Filing summary
Period discrepancy: The request identifies 2018 Q2, but the supplied Form 10-Q is for Onto Innovation Inc. for the quarter ended June 27, 2020, filed August 4, 2020. The comparisons below are to the corresponding 2019 periods. Dollar amounts are in millions unless noted.
Business context and reporting period
Onto designs, manufactures and supports process-control inspection, metrology, lithography and software systems for semiconductor and advanced-packaging manufacturers. Its second fiscal quarter ran March 29–June 27, 2020. The company changed to a 52–53-week fiscal year ending on the Saturday closest to December 31, so quarterly periods do not align exactly with prior-year calendar quarters.
The October 2019 Rudolph–Nanometrics merger is a major comparability factor: the merger was accounted for as a reverse acquisition, with Rudolph as accounting acquirer. 2020 results include Nanometrics after the merger; pre-merger comparative results are Rudolph’s only.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $134.9 | $61.5 | $274.9 | $122.4 |
| Gross profit / margin | $71.6 / 53.0% | $31.9 / 51.9% | $134.2 / 48.8% | $63.9 / 52.2% |
| Operating income | $7.9 | $5.4 | $2.7 | $13.0 |
| Net income | $7.4 | $5.5 | $3.0 | $13.1 |
| Diluted EPS | $0.15 | $0.22 | $0.06 | $0.52 |
- Revenue increased 119.4% in Q2 and 124.6% in the first half, primarily reflecting inclusion of Nanometrics results in 2020; management attributes much of the first-half year-over-year increase to the merger.
- First-half gross margin declined year over year, in part due to $10.2 million of acquired-inventory fair-value step-up charges in cost of revenue. Q2 gross margin improved versus the prior-year quarter.
- First-half operating income and net income fell despite substantially higher revenue. The 2020 period included merger-related intangible amortization ($27.4 million in the first half versus $0.8 million in 2019) and higher operating expenses. Average shares outstanding also nearly doubled after the merger, affecting EPS comparisons.
- Operating cash flow was $46.9 million for the first half, compared with $9.8 million in 2019. Investing activities provided $7.3 million; financing activities used $55.5 million, including $52.0 million of share repurchases. Cash declined $1.3 million to $129.4 million.
- Cash, cash equivalents and marketable securities totaled $312.1 million at June 27, 2020, versus $320.2 million at year-end 2019. Working capital was $546.2 million. Total liabilities were $195.6 million; the filing reports no borrowings and no debt balance. An unused, securities-secured credit line had about $75.6 million available at a stated 1.8% interest rate.
Material changes and unusual items
- Systems and software accounted for 80% of Q2 revenue and 81% of first-half revenue. Parts and services made up the balance; their share of Q2 revenue was higher than in the comparative quarter.
- Two unnamed customers represented 18.2% and 17.3% of first-half 2020 revenue, respectively; a third represented 7.1%. The filing highlights continued customer concentration.
- First-half share repurchases totaled 1.9 million shares for $52.0 million, averaging $27.62 per share; $28.0 million remained authorized. The company settled a convertible note receivable for $2.8 million in April.
- Q2 other expense included $1.3 million of foreign-currency exchange losses. The first-half effective tax rate was 12%, affected by forecast earnings, R&D credits, the FDII deduction and one-time tax items.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management said existing cash, marketable securities and credit availability should cover anticipated needs for the next 12 months.
- Management reported no material adverse operational or financial impact from COVID-19 through the report date, but warned that future effects could be material. Risks include customer demand changes, supply-chain disruption, operating delays and reduced borrowing capacity or access to capital.
- Other key risks include semiconductor-industry cyclicality, reliance on a small number of customers, international exposure and trade restrictions, competition, product development and supply constraints, and integration of the merger.
- In the OSI dispute, the court dismissed two claims with prejudice and two with leave to amend; OSI filed a further amended complaint July 7, 2020. Trial was set for May 2022. The company did not expect the matter to materially affect its financial position, results or cash flows.
- Management stated disclosure controls were effective at a reasonable-assurance level, but excluded Nanometrics from the controls evaluation. Nanometrics represented 54% of first-half revenue and 27% of period-end assets; integration of its financial reporting controls was ongoing.
Important facts for investors to verify
- Confirm the intended filing period: this source is a 2020 Q2 Form 10-Q, not a 2018 Q2 filing.
- Separate merger-driven revenue growth from underlying organic growth; prior-year comparisons exclude pre-merger Nanometrics results.
- Assess whether customer concentration and semiconductor capital-spending trends make recent revenue sustainable.
- Track gross margins and the effects of acquired-inventory charges, intangible amortization and ongoing merger integration.
- Review COVID-19 and trade-related developments, the unused credit line’s securities collateral, and the status of the OSI litigation.