Onto Innovation Inc.: Form 10-Q for the period ended Jun 30, 2026

Forward-Looking Statements

Certain statements in this Form 10-Q, or incorporated by reference in this Form 10-Q, of Onto Innovation Inc. (referred to in this Form 10-Q, together with its consolidated subsidiaries, unless otherwise specified or suggested by the context, as the “Company,” “Onto Innovation,” “we,” “our” or “us”) are considered “forward-looking statements” or are based on “forward-looking statements,” including, but not limited to, those concerning:

• our business momentum and future growth;
• technology development, product introduction and acceptance of our products and services;
• our manufacturing practices and ability to deliver both products and services consistent with our customers’ demands and expectations and to strengthen our market position, including our ability to source components, materials, and equipment due to supply chain delays or shortages;
• the closing of the Rigaku Transaction (as defined below);
• the integration of Semilab USA LLC (“Semilab USA”);
• our expectations of the semiconductor market outlook;
• future revenue, gross profits, research and development and engineering expenses, selling, general and administrative expenses, and cash requirements;
• the anticipated effects of tariffs and trade disputes on our business and financial results;
• the effects of natural disasters or public health emergencies on the global economy and on our customers, suppliers, employees, and business;
• our dependence on certain significant customers and anticipated trends and developments in and management plans for our business and the markets in which we operate; and
• our ability to be successful in managing our cost structure and cash expenditures and results of litigation.

Statements contained or incorporated by reference in this Form 10-Q that are not purely historical are forward-looking statements and are subject to safe harbors under Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 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.

Forward-looking statements contained herein reflect our current expectations, assumptions and projections with respect to future events and are subject to certain risks, uncertainties and assumptions. Actual results may differ materially and adversely from those included in such forward-looking statements as a result of various factors, including risks and uncertainties, many of which are beyond Onto Innovation’s control. Such factors include, but are not limited to, the Company’s ability to leverage its resources to improve its position in its core markets; its ability to weather difficult economic environments; its ability to open new market opportunities and target high-margin markets; the strength/weakness of the back-end and/or front-end semiconductor market segments; fluctuations in customer capital spending; the Company’s ability to effectively manage its supply chain and adequately source components from suppliers to meet customer demand; the effects of political, economic, legal, and regulatory changes or uncertainties, changes in U.S. tariff and trade policy and related retaliatory actions, and geopolitical conflicts, including the ongoing conflict involving Israel, the U.S., Iran and other actors, on the Company’s global operations; the Company’s ability to adequately protect its intellectual property rights and maintain data security; the effects of natural disasters or public health emergencies on the global economy and on the Company’s customers, suppliers, employees, and business; its ability to effectively maneuver global trade issues and changes in trade and export regulations, tariffs and license policies; the Company’s ability to maintain relationships with its customers and manage appropriate levels of inventory to meet customer demands; the Company’s ability to complete the Rigaku Transaction on the timing expected or at all; the Company’s ability to realize the anticipated benefits of the Rigaku Transaction; and the Company’s ability to successfully integrate acquired businesses and technologies, including the business of Semilab USA and to realize the anticipated benefits of such acquisitions. Additional information and considerations regarding the risks faced by Onto Innovation are available in our Annual Report on Form 10-K for the fiscal year ended January 3, 2026 (the “2025 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on February 24, 2026, in Part II, Item 1A. “Risk Factors” and elsewhere in this Form 10-Q, and in the other filings that we make with the SEC from time to time. Forward-looking statements reflect our position as of the date of this Form 10-Q 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.

Critical Accounting Estimates

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.

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 the 2025 Form 10-K in the Items entitled

“Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” There have been no material changes in our critical accounting estimates from the information presented in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2025 Form 10-K.

For more information, please see our critical accounting estimates as previously disclosed in the 2025 Form 10-K and recent accounting pronouncements discussed in Note 1 to the Condensed Consolidated Financial Statements.

