 October 1, 2022 and January 1, 2022: 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 October 1, 2022 Municipal notes and bonds $ 123,978 $ 2,082 $ 50,280 $ 1,140 Asset-backed securities 1,889 31 — — Certificates of deposit 29,400 127 2,500 4 Commercial paper 71,754 174 500 1 Corporate bonds 39,749 891 22,331 431 Total $ 266,770 $ 3,305 $ 75,611 $ 1,576 January 1, 2022 Municipal notes and bonds $ 113,790 $ 262 $ — $ — Certificates of deposit 16,300 10 — — Commercial paper 58,681 40 — — Corporate bonds 53,661 150 2,587 66 Total $ 242,432 $ 462 $ 2,587 $ 66 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 October 1, 2022 and January 1, 2022, these contracts included the future sale of 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 October 1, 2022 and January 1, 2022 were as follows: October 1, 2022 January 1, 2022 Notional amount $ 32,173 $ 32,293 Fair value of assets (liability) $ 25 $ ( 26 ) 10 Table of Contents NOTE 6. Purchased Intangible Assets Intangible Assets Purchased intangible assets as of October 1, 2022 and January 1, 2022 are as follows: Gross Carrying Amount Accumulated Amortization Net October 1, 2022 Finite-lived intangibles: Developed technology $ 378,147 $ 193,031 $ 185,116 Customer and distributor relationships 73,321 29,049 44,272 Trademarks and trade names 14,171 7,589 6,582 Total identifiable intangible assets $ 465,639 $ 229,669 $ 235,970 January 1, 2022 Finite-lived intangibles: Developed technology $ 377,997 $ 155,976 $ 222,021 Customer and distributor relationships 73,321 25,608 47,713 Trademarks and trade names 14,171 6,624 7,547 Total identifiable intangible assets $ 465,489 $ 188,208 $ 277,281 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 2022 (remainder) $ 13,823 2023 54,816 2024 49,131 2025 32,581 2026 31,388 2027 23,166 Thereafter 31,065 Total $ 235,970 NOTE 7. Balance Sheet Details Inventories Inventories, net are comprised of the following: October 1, 2022 January 1, 2022 Materials $ 211,312 $ 157,343 Work-in-process 73,273 60,415 Finished goods 23,279 25,350 Total inventories, net $ 307,864 $ 243,108 11 Table of Contents Property, Plant and Equipment Property, plant and equipment, net is comprised of the following: October 1, 2022 January 1, 2022 Machinery and equipment $ 54,227 $ 50,226 Land and building 48,307 48,297 Computer equipment and software 14,945 13,856 Leasehold improvements 15,635 13,710 Furniture and fixtures 2,771 2,534 135,885 128,623 Accumulated depreciation and amortization ( 51,632 ) ( 46,529 ) Total property, plant and equipment, net $ 84,253 $ 82,094 Other assets Other assets is comprised of the following: October 1, 2022 January 1, 2022 Operating lease right-of-use assets $ 20,513 $ 17,488 Other 4,297 4,228 Total other assets $ 24,810 $ 21,716 Accrued liabilities Accrued liabilities is comprised of the following: October 1, 2022 January 1, 2022 Payroll and related expenses $ 33,257 $ 32,581 Warranty 11,077 9,093 Other 1,012 1,368 Total accrued liabilities $ 45,346 $ 43,042 Other current liabilities Other current liabilities is comprised of the following: October 1, 2022 January 1, 2022 Customer deposits $ 14,471 $ 9,459 Current operating lease obligations 5,015 3,968 Income tax payable 1,518 6,315 Accrued professional fees 1,234 912 Other 9,240 7,506 Total other current liabilities $ 31,478 $ 28,160 Other non-current liabilities Other non-current liabilities is comprised of the following: October 1, 2022 January 1, 2022 Non-current operating lease obligations $ 16,941 $ 13,754 Unrecognized tax benefits (including interest) 8,497 7,861 Deferred revenue 2,269 1,693 Other 5,629 5,643 Total other non-current liabilities $ 33,336 $ 28,951 12 Table of Contents 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 $ 21,498 of receivables during the nine months ended October 1, 2022. 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 October 1, 2022. 