ONTO INNOVATION INC

Current report

Results of Operations for the Three and Nine Months Ended September 28, 2024 and September 30, 2023

Current report

Revenue. Our revenue is primarily derived from the sale of our systems, software licensing, services and spare parts. Our revenue of $252.2 million increased 21.7% for the three months ended September 28, 2024 as compared to the three months ended September 30, 2023, in which revenue totaled $207.2 million. For the nine months ended September 28, 2024 and September 30, 2023, our revenue totaled $723.4 million and $597.0 million, respectively, representing a year-over-year increase of 21.2%

Current report

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

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Total systems and software revenue increased $47.8 million and $126.9 million for the three and nine months ended September 28, 2024, respectively, as compared to the three and nine months ended September 30, 2023, respectively. The increases for the three months ended September 28, 2024 were primarily due to an increase in shipments of our inspection and metrology product lines to DRAM and NAND customers, which was partially offset by a decrease in shipments of our lithography product lines to OSAT customers. The increases for the nine months ended September 28, 2024 were primarily due to an increase in shipments of our inspection product lines to DRAM and foundry customers, which was partially offset by a decrease in shipments of our metrology and lithography product lines. The decrease in total parts and services revenue for the three and nine months ended September 28, 2024, as compared to the three and nine months ended September 30, 2023, was primarily due to lower demand by several of our customers, resulting in a decline in their spare parts requirements. Parts and services revenue is generated from part sales, maintenance service contracts, and system upgrades, as well as time and material billable service calls.

Current report

Gross Profit. Our gross profit has been and will likely continue to be affected by a variety of factors, including manufacturing efficiencies, provision for excess and obsolete inventory, pricing by competitors or suppliers, new product introductions, production volume, customization and reconfiguration of systems, international and domestic sales mix, system and software product mix and parts and service margins.

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

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The increase in gross profit as a percentage of revenue for the three and nine months ended September 28, 2024 as compared to the three and nine months ended September 30, 2023 was primarily due to increased volume and change in product mix.

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Operating Expenses.

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Our operating expenses consist of:

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Research and Development. We believe that it is critical to continue to make substantial investments in research and development to ensure the availability of innovative technology that meets the current and projected requirements of our customers’ most advanced designs. We have maintained and intend to continue our commitment to investing in research and development in order to continue to offer new products and technologies. Accordingly, we devote a significant portion of our technical, management and financial resources to research and development programs. Research and development expenditures consist primarily of salaries and related expenses of employees engaged in research, design and development activities. They also include consulting fees, the cost of related supplies and legal costs to defend our patents. Our research and development expenses were $28.3 million and $81.9 million for the three and nine month periods ended September 28, 2024, respectively, as compared to $26.1 million and $80.4 million for the three and nine month periods ended September 30, 2023, respectively. The increase in research and development expenses of $2.2 million for the three month period ended September 28, 2024, as compared to the three month period ended September 30, 2023 was primarily due to increases in compensation costs of $1.7 million, product development costs of $0.2 million, travel costs of $0.2 million and depreciation and amortization costs of $0.1 million. The increase in research and development expenses of $1.5 million for the nine month period ended September 28, 2024, as compared to the nine month period ended September 30, 2023, was primarily due to increases in compensation costs of $0.7 million, travel costs of $0.5 million and outside service costs of $0.3 million.

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Sales and Marketing. Sales and marketing expenses are primarily comprised of salaries, commissions and related costs for sales and marketing personnel, as well as other non-personnel related expenses. Our sales and marketing expenses were $19.5 million and $56.7 million for the three and nine month periods ended September 28, 2024, respectively, compared to $14.8 million and $46.4 million for the three and nine month periods ended September 30, 2023, respectively. The increase in sales and marketing expenses of $4.7 million for the three month period ended September 28, 2024, as compared to the three month period ended September 30, 2023, was primarily due to increases in compensations costs of $4.3 million, travel costs of $0.3 million and freight and duty costs of $0.1 million. The increase in sales and marketing expenses of $10.3 million for the nine month period ended September 28, 2024, as compared to the nine month period ended September 30, 2023, was primarily due to increases in compensations costs of $9.4 million, travel costs of $0.4 million, sales and marketing costs of $0.3 million, outside services costs of $0.1 million and freight and duty costs of $0.1 million.