Executive Summary

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” manufacturing, and in device packaging and test facilities, commonly referred to as “back-end” manufacturing. 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 principal market is semiconductor capital equipment. Semiconductors packaged as integrated circuits (“ICs”), or “chips,” are used in consumer electronics, server and enterprise systems, mobile computing (including smart phones and tablets), data storage devices, and embedded automotive and control systems. Our core focus is the measurement and control of the structure, composition, and geometry of semiconductor devices as they are fabricated on silicon wafers to improve device performance and manufacturing yields.

Our products and services are used by our customers who manufacture many types of ICs for a multitude of applications, each having unique manufacturing challenges. This includes ICs to enable information processing and management (logic ICs), memory storage (NAND, 3D-NAND, NOR, and DRAM), analog devices (e.g., Wi-Fi and 5G radio ICs, power devices), MEMS sensor devices (accelerometers, pressure sensors, microphones), image sensors, and other end markets including components for AI, hard disk drives, LEDs, and power management.

The semiconductor and electronics industries have also been characterized by constant technological innovation. We believe that, over the long term, our customers will continue to invest in advanced technologies and new materials to enable smaller design rules and higher density applications that fuel demand for process control equipment.

The following table summarizes certain key financial information for the periods indicated below:

(in thousands, except for percentages and per share data)

• In the fiscal quarter ended June 30, 2026 (the “June 2026 quarter”), revenue increased 17.5% compared to the fiscal quarter ended March 31, 2026 (the “March 2026 quarter”), primarily due to higher sales of inspection and metrology systems supporting advanced packaging and advanced node semiconductor applications.
• Gross profit as a percentage of revenue for the June 2026 quarter increased by 330 basis points compared to the March 2026 quarter. This margin increase was primarily driven by a favorable shift in sales mix as product sales move toward high-margin inspection and metrology product lines.
• Operating expenses for the June 2026 quarter increased by 6.1% compared to the March 2026 quarter. This increase was driven by higher compensation-related costs, increased headcount, and engineering spend related to product development activities.

Our cash, cash equivalents and marketable securities balance increased to $1.9 billion at June 30, 2026, compared to $639.6 million at January 3, 2026. This increase was primarily the result of $1.2 billion of cash provided by financing activities and $87.8 million of cash generated from operating activities partially offset by capital expenditures of $7.2 million. Employee headcount at June 30, 2026 was approximately 1,867.

On May 21, 2026, we issued $1.5 billion aggregate principal amount of 2031 Notes. The 2031 Notes were issued pursuant to an Indenture, dated May 21, 2026 (the “Indenture”), between the Company and U.S. Bank Trust Company, National Association, as trustee (the “Trustee”). Pursuant to the purchase agreement between the Company and the representative of the initial purchasers of the 2031 Notes, we granted the initial purchasers an option to purchase up to an additional $200 million aggregate principal amount of 2031 Notes. On May 19, 2026, the initial purchasers exercised this option in full and the 2031 Notes issued on May 21, 2026 include the additional $200 million aggregate principal amount of 2031 Notes. Also in May 2026, in connection with the pricing of the 2031 Notes and the exercise by the initial purchasers of their option in full to purchase additional Notes, respectively, we entered into the Capped Call Transactions with several financial institutions, including one or more of the initial purchasers and/or their respective affiliates.

On April 20, 2026, we entered into a definitive share purchase agreement (the “Rigaku Transaction”) with Atom Investment, L.P., an affiliate of The Carlyle Group, to acquire 27% of the outstanding common stock of Rigaku Holdings Corporation for approximately $710 million. The Rigaku Transaction is expected to close in the second half of 2026. Also on April 20, 2026, we entered into a commitment letter with Goldman Sachs Bank USA, which provides for a senior secured 364-day $500 million bridge term loan credit facility (the “Bridge Commitment”). The Bridge Commitment was intended to be available to the Company to finance, together with other sources of funds, the Rigaku Transaction and related fees and expenses on or prior to the closing of the Transaction. On May 21, 2026, we terminated the Bridge Commitment, incurring total costs of $4.4 million.