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 Condensed 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. Warranty provisions are generally related to current period sales. Settlements of warranty reserves are generally associated with sales that occurred during the 12 to 14 months prior to the period-end. Changes in the Company’s warranty reserves are as follows: Nine Months Ended October 1, September 25, 2022 2021 Balance, beginning of the period $ 9,682 $ 6,485 Accruals 11,288 8,261 Warranty liability assumed in acquisition — 407 Usage ( 9,076 ) ( 6,134 ) Balance, end of the period $ 11,894 $ 9,019 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 13 Table of Contents 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 between Nanometrics and Rudolph Technologies, Inc. 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 the discovery cutoff is January 12, 2023 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 October 1, 2022 was approximately $ 138.0 million with an available interest rate of 4.8 %. 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 Nine Months Ended October 1, September 25, October 1, September 25, 2022 2021 2022 2021 Point-in-time $ 242,209 $ 190,014 $ 716,645 $ 533,308 Over-time 12,044 10,575 35,268 29,947 Total revenue $ 254,253 $ 200,589 $ 751,913 $ 563,255 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 primarily related to service contracts and installation. For contracts that have a duration of one year or less, these amounts are recorded as current deferred revenue in the Condensed Consolidated Balance Sheets. As of October 1, 2022 and January 1, 2022, the Company carried a long-term deferred revenue balance of $ 2,269 and $ 1,693 , respectively, in other non-current liabilities on the Condensed Consolidated Balance Sheets. Changes in deferred revenue were as follows: Three Months Ended Nine Months Ended October 1, September 25, October 1, September 25, 2022 2021 2022 2021 Balance, beginning of the period $ 34,431 $ 22,906 $ 31,673 $ 15,626 Deferred revenue assumed in acquisition — — — 386 Deferral of revenue 15,333 17,317 60,389 51,666 Recognition of deferred revenue ( 18,717 ) ( 12,364 ) ( 61,015 ) ( 39,819 ) Balance, end of the period $ 31,047 $ 27,859 $ 31,047 $ 27,859 14 Table of Contents NOTE 10. Share-Based Compensation Restricted Stock Unit Activity A summary of the Company’s restricted stock unit activity with respect to the nine months ended October 1, 2022 is as follows: Number of Shares Weighted Average Grant Date Fair Value Nonvested at January 1, 2022 765 $ 48.25 Granted 396 $ 83.03 Vested ( 357 ) $ 42.20 Forfeited ( 53 ) $ 57.30 Nonvested at October 1, 2022 751 $ 68.83 Of the 751 nonvested shares outstanding at October 1, 2022, 652 are service-based RSUs and 99 are market-based PRSUs. The fair value of the Company’s service-based RSUs was calculated based on the fair market value of the Company’s stock at the date of grant. The fair value of the Company’s market-based PRSUs granted during fiscal years 2022 and 2021 was calculated using a Monte Carlo simulation model at the date of the grant, resulting in a weighted average grant-date fair value per share of $ 85.49 and $ 80.04 , respectively. As of October 1, 2022 and January 1 2022, there was $ 33,262 and $ 21,019 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 1.7 years and 1.5 years for October 1, 2022 and January 1, 2022, respectively. NOTE 11. Other Expense, Net Other expense, net, is comprised of the following: Three Months Ended Nine Months Ended October 1, September 25, October 1, September 25, 2022 2021 2022 2021 Foreign currency exchange losses, net $ ( 1,016 ) $ ( 204 ) $ ( 2,041 ) $ ( 1,803 ) Other 54 ( 87 ) 16 ( 21 ) Total other expense, net $ ( 962 ) $ ( 291 ) $ ( 2,025 ) $ ( 1,824 ) NOTE 12. Income Taxes The following table provides details of income taxes: Three Months Ended Nine Months Ended October 1, September 25, October 1, September 25, 2022 2021 2022 2021 Income before income taxes $ 59,861 $ 43,069 $ 176,031 $ 105,627 Provision for income taxes $ 7,646 $ 6,621 $ 18,911 $ 10,015 Effective tax rate 13 % 15 % 11 % 10 % The income tax provision for the three and nine months ended October 1, 2022 was computed based on the Company’s annual forecast of profit by jurisdiction and forecasted effective tax rate for the year. The income tax provision in the 2022 periods reflected the impact of a change in U.S. tax law effective January 1, 2022, which