ONTO INNOVATION INC. - Quarter Report: 2020 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 27, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 001-39110

ONTO INNOVATION INC.

(Exact name of registrant as specified in its charter)

Delaware

94-2276314

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

16 Jonspin Road, Wilmington, Massachusetts 01887

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (978) 253-6200

Securities registered pursuant to Section 12(b) of the Act


Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, $0.001 par value per share	ONTO	New York Stock Exchange (NYSE)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of outstanding shares of the Registrant’s Common Stock on July 16, 2020 was 48,815,391.

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TABLE OF CONTENTS


Item No.		Page
	PART I FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Statements of Operations for the three and six months ended June 27, 2020 and June 30, 2019	1
	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 27, 2020 and June 30, 2019	2
	Condensed Consolidated Balance Sheets at June 27, 2020 and December 31, 2019	3
	Condensed Consolidated Statements of Cash Flows for the six months ended June 27, 2020 and June 30, 2019	4
	Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 27, 2020 and June 30, 2019	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 4.	Controls and Procedures	26

	PART II OTHER INFORMATION

Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Defaults Upon Senior Securities	41
Item 4.	Mine Safety Disclosures	41
Item 5.	Other Information	41
Item 6.	Exhibits	42

Signatures

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PART I FINANCIAL INFORMATION

Item 1. Financial Statements

ONTO INNOVATION INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended						Six Months Ended
	June 27,			June 30,			June 27,			June 30,
	2020			2019			2020			2019
Revenue	$	134,948		$	61,511		$	274,876		$	122,403
Cost of revenue		63,363			29,600			140,660			58,473
Gross profit		71,585			31,911			134,216			63,930
Operating expenses:
Research and development		22,167			10,659			43,094			21,199
Sales and marketing		11,869			5,798			24,940			10,524
General and administrative		15,916			9,649			36,063			18,407
Amortization		13,703			387			27,435			774
Total operating expenses		63,655			26,493			131,532			50,904
Operating income		7,930			5,418			2,684			13,026
Interest income, net		686			860			1,896			1,666
Other (expense) income, net		(1,198	)		(157	)		(1,166	)		224
Income before provision for income taxes		7,418			6,121			3,414			14,916
Provision (benefit) for income taxes		(6	)		595			394			1,814
Net income	$	7,424		$	5,526		$	3,020		$	13,102
Earnings per share:
Basic	$	0.15		$	0.22		$	0.06		$	0.52
Diluted	$	0.15		$	0.22		$	0.06		$	0.52
Weighted average shares outstanding:
Basic		48,736			25,032			49,417			24,977
Diluted		49,014			25,250			49,782			25,227

The accompanying notes are an integral part of these financial statements.

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ONTO INNOVATION INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Three Months Ended				Six Months Ended
	June 27,		June 30,		June 27,		June 30,
	2020		2019		2020		2019
Net income	$	7,424	$	5,526	$	3,020	$	13,102
Other comprehensive income (loss), net of tax:
Change in net unrealized gains on available-for-sale marketable securities		795		114		269		209
Change in currency translation adjustments		2,495		316		264		(202	)
Other comprehensive income		3,290		430		533		7
Total comprehensive income	$	10,714	$	5,956	$	3,553	$	13,109

The accompanying notes are an integral part of these financial statements.

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ONTO INNOVATION INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

	June 27, 2020			December 31, 2019
ASSETS
Current Assets:
Cash and cash equivalents	$	129,388		$	130,673
Marketable securities		182,673			189,563
Accounts receivable, less allowance of $1,665 and $1,247		137,529			123,656
Inventories, net		171,836			176,134
Prepaid expenses and other current assets		23,486			21,638
Total current assets		644,912			641,664
Property, plant and equipment, net		95,517			98,420
Goodwill		307,626			307,148
Identifiable intangible assets, net		344,569			371,953
Deferred income taxes		1,285			1,456
Other assets		22,863			27,939
Total assets	$	1,416,772		$	1,448,580
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	34,318		$	27,738
Accrued liabilities		35,131			26,204
Deferred revenue		15,656			12,629
Other current liabilities		13,610			19,172
Total current liabilities		98,715			85,743
Deferred and other tax liabilities		66,271			67,040
Other non-current liabilities		30,577			31,771
Total liabilities		195,563			184,554
Commitments and contingencies
Stockholders’ equity:
Common stock		49			50
Additional paid-in capital		1,223,068			1,269,437
Accumulated other comprehensive loss		(65	)		(598	)
Accumulated deficit		(1,843	)		(4,863	)
Total stockholders’ equity		1,221,209			1,264,026
Total liabilities and stockholders’ equity	$	1,416,772		$	1,448,580

The accompanying notes are an integral part of these financial statements.

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ONTO INNOVATION INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended
	June 27,			June 30,
	2020			2019
Cash flows from operating activities:
Net income	$	3,020		$	13,102
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Amortization of intangibles		27,435			774
Depreciation		6,240			2,363
Share-based compensation		8,730			3,836
Acquired inventory step-up amortization		10,173			—
Provision for doubtful accounts and inventory valuation		3,108			1,003
Other, net		1,102			(222	)
Changes in operating assets and liabilities		(12,937	)		(11,066	)
Net cash and cash equivalents provided by operating activities		46,871			9,790
Cash flows from investing activities:
Purchases of marketable securities		(140,364	)		(38,227	)
Proceeds from sales of marketable securities		147,473			33,186
Cash received from convertible note receivable		2,848			—
Purchases of property, plant and equipment		(2,609	)		(2,654	)
Net cash and cash equivalents provided by (used in) investing activities		7,348			(7,695	)
Cash flows from financing activities:
Purchase of common stock		(52,000	)		(744	)
Tax payments related to shares withheld for share-based compensation plans		(3,279	)		(749	)
Payment of contingent consideration for acquired business		(435	)		(1,121	)
Issuance of shares through share-based compensation plans		179			160
Net cash and cash equivalents used in financing activities		(55,535	)		(2,454	)
Effect of exchange rate changes on cash and cash equivalents		31			(71	)
Net decrease in cash and cash equivalents		(1,285	)		(430	)
Cash and cash equivalents at beginning of period		130,673			112,388
Cash and cash equivalents at end of period	$	129,388		$	111,958

Supplemental disclosure of cash flow information:
Income taxes paid	$	3,463		$	209

The accompanying notes are an integral part of these financial statements.

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ONTO INNOVATION INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

	Common Stock						Additional Paid-in			Accumulated Other Comprehensive			Accumulated
	Shares			Amount			Capital			Loss			Deficit			Total
Balance at December 31, 2019		50,184		$	50		$	1,269,437		$	(598	)	$	(4,863	)	$	1,264,026
Issuance of shares through share-based compensation plans, net		240			—			164			—			—			164
Repurchase of common stock		(1,250	)		(1	)		(33,613	)		—			—			(33,614	)
Net loss		—			—			—			—			(4,404	)		(4,404	)
Share-based compensation		—			—			3,955			—			—			3,955
Share-based compensation plan withholdings		(42	)		—			(1,565	)		—			—			(1,565	)
Currency translation		—			—			—			(2,231	)		—			(2,231	)
Unrealized loss on investments		—			—			—			(526	)		—			(526	)
Balance at March 28, 2020		49,132		$	49		$	1,238,378		$	(3,355	)	$	(9,267	)	$	1,225,805
Issuance of shares through share-based compensation plans, net		279			—			15			—			—			15
Repurchase of common stock		(632	)		—			(18,385	)		—			—			(18,385	)
Net income		—			—			—			—			7,424			7,424
Share-based compensation		—			—			4,775			—			—			4,775
Share-based compensation plan withholdings		(55	)		—			(1,715	)		—			—			(1,715	)
Currency translation		—			—			—			2,495			—			2,495
Unrealized gain on investments		—			—			—			795			—			795
Balance at June 27, 2020		48,724		$	49		$	1,223,068		$	(65	)	$	(1,843	)	$	1,221,209

	Common Stock					Additional Paid-in			Accumulated Other Comprehensive			Retained Earnings (Accumulated
	Shares			Amount		Capital			Loss			Deficit)			Total
Balance at December 31, 2018		24,855		$	31	$	369,893		$	(1,263	)	$	(6,773	)	$	361,888
Issuance of shares through share-based compensation plans, net		83			—		—			—			—			—
Repurchase of common stock		(30	)		—		(744	)		—			—			(744	)
Net income		—			—		—			—			7,576			7,576
Share-based compensation		—			—		2,163			—			—			2,163
Share-based compensation plan withholdings		(22	)		—		(598	)		—			—			(598	)
Currency translation		—			—		—			(518	)		—			(518	)
Unrealized gain on investments		—			—		—			95			—			95
Balance at March 31, 2019		24,886		$	31	$	370,714		$	(1,686	)	$	803		$	369,862
Issuance of shares through share-based compensation plans, net		143			—		160			—			—			160
Net income		—			—		—			—			5,526			5,526
Share-based compensation		—			—		1,673			—			—			1,673
Share-based compensation plan withholdings		(5	)		—		(151	)		—			—			(151	)
Currency translation		—			—		—			316			—			316
Unrealized gain on investments		—			—		—			114			—			114
Balance at June 30, 2019		25,024		$	31	$	372,396		$	(1,256	)	$	6,329		$	377,500

The accompanying notes are an integral part of these financial statements.

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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. (the “Company,” or “Onto”, “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 six months ended June 27, 2020 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 December 31, 2019 (“2019 Form 10-K”) filed with the Securities and Exchange Commission (“SEC”) on February 25, 2020. The accompanying Condensed Consolidated Balance Sheet at December 31, 2019 has been derived from the audited consolidated financial statements included in the 2019 Form 10-K.

As further discussed in Note 2 of the Notes to the Condensed Consolidated Financial Statements, Rudolph Technologies, Inc. (“Rudolph”) and Nanometrics Incorporated (“Nanometrics”) completed a merger effective October 25, 2019 (the “Merger”). Upon consummation of the Merger, the combined company was renamed Onto Innovation Inc. The Merger was accounted for as a reverse acquisition where Rudolph was the accounting acquirer and Nanometrics was the legal acquirer in accordance with Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations”. Accordingly, Rudolph’s historical results of operations replaced the Nanometrics historical results of operations for all periods prior to the Merger. Specifically, the accompanying Condensed Consolidated Financial Statements for all periods prior to the Merger are those of Rudolph and for the period after the Merger, also include Nanometrics. The Condensed Consolidated Financial Statements reflect the assets and liabilities of Rudolph at historical cost basis and the assets and liabilities of Nanometrics are reflected at fair value under the acquisition method. While Rudolph applied the acquisition method of accounting to Nanometrics, the legal capital in the current and prior periods has been retroactively adjusted to reflect the legal capital of Nanometrics. Accordingly, earnings per share has been retroactively restated for periods prior to the merger date.

On February 28, 2020, the Company’s Board of Directors determined it is in the best interests of the Company to change its fiscal year end from December 31 to a 52-53 week fiscal year ending on the Saturday closest to December 31. The change is intended to align the Company’s fiscal periods more closely with industry peers and improve comparability. The Company made the fiscal year change on a prospective basis and has not adjusted operating results for prior periods. The change affects the prior year comparability of the Company’s fiscal quarters in 2020 and results in shifts in the quarterly periods, which has not had, and is not expected to have, a material impact on quarterly financial results. The second fiscal quarter of 2020 began on March 29, 2020 and ended June 27, 2020 and is referred to throughout this Quarterly Report on Form 10-Q as the “three months ended June 27, 2020” or the “second quarter of 2020.” The Company’s current fiscal year will end on December 26, 2020.

Reclassifications

In conjunction with the Merger, the Company assessed the need to realign its financial statement presentation and certain income statement classifications were adjusted with prior periods reclassified to conform with current period presentation. The changes made were as follows:

•

Amounts related to sales and marketing are now presented on a separate line on the Condensed Consolidated Statements of Operations and were previously reported under the caption “Selling, general and administrative.”

•

Amounts related to applications engineering are now presented under the caption, “Sales and marketing” on the Condensed Consolidated Statements of Operations and were previously reported under the caption “Research and development.”

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP 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

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estimates made by management that are evaluated on an ongoing basis include the allowances for doubtful accounts and convertible notes receivable, 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.

The Company also assessed the impacts of COVID-19 on the above accounting matters as of June 27, 2020 and through the date of this report. While there was not a material impact as of and for the quarter ended June 27, 2020, future actual magnitude and duration of COVID-19, as well as other associated factors, could result in material negative impacts to its condensed consolidated financial statements in future reporting periods.

Recent Accounting Pronouncements

Recently Adopted

Effective January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU is part of the Financial Accounting Standard Board’s (“FASB”) larger disclosure framework project intended to improve the effectiveness of financial statement footnote disclosure. ASU No. 2018-13 modifies required fair value disclosures related primarily to Level 3 investments. This ASU is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The adoption of ASU No. 2018-13 did not have a material impact on the Company’s consolidated financial position, results of operations, and cash flows.

Effective January 1, 2020, the Company adopted ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” This ASU amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Accounting Standards Codification (“ASC”) 718. The ASU is effective for the fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. The adoption of ASU No. 2017-09 did not have a material impact on the Company’s consolidated financial position, results of operations, and cash flows.

Effective January 1, 2020, the Company adopted ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which represents a credit loss standard that changes the impairment model for most financial assets and certain other financial instruments. Specifically, this guidance requires entities to utilize a new “expected loss” model as it relates to trade receivables, notes receivable and other commitments to extend credit held by a reporting entity. In addition, entities are required to recognize an allowance for estimated credit losses on available-for-sale debt securities, regardless of the length of time that a security has been in an unrealized loss position. This guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods, with early adoption permitted. The adoption of ASU No. 2016-13 did not have a material impact on the Company’s consolidated financial position, results of operations, and cash flows.

Recently Issued

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating consolidated income taxes to separate financial statements of entities not subject to income tax. ASU No. 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Upon adoption, the Company must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this new standard on its consolidated financial position, results of operations, and cash flows.

Recently issued accounting guidance not discussed above is not applicable or is not expected to have a material impact to the Company’s consolidated financial position, results of operations, and cash flows.