For a discussion of the risks related to our business and operations, see Part I, Item 1A - Risk Factors of the 2025 Form 10-K and Part II, Item 1A - Risk Factors of this Form 10-Q.

Results of Operations for the Three and Six Months ended June 30, 2026 and June 28, 2025

Revenue. Our revenue is primarily derived from the sale of our systems, software licensing, services and spare parts. Our revenue of $343.1 million increased 35.3% for the three months ended June 30, 2026 as compared to the three months ended June 28, 2025, for which revenue totaled $253.6 million. For the six months ended June 30, 2026 and June 28, 2025, our revenue totaled $635.1 million and $520.2 million, respectively, representing a year-over-year increase of 22.1%.

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

(in thousands, except for percentages)

Total systems and software revenue increased $79.5 million, and $95.5 million for the three and six months ended June 30, 2026, respectively, as compared to the three and six months ended June 28, 2025, respectively. The increase was attributable to stronger demand for inspection and metrology systems. The increase in total parts and services revenue for the three and six months ended June 30, 2026, as compared to the three and six months ended June 28, 2025, was primarily due to higher customer support activity and service contract revenue.

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

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

(in thousands, except for percentages)

The increase in gross profit as a percentage of revenue for the three and six months ended June 30, 2026 as compared to the three and six months ended June 28, 2025 was primarily due to increased sales of newer product lines with higher standard margins. The increase for the three month period also benefited from lower restructuring expenses compared to the prior year period.

Operating Expenses.

Our operating expenses consist of:

• Research and Development. We believe that it is critical to continue to make substantial investments in research and development to ensure the availability of innovative technology that meets the current and projected requirements of our customers’ most advanced designs. We have maintained and intend to continue our commitment to investing in research and development in order to continue to offer new products and technologies. Accordingly, we devote a significant portion of our technical, management and financial resources to research and development programs. Research and development expenditures consist primarily of salaries and related expenses of employees engaged in research, design and development activities. These expenditures also include consulting fees, the cost of related supplies and legal costs to defend our patents. Our research and development expenses were $38.9 million and $73.9 million for the three and six month periods ended June 30, 2026, as compared to $35.3 million and $63.3 million for the three and six month periods ended June 28, 2025. The increase in research and development expenses for the three month period ended June 30, 2026, as compared to the three month period ended June 28, 2025 was primarily due to higher compensation-related costs driven by stock-based compensation expense and increased headcount, as well as increased engineering spend associated with product development activities. The increase in research and development expenses for the six-month period ended June 30, 2026, as compared to the six-month period ended June 28, 2025 was primarily due to higher compensation-related costs driven by stock-based compensation expense and increased headcount, as well as higher engineering spend associated with product development activities.
• Sales and Marketing. Sales and marketing expenses are primarily comprised of salaries, commissions and related costs for sales and marketing personnel, as well as other non-personnel related expenses. Our sales and marketing expenses were $23.1 million and $44.6 million for the three and six month periods ended June 30, 2026, compared to $14.9 million and $34.6 million for the three and six month periods ended June 28, 2025. The increase in sales and marketing expenses for the three month period ended June 30, 2026, as compared to the three month period ended June 28, 2025, was primarily driven by higher compensation-related costs and increased headcount to support higher sales activity. The increase in sales and marketing expenses for the six-month period ended June 30, 2026, as compared to the six-month period ended June 28, 2025, was primarily driven by higher compensation-related costs, increased headcount and higher selling costs associated with increased revenue and customer activity.
• General and Administrative. General and administrative expenses are primarily comprised of salaries and related costs for corporate and administrative personnel, as well as other non-personnel related expenses. Our general and administrative expenses were $34.3 million and $65.7 million for the three and six month periods ended June 30, 2026, as compared to $25.0 million and $47.8 million for the three and six month periods ended June 28, 2025. The increase in general and administrative expenses for the three month period ended June 30, 2026, as compared to the three month period ended June 28, 2025, was primarily driven by higher compensation-related costs, including stock-based compensation expense. The increase in general and administrative expenses for the six-month period ended June 30, 2026, as compared to the six-month period ended June 28, 2025, was primarily driven by higher compensation-related costs, including costs associated with the Semilab USA integration.
• Amortization of Identifiable Intangible Assets. Amortization of identifiable intangible assets was $19.7 million and $39.4 million for the three and six month periods ended June 30, 2026, compared to $8.4 million and $16.9 million for the three and six month periods ended June 28, 2025. The increase in amortization of identifiable intangible assets