Current report

General and Administrative. General and administrative expenses are primarily comprised of salaries and related costs for corporate and administrative personnel, as well as other non-personnel related expenses. Our general and administrative expenses were $22.5 million and $60.3 million for the three and nine month periods ended September 28, 2024, respectively, as compared to $18.1 million and $56.1 million for the three and nine month periods ended September 30, 2023, respectively. The increase in general and administrative expenses of $4.4 million for the three month period ended September 28, 2024, as compared to the three month period ended September 30, 2023, was primarily due to increases in compensation costs of $3.7 million, other office expense costs of $0.6 million, and travel costs of $0.1 million. The increase in general and administrative expenses of $4.2 million for the nine month period ended September 28, 2024, as compared to the nine month period ended September 30, 2023, was primarily due to increases in compensation costs of $2.6 million, depreciation and amortization of $1.3 million, travel costs of $0.6 million and other office expense costs of $0.4 million, partially offset by an decrease in outside services costs of $0.7 million.

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Amortization of Identifiable Intangible Assets. Amortization of identifiable intangible assets was $13.1 million and $39.3 million for the three and nine month periods ended September 28, 2024, respectively, compared to $13.8 million and $41.5 million for the three and nine month periods ended September 30, 2023, respectively. The decreases in amortization of identifiable intangible assets of $0.7 million and $2.2 million for the three and nine month periods ended September 28, 2024, as compared to the three and nine month periods ended September 30, 2023, respectively, were primarily due to certain assets becoming fully amortized.

Current report

Interest income, net. Net interest income was $8.7 million and $24.5 million for the three and nine month periods ended September 28, 2024, respectively, as compared to $5.7 million and $13.9 million for the three and nine month periods ended September 30, 2023, respectively. The increases in net interest income for both the three and nine month periods ended September 28, 2024, as compared to the three and nine month periods ended September 30, 2023, were due to higher cash and marketable securities balances and higher interest rates during the 2024 period.

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Other (expense) income, net. Other expense, net was $0.7 million for the three month period ended September 28, 2024, as compared to $1.0 million for the same period in the prior year. Other income, net was $10 thousand for the nine month period ended September 28, 2024, as compared to other expense, net of $3.0 million for the same period in the prior year. Decreases in foreign exchange losses, net during all of the comparative periods presented were the primary drivers in the period over period changes.

Current report

Income Taxes. We recorded an income tax provision of $8.0 million and $16.3 million for the three and nine month periods ended September 28, 2024, respectively, as compared to $2.8 million and $7.9 million for the three and nine month periods ended September 30, 2023, respectively. Our effective tax rates of 13% and 10% for the three and nine month periods ended September 28, 2024 respectively, differ from the statutory rate of 21%, primarily due to (i) research and development tax credits, (ii) the deduction related to foreign derived intangible income (“FDII”), and (iii) excess tax benefits associated with equity compensation. Our effective tax rate of 7% and 8% for the three and nine month periods ended September 30, 2023, respectively, differed from the statutory rate of 21%, primarily due to (i) research and development tax credits, (ii) the deduction related to FDII, and (iii) excess tax benefits associated with equity compensation.

Current report

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.

Current report

We currently have a partial valuation allowance recorded for certain foreign and state loss and credit carryforwards where the realizability of such deferred tax assets is substantially in doubt. Each quarter we assess the likelihood that we will be able to recover our deferred tax assets primarily relating to state research and development credits. We consider available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. As a result of our analysis, we concluded that it is more likely than not that a portion of our net deferred tax assets will not be realized. Therefore, we continue to provide a valuation allowance against certain net deferred tax assets. We continue to monitor available evidence and may reverse some or all of the valuation allowance in future periods, if appropriate.