requires the capitalization and amortization of research and development expenditures incurred after December 31, 2021. The increase in the Company’s income tax provision for the three and nine months ended October 1, 2022 as compared to the three and nine months ended September 25, 2021 is primarily due to an increase in quarterly earnings, offset by an increase in the Foreign Derived Intangible Income (“FDII”) deduction, and a one-time benefit recorded for the nine months ended September 25, 2021 for 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, federal research and development tax credits, and excess tax benefits associated with equity compensation. 15 Table of Contents 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 $ 10,948 for both October 1, 2022 and January 1, 2022. 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 Nine Months Ended October 1, September 25, October 1, September 25, 2022 2021 2022 2021 Numerator: Net income $ 52,215 $ 36,448 $ 157,120 $ 95,612 Denominator: Basic earnings per share - weighted average shares outstanding 49,680 49,361 49,582 49,190 Effect of potential dilutive securities: Employee stock options, employee stock purchase grants and restricted stock units - dilutive shares 269 401 346 494 Diluted earnings per share - weighted average shares outstanding 49,949 49,762 49,928 49,684 Earnings per share: Basic $ 1.05 $ 0.74 $ 3.17 $ 1.94 Diluted $ 1.05 $ 0.73 $ 3.15 $ 1.92 NOTE 14. Accumulated Other Comprehensive Income (Loss) The components of accumulated other comprehensive loss, net of tax, at October 1, 2022, as well as the activity for the nine months ended October 1, 2022, were as follows: Foreign currency translation adjustments Net unrealized losses on available-for-sale marketable securities Accumulated other comprehensive income (loss) Balance at January 1, 2022 $ 1,764 $ ( 448 ) $ 1,316 Net current period other comprehensive loss ( 13,665 ) ( 3,456 ) ( 17,121 ) Reclassifications — — — Balance at October 1, 2022 $ ( 11,901 ) $ ( 3,904 ) $ ( 15,805 ) For the nine months ended October 1, 2022, tax effects on net income of amounts recorded in other comprehensive loss for net unrealized losses on available-for-sale marketable securities and foreign currency translation adjustments were $ 962 and $ 0 , respectively. 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- 16 Table of Contents 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 Nine Months Ended October 1, September 25, October 1, September 25, 2022 2021 2022 2021 Systems and software $ 216,082 85 % $ 170,937 85 % $ 646,252 86 % $ 475,345 84 % Parts 21,598 8 % 17,804 9 % 64,211 9 % 53,919 10 % Services 16,573 7 % 11,848 6 % 41,450 5 % 33,991 6 % Total revenue $ 254,253 100 % $ 200,589 100 % $ 751,913 100 % $ 563,255 100 % 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 Nine Months Ended October 1, September 25, October 1, September 25, 2022 2021 2022 2021 Revenue from third parties: China $ 78,412 $ 30,442 $ 215,578 $ 98,495 South Korea 41,039 29,877 171,055 121,705 Taiwan 49,611 59,258 151,460 144,052 United States 27,443 40,483 79,164 91,663 Europe 18,130 16,685 55,606 48,517 Southeast Asia 25,863 9,538 45,627 19,266 Japan 13,755 14,306 33,423 39,557 Total revenue $ 254,253 $ 200,589 $ 751,913 $ 563,255 The following customers accounted for 10% or more of total revenue for the indicated periods: Nine Months Ended October 1, September 25, 2022 2021 Taiwan Semiconductor Manufacturing Co. Ltd. 15 % 18 % SK Hynix Inc. 14 % 7 % Yangtze Memory Technologies Co., Ltd 11 % 3 % Samsung Semiconductor 10 % 18 % NOTE 16. Share Repurchase Authorization In November 2020, the Onto Innovation Board of Directors approved a 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. During the three and nine month periods ended October 1, 2022, the Company purchased and retired 172 thousand shares of its common stock. The amount paid to repurchase the shares in excess of par value, including transaction costs, is recorded directly as a decrease to additional paid-in capital. At October 1, 2022, there was $ 88,465 available for future share repurchases under this share repurchase authorization. 17 Table of Contents