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NOTE 2. Business Combination

Rudolph and Nanometrics completed the Merger effective October 25, 2019. The Company accounted for the Merger as a reverse acquisition, using the acquisition method of accounting in accordance with U.S. GAAP, with Rudolph being treated as the accounting acquiring entity. The acquired assets and liabilities of Nanometrics were recorded at their respective fair values including an amount for goodwill, which represents the purchase price paid in excess of the fair value of the net tangible and intangible assets acquired and liabilities assumed, and is attributable primarily to expected synergies, economies of scale and the assembled workforce of Nanometrics.

The following table summarizes the preliminary allocation of the total purchase consideration to the initial estimated fair values of the assets acquired and liabilities assumed as of October 25, 2019, as well as adjustments aggregating $0 and $478 to other non-current liabilities during the three and six months ended June 27, 2020:

Cash and cash equivalents	$	43,882
Marketable securities		94,389
Account receivables		49,917
Inventories		98,478
Prepaid expenses and other current assets		7,734
Property, plant and equipment		77,451
Operating lease right-of-use assets		9,658
Identifiable intangible assets		374,900
Deferred income taxes		1,352
Other assets		850
Total assets acquired		758,611
Accounts payable		(23,361	)
Payroll and related expenses		(20,290	)
Deferred revenue		(5,931	)
Other current liabilities		(10,739	)
Income taxes payable		(2,699	)
Other non-current liabilities		(90,591	)
Net assets acquired		605,000
Goodwill		285,131
Total purchase consideration	$	890,131

NOTE 3. Fair Value Measurements

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.

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The following tables provide the assets and liabilities carried at fair value measured on a recurring basis at June 27, 2020 and December 31, 2019:

			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)
June 27, 2020
Assets:
Available-for-sale debt securities:
Municipal notes and bonds	$	64,599	$	—	$	64,599	$	—
U.S. treasury securities		4,996		4,996		—		—
Asset-backed securities		15,557		—		15,557		—
Certificates of deposit		35,799		—		35,799		—
Commercial paper		26,491		—		26,491		—
Corporate bonds		35,231		—		35,231		—
Total assets	$	182,673	$	4,996	$	177,677	$	—
Liabilities:
Contingent consideration - acquisitions	$	134	$	—	$	—	$	134
Foreign currency forward contracts		139		—		139		—
Total liabilities	$	273	$	—	$	139	$	134

December 31, 2019
Assets:
Available-for-sale debt securities:
Municipal notes and bonds	$	81,108	$	—	$	81,108	$	—
Asset-backed securities		10,779		—		10,779		—
Certificates of deposit		30,507		—		30,507		—
Commercial paper		30,708		—		30,708		—
Corporate bonds		36,461		—		36,461		—
Foreign currency forward contracts		120		—		120		—
Total assets	$	189,683	$	—	$	189,683	$	—
Liabilities:
Contingent consideration - acquisitions	$	569	$	—	$	—	$	569
Total liabilities	$	569	$	—	$	—	$	569

The Company’s available-for-sale debt securities classified as Level 1 are based on quoted prices that are available in active markets. The U.S. Treasury securities are measured based on quoted market prices.

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 liabilities consisted of contingent consideration related to an acquisition for which the Company uses a discounted cash flow model to value these liabilities. The Level 3 assumptions used in the discounted cash flow model for the contingent consideration included projected revenue, timing of cash flows and estimates of discount rates.

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This table presents a reconciliation of the Contingent consideration - acquisitions liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 27, 2020:

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Balance at December 31, 2019	$	569
Additions		—
Payments		(435	)
Transfer into (out of) Level 3		—
Balance at June 27, 2020	$	134

See Note 4 for additional discussion regarding the fair value of the Company’s marketable securities.

Fair Value of Other Financial Instruments

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. The estimated fair value of these obligations is based, primarily, on a market approach, comparing the Company’s interest rates to those rates the Company believes it would reasonably receive upon re-entry into the market. Judgment is required to estimate the fair value using available market information and appropriate valuation methods.

NOTE 4. Marketable Securities

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 loss.” Realized gains and losses on available-for-sale securities are included in “Other (expense) income, net” on the Condensed Consolidated Statements of Operations. The Company records other-than-temporary impairment charges 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 June 27, 2020 and December 31, 2019 are temporary in nature. The Company reviews its investment portfolio to identify and evaluate marketable securities that have indications of possible impairment. Factors considered in determining whether a loss is other-than-temporary 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.

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At June 27, 2020 and December 31, 2019, marketable securities are categorized as follows:

	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses		Fair Value
June 27, 2020
Municipal notes and bonds	$	64,366	$	235	$	2	$	64,599
U.S. treasury securities		4,996		—		—		4,996
Asset-backed securities		15,479		78		—		15,557
Certificates of deposit		35,798		18		17		35,799
Commercial paper		26,474		19		2		26,491
Corporate bonds		35,022		211		2		35,231
Total marketable securities	$	182,135	$	561	$	23	$	182,673
December 31, 2019
Municipal notes and bonds	$	80,926	$	188	$	6	$	81,108
Asset-backed securities		10,767		12		—		10,779
Certificates of deposit		30,500		7		—		30,507
Commercial paper		30,707		1		—		30,708
Corporate bonds		36,409		52		—		36,461
Total marketable securities	$	189,309	$	260	$	6	$	189,563

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 June 27, 2020 and December 31, 2019:

	June 27, 2020				December 31, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due within one year	$	144,394	$	144,797	$	152,649	$	152,852
Due after one through five years		37,741		37,876		36,660		36,711
Due after five through ten years		—		—		—		—
Due after ten years		—		—		—		—
Total marketable securities	$	182,135	$	182,673	$	189,309	$	189,563

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 June 27, 2020 and December 31, 2019:

	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
June 27, 2020
Municipal notes and bonds	$	7,280	$	2	$	—	$	—
Asset-backed securities		3,049		1		—		—
Certificates of deposit		14,983		17		—		—
Commercial paper		5,498		1		—		—
Corporate bonds		4,277		2		—		—
Total	$	35,087	$	23	$	—	$	—
December 31, 2019
Municipal notes and bonds	$	14,166	$	6	$	—	$	—
Total	$	14,166	$	6	$	—	$	—

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 June 27, 2020 and December 31, 2019, these contracts included the future sale of British Pound, European Euro, Israeli Shekel, Japanese Yen, Korean Won, Singapore Dollar, Taiwanese Dollar,

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and Chinese Yuan 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) income, 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 June 27, 2020 and December 31, 2019 were as follows:

June 27,

2020

December 31,

2019

Notional amount

32,346

38,887

Fair value of (liability) asset

(139

)

120

NOTE 6. Purchased Intangible Assets

Goodwill

The changes in the carrying amount of goodwill are as follows:

Balance at December 31, 2019	$	307,148
Goodwill adjustments (Note 2)		478
Balance at June 27, 2020	$	307,626

Purchased intangible assets as of June 27, 2020 and December 31, 2019 are as follows:

	Gross Carrying Amount		Accumulated Amortization		Net
June 27, 2020
Finite-lived intangibles:
Developed technology	$	326,777	$	89,396	$	237,381
Customer and distributor relationships		69,261		16,388		52,873
Trademarks and trade names		12,461		4,746		7,715
Total finite-lived intangible assets		408,499		110,530		297,969
In-process research and development		46,600		—		46,600
Total identifiable intangible assets	$	455,099	$	110,530	$	344,569
December 31, 2019
Finite-lived intangibles:
Developed technology	$	326,726	$	67,861	$	258,865
Customer and distributor relationships		69,261		11,078		58,183
Trademarks and trade names		12,461		4,156		8,305
Total finite-lived intangible assets		408,448		83,095		325,353
In-process research and development		46,600		—		46,600
Total identifiable intangible assets	$	455,048	$	83,095	$	371,953

Intangible assets amortization expenses for the three and six months ended June 27, 2020 were $13,703 and $27,435, respectively. For the three and six month periods ended June 30, 2019, intangible assets amortization expenses were $387 and $774, respectively. Assuming no change in the gross carrying value of identifiable intangible assets and estimated lives, estimated amortization expenses for the remainder of fiscal 2020 are $26,309, and for each of the next five fiscal years estimated amortization expenses are $48,014 for 2021, $47,615 for 2022, $47,140 for 2023, $41,455 for 2024, and $24,905 for 2025.

NOTE 7. Convertible Notes Receivable

On May 31, 2018, the Company entered into a convertible note agreement with Simax Precision Technologies Limited (“the borrower”), which allowed them to borrow up to $15,000 in multiple promissory notes with an interest rate of 4.25% per annum payable on a semi-annual basis. The Company expected to be a supplier of lithography modules to Simax, which is

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used in the manufacture, sale and service of lithography systems. At December 31, 2019, the Company had $3,000, net of allowance, in outstanding convertible notes receivable with the borrower.

The Company and the borrower entered into a settlement agreement to end their relationship as it pertains to this convertible note agreement. The Company agreed to the settlement amount of $2,848, which was paid in April 2020.

NOTE 8. Balance Sheet Details

Inventories

Inventories, net are comprised of the following:

	June 27, 2020		December 31, 2019
Materials	$	114,172	$	108,492
Work-in-process		35,738		42,694
Finished goods		21,926		24,948
Total inventories, net	$	171,836	$	176,134

Property, Plant and Equipment

Property, plant and equipment, net is comprised of the following:

	June 27, 2020			December 31, 2019
Land and building	$	46,929		$	47,222
Machinery and equipment		57,441			56,504
Furniture and fixtures		4,164			3,968
Computer equipment and software		16,758			15,770
Leasehold improvements		13,231			13,069
		138,523			136,533
Accumulated depreciation		(43,006	)		(38,113	)
Total property, plant and equipment, net	$	95,517		$	98,420

Other assets

Other assets is comprised of the following:

	June 27, 2020		December 31, 2019
Convertible notes receivable, net of allowance of $2,000 at December 31, 2019	$	—	$	3,000
Operating lease right-of-use assets		21,330		23,588
Other		1,533		1,351
Total other assets	$	22,863	$	27,939

Accrued liabilities

Accrued liabilities is comprised of the following:

	June 27, 2020		December 31, 2019
Payroll and related expenses	$	28,132	$	19,365
Warranty		6,367		6,348
Other		632		491
Total accrued liabilities	$	35,131	$	26,204

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Other current liabilities

Other current liabilities is comprised of the following:

	June 27, 2020		December 31, 2019
Contingent consideration - acquisitions	$	134	$	569
Income tax payable		217		2,783
Current operating lease obligations		4,603		4,906
Customer deposits		671		1,994
Accrued inventory		1,943		1,614
Accrued professional fees		890		1,520
Other		5,152		5,786
Total other current liabilities	$	13,610	$	19,172

Other non-current liabilities

Other non-current liabilities is comprised of the following:

	June 27, 2020		December 31, 2019
Unrecognized tax benefits (including interest)	$	6,535	$	6,384
Non-current operating lease obligations		18,149		19,970
Deferred revenue		2,238		2,464
Other		3,655		2,953
Total other non-current liabilities	$	30,577	$	31,771

NOTE 9. 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. These receivables were not included in the condensed consolidated balance sheets as the criteria for sale treatment had been met. The Company sold $6,357 of receivables during the three months ended June 27, 2020. 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 June 27, 2020.

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 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. Settlements of warranty reserves are generally associated with sales that occurred during the 12 to 14 months prior to the year-end and warranty accruals are related to sales during the same year.

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Changes in the Company’s warranty reserves are as follows:

	Six Months Ended
	June 27,			June 30,
	2020			2019
Balance, beginning of the period	$	6,348		$	2,441
Accruals		2,794			1,390
Usage		(2,327	)		(1,688	)
Balance, end of the period	$	6,815		$	2,143

Warranty reserves are reported in the Condensed Consolidated Balance Sheets under the caption “Accrued 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. 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. 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 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. 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. Trial has been set for May 16, 2022. At this time, the Company does not anticipate the outcome of this 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 June 27, 2020 was approximately $75.6 million with an available interest rate of 1.8%. 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 10. Revenue

The following table represents a disaggregation of revenue by timing of revenue:

	Three Months Ended				Six Months Ended
	June 27,		June 30,		June 27,		June 30,
	2020		2019		2020		2019
Point-in-time	$	131,796	$	57,308	$	265,541	$	113,899
Over-time		3,152		4,203		9,335		8,504
Total revenue	$	134,948	$	61,511	$	274,876	$	122,403

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See Note 16 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. These amounts are recorded as deferred revenue in the Condensed Consolidated Balance Sheets.

Changes in deferred revenue were as follows:

	Three Months Ended						Six Months Ended
	June 27,			June 30,			June 27,			June 30,
	2020			2019			2020			2019
Balance, beginning of the period	$	18,032		$	8,687		$	15,093		$	8,080
Deferral of revenue		8,818			6,130			23,252			11,631
Recognition of deferred revenue		(8,956	)		(5,468	)		(20,451	)		(10,362	)
Balance, end of the period	$	17,894		$	9,349		$	17,894		$	9,349

NOTE 11. Share-Based Compensation

Restricted Stock Unit Activity

A summary of the Company’s restricted stock unit activity with respect to the six months ended June 27, 2020 is as follows:

	Number of Shares			Weighted Average Grant Date Fair Value
Nonvested at December 31, 2019		1,107		$	28.89
Granted		483		$	34.68
Vested		(448	)	$	29.18
Forfeited		(92	)	$	29.12
Nonvested at June 27, 2020		1,050		$	31.30

As of June 27, 2020 and December 31, 2019, there was $27,558 and $22,230 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 2.1 years and 1.9 years for each of the respective periods.

