Veeco Instruments Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
Veeco designs, manufactures, and supports semiconductor process equipment. It reports one operating segment and categorizes sales across Front-End Semiconductor; LED Lighting, Display & Compound Semiconductor; Scientific & Industrial; and Advanced Packaging, MEMS & RF Filters.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $112.1 | $109.0 | $315.2 | $306.1 |
| Gross profit / margin | $49.1 / 43.9% | $42.2 / 38.8% | $137.5 / 43.6% | $113.2 / 37.0% |
| Operating income (loss) | $7.0 | $(7.4) | $12.0 | $(32.7) |
| Net income (loss) | $0.6 | $(11.8) | $(8.3) | $(45.9) |
| Diluted earnings (loss) per share | $0.01 | $(0.25) | $(0.17) | $(0.97) |
| Operating cash flow | Not presented by quarter in the supplied filing text | $27.6 | $(23.0) |
Q3 sales increased 3% year over year. Scientific & Industrial rose 31% to $52.5 million and Advanced Packaging, MEMS & RF Filters rose 64% to $18.7 million; Front-End Semiconductor fell 38% to $20.8 million, while LED Lighting, Display & Compound Semiconductor fell 16% to $20.1 million. For the nine-month period, Scientific & Industrial increased 14% and LED/Display/Compound Semiconductor increased 9%, partly offset by declines in Front-End Semiconductor (13%) and Advanced Packaging and related markets (4%).
Management attributed higher gross margin to increased production activity and lower inventory reserves and warranty expenses. Operating expense fell year over year, reflecting cost-reduction actions and lower travel-related expenses. Nine-month results also included a $3.0 million loss on extinguishment of debt and $0.3 million of asset impairment expense.
Liquidity, debt, and balance sheet
- At September 30, cash and cash equivalents were $147.6 million, restricted cash $0.7 million, and short-term investments $161.6 million; combined liquidity was $309.8 million, versus $245.2 million at year-end 2019.
- Operating cash flow was $27.6 million for the first nine months, compared with cash use of $23.0 million in 2019. The 2020 inflow included non-cash adjustments of $46.7 million and was offset in part by working-capital outflows, especially receivables and inventories.
- Long-term debt carrying value was $320.8 million; principal outstanding was $381.7 million, comprising $256.7 million of 2023 Notes and $125.0 million of 2027 Notes. Current liabilities were $146.9 million and stockholders’ equity was $398.1 million.
- In May 2020, Veeco issued $125.0 million of 3.75% convertible notes due 2027, repurchased $88.3 million principal amount of 2.70% notes due 2023 for $81.2 million, and paid $10.3 million for capped calls. The 2027 Notes’ initial conversion price was $13.98 per share; the capped-call cap was approximately $18.46.
- Management said cash, investments, and projected operating cash flow should cover working capital, contractual obligations, and other cash needs for the next 12 months, including note interest, purchase commitments, and lease payments.
Outlook, risks, and unusual items
- Management said Data Storage, RF Filters, and Front-End Semiconductor were performing well and expected these markets to provide near-term growth through 2021. It cited longer-term growth opportunities in Front-End Semiconductor and Compound Semiconductor, supported by investment in R&D, inventory, evaluation systems, and service capabilities. This is management commentary, not formal numerical guidance.
- COVID-19 had not yet caused significant supply-chain interruptions, and manufacturing facilities remained open; however, prolonged economic weakness, customer purchase delays or payment problems, supplier and transport disruption, and additional operating costs could adversely affect results.
- U.S.–China trade restrictions and export controls could affect sales, particularly if Chinese customers develop alternatives or switch to competitors. China represented 9% of Q3 sales and 12% of nine-month sales.
- Veeco had $103.6 million of purchase commitments, substantially all due within one year. Outstanding bank guarantees and standby letters of credit totaled $5.8 million. The filing states there were no material off-balance-sheet arrangements beyond disclosed guarantees and purchase commitments.
- Two California matters related to the Ultratech acquisition remain pending: a consolidated securities class action alleging misleading acquisition disclosures and a derivative action alleging fiduciary-duty and related claims. Veeco said it is defending both vigorously; it did not believe ordinary-course legal proceedings would materially affect financial position, results, or cash flows.
- The sale of a non-core product line closed in Q2 for approximately $11.4 million; the filing reported a $4.3 million total loss on the disposal group, including the previously recorded impairment. The transaction was not reported as discontinued operations.
- Management reported disclosure controls and procedures were effective as of September 30, 2020 and no material change in internal control occurred during the quarter.
Important facts for investors to verify
- Whether the expected near-term market strength through 2021 materializes, particularly in Data Storage, RF Filters, and Front-End Semiconductor.
- Whether gross-margin improvement persists, given management’s warning that margins fluctuate with product mix and other factors.
- Cash conversion and working-capital trends, especially receivables, inventories, customer deposits, and deferred revenue.
- Convertible-note interest, maturity and potential dilution exposure; assess the distinction between $381.7 million principal and $320.8 million carrying value.
- Potential effects of COVID-19, export controls, and customer or supplier concentration, as well as developments in the pending Ultratech-related litigation.