Current report

The Organization for Economic Co-operation and Development (“OECD”) has been working on a Base Erosion and Profits Shifting project that, upon implementation, would change various aspects of the existing framework under which our tax obligations are determined in many of the countries in which we operate. In this regard, the OECD has proposed policies aiming to modernize global tax systems, including a country-by-country 15% minimum effective tax rate (“Pillar Two”) for multinational companies. Numerous countries have enacted, or are in the process of enacting, legislation to implement the Pillar Two model rules with a subset of the rules becoming effective during the current year, and the remaining rules becoming effective in later periods. At this point in time, we do not expect any material tax impact associated with Pillar Two rules in the countries where we operate. As these rules continue to evolve with new legislation and guidance, we will continue to monitor and account for the enactment of Pillar Two and the potential impacts such rules may have on our effective tax rate and cash flows in future years.

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Liquidity and Capital Resources

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Our cash, cash equivalents and marketable securities consist of the following in dollars (thousands) for the periods indicated:

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Sources and Uses of Cash

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A summary of cash provided by (used in) operating, investing, and financing activities is as follows in dollars (thousands) for the periods indicated:

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Operating Activities

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Net cash and cash equivalents provided by operating activities for the nine months ended September 28, 2024 were $189.7 million. The net cash and cash equivalents provided by operating activities during the nine months ended September 28, 2024 resulted primarily from net income, adjusted to exclude the effect of non-cash operating charges, of $214.7 million. Significant non-cash operating charges included depreciation, amortization, share-based compensation, provision for inventory valuation and deferred income taxes. Cash provided by operating activities for the first nine months of fiscal 2024 increased compared to the corresponding period in fiscal 2023 primarily due to improved inventory management, higher cash collections and higher investment income.

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Our working capital was $1,313.2 million at September 28, 2024 and $1,135.5 million at December 30, 2023.

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Investing Activities

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Net cash and cash equivalents used in investing activities for the nine months ended September 28, 2024 were $222.5 million. During the nine months ended September 28, 2024, net cash and cash equivalents used in investing activities included purchases of marketable securities of $538.1 million and capital expenditures of $27.3 million, partially offset by proceeds from maturities and sales of marketable securities of $343.0 million .

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From time to time, we evaluate whether to acquire new or complementary businesses, products or technologies. We may fund all of or a portion of the price of these investments or acquisitions in cash, stock, or a combination of cash and stock.

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Financing Activities

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Net cash and cash equivalents used in financing activities for the nine months ended September 28, 2024 were $10 million. During the nine months ended September 28, 2024, financing activities used cash primarily for tax payments related to shares withheld to satisfy employee tax obligations in connection with the vesting of awards under share-based compensation plans of $18.4 million, partially offset by proceeds from sales of shares through share-based compensation plans of $9.2 million.

Current report

In February 2024, the Onto Innovation Board of Directors approved a share repurchase authorization, which allows the Company to repurchase up to $200 million worth of shares of its common stock. Repurchases may be made through both public market and private transactions from time to time. During the three and nine months ended September 28, 2024, we repurchased no shares of common stock under this repurchase authorization. As of September 28, 2024, there was $200 million available for future share repurchases under this share repurchase authorization.

Current report

We have a credit agreement with a bank that provides for a variable-rate line of credit that is secured by the marketable securities we have with the bank. We are permitted to borrow up to 70% of the value of eligible securities held at the time the line of credit is accessed, up to a maximum of $100 million. As of September 28, 2024, the available line of credit was $100 million with an available interest rate of 6.6%. The credit agreement is available to us until such time that either party terminates the arrangement at its discretion. As of the date of this filing, we have not utilized the line of credit.

Current report

Our future capital requirements will depend on many factors, including the timing and amount of our revenue and our investment decisions, which will affect our ability to generate additional cash. We expect that our existing cash, cash equivalents, marketable securities and availability under our line of credit will be sufficient to meet our anticipated cash requirements for working capital, capital expenditures and other cash needs for the next 12 months following the filing of this Form 10-Q. Thereafter, if cash generated from operations and financing activities is insufficient to satisfy our working capital requirements, we may seek additional funding through bank borrowings, sales of securities or other means. A reduction in or volatility with respect to our stock price or a general market downturn could materially impact our ability to sell securities on favorable terms or at all. There can be no assurance that we will be able to raise any such capital on terms acceptable to us or at all.