NOTE 12. Other (Expense) Income, Net

Other (expense) income, net, is comprised of the following:

	Three Months Ended						Six Months Ended
	June 27,			June 30,			June 27,			June 30,
	2020			2019			2020			2019
Foreign currency exchange gains (losses), net	$	(1,271	)	$	(159	)	$	(1,305	)	$	222
Other		73			2			139			2
Total other (expense) income, net	$	(1,198	)	$	(157	)	$	(1,166	)	$	224

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NOTE 13. Income Taxes

The following table provides details of income taxes:

	Three Months Ended						Six Months Ended
	June 27,			June 30,			June 27,			June 30,
	2020			2019			2020			2019
Income before income taxes	$	7,418		$	6,121		$	3,414		$	14,916
Provision (benefit) for income taxes	$	(6	)	$	595		$	394		$	1,814
Effective tax rate		(0	%)		10	%		12	%		12	%

The income tax provision for the six months ended June 27, 2020 was computed based on the Company’s annual forecast of profit by jurisdiction and forecasted effective tax rate for the year. The changes in the Company’s effective tax rate for the three and six months ended June 27, 2020 as compared to the three and six months ended June 30, 2019 are primarily due to (i) changes in forecasted earnings, (ii) computed research and development credits on forecasted earnings levels, and (iii) the Foreign Derived Intangible Income (“FDII”) deduction on forecasted earnings levels, and (iv) a one-time provision for additional withholding tax related to a dividend distribution from the Company’s Korea subsidiary offset by a one-time benefit related to the filings of the Company’s 2019 foreign income tax returns. The Company’s recorded effective tax rate is less than the U.S. statutory rate primarily due to projected FDII deductions and federal research and development tax credits.

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 the remaining valuation allowance in future periods, if appropriate. The Company has a recorded valuation allowance against certain of its deferred tax assets of $14,143 and $14,160 as of June 27, 2020 and December 31, 2019, respectively.

On March 27, 2020, the “Coronavirus Aid, Relief and Economic Security Act” (the “CARES Act”) was enacted. The CARES Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. These changes did not have a material impact on the Company’s consolidated financial position, results of operations, and cash flows.

NOTE 14. Earnings Per Share

Basic earnings per share is calculated using the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in the same manner and also gives effect to all dilutive common stock equivalent shares outstanding during the period. Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive. In accordance with U.S. GAAP, these shares were not included in calculating diluted earnings per share.

The following table sets forth the weighted average number of restricted stock units that have been excluded from the calculation of diluted earnings per share as their effect would have been anti-dilutive:

	Three Months Ended				Six Months Ended
	June 27,		June 30,		June 27,		June 30,
	2020		2019		2020		2019
Restricted stock units		52		52		59		110
Total		52		52		59		110

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The Company’s basic and diluted earnings per share amounts are as follows:

	Three Months Ended				Six Months Ended
	June 27,		June 30,		June 27,		June 30,
	2020		2019		2020		2019
Numerator:
Net income	$	7,424	$	5,526	$	3,020	$	13,102
Denominator:
Basic earnings per share - weighted average shares outstanding		48,736		25,032		49,417		24,977
Effect of potential dilutive securities:
Employee stock options and restricted stock units - dilutive shares		278		218		365		250
Diluted earnings per share - weighted average shares outstanding		49,014		25,250		49,782		25,227
Earnings per share:
Basic	$	0.15	$	0.22	$	0.06	$	0.52
Diluted	$	0.15	$	0.22	$	0.06	$	0.52

NOTE 15. Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss, net of tax at June 27, 2020, as well as the activity for the six months ended June 27, 2020, were as follows:

	Accumulated Foreign Currency Translation Adjustment			Accumulated Net Unrealized Gain (Loss) on Available-For-Sale Marketable Securities			Accumulated Other Comprehensive Loss
Balance at December 31, 2019	$	(564	)	$	(34	)	$	(598	)
Net current period other comprehensive gain		264			269			533
Reclassifications		—			—			—
Balance at June 27, 2020	$	(300	)	$	235		$	(65	)

NOTE 16. Segment Reporting and Geographic Information

The Company and its subsidiaries currently operate in a single operating segment: the design, development, manufacture and support of high-performance process control defect inspection and metrology, advanced packaging 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								Six Months Ended
	June 27,				June 30,				June 27,				June 30,
	2020				2019				2020				2019
Systems and software	$	108,247	80	%	$	51,612	84	%	$	222,577	81	%	$	101,421	83	%
Parts		16,329	12	%		7,073	11	%		29,904	11	%		15,150	12	%
Services		10,372	8	%		2,826	5	%		22,395	8	%		5,832	5	%
Total revenue	$	134,948	100	%	$	61,511	100	%	$	274,876	100	%	$	122,403	100	%

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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				Six Months Ended
	June 27,		June 30,		June 27,		June 30,
	2020		2019		2020		2019
Revenue from third parties:
United States	$	22,378	$	8,932	$	42,026	$	18,063
Taiwan		31,997		7,111		67,178		18,142
Japan		13,908		3,427		28,935		7,367
China		27,001		24,177		58,384		40,221
South Korea		22,964		10,775		43,721		21,546
Singapore		6,338		1,596		8,928		3,612
Other Asia		273		1,047		546		2,039
Germany		2,510		674		8,592		2,524
Other Europe		7,579		3,772		16,566		8,889
Total revenue	$	134,948	$	61,511	$	274,876	$	122,403

The following customers accounted for more than 10% of total revenue for the indicated periods:

	Six Months Ended
	June 27,			June 30,
	2020			2019
Customer A		18.2	%		3.7	%
Customer B		17.3	%		6.9	%
Customer C		7.1	%		24.6	%

NOTE 17. Share Repurchase Authorization

Following the Merger, the Company assumed the share repurchase authorization previously approved by the former Nanometrics Board of Directors. This share repurchase authorization allows for the Company to purchase up to $80,000 worth of shares of its common stock. Under the terms of this share repurchase authorization, shares may be repurchased through open market or privately negotiated transactions. Share repurchases during the three and six months ended June 27, 2020 were made under this repurchase authorization and at June 27, 2020, there was $28,000 available for future share repurchases. During the six months ended June 30, 2019, share repurchases were made under a legacy Rudolph share repurchase authorization which was terminated on October 25, 2019 due to closing of the Merger. See Note 2 for additional information regarding the Merger.

The following table summarizes the Company’s share repurchases for the periods indicated:

	Three Months Ended				Six Months Ended
	June 27,		June 30,		June 27,		June 30,
	2020		2019		2020		2019
Shares of common stock repurchased		632		—		1,882		30
Cost of shares repurchased	$	18,385	$	—	$	52,000	$	744
Average price paid per share	$	29.08	$	—	$	27.62	$	24.68

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q (this “Form 10-Q”) of Onto Innovation Inc. (referred to in this Form 10-Q as the “Company,” or “Onto,” “we,” “our” or “us”) are forward-looking statements, including those concerning anticipated effects of, and future actions to be taken in response to, the COVID-19 pandemic, our business momentum and future growth, acceptance of our products and services, our ability to deliver both products and services consistent with our customers’ demands and expectations and to strengthen our market position, our expectations of the semiconductor market outlook, future revenue, gross profits, research and development and engineering expenses, selling, general and administrative expenses, product introductions, technology development, manufacturing practices, cash requirements, our dependence on

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certain significant customers and anticipated trends and developments in and management plans for our business and the markets in which we operate, our anticipated revenue as a result of acquisitions, and our ability to be successful in managing our cost structure and cash expenditures and results of litigation. The statements contained in this Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as, but not limited to, “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “plan,” “should,” “may,” “could,” “will,” “would,” “forecast,” “project” and words or phrases of similar meaning, as they relate to our management or us.

The forward-looking statements contained herein reflect our expectations with respect to future events and are subject to certain risks, uncertainties and assumptions. Actual results may differ materially from those included in such forward-looking statements for a number of reasons including, but not limited to, the following: effects of the COVID-19 pandemic and the measures being taken to limit the spread of COVID-19, including impact on demand for our products, reductions in production levels, R&D activities, and qualification activities with our customers, increased costs, disruptions to our supply chain and a decrease in availability under our credit agreement; variations in the level of orders which can be affected by general economic conditions; seasonality and growth rates in the semiconductor manufacturing industry and in the markets served by our customers; the global economic and political climates; difficulties or delays in product functionality or performance; the delivery performance of sole source vendors; the timing of future product releases; failure to respond adequately to either changes in technology or customer preferences; changes in pricing by us or our competitors; our ability to manage growth; changes in management; risk of nonpayment of accounts receivable; changes in budgeted costs; our ability to leverage our resources to improve our position in our core markets, to weather difficult economic environments, to open new market opportunities and to target high-margin markets; the strength/weakness of the back-end and/or front-end semiconductor market segments; the imposition of tariffs or trade restrictions and costs, burdens and restrictions associated with other governmental actions; the ability to successfully integrate the businesses of Rudolph Technologies, Inc. (“Rudolph”) and Nanometrics Incorporated (“Nanometrics”)promptly and effectively and to achieve the anticipated synergies and value-creation contemplated by the merger of Rudolph and Nanometrics consummated on October 25, 2019 (the “Merger”) within the expected time frame; unanticipated difficulties or expenditures relating to the Merger and integration of the Rudolph and Nanometrics businesses; the response of business partners and retention as a result of the Merger; the diversion of management time in connection with the integration; an increased litigation risk arising from the Merger and the outcome of any such litigation; and the “Risk Factors” set forth in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”) and in Part II, Item 1A of this Form 10-Q. You should carefully review the cautionary statements and “Risk Factors” contained in the 2019 Form 10-K and in this Form 10-Q. You should also review any additional disclosures and cautionary statements and “Risk Factors” we include from time to time in our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings we make with the Securities and Exchange Commission (the “SEC”). The forward-looking statements reflect our position as of the date that they are made, and we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

The Merger

On October 25, 2019, the merger of Nanometrics with Rudolph was consummated and resulted in the combined company, which was renamed as Onto Innovation Inc. Onto accounts for the Merger as a reverse acquisition using the acquisition method of accounting in accordance with generally accepted accounting principles, with Rudolph being treated as the acquiring entity for accounting purposes. Because Rudolph is treated as the accounting acquirer in the Merger, the financial statements filed with this Form 10-Q include the financial results of Rudolph for all periods presented and the financial results of the former Nanometrics for the periods on or after October 26, 2019. As used in this Form 10-Q, the terms “Onto,” the “Company,” “we,” “us” or “our” refer to Onto Innovation Inc. and its consolidated subsidiaries, unless otherwise specified or suggested by the context.

Impact of COVID-19 on our Business

The spread of COVID-19 during the first quarter of 2020 has caused an economic downturn on a global scale, as well as significant volatility in the financial markets. In March 2020, the World Health Organization declared the outbreak of the COVID-19 pandemic. As of August 5, 2020, our operations have been impacted by our pandemic response, as described below, and the global nature of our workforce and our operations, but we have not experienced significant financial impact directly related to the pandemic.

We have prioritized the health and safety of our employees and customers in our pandemic response. As governmental authorities implement restrictions on commercial operations, we have continued to ensure compliance with these directives while also maintaining business continuity for our essential operations. We have a global workforce. Although our

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manufacturing is conducted solely in the U.S., we maintain offices in the United States, South Korea, Japan, Taiwan, China, Singapore and Europe. Our operations at these offices are subject to various governmental directives and, as a result thereof, we have instituted a work-from-home policy for these employees to the extent practical. Where our essential employees are required to continue to report to work to perform their responsibilities, we have implemented staggered shifts or otherwise adjusted work schedules to maximize our operating capacity while adhering to applicable restrictions, including recommended distancing between persons. We have also provided our essential employees with appropriate protective equipment and have enhanced and increased cleanings at our facilities. At this time, we have not experienced any reduction in productivity, though we have incurred certain costs related to the implementation of these policies and practices. We may take further actions that we determine to be in the best interests of our employees or as may be required by federal, state, or local authorities.

We cannot at this time predict the impact that the COVID-19 pandemic will have on our financial condition and operations, although we are continuing to monitor our supply chain and orders from customers for COVID-19-related changes. Disruptions to our supply chain in connection with the sourcing of materials, equipment and engineering support, and services from geographic areas that have been impacted by COVID-19 may pose risks to our business, results of operations and financial condition. In this time of uncertainty as a result of the COVID-19 pandemic, we are continuing to serve our customers while taking every precaution to provide a safe work environment for our employees and customers.

To date the COVID-19 pandemic has disrupted the way that we conduct business, but has not had a material adverse impact on our operations. However, the extent of the pandemic’s effect on our operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, such as the extent of restrictions on gatherings and travel, the impact on governmental programs and budgets, the development of treatments or vaccines, and the resumption of widespread economic activity. Trade tensions between the United States and China may escalate as a result of COVID-19 or otherwise and could result in the imposition of additional tariffs, trade restrictions or policy changes, any of which could increase costs of our product components and pricing of, and consumer demand for, our products, which could have a negative effect on our results of operations.

Although the inherent uncertainty of the unprecedented and rapidly evolving crisis makes it difficult to predict with any confidence the likely impact on our future operations, the COVID-19 pandemic could have a material adverse impact on our consolidated business, results of operations and financial condition. For a discussion of certain risks related to COVID-19 and the international nature of our business and our operations, see Part II, Item 1A – Risk Factors of this Form 10-Q, Part II, Item 1A – Risk Factors of our Q1 2020 Form 10-Q and Part I, Item 1A of our 2019 Form 10-K..

Critical Accounting Policies

The preparation of condensed consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make judgments, assumptions and estimates that affect the amounts reported. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.

A critical accounting policy is defined as one that is both material to the presentation of our condensed consolidated financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition or results of operations. Specifically, these policies have the following attributes: (1) we are required to make judgments and assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, could have a material effect on our financial position and results of operations.

Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. In addition, management is periodically faced with uncertainties, the outcomes of which are not within our control and will not be known for prolonged periods of time. Certain of these uncertainties are discussed in our 2019 Form 10-K in the Items entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our condensed consolidated financial statements are fairly stated in accordance with U.S. GAAP and provide a fair presentation of our financial position and results of operations.

For more information, please see our critical accounting policies as previously disclosed in our 2019 Form 10-K and recent accounting pronouncements discussed in Note 1 to the Condensed Consolidated Financial Statements.

