Veeco Instruments Inc. — Q3 2022 Form 10-Q
Business context and period. Veeco develops, manufactures, sells, and supports semiconductor and thin-film process equipment. This unaudited quarterly report covers the three and nine months ended September 30, 2022; financial statement amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Net sales | $171.9 | $150.2 | +14% |
| Gross profit / margin | $70.0 / 40.7% | $63.2 / 42.0% | Profit +11%; margin lower |
| Operating income / margin | $17.6 / 10.2% | $16.4 / 10.9% | +7% |
| Net income | $15.0 | $9.0 | +67% |
| Diluted EPS | $0.27 | $0.17 | +59% |
For the nine months ended September 30, sales were $492.3 million, up 14%; gross profit was $200.2 million, with a 40.7% margin; operating income was $46.9 million; net income was $38.0 million; and diluted EPS was $0.70. Year-ago figures were sales of $430.3 million, gross profit of $178.3 million, operating income of $39.1 million, net income of $17.8 million, and diluted EPS of $0.33.
- Revenue mix: Q3 Semiconductor sales rose 32% to $100.4 million; Compound Semiconductor rose 21% to $28.1 million; Scientific & Other rose 38% to $15.7 million. Data Storage declined 29% to $27.7 million. For the nine-month period, Semiconductor sales increased 52%, while Data Storage fell 46%.
- Cash flow: Nine-month operating cash flow was $75.4 million, versus $50.6 million a year earlier. Capital expenditures were $21.8 million versus $31.5 million; investing cash outflow was $21.2 million. Cash, cash equivalents, and restricted cash increased by $49.2 million to $169.7 million.
- Liquidity: Cash, cash equivalents, restricted cash, and short-term investments totaled $271.5 million at September 30, versus $224.7 million at year-end 2021. Current assets were $649.7 million and current liabilities $260.2 million.
- Debt: Convertible notes had $277.7 million principal outstanding and $274.4 million net carrying value. The $20.2 million 2023 Notes mature January 2023; the other notes mature in 2025 and 2027. The $150 million revolving facility had no borrowings outstanding.
Material changes versus the comparable period
- Q3 sales growth was led by Semiconductor, while Data Storage contracted. Nine-month Semiconductor growth more than offset the substantial Data Storage decline.
- Q3 gross margin fell to 40.7% from 42.0%, mainly due to higher logistics costs and investment in service infrastructure and capacity. Nine-month margins were approximately level year over year, with mix benefits offset by these cost pressures.
- Research and development expense increased 23% in Q3 and 16% year to date, primarily reflecting personnel costs and investment in technology and applications.
- Net interest expense declined substantially: $2.3 million in Q3 versus $7.0 million, and $7.8 million year to date versus $20.2 million. The company attributed much of the reduction to adoption of ASU 2020-06, which reduced non-cash interest expense, and to the prior repurchase of 2023 Notes.
- Adoption of ASU 2020-06 increased reported diluted share count through the if-converted method for the notes. The filing’s adoption comparison shows Q3 diluted EPS of $0.27 under the new method versus $0.24 under legacy accounting.
Outlook, commentary, and risks
- Management continued to expect revenue growth for 2022, citing backlog, customer engagements, and order activity, despite macroeconomic challenges. No numerical revenue or earnings guidance is provided in the supplied filing text.
- Management expected supply shortages and related challenges to persist through the rest of 2022 and into 2023. Longer lead times, component shortages, inflation in labor, logistics, and materials, and customer requests to cancel orders, delay shipments, or defer payments could affect performance.
- Management expected 2023 Data Storage revenue to meaningfully exceed 2022, conditional on no shift in market dynamics, including customer cancellations or delays. Q3 order activity in Advanced Packaging lithography had slowed.
- New U.S. export controls announced in October 2022 require licenses for certain semiconductor equipment and activities involving China, with a presumption of denial in specified cases. Veeco said it believed most of its China backlog would not be negatively affected, but warned restrictions could impede sales, servicing, customer discussions, and inventory recovery. The filing identifies this as a material risk.
- Other risks include COVID-19 effects, global economic weakness, customer concentration, cyclical end markets, supply-chain and sole-source supplier dependence, and volatility in order timing and revenue recognition.
- Veeco reported $299.4 million of purchase commitments, substantially all due within one year. Management said cash, investments, and projected operating cash flow should cover working capital and obligations for the next 12 months.
- The $15 million class-action settlement relating to the Ultratech acquisition received final court approval and was funded by insurers. A separate derivative-action settlement, including $0.3 million of insurer-funded fees and governance changes, had preliminary approval; final approval was scheduled for November 17, 2022.
- U.S. deferred tax assets remained fully offset by a valuation allowance. Management said a significant release might become possible within 12 months if sufficient positive evidence emerges; such a release would lower tax expense in the period recorded.
Most important facts for investors to verify
- Whether the expected 2022 revenue growth and meaningful 2023 Data Storage growth materialized, and how backlog, cancellations, and order trends developed.
- The actual revenue and earnings impact of China export controls, including any license denials, shipment delays, or inventory charges.
- Whether gross-margin pressure from logistics, inflation, product mix, and capacity investment persisted.
- The company’s ability to meet or refinance the $20.2 million 2023 Notes maturity and maintain compliance with revolving-credit covenants.
- The note conversion disclosure: the filing says the 2027 Notes were convertible through December 31, 2022 in the notes, but elsewhere says they were convertible until September 30, 2022. Confirm the applicable conversion period and potential dilution.
- The timing and accounting impact of any release of the U.S. deferred-tax-asset valuation allowance.