Onto Innovation(ONTO) - 2023 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements Onto Innovation Inc.'s unaudited financial statements show a year-over-year decline in revenue and net income for Q3 and the first nine months of 2023, alongside increased assets and operating cash flow Condensed Consolidated Statements of Operations Highlights (In thousands, except per share data) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Oct 1, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Oct 1, 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $207,185 | $254,253 | $597,012 | $751,913 | | Gross Profit | $106,852 | $138,849 | $312,288 | $401,999 | | Operating Income | $34,006 | $59,307 | $87,848 | $175,502 | | Net Income | $35,886 | $52,215 | $90,850 | $157,120 | | Diluted EPS | $0.73 | $1.05 | $1.84 | $3.15 | Condensed Consolidated Balance Sheets Highlights (In thousands) | Metric | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $206,585 | $175,872 | | Marketable securities | $423,079 | $371,912 | | Total current assets | $1,221,202 | $1,134,872 | | Total assets | $1,862,188 | $1,794,863 | | Total current liabilities | $135,758 | $160,558 | | Total liabilities | $166,046 | $198,437 | | Total stockholders' equity | $1,696,142 | $1,596,426 | Condensed Consolidated Statements of Cash Flows Highlights (In thousands) | Metric | Nine Months Ended Sep 30, 2023 | Nine Months Ended Oct 1, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $110,387 | $87,208 | | Net cash used in investing activities | ($66,259) | ($29,226) | | Net cash used in financing activities | ($9,082) | ($17,897) | | Net increase in cash and cash equivalents | $30,713 | $30,781 | Notes to Condensed Consolidated Financial Statements The notes detail financial statement preparation, fair value measurements, and balance sheet specifics, highlighting a single operating segment, key customer revenue concentration, a 2023 restructuring, and an ongoing legal proceeding - The company operates in a single reportable segment: the design, development, manufacture, and support of high-performance process control systems for microelectronics device manufacturers[70] Revenue by Geographic Region (Nine Months Ended) | Region | Sep 30, 2023 Revenue (in thousands) | Oct 1, 2022 Revenue (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | | South Korea | $122,205 | $171,055 | -28.6% | | China | $108,294 | $215,578 | -49.8% | | United States | $103,756 | $79,164 | +31.1% | | Taiwan | $85,802 | $151,460 | -43.4% | | Southeast Asia | $68,040 | $45,627 | +49.1% | | Japan | $60,832 | $33,423 | +82.0% | | Europe | $48,083 | $55,606 | -13.5% | | Total | $597,012 | $751,913 | -20.6% | - For the nine months ended September 30, 2023, Samsung Semiconductor and Taiwan Semiconductor Manufacturing Co. Ltd. accounted for 20% and 11% of total revenue, respectively[71] - The company initiated a restructuring plan in 2023, recording $3.2 million in employee severance costs and $2.3 million in inventory write-downs during the first nine months of the year[75] - In the legal case Optical Solutions Inc. v. Nanometrics Incorporated, the trial date is set for December 4, 2023, with the company believing the loss contingency is remote and does not anticipate a material impact[54] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 20.6% year-over-year revenue decline for the first nine months of 2023 to decreased metrology product shipments and U.S. export regulations, while maintaining strong liquidity despite lower gross margin and net income - Revenue for the nine months ended September 30, 2023, decreased by 20.6% year-over-year, primarily due to a decrease in shipments of metrology product lines to customers in advanced nodes applications[89] - U.S. government export controls have resulted in lower net sales in China for the first nine months of fiscal 2023 compared to the same period in the prior year[87] Gross Profit Margin Analysis | Period | Gross Profit (in thousands) | Gross Profit Margin | | :--- | :--- | :--- | | Three Months Ended | | | | Sep 30, 2023 | $106,852 | 51.6% | | Oct 1, 2022 | $138,849 | 54.6% | | Nine Months Ended | | | | Sep 30, 2023 | $312,288 | 52.3% | | Oct 1, 2022 | $401,999 | 53.5% | - General and administrative expenses for the nine months ended September 30, 2023, increased by $4.5 million compared to the prior year period, primarily due to $3.2 million in restructuring charges for employee severance[95] - As of September 30, 2023, the company had $629.7 million in cash, cash equivalents, and marketable securities, and $1,085.4 million in working capital, without utilizing its available $100.0 million line of credit[101][106] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company reports no material changes in market risk compared to its 2022 Annual Report on Form 10-K - There have been no material changes in market risk from the information presented in the 2022 Form 10-K[108] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of September 30, 2023, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level[110] - No changes in internal control over financial reporting occurred during the fiscal quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, internal controls[111] PART II OTHER INFORMATION Item 1. Legal Proceedings The company refers to Note 7 of the financial statements for details on material pending legal proceedings, including the case with Optical Solutions Inc - For a description of material pending legal proceedings, the report refers to the "Legal Matters" section of Note 7 to the Condensed Consolidated Financial Statements[113] Item 1A. Risk Factors The company identifies key risks including international operations, U.S. export regulations impacting China business, the cyclical semiconductor industry, dependency on large customers, and potential supply chain disruptions from limited suppliers and geopolitical conflicts - The company is exposed to supply chain risks due to its dependence on a limited group of suppliers for some components and subassemblies, with the conflict in Israel noted as a potential risk due to sourcing from a supplier in the country[130][131] - A substantial portion of revenue is derived from a few large customers, where the loss, delay, or cancellation of a large order could significantly harm revenue and cash flows[118][147] - U.S. export controls, particularly the October 2022 regulations targeting China's semiconductor industry, have adversely affected the company's ability to compete and win business in China and may continue to negatively impact results[173][174][176] - The cyclical nature of the semiconductor industry significantly impacts the company's operating results, as its business depends on the capital expenditures of semiconductor device manufacturers[201] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company details its Q3 2023 share repurchase activity, noting that shares purchased were primarily for tax obligations on vested employee equity awards, with $31.6 million remaining under the repurchase authorization - As of September 30, 2023, $31.6 million remained available for future repurchases under the company's share repurchase authorization[210] - During the three months ended September 30, 2023, the company repurchased 3 thousand shares, which were shares withheld through net share settlements to cover tax withholding obligations on vested employee equity awards[211][212]