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Overview

We are a worldwide leader in the design, development, manufacture and support of process control tools that perform macro-defect inspection and metrology, lithography systems, and process control analytical software used by semiconductor and advanced packaging device manufacturers. We deliver comprehensive solutions throughout the semiconductor fabrication process with our families of proprietary products that provide critical yield-enhancing information, enabling microelectronic device manufacturers to drive down costs and time to market of their devices. We provide process and yield management solutions used in both wafer processing facilities, often referred to as “front-end” and device packaging and test facilities, or “back-end” manufacturing, through a portfolio of standalone systems for macro-defect inspection, lithography, probe card test and analysis, and transparent and opaque thin film measurements. All of our systems feature sophisticated software and production-worthy automation. In addition, our advanced process control software portfolio includes powerful solutions for standalone tools, groups of tools, or factory-wide suites to enhance productivity and achieve significant cost savings. Our systems are backed by worldwide customer service and applications support.

Historically, a significant portion of our revenue in each quarter and year has been derived from sales to relatively few customers, and we expect this trend to continue. For the six months ended June 27, 2020 and for the years ended December 31, 2019, 2018 and 2017, aggregate sales to customers that individually represented at least five percent of our revenue accounted for 55.1%, 42.7%, 18.3%, and 27.2% of our revenue, respectively.

Results of Operations for the Three and Six Months Ended June 27, 2020 and June 30, 2019

Revenue. Our revenue is primarily derived from the sale of our systems, services, spare parts and software licensing. Our revenue of $134.9 million increased 119.4% for the three months ended June 27, 2020 as compared to the same period in 2019, in which revenue totaled $61.5 million. For the six month periods ended June 30, 2020 and 2019, our revenue totaled $274.9 million and $122.4 million, respectively, representing a year-over-year increase of 124.6%.

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

	Three Months Ended								Six Months Ended
	June 27,				June 30,				June 27,				June 30,
	2020				2019				2020				2019
Systems and software	$	108,247	80	%	$	51,612	84	%	$	222,577	81	%	$	101,421	83	%
Parts		16,329	12	%		7,073	11	%		29,904	11	%		15,150	12	%
Services		10,372	8	%		2,826	5	%		22,395	8	%		5,832	5	%
Total revenue	$	134,948	100	%	$	61,511	100	%	$	274,876	100	%	$	122,403	100	%

Total systems and software revenue increased $121.2 million for the six months ended June 27, 2020 as compared to the six months ended June 30, 2019 primarily due to the inclusion of revenue from legacy Nanometrics for the first half of 2020. The year-over-year change in systems revenue was primarily due to the inclusion of $116.4 million of revenue from legacy Nanometrics for the period. The year-over-year increase in parts and services revenue in absolute dollars from the six months ended June 30, 2019 to the six months ended June 27, 2020 was primarily due to the inclusion of $31.1 million of parts and service revenue from legacy Nanometrics for the period. Parts and services revenue is generated from part sales, maintenance service contracts, system upgrades, as well as time and material billable service calls.

Gross Profit. Our gross profit has been and will 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. Our gross profit was $71.6 million and $134.2 million for the three and six months ended June 27, 2020, respectively, as compared to $31.9 million and $63.9 million for the three and six months ended June 30, 2019, respectively. Our gross profit represented 53.0% and 48.8% of our revenue for the three and six months ended June 27, 2020, respectively, and 51.9% and 52.2% for the three and six months ended June 30, 2019, respectively. The decrease in gross profit as a percentage of revenue for the six months ended June 27, 2020, as compared to the six months ended June 30, 2019, is primarily due charges to cost of goods sold of $10.2 million for the sale of inventory written-up to fair value upon the Merger.

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Operating Expenses.

Our operating expenses consist of:

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Research and Development. The process control defect inspection and metrology, advanced packaging lithography, and data analysis systems and software market is characterized by continuous technological development and product innovations. We believe that the rapid and ongoing development of new products and enhancements of existing products, including the transition to copper and low-k dielectrics, wafer level packaging, the continuous shrinkage in critical dimensions, and the evolution of ultra-thin gate process control is critical to our success. 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 $22.2 million and $43.1 million for the three and six months ended June 27, 2020, respectively, as compared to $10.7 million and $21.2 million for the three and six months ended June 30, 2019, respectively. The year-over-year dollar increase from the 2019 period to the 2020 period was primarily due to the inclusion in the 2020 period of $23.1 million in research and development expense of legacy Nanometrics resulting from the Merger. We continue to maintain our commitment to investing in new product development and enhancement to existing products.

•

Sales and Marketing. Sales and marketing expenses are primarily comprised of salaries and related costs for sales and marketing personnel, as well as commissions and other non-personnel related expenses. Our sales and marketing expenses were $11.9 million and $24.9 million for the three and six months ended June 27, 2020, respectively, as compared to $5.8 million and $10.5 million for the three and six months ended June 30, 2019, respectively. The year-over-year dollar increase in sales and marketing expenses from the 2019 period to the 2020 period was primarily due to the inclusion in the 2020 period of $16.0 million in sales and marketing expenses of legacy Nanometrics resulting from the Merger.

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General and Administrative. General and administrative expenses are primarily comprised of salaries and related costs for general administrative personnel, as well as other non-personnel related expenses. Our general and administrative expenses were $15.9 million and $36.1 million for the three and six months ended June 27, 2020, respectively, as compared to $9.6 million and $18.4 million for the three and six months ended June 30, 2019, respectively. The year-over-year dollar increase in general and administrative expenses from the 2019 period to the 2020 period was primarily due to the inclusion in the 2020 period of $17.9 million in general and administrative expenses of legacy Nanometrics resulting from the Merger.

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Amortization of Identifiable Intangible Assets. Amortization of identifiable intangible assets was $13.7 million and $27.4 million for the three and six months ended June 27, 2020, respectively, as compared to $0.4 million and $0.8 million for the same periods in 2019. The year-over-year increase in amortization expense from the 2019 period to the 2020 period was due to additional amortization recorded in the 2020 period associated with additional purchased intangible assets recorded as a result of the Merger.

Interest income, net. Net interest income was $0.7 million and $1.9 million for the three and six months ended June 27, 2020, respectively, as compared to $0.9 million and $1.7 million for the same periods in 2019. The decrease in interest income for the three months ended June 27, 2020 as compared to the three months ended June 30, 2020 was primarily due to lower interest rates in the 2020 period. The increase in net interest income for the six months ended June 27, 2020 as compared to the six months ended June 30, 2019 was due to interest earned on our marketable securities and additional interest income on a higher marketable securities balance following the Merger.

Income Taxes. We recorded an income tax benefit of $6 thousand and income tax provision of $0.4 million for the three and six months ended June 27, 2020 respectively, as compared to income tax provision of $0.6 million and $1.8 million for the same periods in 2019. Our effective tax rate of 12% differs from the statutory rate of 21% for the six months ended June 27, 2020 primarily due to computed research and development credits on forecasted earning levels, the deduction related to foreign derived intangible income (FDII), as well as a one-time provision for additional withholding tax related to a dividend distribution from the Company’s Korea subsidiary, offset by a one-time benefit related to the filings of our 2019 foreign income tax returns. Our effective tax rate of (0.1%) differs from the statutory rate of 21% for the three months ended June 27, 2020 primarily due to computed research and development credits on forecasted earning levels, the deduction related to foreign derived intangible income (FDII), as well as a one-time benefit related to the filings of our 2019 foreign income tax returns.

Our future effective income tax rate depends on various factors, such as possible further 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.

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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.

On March 27, 2020, the “Coronavirus Aid, Relief and Economic Security Act” (the “CARES Act”) was enacted. The CARES Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. These changes did not have a material impact on our consolidated financial position, results of operations, and cash flows.

Liquidity and Capital Resources

At June 27, 2020, we had $312.1 million of cash, cash equivalents and marketable securities and $546.2 million in working capital. At December 31, 2019, we had $320.2 million of cash, cash equivalents and marketable securities and $555.9 million in working capital.

Operating activities provided $46.9 million in net cash and cash equivalents for the six months ended June 27, 2020. The net cash and cash equivalents provided by operating activities during the six months ended June 27, 2020 resulted primarily from net income, adjusted to exclude the effect of non-cash operating charges, of $59.8 million, partially offset by a decrease in cash provided from operating assets and liabilities of $12.9 million. Operating activities provided $9.8 million in net cash and cash equivalents for the six months ended June 30, 2019. The net cash and cash equivalents provided by operating activities during the six months ended June 30, 2019 resulted primarily from net income, adjusted to exclude the effect of non-cash operating charges of $20.9 million, partially offset by a decrease in cash provided from operating assets and liabilities of $11.1 million.

Investing activities provided net cash and cash equivalents of $7.3 million during the six months ended June 27, 2020 through proceeds from sales of marketable securities of $147.5 million and cash received from convertible note receivable of $2.8 million, partially offset by purchases of marketable securities of $140.4 million and capital expenditures of $2.6 million. Net cash and cash equivalents of $7.7 million were used in investing activities during the six months ended June 30, 2019 primarily for the purchases of marketable securities of $38.2 million and capital expenditures of $2.7 million, offset by proceeds from sales of marketable securities of $33.2 million.

Net cash and cash equivalents used in financing activities during the six months ended June 27, 2020 of $55.5 million resulted from the purchase of shares of our common stock under a share repurchase authorizations of $52.0 million, tax payments related to shares withheld for share-based compensation plans of $3.3 million and payment of contingent consideration for acquired business of $0.4 million, partially offset by proceeds from sales of shares through share-based compensation plans of $0.2 million. For the six months ended June 30, 2019, financing activities used $2.5 million, which resulted from payment of contingent consideration for acquired business of $1.1 million, the purchase of shares of our common stock under Rudolph’s previous share repurchase authorizations of $0.7 million and tax payments related to shares withheld for share-based compensation plans of $0.7 million, partially offset by proceeds from sales of shares through share based compensation plans of $0.2 million.

From time to time, we evaluate whether to acquire new or complementary businesses, products and/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.

Following the Merger, we assumed the share repurchase authorization approved on March 14, 2019 by the former Nanometrics Board of Directors. This share repurchase authorization allows us to purchase up to $80.0 million worth of shares of our common stock. Under the terms of this share repurchase authorization, shares may be repurchased through open market or privately negotiated transactions. During the three and six months ended June 27, 2020, we repurchased 0.6 million and 1.9 million shares of common stock under this repurchase authorization and those shares were subsequently retired. At June 27, 2020, there was $28.0 million available for future share repurchases.

We have a credit agreement with a bank that provides for a 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. As of June 27, 2020, the available line of credit was approximately $75.6 million with an available interest rate of 1.8%. The credit agreement is available to us until such time that either party terminates the arrangement at its discretion. To date, we have not utilized the line of credit.

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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. In addition, although the ultimate impact of the recent COVID-19 pandemic on our future results remains uncertain, we believe our business model and our current cash reserves leave us well-positioned to manage our business through this crisis as it continues to unfold. 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. Market conditions due to the COVID-19 pandemic may have an impact on our ability to access such additional funding. Our borrowing capacity under our existing line of credit is tied to the value of eligible securities held at the time of borrowing, which may be negatively impacted by market conditions due to COVID-19 and government responses thereto. In addition, a reduction in or volatility with respect to our stock price or the 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate and Credit Market Risk

We are exposed to changes in interest rates and market liquidity including our investments in certain available-for-sale securities. Our available-for-sale securities consist of fixed and variable rate income investments, such as municipal notes, municipal bonds and corporate bonds. We continually monitor our exposure to changes in interest rates, market liquidity and credit ratings of issuers for our available-for-sale securities. It is possible that we are at risk if interest rates, market liquidity or credit ratings of issuers change in an unfavorable direction. The magnitude of any gain or loss will be a function of the difference between the fixed or variable rate of the financial instrument and the market rate, and our financial condition and results of operations could be materially affected. Based on a sensitivity analysis performed on our financial investments held as of June 27, 2020, an immediate adverse change of 10% in interest rates (e.g. 3.00% to 3.30%) would result in a decrease of $1.1 million in the fair value of our available-for-sale debt securities and would not have a material impact on our consolidated financial position, results of operations or cash flows.

Foreign Currency Risk

To manage the level of exposure to the risk of foreign currency exchange rate fluctuations, we enter into foreign currency forward exchange contracts to protect against a portion of our currency exchange risks associated with existing assets and liabilities. While a substantial portion of our systems and software sales are denominated in U.S. Dollars and have relatively little exposure to foreign currency exchange risk with respect to these sales, substantially all of our sales in Japan are denominated in Japanese Yen. A foreign currency forward exchange contract acts as a hedge by increasing in value when underlying assets decrease in value or underlying liabilities increase in value due to changes in foreign exchange rates. Conversely, a foreign currency forward exchange contract decreases in value when underlying assets increase in value or underlying liabilities decrease in value due to changes in foreign exchange rates. These forward contracts are not designated as accounting hedges, so the unrealized gains and losses are recognized under the caption “Other (expense) income, net,” in the Condensed Consolidated Statements of Operations for each reporting period in advance of the actual foreign currency cash flows with the fair value of these forward contracts being recorded under the caption “Other current liabilities” or “Prepaids and other current assets” on the Condensed Consolidated Balance Sheets. As of June 27, 2020, we had nine outstanding forward contracts with a total notional contract value of $32.3 million. We do not use derivative financial instruments for trading or speculative purposes.

The Company has branch sales and service offices or subsidiaries in Korea, Japan, China, Taiwan, Singapore and in several countries in Europe. Our international subsidiaries and branches operate primarily using local functional currencies. Our exposure to foreign currency exchange rate fluctuations arise from intercompany balances between our U.S. headquarters and that of our foreign owned entities. Our intercompany balances are denominated in U.S. dollars. Since each foreign entity’s functional currency is generally denominated in its local currency, there is exposure to foreign exchange risk when the foreign entity’s intercompany balance is remeasured at a reporting date resulting in transaction gains or losses. The intercompany balance exposed to foreign currency risk, as of June 27, 2020 was approximately $42.0 million. A hypothetical change of 10% in the relative value of the U.S. dollar versus local functional currencies could result in approximately $0.2 million in foreign currency exchange gains (losses) which would be recorded as non-operating expense under the caption “Other (expense) income, net” in our Condensed Consolidated Statements of Operations. We cannot accurately predict future exchange rates or the overall impact of future exchange rate fluctuations on our business, results of operations and consolidated financial condition.