for the three months ended June 30, 2026, as compared to the three months ended June 28, 2025, was due to Semilab USA amortization. The increase in amortization of identifiable intangible assets for the six months ended June 30, 2026, as compared to the six months ended June 28, 2025, was due to amortization in connection with the acquisition of Semilab USA.

• Restructuring and Other. Restructuring and other expenses were $3.8 million and $8.9 million for the three and six-month period ended June 30, 2026, compared to $6.2 million and $7.3 million for the three and six month periods ended June 28, 2025. The increase in restructuring and other expenses for the three month period ended June 30, 2026, as compared to the three month period ended June 28, 2025, and for the six month period ended June 30, 2026, as compared to the six month period ended June 28, 2025, was primarily due to employee severance costs and business transformation projects.

Total other income, net. Total other income, net was $4.9 million and $9.5 million for the three and six month periods ended June 30, 2026, as compared to $7.5 million and $16.0 million for the three and six month periods ended June 28, 2025. The decrease in total other income, net for the three months ended June 30, 2026, as compared to the three months ended June 28, 2025, and for the six months ended June 30, 2026, as compared to the six months ended June 28, 2025, was attributable to expenses associated with increased capital markets activity and fees related to the Bridge Commitment, as well as amortization of debt issuance costs.

Income Taxes. We recorded an income tax provision of $8.4 million and $12.7 million for the three and six month periods ended June 30, 2026, as compared to $5.8 million and $13.4 million for the three and six month periods ended June 28, 2025. Our effective tax rate of 12.3% and 11.9% for the three and six month periods ended June 30, 2026 and our effective tax rate of 14.7% and 12.0% for the three month period ended June 28, 2025, respectively, differed from the statutory rate of 21.0%, primarily due to the tax benefit associated with the Foreign Derived Intangible Income (“FDII”) deductions, federal research and development tax credits, and excess tax benefits associated with equity compensation.

Our future effective income tax rate depends on various factors, such as possible changes in tax legislation, the geographic composition of our pre-tax income, the amount of our pre-tax income as business activities fluctuate, non-deductible expenses incurred in connection with business combinations, and research and development tax credits as a percentage of aggregate pre-tax income.

Liquidity and Capital Resources

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

(in thousands)

Sources and Uses of Cash

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

(in thousands)

Operating Activities

Net cash and cash equivalents provided by operating activities for the six months ended June 30, 2026 was $87.8 million. The net cash and cash equivalents provided by operating activities during the six months ended June 30, 2026 resulted primarily from net income, adjusted to exclude the effect of non-cash operating charges, of $76.4 million. Significant non-cash operating charges included depreciation, amortization, share-based compensation and provision for inventory valuation. Cash provided by operating activities for the first six months of 2026 decreased compared to the corresponding period in fiscal 2025, primarily due to timing of accounts receivable payments and higher inventory levels driven by revenue growth, partially offset by increased in accounts payable and accrued expense due to the timing of vendor payments and higher operational activity.

Investing Activities

Net cash and cash equivalents used in investing activities for the six months ended June 30, 2026 was $342.8 million. During the six months ended June 30, 2026, net cash and cash equivalents used in investing activities included purchases of marketable securities of $652.1 million and capital expenditures of $7.2 million, partially offset by proceeds from maturities and sales of marketable securities of $316.6 million.

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

Financing Activities

Net cash and cash equivalents provided by financing activities for the six months ended June 30, 2026 was $1.16 billion. During the six months ended June 30, 2026, financing activities provided cash from proceeds of the 2031 Notes, partially offset by cash used for the Capped Call Transaction and repurchases of common stock, as well as for tax payments related to shares withheld to satisfy employee tax obligations in connection with the vesting of awards under share-based compensation plans.

