Veeco Instruments Inc. — Q1 2023 Form 10-Q
Business context and period: Veeco designs, manufactures, sells, and supports semiconductor and thin-film process equipment. This unaudited report covers the three months ended March 31, 2023, compared with the same period in 2022. Veeco reports one operating and reportable segment.
Key financial metrics
Amounts are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $153.5 | $156.4 |
| Gross profit / gross margin | $62.0 / 40% | $66.0 / 42% |
| Operating income / operating margin | $9.8 / 6% | $16.5 / 11% |
| Net income | $8.7 | $13.3 |
| Diluted EPS | $0.17 | $0.24 |
| Operating cash flow | $13.9 | $24.8 |
| Capital expenditures | $6.9 | $10.9 |
- Profitability: Sales declined 2% year over year; gross profit fell 6%, operating income 41%, and net income 34%. Gross margin decreased to 40% from 42%, reflecting sales volume and mix and higher logistics costs, partly offset by favorable operations spending. R&D expense rose 14% to $27.6 million, primarily due to personnel-related investment.
- Cash flow: Operating cash flow decreased about 44%. Higher inventory absorbed $25.8 million of cash, partly offset by increases in accounts payable and accrued expenses and customer deposits and deferred revenue. Investing cash outflow was $0.8 million, including $30.4 million net cash paid for Epiluvac, offset substantially by proceeds from investment sales. Financing cash outflow was $27.4 million, including repayment of the 2023 Notes.
- Liquidity: At March 31, cash and cash equivalents were $140.7 million, restricted cash $0.5 million, and short-term investments $112.2 million, totaling $253.4 million. Current assets were $643.3 million and current liabilities $267.2 million.
- Debt: Long-term debt carrying value was $254.7 million, representing $132.5 million principal of 3.50% convertible notes due 2025 and $125.0 million principal of 3.75% notes due 2027. No amounts were outstanding under the $150 million revolving facility. The 2027 Notes were convertible at holders’ option through June 30, 2023, based on the stock-price condition disclosed in the filing.
- Other balance-sheet items: Inventory increased to $225.7 million from $206.9 million at year-end 2022. Customer deposits and deferred revenue totaled $133.2 million. Remaining performance obligations on contracts with original terms of at least one year were approximately $232.5 million; about 45% was expected to be recognized within one year.
Material changes and business developments
- Semiconductor sales rose 20% to $93.1 million, led by laser annealing systems; Compound Semiconductor sales fell 43% to $21.2 million. Data Storage sales were approximately flat at $21.5 million, while Scientific & Other sales declined 12% to $17.7 million.
- China sales increased to $60.7 million from $30.4 million; U.S. sales decreased to $31.0 million from $47.5 million. China represented 40% of Q1 sales.
- Veeco acquired Epiluvac AB on January 31, 2023, adding silicon carbide epitaxy equipment technology. Acquisition-date consideration was $56.4 million, including $30.4 million cash net of acquired cash and $26.1 million estimated contingent consideration. Epiluvac’s Q1 results were immaterial; its purchase-price allocation remains preliminary. Veeco expects revenue from the acquired technology starting in 2024.
- The 2023 Notes matured and were repaid in cash in January 2023; the quarter’s cash-flow statement reports a $20.2 million repayment.
Outlook, management commentary, and risks
- Management maintained its 2023 revenue outlook of $630 million to $670 million, based on current visibility and backlog. It expects Semiconductor revenue to outpace forecast wafer-fab-equipment spending declines of 15%–25% or more, and expects Data Storage revenue growth in 2023.
- Management expects supply shortages and elevated lead times to persist through 2023, though some improvement may occur in the second half. Higher labor, logistics, and material costs are pressuring gross margins. Veeco increased purchase commitments to secure critical components and is managing the pace of spending.
- Veeco reported softness in shorter-lead-time products, including wet processing, advanced-packaging lithography, spare parts, and upgrades. It also cited customer requests for order cancellations, shipment delays, or payment delays.
- New U.S. China-export controls may affect some China backlog. Management believed the substantial majority of that backlog would not be negatively affected, but anticipated China backlog declining in the second half as systems were delivered in the first half.
- Purchase commitments were $255.5 million, substantially all due within one year. The company said projected operating cash flow, cash, and investments should cover working capital, contractual obligations, and other needs for the next 12 months. Legal proceedings in the normal course were not expected to have a material adverse effect.
- Principal disclosed risks include semiconductor-market cyclicality and weaker end-market demand; customer and geographic concentration; supply-chain and supplier dependence; export controls and licensing; competition and rapid technological change; backlog cancellations; and debt covenants and convertible-note terms. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the $630 million–$670 million 2023 revenue outlook remains achievable as market demand, order timing, and customer cancellations evolve.
- How much China backlog is subject to export restrictions, and whether deliveries and revenue recognition proceed as management expects.
- Whether supply constraints, purchase commitments, and rising costs continue to affect shipments, inventory levels, and gross margins.
- Progress toward Epiluvac milestones and the assumptions underlying its $26.1 million contingent-consideration estimate and expected 2024 revenue contribution.
- The status and potential dilution or cash-settlement implications of the 2027 Notes, which were convertible through June 30, 2023, as well as liquidity under the credit facility and compliance with its covenants.
- Conversion of the $232.5 million of remaining performance obligations into recognized revenue and cash collections.