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Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in SEC rules and forms. These controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, we have recognized that any control and procedure, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is required to exercise judgment in evaluating its controls and procedures.

Scope of the Controls Evaluation

The evaluation of our disclosure controls and procedures included a review of the controls’ objectives and design, our implementation of the controls and the effect of the controls on the information generated for use in this Form 10-Q. In the course of the evaluation, we sought to identify data errors, control problems or acts of fraud and confirm that appropriate corrective actions, if any, including process improvements, were being undertaken. This type of evaluation is performed on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of the controls can be reported in our Quarterly Reports on Form 10-Q and in our Annual Reports on Form 10-K. Many of the components of our disclosure controls and procedures are also evaluated on an ongoing basis by other personnel in our accounting, finance, internal audit and legal functions. The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures and to modify them on an ongoing basis as necessary. A control system can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

In accordance with the SEC’s published guidance, because the Merger closed in the fourth quarter of the year ended December 31, 2019, management excluded Nanometrics from its evaluation of disclosure controls and procedures as of June 27, 2020. Legacy Nanometrics constituted 27% of total assets as of June 27, 2020 and 54% of revenue for the six months then ended.

Conclusions

As of June 27, 2020, an evaluation of our disclosure controls and procedures was carried out under the supervision and with the participation of our management, including the CEO and CFO. Based on this evaluation, the CEO and CFO have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this Form 10-Q.

Changes in Internal Control over Financial Reporting

In October 2019, we completed the merger with Nanometrics which operated under its own set of systems and internal controls. During the six months ended June 27, 2020, we continue to integrate Nanometrics into our financial reporting processes and procedures and internal control over financial reporting and we expect the integration to continue throughout the remainder of 2020. In addition, in January 2020, we implemented a new enterprise resource planning (“ERP”) system in our domestic legacy Rudolph business to provide better support for our changing business needs and plans for future growth. As a result of this implementation, we modified certain existing internal controls over financial reporting and implemented certain new controls relating to the ERP system. We will continue to evaluate the design and operating effectiveness of our internal controls during subsequent periods.

Other than noted above, there have been no additional changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company’s quarter ended June 27, 2020 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting due to the fact that most of our employees responsible for financial reporting are working remotely during the COVID-19 pandemic. We are continually monitoring and assessing the impact of the COVID-19 pandemic on our internal controls to minimize the impact to their design and operating effectiveness.

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PART II OTHER INFORMATION

Item 1. Legal Proceedings

For a description of our material pending legal proceedings refer to Part I, Item 3, “Legal Proceedings” in our 2019 Form 10-K and Note 10, “Commitments and Contingencies,” to the Consolidated Financial Statements filed therewith, as updated in Note 9, “Commitments and Contingencies,” to the accompanying Notes to the Condensed Consolidated Financial Statements.

Item 1A. Risk Factors

The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occurs, our business, financial condition or results of operations could be materially adversely affected. Many of the risks and uncertainties described below may be exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result.

Risks Related to Our Business

The effects of the COVID-19 pandemic could adversely affect our business, results of operations, and financial condition.

The effects of a public health crisis caused by the COVID-19 pandemic and the measures being taken to limit the spread of COVID-19 are uncertain and difficult to predict, but pose the following risks to our business, results of operations and financial condition:

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A likely decrease in short-term and/or long-term demand for our products and disruptions to our operations resulting from the immediate consequences of and responses to the pandemic, including the public health problems resulting from COVID-19 and precautionary measures instituted by governments and businesses to mitigate its spread, which have raised the prospect of an extended global recession, which would adversely impact the businesses of our customers, suppliers and partners;

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Changes in our operations in response to COVID-19 and employee illnesses resulting from the pandemic, which have impacted the way that we operate and conduct business, and may result in additional inefficiencies or delays, including in sales and product development efforts and additional costs related to business continuity initiatives, which cannot be avoided or alleviated through succession planning, employees working remotely or teleconferencing technologies;

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Negative impacts to our operations, including reductions in production levels, research and development activities, and qualification activities with our customers, inefficiencies and delays, and increased costs resulting from our efforts to mitigate the impact and spread of COVID-19 through changes in our operations we have enacted at certain of our locations around the world in an effort to protect our employees’ health and well-being (including the implementation of work-from-home policies, social-distancing measures, modified work schedules and shifts, the suspension of employee travel, and limits on the number of employees attending in-person meetings and the number of people permitted to be present at our facilities at any one time);

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Management focus on mitigating the impact of the coronavirus pandemic, which has required and will continue to require a substantial investment of time and resources across our enterprise, which has resulted and can be expected to continue to result in a diversion of management attention and resources;

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Disruptions to our supply chain in connection with the sourcing of materials, equipment and engineering support, and services from geographic areas that have been impacted by COVID-19 and by efforts to contain the spread of COVID-19;

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A decrease in availability under our credit agreement, which permits us to borrow up to 70% of the value of eligible securities held at the time the line of credit is accessed, due a decrease in the value of eligible securities resulting from the impact of COVID-19 on global markets; and

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Difficulty accessing capital, if needed in the future, through a sale of securities, or in obtaining favorable terms of such securities, due to market conditions generally or a decline or volatility in the market for our securities.

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The resumption of normal business operations after such interruptions may be delayed or constrained by lingering effects of COVID-19 on our suppliers, third-party service providers, and/or customers. These effects, alone or taken together, could have a material adverse effect on our business, results of operations, legal exposure, or financial condition. A sustained or prolonged outbreak could exacerbate the adverse impact of such measures.

Our operating results have varied and will likely continue to vary significantly from quarter to quarter in the future, causing volatility in our stock price.

Our quarterly operating results have varied in the past and will likely continue to vary significantly from quarter to quarter in the future, causing volatility in our stock price. Some of the factors that may influence our operating results and subject our stock to extreme price and volume fluctuations include:

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changes in customer demand for our systems, which is influenced by economic conditions in the semiconductor device industry, demand for products that use semiconductors, market acceptance of our systems and products of our customers and changes in our product offerings;

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seasonal variations in customer demand;

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the timing, cancellation or delay of customer orders, shipments and acceptance;

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the gain or loss of a key customer or significant changes in the financial condition of one or more key customers;

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product development costs, including increased research, development, engineering and marketing expenses associated with our introduction of new products and product enhancements; and

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the levels of our fixed expenses, including research and development costs associated with product development, relative to our revenue levels.

In light of these factors and the cyclical nature of the semiconductor industry, we expect to continue to experience significant fluctuations in quarterly and annual operating results. Moreover, many of our expenses are fixed in the short-term which, together with the need for continued investment in research and development, marketing and customer support, limits our ability to reduce expenses quickly. As a result, declines in net sales could harm our business and the price of our common stock could substantially decline.

Our largest customers account for a substantial portion of our revenue, and our revenue and cash flows could decline considerably if one or more of these customers were to purchase significantly fewer of our systems or delay or cancel a large order.

Sales to end user customers that individually represent at least five percent of our revenue typically account for, in the aggregate, a considerable amount of our revenue. We operate in the highly concentrated, capital-intensive semiconductor device manufacturing industry. Historically, a substantial portion of our revenue in each quarter and year has been derived from sales to relatively few customers, and this trend is expected to continue. If any of our key customers were to purchase significantly fewer of our systems in the future, or if they delay or cancel a large order, our revenue and cash flows could meaningfully decline. We expect that we will continue to depend on a small number of large customers for a sizable portion of our revenue. In addition, as large semiconductor device manufacturers seek to establish closer relationships with their suppliers, we expect that our customer base will become even more concentrated.

Our customers may be unable to pay us for our products and services.

Our customers include some companies that may, from time to time, encounter financial difficulties. If a customer’s financial difficulties become severe, the customer may be unwilling or unable to pay our invoices in the ordinary course of business, which could adversely affect collections of both our accounts receivable balance and unbilled services. The bankruptcy of a customer with a substantial account balance owed to us could have a material adverse effect on our financial condition and results of operations. In addition, if a customer declares bankruptcy after paying us certain invoices, a court may determine that we are not properly entitled to that payment and may require repayment of some or all of the amount we received, which could adversely affect our financial condition and results of operations.

Variations in the amount of time it takes for us to sell our systems may cause fluctuations in our operating results, which could cause our stock price to decline.

Variations in the length of our sales cycles could cause our revenue and cash flows, and consequently, our business, financial condition, operating results and cash flows to fluctuate widely from period to period. This variation could cause our stock price to decline. Our customers generally take a long time to evaluate our inspection and/or film metrology systems and many people are involved in the evaluation process. We expend significant resources educating and providing information to our prospective customers regarding the uses and benefits of our systems in the semiconductor fabrication process. The length of time it takes for us to make a sale depends upon many factors, including, but not limited to:

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the efforts of our sales force;

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the complexity of the customer’s fabrication processes;

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the internal technical capabilities and sophistication of the customer;

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the customer’s budgetary constraints; and

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the quality and sophistication of the customer’s current metrology, inspection or lithography equipment.

Because of the number of factors influencing the sales process, the period between our initial contact with a customer and the time when we recognize revenue from that customer and receive payment, if ever, varies widely in length. Our sales cycles, including the time it takes for us to build a product to customer specifications after receiving an order to the time we recognize revenue, typically range from three to twenty-four months. Sometimes our sales cycles can be much longer, particularly with customers in Asia. During these cycles, we commit substantial resources to our sales efforts in advance of receiving any revenue, and we may never receive any revenue from a customer despite our sales efforts. If we do make a sale, our customers often purchase only one of our systems, the performance of which they then evaluate for a lengthy period before purchasing any more of our systems. The number of additional products a customer purchases, if any, depends on many factors, including the customer’s capacity requirements. The period between a customer’s initial purchase and any subsequent purchases can vary from three months to a year or longer, and variations in the length of this period could cause further fluctuations in our operating results and, possibly, in our stock price.

We are subject to order and shipment uncertainties. Our profitability will decline if we fail to accurately forecast customer demand when managing inventory.

We typically plan production and inventory levels based on internal forecasts of customer demand, which can be highly unpredictable and can fluctuate substantially, which could lead to excess inventory write-downs and resulting negative impacts on gross margin and net income. We have limited visibility into our customers’ inventories, future customer demand and the product mix that our customers will require, which could adversely affect our production forecasts and operating margins. In addition, innovation in our industry could render significant portions of our inventory obsolete. If we overestimate our customers’ requirements, we may have excess inventory, which could lead to obsolete inventory and unexpected costs. Conversely, if we underestimate our customers’ requirements, we may have inadequate inventory, which could lead to foregone revenue opportunities, loss of potential market share and damage to customer relationships as product deliveries may not be made on a timely basis, disrupting our customers’ production schedules. In response to anticipated long lead times to obtain inventory and materials from outside suppliers and foundries, we periodically order materials in advance of customer demand. This advance ordering has in the past and may in the future result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize, or other factors make our products less saleable. In addition, any significant future cancellation or deferral of product orders could adversely affect our revenue and margins, increase inventory write-downs due to obsolete inventory, and adversely affect our operating results and stock price.

Most of our revenue has been derived from customers outside of the United States, subjecting us to operational, financial and political risks, such as unexpected changes in regulatory requirements, tariffs, political and economic instability, outbreaks of hostilities, natural disasters, climate change and difficulties in managing foreign sales representatives and foreign branch operations, as well as risks associated with foreign currency fluctuations.

Due to the significant level of our international sales, we are subject to a number of material risks, including:

Compliance with foreign laws. Our business is subject to risks inherent in doing business internationally, including compliance with, inconsistencies among, and unexpected changes in, a wide variety of foreign laws and regulatory environments with which we are not familiar, including, among other issues, with respect to employees, protection of our intellectual property, and a wide variety of operational regulations and trade and export controls under domestic, foreign, and international law.

Unexpected changes in regulatory requirements including tariffs and other market barriers. The semiconductor device industry is a high-visibility industry in many of the European and Asian countries in which we sell our products. Because the governments of these countries have provided extensive financial support to our semiconductor device manufacturing customers in these countries, we believe that our customers could be disproportionately affected by any trade embargoes, excise taxes, tariffs or other restrictions imposed by their governments on trade with United States companies such as ourselves, particularly with respect to the ongoing trade negotiations between the United States and China. As of January 2020, trade delegations from the United States and China reached partial agreement over tariffs on certain products, but if the United States and China do not continue negotiations and reach agreement on a trade policy, tariffs imposed by China may result in lower sales to customers in China as the costs of our products become more expensive to such customers. In addition, tariffs imposed by the United States will increase the cost of raw materials that we import from China. Any restrictions of these types could result in a reduction in our sales to customers in these countries. In addition, given the relatively fluid regulatory environment

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in China, there could be additional tax or other regulatory changes in the future. Such actions in the future, as well as other changes in Chinese laws and regulations, including actions in furtherance of China’s stated policy of reducing its dependence on foreign semiconductor manufacturers, could increase the cost of doing business in China, foster the emergence of Chinese-based competitors, decrease the demand for our customers’ products in China, or reduce the supply of critical materials for our customers’ products, which could have a material adverse effect on our business and results of operations.

Political and economic instability. We are subject to various global risks related to political and economic instabilities in countries in which we derive sales. If terrorist activities, armed conflict, civil or military unrest or political instability occurs outside of the U.S., these events may result in reduced demand for our products. There is considerable political instability in Taiwan related to its disputes with China and in South Korea related to its disputes with North Korea. In addition, several Asian countries, particularly Japan, have experienced significant economic instability. An outbreak of hostilities or other political upheaval in China, Taiwan or South Korea, or an economic downturn in Japan or other countries, would likely harm the operations of our customers in these countries. The effect of these types of events on our revenue and cash flows could be material because we derive substantial revenue from sales to semiconductor device foundries in Taiwan such as Taiwan Semiconductor Manufacturing Company Ltd., from memory chip manufacturers in South Korea such as Samsung Electronics Co., Ltd., and from semiconductor device manufacturers in Japan such as Toshiba Corporation.