In February 2024, the Onto Innovation Board of Directors (the “Board”) approved a share repurchase authorization (the “2024 Authorization,”) which allows us to repurchase up to $200 million worth of shares of Common Stock. Under the 2024 Authorization, repurchases may be made through both public market and private transactions from time to time. Any amount paid to repurchase the shares in excess of par value, including transaction costs, would be recorded directly as a decrease to additional paid-in capital. During the three and six months ended June 30, 2026, no shares of the Company’s common stock were repurchased under the 2024 Authorization. During the three and six months ended June 28, 2025, no shares, and 492 thousand shares, respectively, of the Company’s common stock were repurchased under the 2024 Authorization. At June 30, 2026, there was $99.9 million available for future share repurchases under the 2024 Authorization.

Additionally, in May 2026, the Board approved a share repurchase authorization (the “2026 Authorization,”) which allowed the Company to repurchase up to $300 million worth of shares of Common Stock solely in connection with the 2031 Notes issuance. During the three and six months ended June 30, 2026, 805 thousand shares of the Company’s common stock were repurchased under the 2026 Authorization. The 2026 Authorization ceases to be in effect and any and all remaining and unused amount under the 2026 Authorization is no longer available for repurchase.

Indebtedness

As of June 30, 2026, the net carrying amount of our 2031 Notes of $1.47 billion (principal balance of $1.5 billion maturing in 2031) is presented in non-current liabilities in our condensed consolidated balance sheets. If the closing price of our stock exceeds $496.34 (or 130% of the conversion price of $381.80) for 20 of the last 30 trading days of any future quarter, our 2031 Notes would become convertible at the option of the holders during the subsequent fiscal quarter and the debt would be reclassified to current liabilities in our consolidated balance sheets.

On April 20, 2026, in connection with the Rigaku Transaction, we entered into a commitment letter with Goldman Sachs Bank USA (“Goldman Sachs”) for a senior secured 364-day $500 million bridge term loan credit facility (the “Bridge Commitment”). The Bridge Commitment was intended to provide a stop-gap source of funds, together with other sources, to finance the Rigaku Transaction and related fees and expenses on or prior to closing. In connection with the Bridge Commitment, the Company executed an Engagement Letter, Bridge Commitment Letter, Bridge Administrative Agent Fee Letter, and Bridge Arranger Fee Letter (collectively, the “Bridge Documents”). The Company incurred total costs of $4.4 million in connection with the Bridge Commitment, including a $3.75 million commitment, underwriting and structuring fee, as well as other related expenses. On May 21, 2026, following successful execution of the 2031 Notes offering and Capped Call Transactions, we delivered an executed Notice of Bridge Commitment Termination to Goldman Sachs, terminating the Bridge Commitment in full. No additional fees were owed in connection with the termination.

The Company had a credit agreement with a bank that provides for a variable-rate line of credit which was secured by the marketable securities the Company has with the bank. At January 3, 2026 the Company was permitted to borrow up to 70.0% of the value of eligible securities held at the time the line of credit would be accessed, up to a maximum of $100.0 million. The available line of credit as of January 3, 2026 was $100.0 million with an available interest rate of 4.3%. The Company terminated this line of credit during the six months ended June 30, 2026, and did not utilize the line of credit while it was active.

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

There have been no material changes in market risk from the information presented in Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk,” in the 2025 Form 10-K.

Evaluation of Disclosure 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 principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, we have recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is required to apply judgment in evaluating its controls and procedures.

We performed an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to assess the effectiveness of the design and operation of our disclosure controls and procedures under the Exchange Act as of June 30, 2026. Based on that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures were effective as of June 30, 2026 at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our fiscal quarter ended June 30, 2026 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes from the risk factors previously disclosed under the heading “Risk Factors” in the 2025 Form 10-K, as updated by the risk factors previously disclosed under the heading “Risk Factors” in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2026, filed with the SEC on May 5, 2026, except as set forth below. We may disclose additional changes to risk factors or additional factors from time to time in our future filings with the SEC.

