Onto Innovation Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended October 1, 2022, filed November 9, 2022. The request metadata says 2020 Q3, but the filing itself covers 2022 Q3. Amounts below are in millions of dollars unless otherwise noted.
Business context and reporting period
Onto designs, manufactures, and supports process-control equipment and software for semiconductor and advanced-packaging manufacturers. It reports one operating segment. The quarter’s results are compared with the quarter ended September 25, 2021; year-to-date results cover nine months.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $254.3 | $200.6 | $751.9 | $563.3 |
| Gross profit | $138.8 | $109.4 | $402.0 | $305.3 |
| Gross margin | 54.6% | 54.5% | 53.5% | 54.2% |
| Operating income | $59.3 | $43.1 | $175.5 | $106.6 |
| Net income | $52.2 | $36.4 | $157.1 | $95.6 |
| Diluted EPS | $1.05 | $0.73 | $3.15 | $1.92 |
| Cash provided by operating activities | Not presented quarterly | Not presented quarterly | $87.2 | $126.3 |
Quarterly revenue increased 26.8% year over year; nine-month revenue increased 33.5%. Gross profit dollars rose in both comparisons, while nine-month gross margin declined, primarily due to product mix, higher freight and logistics costs, and higher personnel costs. Quarterly margin was broadly flat year over year. Operating expenses rose, including R&D expense of $32.2 million for the quarter, which included a $4.4 million write-off of acquired in-process R&D. The effective tax rate was 13% for the quarter and 11% year to date.
At October 1, 2022, cash and cash equivalents were $200.4 million and marketable securities were $352.3 million, totaling $552.7 million; working capital was $953.1 million. Total liabilities were $218.4 million, with no borrowings reported on the balance sheet. The company had not drawn on its secured line of credit, with approximately $138 million available at a stated rate of 4.8%. Inventory was $307.9 million, up from $243.1 million at fiscal year-end, and accounts receivable was $235.5 million, up from $177.2 million.
Cash flow, capital allocation, and material changes
- Nine-month operating cash flow fell to $87.2 million from $126.3 million, primarily reflecting a $127.0 million use from changes in operating assets and liabilities, especially higher inventory and receivables.
- Investing activities used $29.2 million; financing activities used $17.9 million. Capital expenditures were $9.8 million.
- The company repurchased and retired 172,000 shares for $11.5 million during the nine months; $88.5 million remained under its $100 million authorization.
- Currency translation and unrealized investment losses contributed to a $17.1 million nine-month other comprehensive loss.
- Revenue increased year over year across systems and software, parts, and services. By contrast, Q3 revenue declined 0.8% sequentially from Q2, reflecting lower sales to certain DRAM and OSAT customers, partly offset by higher foundry and MEMS-related sales.
Outlook, commentary, risks, and contingencies
- Export controls: New U.S. export controls announced in October 2022 require licenses for certain business with Chinese customers. Management estimated a negative revenue impact of approximately $10 million in Q4 2022 and $80 million in fiscal 2023; delays or denied licenses could add to the impact.
- Supply chain and costs: Management said demand remained strong, but component shortages, long lead times, logistics constraints, and inflationary pressures were affecting operations and were expected to persist through the remainder of 2022 and into 2023.
- Customer and geographic concentration: China was the largest Q3 revenue geography at $78.4 million. For the nine months, four customers each represented at least 10% of revenue: TSMC 15%, SK Hynix 14%, Yangtze Memory Technologies 11%, and Samsung Semiconductor 10%.
- Liquidity outlook: Management expected cash, marketable securities, and the available credit line to cover anticipated cash needs for at least the next 12 months.
- Legal matter: A pending dispute with Optical Solutions Inc. was in discovery, with trial scheduled for December 2023. The company assessed the loss contingency as remote and did not expect a material financial impact.
- Other notable items: The company recorded a $4.4 million write-off of acquired in-process R&D. It also had a $1.7 million accrued potential earnout related to Inspectrology. Management reported disclosure controls effective as of quarter-end and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether export licenses are obtained and how the disclosed $10 million Q4 and $80 million fiscal 2023 revenue estimates develop.
- Whether elevated inventory and receivables convert to shipments and collections, and whether operating cash flow improves.
- How component availability, freight and logistics costs, and inflation affect delivery performance and gross margins.
- Revenue exposure to major customers and China, including the effect of customer spending changes or additional export restrictions.
- Developments in the Optical Solutions litigation and the Inspectrology earnout obligation.