Natural disasters and climate change. Natural disasters, changes in climate and geo-political events could materially adversely affect our worldwide operations (or those of our business partners). The occurrence of one or more natural disasters such as hurricanes, tropical storms, fires, cyclones, earthquakes, tsunamis, flooding, typhoons, volcanic eruptions and weather conditions such as major or extended winter storms, droughts and tornadoes, whether as a result of climate change or otherwise, may disrupt manufacturing or other operations. For example, our Milpitas operations are located near major earthquake fault lines in California. There may also be conflict or uncertainty in the countries in which we operate, including public health issues (for example, an outbreak of a contagious disease such as COVID-19, avian influenza, measles or Ebola), safety issues, natural disasters, fire, disruptions of service from utilities, nuclear power plant accidents or general economic or political unrest, including war, civil unrest or terrorist attacks.

Difficulties in staffing and managing foreign branch operations. During periods of tension between the governments of the United States and certain other countries, it is often difficult for United States companies such as us to staff and manage operations in such countries. Language and other cultural differences may also inhibit our sales and marketing efforts and create internal communication problems among our U.S. and foreign research and development teams, increasing the difficulty of managing multiple remote locations performing various development, quality assurance, and yield ramp analysis projects.

Currency fluctuations as compared to the U.S. Dollar. A substantial portion of our international sales are denominated in U.S. dollars. As a result, if the dollar rises in value in relation to foreign currencies, our systems will become more expensive to customers outside the United States and less competitive with systems produced by competitors outside the United States. These conditions could negatively impact our international sales. Foreign sales also expose us to collection risk in the event it becomes more expensive for our foreign customers to convert their local currencies into U.S. dollars. Additionally, in the event a larger portion of our revenue becomes denominated in foreign currencies, we would be subject to a potentially significant exchange rate risk.

FCPA and Other Anti-Corruption Laws. We are subject to the Foreign Corrupt Practices Act of 1977 ("FCPA"), and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. Also, similar worldwide anti-bribery laws, such as the U.K. Bribery Act and Chinese anti-corruption laws, generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Some of our distribution partners are located in parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. The policies and procedures we have implemented to discourage these practices by our employees, our existing safeguards and any future improvements may prove to be less than effective, and our employees, consultants, sales agents or distributors may engage in conduct for which we might be held responsible. Violations of the FCPA or international anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold us liable for successor liability FCPA violations committed by companies in which we invest or that we acquire. We cannot assure you that our internal control policies and procedures will protect us from reckless or negligent acts committed by our employees, distributors, partners, consultants or agents.

If we deliver systems with defects, our credibility will be harmed and the sales and market acceptance of our systems will decrease.

Our systems are complex and have occasionally contained errors, defects and bugs when introduced. Defects may be created during probing, bumping, dicing or general handling, and can have a major impact on device and process quality. When this occurs, our credibility and the market acceptance and sales of our systems could be harmed. Further, if our systems contain

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errors, defects or bugs, computer viruses or malicious code as a result of cyber-attacks to our computer networks, we may be required to expend significant capital and resources to alleviate these problems. Defects could also lead to product liability as a result of product liability lawsuits against us or against our customers. We have agreed to indemnify our customers under certain circumstances against liability arising from defects in our systems. Our product liability insurance policy currently provides $2.0 million of aggregate coverage, with an overall umbrella limit of $14.0 million. In the event of a successful product liability claim, we could be obligated to pay damages significantly in excess of our product liability insurance limits.

If we are not successful in developing new and enhanced products for the semiconductor device manufacturing industry, we will lose sales and market share to our competitors.

We operate in an industry that is highly competitive and subject to evolving industry standards, rapid technological changes, rapid changes in consumer demands and the rapid introduction of new, higher performance systems with shorter product life cycles. To be competitive in our demanding market, we must continually design, develop and introduce in a timely manner new lithography, inspection and metrology process control systems that meet the performance and price demands of semiconductor device manufacturers. We must also continue to refine our current systems so that they remain competitive. We expect to continue to make significant investments in our research and development activities. We may experience difficulties or delays in our development efforts with respect to new systems, and we may not ultimately be successful in our product enhancement efforts to improve and advance products or in responding effectively to technological change, as not all research and development activities result in viable commercial products. In addition, we cannot provide assurance that we will be able to develop new products for the most opportunistic new markets and applications. Any significant delay in releasing new systems could cause our products to become obsolete, adversely affect our reputation, give a competitor a first-to-market advantage or cause a competitor to achieve greater market share.

Some of our competitors have greater financial, engineering, manufacturing, research and development, marketing and customer support resources than we do. As a result, our competitors may be able to respond more quickly to new or emerging technologies or market developments by devoting greater resources to the development, promotion and sale of products, which could impair sales of our products. Moreover, there has been merger and acquisition activity among our competitors and potential competitors. These transactions by our competitors and potential competitors may provide them with a competitive advantage over us by enabling them to rapidly expand their product offerings and service capabilities to meet a broader range of customer needs. Many of our customers and potential customers in the semiconductor industry are large companies that require global support and service for their metrology systems. Some of our larger or more geographically diverse competitors might be better equipped to provide this global support and service.

In addition, our competitors may provide innovative technology that may have performance advantages over systems we currently offer or may offer in the future. They may be able to develop products comparable or superior to those that we offer or may adapt more quickly to new technologies or evolving customer requirements. In particular, while we currently are developing additional product enhancements that we believe will address future customer requirements, we may fail in a timely manner to complete the development or introduction of these additional product enhancements successfully, or these product enhancements may not achieve market acceptance or be competitive.

Further, customers that may otherwise desire to purchase our products from us and purchase other products from our competitors may nevertheless purchase competing products from our competitors rather than purchase our products due to a variety of reasons, including to gain favor or volume pricing from our competitors.

If new products developed by us do not gain general market acceptance, we will be unable to generate revenue and recover our research and development costs.

Inspection, lithography and metrology product development is inherently risky because it is difficult to foresee developments in semiconductor device manufacturing technology, coordinate technical personnel, and identify and eliminate system design flaws. Further, our products are complex and often the applications to our customers’ businesses are unique. Any new systems we introduce may not achieve or sustain a significant degree of market acceptance and sales.

We expect to spend a significant amount of time and resources developing new systems and refining our existing systems. In light of the long product development cycles inherent in our industry, these expenditures will be made well in advance of the prospect of deriving revenue from the sale of those systems. Our ability to commercially introduce and successfully market new systems are subject to a wide variety of challenges during the development cycle, including start-up bugs, design defects, and other matters that could delay introduction of these systems. In addition, since our customers are not obligated by long-term contracts to purchase our systems, our anticipated product orders may not materialize, or orders that are placed may be canceled. As a result, if we do not achieve market acceptance of new products, we may be unable to generate sufficient revenue and cash flow to recover our research and development costs and our market share, revenue, operating results or stock price would be negatively impacted.

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Even if we are able to develop new products that gain market acceptance, sales of these new products could impair our ability to sell existing products.

Competition from our new systems could have a negative effect on sales of our existing systems and the prices that we could charge for these systems. We may also divert sales and marketing resources from our current systems in order to successfully launch and promote our new or next generation systems. This diversion of resources could have a further negative effect on sales of our current systems and the value of inventory.

Our integrated metrology systems are integrated with systems sold independently by Wafer Fabrication Equipment Suppliers, and a decrease in sales by these suppliers, or the development of competing systems by these suppliers, could harm our business.

We believe that sales of integrated metrology systems will continue to be an important source of our net revenues. Sales of our integrated metrology systems depend upon the ability of a small number of Wafer Fabrication Equipment Suppliers to sell semiconductor manufacturing equipment products that are compatible with our metrology systems as components. If these suppliers, such as Applied Materials, Inc., Ebara Corporation, Lam Research Corporation and Tokyo Electron, are unable to sell such products, if they choose to focus their attention on products that do not integrate our systems, or if they choose to develop competing systems, our business could suffer.

If our relationships with our large customers deteriorate, our product development activities could be adversely affected.

The success of our product development efforts depends on our ability to anticipate market trends and the price, performance and functionality requirements of semiconductor device manufacturers. In order to anticipate these trends and ensure that critical development projects proceed in a coordinated manner, we must continue to collaborate closely with our largest customers. Our relationships with these and other customers provide us with access to valuable information regarding trends in the semiconductor device industry, which enables us to better plan our product development activities. If our current relationships with our large customers are impaired, or if we are unable to develop similar collaborative relationships with important customers in the future, our product development activities could be adversely affected.

We may fail to adequately protect our intellectual property and, therefore, lose our competitive advantage.

Our future success and competitive position depend in part upon our ability to obtain and maintain proprietary technology for our principal product families, and we rely, in part, on patent and trade secret law and confidentiality agreements to protect that technology. If we fail to adequately protect our intellectual property, it will give our competitors a significant advantage. We own or have licensed a number of patents relating to our transparent and opaque thin film metrology, lithography and macro-defect inspection systems, and have filed applications for additional patents. Any of our pending patent applications may be rejected, and we may be unable to develop additional proprietary technology that is patentable in the future.

In addition, the patents that we do own or that have been issued or licensed to us may not provide us with competitive advantages and may be challenged by third parties. Further, third parties may also design around these patents. In addition to patent protection, we rely upon trade secret protection for our confidential and proprietary information and technology. We routinely enter into confidentiality agreements with our employees and other third parties. Even though these agreements are in place, there can be no assurances that trade secrets and proprietary information will not be disclosed, that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets, or that we can fully protect our trade secrets and proprietary information. Violations by others of our confidentiality agreements and the loss of employees who have specialized knowledge and expertise could harm our competitive position and cause our sales and operating results to decline as a result of increased competition. Costly and time-consuming litigation might be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection might adversely affect our ability to continue our research or bring products to market.

Protection of our intellectual property rights, or the efforts of third parties to enforce their own intellectual property rights against us, may result in costly and time-consuming litigation, substantial damages, lost product sales and/or the loss of important intellectual property rights.

We may be required to initiate litigation in order to enforce any patents issued to or licensed by us or to determine the scope or validity of a third party’s patent or other proprietary rights. Any litigation, regardless of outcome, could be expensive and time consuming and could subject us to significant liabilities or require us to re-engineer our products or obtain expensive licenses from third parties. There can be no assurance that any patents issued to or licensed by us will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide us with a competitive advantage.

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In addition, our commercial success depends in part on our ability to avoid infringing or misappropriating patents or other proprietary rights owned by third parties. From time to time, we receive communications from third parties asserting that our products or systems infringe, or may infringe, on the proprietary rights of these third parties. These claims of infringement may lead to protracted and costly litigation, which could require us to pay substantial damages or have the sale of our products or systems stopped by an injunction. Infringement claims could also cause product or system delays or require us to redesign our products or systems, and these delays could result in the loss of substantial revenue. We may also be required to obtain a license from the third party or cease activities utilizing the third party’s proprietary rights. We may not be able to enter into such a license or such a license may not be available on commercially reasonable terms. Accordingly, the loss of important intellectual property rights could hinder our ability to sell our systems or to make the sale of these systems more expensive.

Our efforts to protect our intellectual property may be less effective in certain foreign countries where intellectual property rights are not as well protected as in the United States.

The laws of some foreign countries, including China, Japan, South Korea and Taiwan, where we do business, do not protect our proprietary rights to as great an extent as do the laws of the United States, and many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement abroad. For example, Taiwan is not a signatory of the Patent Cooperation Treaty, which is designed to specify rules and methods for defending intellectual property internationally. The publication of a patent in Taiwan prior to the filing of a patent in Taiwan would invalidate the ability of a company to obtain a patent in Taiwan. Similarly, in contrast to the United States where the contents of patents remain confidential during the patent application process, in Taiwan, the contents of a patent are published upon filing, which provides competitors an advance view of the contents of a patent application prior to the establishment of patent rights. Similarly, China’s protection of intellectual property rights historically has been less stringent and robust compared to other countries such as the United States, and consequently intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Monitoring and preventing unauthorized use are also difficult and the measures we take to protect our intellectual property rights may not be adequate. Accordingly, infringement of our intellectual property rights poses a serious risk of doing business in China. Consequently, there is a risk that we may be unable to adequately protect our proprietary rights in certain foreign countries. If this occurs, it would be easier for our competitors to develop and sell competing products in these countries.

Some of our current and potential competitors have significantly greater resources than we do, and increased competition could impair sales of our products or cause us to reduce our prices.

The market for semiconductor capital equipment is highly competitive. We face substantial competition from established companies in each of the markets we serve. We principally compete with KLA Corporation, Nova Measuring Instruments, Camtek and Veeco Instruments. We compete to a lesser extent with Nikon. Each of our products also competes with products that use different metrology, inspection or lithography techniques. Some of our competitors have greater financial, engineering, manufacturing and marketing resources, broader product offerings and service capabilities and larger installed customer bases than we do. As a result, these competitors may be able to respond more quickly to new or emerging technologies or market developments by devoting greater resources to the development, promotion and sale of products, which, in turn, could impair sales of our products. Further, there may be significant merger and acquisition activity among our competitors and potential competitors, which, in turn, may provide them with a competitive advantage over us by enabling them to rapidly expand their product offerings and service capabilities to meet a broader range of customer needs.

Many of our customers and potential customers in the semiconductor device manufacturing industry are large companies that require global support and service for their semiconductor capital equipment. We believe that our global support and service infrastructure is sufficient to meet the needs of our customers and potential customers. However, some of our competitors have more extensive infrastructures than we do, which could place us at a disadvantage when competing for the business of global semiconductor device manufacturers. Many of our competitors are investing heavily in the development of new systems that will compete directly with our systems. We have, from time to time, selectively reduced prices on our systems in order to protect our market share, and competitive pressures may necessitate further price reductions. We expect our competitors in each product area to continue to improve the design and performance of their products and to introduce new products with competitive prices and performance characteristics. These product introductions would likely require us to decrease the prices of our systems and increase the level of discounts that we grant our customers. Price reductions or lost sales as a result of these competitive pressures would reduce our total revenue and could adversely impact our financial results.

Because of the high cost of switching equipment vendors in our markets, it is sometimes difficult for us to win new customers from our competitors even if our systems are superior to theirs.