Risks Related to Our Convertible Senior Notes

We may lack the cash or financing capacity to satisfy required cash payments under the 2031 Notes , including upon conversion, following a fundamental change, or at maturity.

On May 21, 2026, we issued the 2031 Notes pursuant to the Indenture and entered into the Capped Call Transactions. If a Fundamental Change occurs (as defined in the Indenture), holders may require us to repurchase the 2031 Notes in cash at 100% of principal plus accrued and unpaid special or additional interest, if any, to, but excluding, the applicable repurchase date. If holders convert, we will settle conversions by paying cash up to the aggregate principal amount of the 2031 Notes to be converted and paying or delivering, as the case may be, cash, shares, or a combination thereof, at our election, in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of the 2031 Notes being converted. We must also repay any 2031 Notes that remain outstanding at maturity in cash, which could require refinancing. Our ability to fund required cash amounts will depend on cash on hand, cash flows, and access to capital markets and credit facilities, and may be limited by law, regulation, or agreements governing our indebtedness. We may not redeem the 2031 Notes before June 6, 2029, and any optional redemption thereafter requires our common stock to trade above 130% of the conversion price for a specified period and certain other conditions are satisfied, which may affect the timing and magnitude of cash outflows. Failure to make a required cash payment would constitute a default under the Indenture and could result in cross-defaults or accelerations under any other indebtedness we may then have outstanding.

Conversion of the 2031 Notes may adversely affect our liquidity, dilute existing stockholders, and depress the price of our common stock, and the Capped Call Transaction provide only partial offset.

If the conditional conversion feature of the 2031 Notes is triggered, holders may convert their 2031 Notes during specified periods. Upon any conversion, we will be required to settle at least the aggregate principal amount of the 2031 Notes in cash, which could adversely affect liquidity. Even if no conversions occur, applicable accounting rules could require us to reclassify all or a portion of the 2031 Notes as current liabilities, reducing our reported working capital.

The 2031 Notes are initially convertible at 2.6192 shares of common stock per $1,000 principal amount, equivalent to an initial conversion price of approximately $381.80 per share. If we elect to settle the remainder of our conversion obligation in shares, existing stockholders will be diluted. The conversion rate is subject to adjustment upon certain events and may be increased for a limited period in connection with specified corporate events, which could amplify dilution. The Capped Call Transaction offset dilution only up to an initial cap of approximately $509.06 per share, and above that level dilution will not be mitigated. In addition, the existence of the 2031 Notes may encourage short selling by market participants, because conversions can be used to satisfy short positions, and expectations of potential conversion could depress our common stock price.

The 2031 Notes and related Capped Call Transactions may affect the trading price of our common stock and introduce volatility in our reported financial results.

Banks party to the Capped Call Transactions (or their affiliates) may establish, adjust, or unwind hedges in our common stock or related derivatives, including during any conversion observation period and around redemption or unwind events, which could increase or decrease the trading price of our common stock and, during an observation period, affect the amount of conversion consideration and the value of the 2031 Notes. In addition, the 2031 Notes and Capped Call Transactions are subject to complex accounting requirements. Although the Capped Call Transactions are accounted for in stockholders' equity and therefore not remeasured each period, conversions and changes in our share count may affect diluted earnings per share, and application of the relevant accounting standards may introduce period-to-period volatility in our reported results.

We are subject to counterparty risk with respect to the Capped Call Transactions, and the Capped Call Transactions may not operate as planned.

The option counterparties are financial institutions, and we are subject to the risk that any or all of them might default under the Capped Call Transactions. Our exposure to the credit risk of the option counterparties is not secured by any collateral. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the capped call transactions with such option counterparty. Our exposure will depend on many factors but, generally, an increase in our exposure will be correlated to an increase in the market price subject to the cap and in the volatility of our common stock. In addition, upon a default by an option counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the option counterparties.