We believe that once a semiconductor device manufacturer has selected one vendor’s capital equipment for a production-line application, the manufacturer generally relies upon that capital equipment and, to the extent possible, subsequent

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generations of the same vendor’s equipment for the life of the application. Once a vendor’s equipment has been installed in a production line application, a semiconductor device manufacturer must often make substantial technical modifications and may experience production-line downtime in order to switch to another vendor’s equipment. Accordingly, unless our systems offer performance or cost advantages that outweigh a customer’s expense of switching to our systems, it will be difficult for us to achieve significant sales to that manufacturer once it has selected another vendor’s capital equipment for an application.

We must attract and retain experienced senior executives and other key personnel with knowledge of semiconductor device manufacturing and inspection, metrology or lithography equipment and related software to help support our future growth, and competition for such personnel in our industry is high.

Our success depends, to a significant degree, upon the continued contributions of our key executive management, engineering, sales and marketing, customer support, finance and manufacturing personnel. The loss of any of these key personnel through resignations, retirement or other circumstances, each of whom would be extremely difficult to replace, could harm our business and operating results. Although we have employment and noncompetition agreements with key members of our senior management team, these individuals or other key employees may still leave us, which could have a material adverse effect on our business. We do not have key person life insurance on any of our executives. In addition, to support our future growth, we will need to attract and retain additional qualified employees. Competition for such personnel in our industry is intense, and we may not be successful in attracting and retaining qualified employees.

In order to attract and retain executives and other key employees, the Company must provide a competitive compensation package, including cash and stock-based compensation. If the anticipated value of the Company’s stock-based incentive awards does not materialize so that they cease to be viewed as valuable, if the Company’s profits decrease, or if the Company’s total compensation package is not viewed as competitive, the Company’s ability to attract, retain and motivate executives and key employees could be weakened.

We obtain some of the components and subassemblies included in our systems from a limited group of suppliers, and the partial or complete loss of one of these suppliers could cause production delays and a substantial loss of revenue.

We obtain some of the components and subassemblies included in our systems from a limited group of suppliers and do not have long-term contracts with many of our suppliers. Our dependence on limited source suppliers of components and our lack of long-term contracts with many of our suppliers expose us to several risks, including a potential inability to obtain an adequate supply of components, price increases, late deliveries and poor component quality. Disruption or termination of the supply of these components could delay shipments of our systems, damage our customer relationships and reduce our sales. From time to time in the past, we have experienced temporary difficulties in receiving shipments from our suppliers. The lead-time required for shipments of some of our components can be as long as six months. In addition, the lead time required to qualify new suppliers for lasers and certain optics could be as long as a year, and the lead time required to qualify new suppliers of other components could be as long as nine months. If we are unable to accurately predict our component needs, or if our component supply is disrupted, we may miss market opportunities by not being able to meet the demand for our systems. Further, a significant increase in the price of one or more of these components or subassemblies could seriously harm our results of operations and cash flows.

Any prolonged disruption in the operations of our manufacturing facilities could have a material adverse effect on our revenue.

We produce the majority of our systems in our manufacturing facilities located in Milpitas, California and Bloomington, Minnesota. We use contract manufacturers in China, Israel, Japan and the United States. Our manufacturing processes are highly complex and require sophisticated and costly equipment and a specially designed facility. As a result, any prolonged disruption in the operations of our manufacturing facilities, such as those resulting from acts of war, terrorism, political instability, health epidemics, fire, earthquake, flooding or other natural disaster could seriously harm our ability to satisfy our customer order deadlines. If we cannot timely deliver our systems, our results from operations and cash flows could be materially and adversely affected.

We may outsource select manufacturing activities to third-party service providers, which decreases our control over the performance of these functions and may result in lower quality and functionality of our products.

We may outsource product manufacturing to third-party service providers. Outsourcing reduces our control over the performance of the outsourced functions. Dependence on outsourcing may also adversely affect our ability to bring new products to market. If we do not effectively manage our outsourcing strategy or if third party service providers do not perform as anticipated, we may experience operational difficulties, increased costs, manufacturing interruptions or inefficiencies in the operation of our supply chain, any or all of which could delay our delivery of products to our customers, and materially and adversely affect our business, financial condition, and results of operations.

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We are in the process of implementing a world-wide new enterprise resource planning (“ERP”) system, and problems with the design or implementation of this ERP system could interfere with our business and operations.

We are currently engaged in a multi-year process of conforming all our operations to one global enterprise resource planning (“ERP”) system. The ERP system is designed to accurately maintain the Company’s books and records and enhance the speed and quality of information provided to our management team for use in the operation and management of our business. The Company’s ERP transition has required, and will continue to require, the investment of significant human and financial resources. We may not be able to successfully implement the ERP transition without experiencing delays, increased costs and other difficulties. Beyond cost and scheduling, potential flaws in the implementation of an ERP system may pose risks to the Company’s ability to operate successfully and efficiently, including timely and accurate SEC filings. If we are unable to successfully implement the new ERP system as planned, our financial position, results of operations and cash flows could be negatively impacted.

If our network security measures are breached and unauthorized access is obtained to a customer’s data, to our data, or to our information technology systems, we may incur significant legal and financial exposure and liabilities.

As part of our business, we store our data and certain data about our customers, vendors and employees in our information technology system. While we have security measures in place that are designed to protect this information and prevent data loss and other security breaches, if these measures are breached as a result of third-party action, employee error, malfeasance, break-ins or otherwise, and someone obtains unauthorized access to our customers’, vendors’ or employees’ data, we could face loss of business, regulatory investigations or court orders, our reputation could be severely damaged, we could be required to expend significant capital and other resources to alleviate the problem, as well as incur significant costs and liabilities, including due to litigation, indemnity obligations, damages for contract breach, penalties for violation of applicable laws or regulations, and costs for remediation and other incentives offered to customers.

Cyber-attacks and other malicious internet-based activities continue to increase. In response to the COVID-19 pandemic, our expanded reliance on remote access to our information systems has further increased our exposure to potential cybersecurity breaches. As the techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, third parties may attempt to fraudulently induce employees or users to disclose information to gain access to our data or our customers’ data. If any of these events occur, our or our customers’ and vendors’ information could be accessed or disclosed improperly. Any or all of these issues could negatively affect our ability to attract new customers, cause existing customers to choose to purchase from our competitors, result in reputational damage or subject us to third-party lawsuits, regulatory fines or other action or liability, which could adversely affect our operating results.

The General Data Protection Regulation (GDPR) is a regulation in European Union (EU) law on data protection and privacy for all individuals within the EU and the European Economic Area (EEA). It also addresses the export of personal data outside the EU and EEA areas. We need to put in appropriate technical and organizational measures to implement these data protection principles. The GDPR requirements have been reviewed and are in the process of being implemented. We may also be subject to other data privacy laws in the United States and the other countries in which we operate.

Failure to adjust our orders for parts and subcomponents in an accurate and timely manner in response to changing market conditions or customer acceptance of our products could adversely affect our financial position and results of operations.

Our earnings could be negatively affected and our inventory levels could materially increase if we are unable to predict our inventory needs in an accurate and timely manner and adjust our orders for parts and subcomponents in the event that our needs increase or decrease materially due to unexpected increases or decreases in demand for our products. Any material increase in our inventories could result in an adverse effect on our financial position, while any material decrease in our ability to procure needed inventories could result in an inability to supply customer demand for our products, thus adversely affecting our revenue.

Our ability to fulfill our backlog may have an effect on our long-term ability to procure contracts and fulfill current contracts.

Our ability to fulfill our backlog may be limited by our ability to devote sufficient financial and human capital resources and may be limited by available material supplies. If we do not fulfill our backlog in a timely manner, we may experience delays in product delivery, which would postpone receipt of revenue from those delayed deliveries. Additionally, if we are consistently unable to fulfill our backlog, this may be a disincentive to customers to award large contracts to us in the future until they are comfortable that we can effectively manage our backlog.

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If we do not manage our supply chain effectively, our operating results may be adversely affected.

We need to continually evaluate our global supply chains and assess opportunities to reduce costs. We must also enhance quality, speed and flexibility to meet changing demand for our products and product mix and uncertain market conditions. Our success also depends in part on refining our cost structure and supply chains so that we have flexibility and can maintain and improve profitability. Although the current tariff environment has not had a material adverse effect on our costs to date, further deterioration in the tariff environment, or changes in suppliers, may cause our costs to increase, which if we are not able to offset by charging higher sales prices, will cause a decline in our margins. To improve our margins on a product, we will need to establish high volume supply agreements with our vendors. We cannot be certain that we will be able to timely negotiate vendor supply agreements on improved terms and conditions, or at all. Failure to achieve the desired level of cost reductions could adversely affect our financial results. Despite our efforts to control costs and increase efficiency in our facilities, changes in demand could still cause us to realize lower operating margins and profitability.

We may choose to acquire new and complementary businesses, products or technologies instead of developing them ourselves, and we may be unable to complete these acquisitions or may not be able to successfully integrate an acquired business in a cost-effective and non-disruptive manner.

Our success depends on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures. To this end, we have, from time to time, engaged in the process of identifying, analyzing and negotiating possible acquisition transactions, and, from time to time, acquiring one or more businesses, and we expect to continue to do so in the future. We may choose to acquire new and complementary businesses, products, technologies and/or services instead of developing them ourselves. We may, however, face competition for acquisition targets from larger and more established companies with greater financial resources, making it more difficult for us to complete acquisitions. We cannot provide any assurance that we will be successful in consummating future acquisitions on favorable terms or that we will realize the benefits that we anticipate from one or more acquisitions that we consummate. Integrating any business, product, technology or service into our current operations could be expensive and time-consuming and/or disrupt our ongoing business. Further, there are numerous risks associated with acquisitions and potential acquisitions, including, but not limited to:

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diversion of management’s attention from day-to-day operational matters and current products and customers;

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lack of synergy or the inability to successfully integrate the new business or to realize expected synergies;

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failure to commercialize the new technology or business;

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failure to meet the expected performance of the new technology or business;

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failure to retain key employees and customer or supplier relationships;

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lower-than-expected market opportunities or market acceptance of any new products; and

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unexpected reduction of sales of existing products as a result of the introduction of new products.

Our inability to consummate one or more acquisitions on favorable terms, or our failure to realize the intended benefits from one or more acquisitions, could have a material adverse effect on our business, liquidity, financial position and/or results of operations, including as a result of our incurrence of indebtedness and related interest expense and our assumption of unforeseen contingent liabilities. We might need to raise additional funds through public or private equity or debt financings to finance any acquisition. In that event, we could be forced to obtain financing on terms that are not favorable to us and, in the case of equity financing, that result in dilution to our stockholders. In addition, any impairment of goodwill or other intangible assets, amortization of intangible assets, write-down of other assets or charges resulting from the costs of acquisitions and purchase accounting could harm our business and operating results.

If we cannot effectively manage growth, our business may suffer.

Over the long-term, we intend to grow our business by increasing our sales efforts and completing strategic acquisitions. To effectively manage growth, we must, among other things:

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engage, train and manage a larger sales force and additional service personnel;

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expand the geographic coverage of our sales force;

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expand our information systems;

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identify and successfully integrate acquired businesses into our operations; and

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administer appropriate financial and administrative control procedures.

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Growth of our business will likely place a significant strain on our management, financial, operational, technical, sales and administrative resources. Any failure to effectively manage our growth may cause our business to suffer and our stock price to decline.

Risks Related to Tax Laws, Financial Markets and the Environment

Changes in tax rates or tax liabilities could affect results.

As a global company, we are subject to taxation in the United States and various other countries. Significant judgment is required to determine and estimate worldwide tax liabilities. Our future annual and quarterly tax rates could be affected by numerous factors, including changes in the (1) applicable tax laws; (2) composition of earnings in countries with differing tax rates; or (3) recoverability of our deferred tax assets and liabilities. In addition, we are subject to regular examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Although we believe our tax estimates are reasonable, there can be no assurance that any final determination will not be materially different from the treatment reflected in our historical income tax provisions and accruals, which could materially and adversely affect our results of operations.

The Organization for Economic Co-operation and Development (“OECD”), released guidance covering various topics, including country-by-country reporting, definitional changes to permanent establishment and Base Erosion and Profit Shifting (“BEPS”), an initiative that aims to standardize and modernize global tax policy. Depending on the final form of guidance adopted by OECD members and legislation ultimately enacted, if any, there may be significant consequences for us due to our international business activities, including, but not limited to, an increase in our tax uncertainty and adverse effects on our provision for income taxes.

Turmoil or fluctuations in the credit markets and the financial services industry may negatively impact our business, results of operations, financial condition or liquidity, and our factoring arrangements may expose us to additional risks.

In the past, global credit markets and the financial services industry have experienced a period of unprecedented turmoil and upheaval characterized by the tightening of the credit markets, the weakening of the global economy and an unprecedented level of intervention from the United States and other governments. Adverse economic conditions, such as sustained periods of economic uncertainty or a crisis in the financial markets may have a material adverse effect on our liquidity and financial condition if our ability to obtain credit from the capital financial markets, or from trade creditors was impaired. In addition, a worsening economy or an economic crisis could also adversely impact our customers’ ability to finance the purchase of systems from us or our suppliers’ ability to provide us with product, either of which may negatively impact our business and results of operations. In addition, we enter into factoring arrangements with certain financial institutions to sell a certain portion of our trade receivables. If we were to stop entering into these factoring arrangements, our operating results, financial condition and cash flows could be adversely impacted by delays or failure to collect the trade receivables. However, by entering into these arrangements, we are exposed to additional risks. If any of these financial institutions experiences financial difficulties or is otherwise unable to honor the terms of our factoring arrangements, we may experience material financial losses due to the failure of such arrangements, which could have an adverse impact upon our operating results, financial condition and cash flows.

We are subject to various environmental laws and regulations that could impose substantial costs upon us and may harm our business, operating results and financial condition.

Some of our operations use substances regulated under various federal, state, local, and international laws governing the environment, including those relating to the storage, use, discharge, disposal, labeling, and human exposure to hazardous and toxic materials. We could incur costs, fines and civil or criminal sanctions, third-party property damage or personal injury claims, or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental laws. Liability under environmental laws can be joint and several and without regard to comparative fault. Compliance with current or future environmental laws and regulations could restrict our ability to expand our facilities or require us to acquire additional expensive equipment, modify our manufacturing processes, or incur other significant expenses. We may unintentionally violate environmental laws or regulations in the future as a result of human error, equipment failure or other causes.

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Risks Related to Our Recently Completed Merger

Combining the businesses of Rudolph and Nanometrics may be more difficult, costly or time-consuming than expected and we may fail to realize the anticipated benefits of the Merger, which may adversely affect our business results and negatively affect the value of our common stock.

The success of the Merger depends on, among other things, our ability to combine the businesses of Rudolph and Nanometrics in a manner that realizes cost savings and facilitates growth opportunities.

In addition, we must achieve the anticipated growth and cost savings without adversely affecting current revenues and investments in future growth. If we are not able to successfully achieve these objectives, the anticipated benefits of the Merger may not be realized fully, or at all, or may take longer to realize than expected.

An inability to realize the full extent of the anticipated benefits of the Merger, as well as any delays encountered in the integration process, could have an adverse effect upon our revenues, level of expenses and operating results, which may adversely affect the value of our common stock.

In addition, the integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized. Actual growth and cost savings, if achieved, may be lower than what we expect and may take longer to achieve than anticipated. If we are not able to adequately address integration challenges, we may be unable to realize the anticipated benefits of the integration of Rudolph and Nanometrics.

The failure to successfully integrate the businesses and operations of Rudolph and Nanometrics in the expected time frame may adversely affect our future results.

Prior to completion of the Merger, Rudolph and Nanometrics operated independently. There can be no assurances that their businesses can be integrated successfully. It is possible that the integration process could result in the loss of key Rudolph employees or key Nanometrics employees, the loss of customers, the disruption of our ongoing businesses, inconsistencies in standards, controls, procedures and policies, unexpected integration issues, higher than expected integration costs or an overall post-completion integration process that takes longer than originally anticipated. Specifically, the following issues, among others, must be addressed in integrating the operations of Rudolph and Nanometrics in order to realize the anticipated benefits of the Merger so we perform as expected:

•combining the companies’ operations and corporate functions;

•combining the businesses of Rudolph and Nanometrics and meeting our capital requirements, in a manner that permits us to achieve any cost savings or revenue synergies anticipated to result from the Merger, the failure of which would result in the anticipated benefits of the Merger not being realized in the time frame currently anticipated or at all;

•integrating personnel from the two companies;

•integrating and unifying the offerings and services available to customers;

•harmonizing the companies’ operating practices, employee development and compensation programs, internal controls and other policies, procedures and processes;

•maintaining existing agreements with customers, distributors, providers and vendors and avoiding delays in entering into new agreements with prospective customers, distributors, providers and vendors;

•addressing possible differences in business backgrounds, corporate cultures and management philosophies;

•consolidating the companies’ administrative and information technology infrastructure;

•coordinating distribution and marketing efforts; and

•coordinating geographically dispersed organizations.

In addition, at times the attention of certain members of management and resources may be focused on the integration of the businesses of the two companies and diverted from day-to-day business operations or other opportunities that may have been beneficial, which may disrupt our business.

We may not be able to retain customers or suppliers, or customers or suppliers may seek to modify contractual obligations with us, which could have an adverse effect on our business and operations. Third parties may terminate or alter existing contracts or relationships with Rudolph or Nanometrics.

As a result of the Merger, we may experience impacts on relationships with customers and suppliers that may harm our business and results of operations. Certain customers, licensors, business partners or suppliers may seek to terminate or modify

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contractual obligations whether or not contractual rights were triggered as a result of the Merger. There can be no guarantee that customers and suppliers of Rudolph or Nanometrics will remain with or continue to have a relationship with us or do so on the same or similar contractual terms to those they had with Rudolph or Nanometrics prior to the Merger. If any customers or suppliers seek to terminate or modify contractual obligations or discontinue the relationship with us, then our business and results of operations may be harmed. Furthermore, we do not have long-term arrangements with many of our significant suppliers. If our suppliers were to seek to terminate or modify an arrangement with us, then we may be unable to procure necessary supplies from other suppliers in a timely and efficient manner and on acceptable terms, or at all. Any of the aforementioned disruptions could limit our ability to achieve the anticipated benefits of the Merger.

We may be exposed to increased litigation due to the Merger, which could have an adverse effect on our business and operations.

We may be exposed to increased litigation from stockholders, customers, suppliers, consumers and other third parties due to the combination of Rudolph’s business and Nanometrics’ business. Such litigation may have an adverse impact on our business and results of operations or may cause disruptions to our operations.

We may be unable to retain former Rudolph and Nanometrics personnel successfully.

The success of the Merger will depend in part on our ability to retain the talents and dedication of the professionals previously separately employed by Rudolph and Nanometrics. It is possible that these employees may decide not to remain with us. If key employees terminate their employment, or if an insufficient number of employees are retained to maintain effective operations, our business activities may be adversely affected and management’s attention may be diverted from successfully integrating Rudolph and Nanometrics to hiring suitable replacements, all of which may cause our business to suffer. In addition, we may not be able to locate suitable replacements for any key employees that leave the Company or offer employment to potential replacements on reasonable terms.

Risks Related to the Global Economy and Semiconductor Industry

Cyclicality in the semiconductor device industry has led to substantial decreases in demand for our systems and may, from time to time, continue to do so.

Our operating results are subject to significant variation due to global economic conditions and the cyclical nature of the semiconductor device industry. Our business depends upon the capital expenditures of semiconductor device manufacturers, which, in turn, depend upon the current and anticipated market demand for semiconductors and products using semiconductors. The timing, length and severity of the up-and-down cycles in the semiconductor equipment industry are difficult to predict. In recent years, the industry has experienced significant downturns, generally in connection with declines in economic conditions. This cyclical nature of the industry in which we operate affects our ability to accurately predict future revenue and, thus, future expense levels. When cyclical fluctuations result in lower than expected revenue levels, operating results may be adversely affected, and cost reduction measures may be necessary in order for us to remain competitive and financially sound. During a down cycle, we must be in a position to adjust our cost and expense structure to prevailing market conditions and to continue to motivate and retain our key employees. In addition, during periods of rapid growth, we must be able to increase manufacturing capacity and personnel to meet customer demand. We can provide no assurance that these objectives can be met in a timely manner in response to industry cycles. If we fail to respond to industry cycles, our business could be seriously harmed.

In addition, demand for our products is highly inelastic which means we have little ability to control product revenues created by customer demand for more capacity. The market for our products is characterized by constant and rapid technological change, price erosion, product obsolescence, evolving standards, short product life cycles and significant volatility in supply and demand. Due to the inelastic nature of demand in the semiconductor industry, we may need to take actions to reduce costs in the future, which could reduce our ability to significantly invest in research and development at levels we believe are necessary. If we are unable to effectively align our cost structure with prevailing market conditions, our business, financial condition and results of operations may be materially and adversely affected.

We may also experience supplier or customer issues as a result of adverse macroeconomic conditions. If our customers have difficulties in obtaining capital or financing, this could result in lower sales. Customers with liquidity issues could also result in an increase in bad debt expense. These conditions could also affect our key suppliers, which could affect their ability to supply parts and result in delays of our customer shipments.

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Our future rate of growth is highly dependent on the development and growth of the market for microelectronic device inspection, lithography and metrology equipment.

We target our products to address the needs of microelectronic device manufacturers for defect inspection, metrology and lithography. If for any reason the market for microelectronic device inspection, lithography or metrology equipment fails to grow in the long term, we may be unable to maintain current revenue levels in the short term and maintain our historical growth in the long term. Growth in the inspection market is dependent to a large extent upon microelectronic manufacturers replacing manual inspection with automated inspection technology. Growth in the metrology market is dependent to a large extent upon new chip designs and capacity expansion of microelectronic manufacturers. Growth in the lithography market is dependent on the development of cost-effective packaging with high fine pitch RDLs, ultimately migrating to multi-die, large, form-factor packages. There can be no assurance that manufacturers will undertake these actions at the rate we expect.

Risks Related to our Stock

Provisions of our charter documents and of Delaware law could discourage potential acquisition proposals and/or delay, deter or prevent a change in control of our company.

Provisions of our certificate of incorporation and by-laws may inhibit changes in control of our company not approved by our Board of Directors. These provisions also limit the circumstances in which a premium can be paid for our common stock and in which a proxy contest for control of our board may be initiated. These provisions provide for:

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a prohibition on stockholder actions through written consent;

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a requirement that special meetings of stockholders be called only by our chief executive officer or Board of Directors;

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advance notice requirements for stockholder proposals and director nominations by stockholders;

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limitations on the ability of stockholders to amend, alter or repeal our by-laws; and

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the authority of our board to issue, without stockholder approval, preferred stock with such terms as the board may determine; and

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The authority of our board, without stockholder approval, to adopt a stockholder rights plan.

We are also entitled to avail ourselves of the protections of Section 203 of the Delaware General Corporation Law, which could inhibit changes in control of the Company.

Our stock price is volatile.

The market price of our common stock has fluctuated widely. Consequently, the current market price of our common stock may not be indicative of future market prices, and we may be unable to sustain or increase the value of an investment in our common stock. Factors affecting our stock price may include:

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variations in operating results from quarter to quarter;

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changes in earnings estimates by analysts or our failure to meet analysts’ expectations;

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changes in the market price per share of our public company customers;

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market conditions in the semiconductor and other industries into which we sell products;

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general economic conditions;

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political changes, hostilities or natural disasters such as hurricanes and floods;

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the impact of the COVID-19 pandemic, or other future infectious disease pandemics, on the global economy and on our customers, suppliers, employees, and business

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low trading volume of our common stock; and

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the number of firms making a market in our common stock.

In addition, the stock market has experienced periods of significant price and volume fluctuations. These fluctuations have particularly affected the market prices of the securities of high technology companies like ours. Any such market fluctuations in the future could adversely affect the market price of our common stock.

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There are various risks related to the legal and regulatory environments in which we perform our operations and conduct our business that may expose us to risk.

We are faced with various risks that may be associated with our compliance with existing, new, different, inconsistent or conflicting laws, regulations and rules enacted by governments and/or their regulatory agencies in the countries in which we operate as well as rules and policies implemented at our customer sites. These laws, regulations, rules and policies could relate to any of an array of issues including, but not limited to, environmental, tax, intellectual property, trade secrets, product liability, contracts, antitrust, employment, securities, import/export and unfair competition. In the event that we fail to comply with or violate U.S. or foreign laws or regulations or customer policies, we could be subject to civil or criminal claims or proceedings that may result in monetary fines, penalties or other costs against us or our employees, which may adversely affect our operating results, financial condition, customer relations and ability to conduct our business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Following the Merger, the Company assumed the share repurchase authorization previously approved by the former Nanometrics Board of Directors, that was announced on May 1, 2019. This share repurchase authorization allows for the Company to purchase up to $80.0 million worth of shares of its common stock. Under the terms of this share repurchase authorization, shares may be repurchased through open market or privately negotiated transactions with no specified end date. During the three and six months ended June 27, 2020, we repurchased 632 thousand and 1.9 million shares of common stock under this repurchase authorization. At June 27, 2020, there was $28.0 million available for future share repurchases. For further information, see Note 2, “Business Combinations” and Note 17, “Share Repurchase Authorization” in the accompanying Notes to the Condensed Consolidated Financial Statements.

In addition to our share repurchase program, we withhold shares of common stock to cover tax withholding obligations upon the vesting of restricted stock unit awards and stock option exercises under the Company’s equity incentive program. During the three and six months ended June 27, 2020, we withheld 55 thousand and 98 thousand shares through net share settlements. For the three and six months ended June 27, 2020, net share settlements cost $1.7 million and $3.3 million, respectively. Please refer to Note 11, “Share-Based Compensation,” of the Notes to the Condensed Consolidated Financial Statements for further discussion regarding our equity incentive plan.

The following table provides details of common stock purchased during the three months ended June 27, 2020 (in thousands, except per share data):

Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program		Approximate Dollar Value of Shares that May Yet be Purchased Under the Program
March 29, 2020 - April 28, 2020		639	$	29.10		632	$	28,000
April 29, 2020 - May 28, 2020		—		—		—	$	28,000
May 29, 2020 - June 27, 2020		49	$	31.07			$	28,000
Three months ended June 27, 2020		688	$	29.24		632	$	28,000

¹ Includes shares withheld through net share settlements.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibit No.	Description

3.1	Amended and Restated Certificate of Incorporation of Onto Innovation Inc., dated October 25, 2019, incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K filed with the SEC on October 28, 2019 (File No. 001-39110).

3.2	Amended and Restated Bylaws of Onto Innovation Inc., dated January 22, 2020, incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on January 27, 2020 (File No. 001-39110).

10.1	Onto Innovation Inc. Amended 2020 Employee Stock Purchase Plan

10.2⁺	Onto Innovation Inc. 2020 Stock Plan and forms of restricted stock units purchase agreements, performance stock unit purchase agreements and stock option agreements, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on May 14, 2020 (File No. 001-39110).

31.1*	Certification of Michael P. Plisinski, Chief Executive Officer, pursuant to Securities Exchange Act Rule 13a-14(a)

31.2*	Certification of Steven R. Roth, Chief Financial Officer, pursuant to Securities Exchange Act Rule 13a-14(a)

32.1**	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Michael P. Plisinski, Chief Executive Officer of Onto Innovation Inc.

32.2**	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Steven R. Roth, Chief Financial Officer of Onto Innovation Inc.

101.INS*	Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH*	Inline XBRL Taxonomy Extension Schema Document

101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*	Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE*	Inline XBRL Taxonomy Extension Presentation Linkbase Document

104*	Cover Page Interactive Data File (formatted as Inline XBRL and included in Exhibit 101)

* Filed herewith.

**Furnished herewith.

+Management contract, compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		Onto Innovation Inc.

Date:	August 4, 2020	By:	/s/ Michael P. Plisinski
		Michael P. Plisinski
		Chief Executive Officer

Date:	August 4, 2020	By:	/s/ Steven R. Roth
		Steven R. Roth
		Senior Vice President, Chief Financial Officer and Principal Accounting Officer