Veeco Instruments Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; interim statements are unaudited. Veeco designs, manufactures, and supports semiconductor process equipment across four end markets. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $109.0 | $126.8 | $306.1 | $443.1 |
| Gross profit / margin | $42.2 / 38.8% | $46.4 / 36.6% | $113.2 / 37.0% | $158.5 / 35.8% |
| Operating income (loss) | $(7.4) | $(3.9) | $(32.7) | $(276.5) |
| Net income (loss) | $(11.8) | $(9.0) | $(45.9) | $(262.4) |
| Diluted loss per share | $(0.25) | $(0.19) | $(0.97) | $(5.55) |
| Operating cash flow | Not separately provided | Not separately provided | $(23.0) | $(39.4) |
- Q3 sales declined 14% year over year; nine-month sales declined 31%. Gross margin improved in both comparisons, principally due to product and regional sales mix, but lower sales volume reduced gross profit.
- Q3 operating loss widened despite lower operating expenses. Nine-month results improved substantially year over year, chiefly because 2018 included a $252.3 million non-cash intangible-asset impairment charge and $2.9 million of acquisition costs. The 2018 nine-month tax benefit of $28.0 million also contrasts with $0.4 million of tax expense in 2019.
- At September 30, cash and cash equivalents were $135.3, restricted cash $0.7, and short-term investments $95.7, totaling $231.6, versus $261.3 at December 31, 2018. Current assets were $486.3 and current liabilities $142.0. The company used $23.0 of operating cash in the first nine months.
- Long-term debt carrying value was $296.8; the notes’ principal was $345.0. Veeco has $345.0 of 2.70% convertible senior notes due January 2023. Interest expense was $16.5 for the first nine months, including $9.4 of non-cash discount and transaction-cost amortization.
- Inventories fell to $135.2 from $156.3 at year-end. Total liabilities were $459.8 and stockholders’ equity $402.5.
Sales trends and material changes
- Q3 end-market sales: Advanced Packaging, MEMS & RF Filters $11.4, down 54%; LED Lighting, Display & Compound Semiconductor $24.0, down 59%; Front-End Semiconductor $33.6, up 149%; Scientific & Industrial $40.0, up 34%.
- Nine-month end-market sales: Advanced Packaging, MEMS & RF Filters $51.0, down 33%; LED Lighting, Display & Compound Semiconductor $47.3, down 80%; Front-End Semiconductor $80.7, up 96%; Scientific & Industrial $127.2, up 43%.
- China sales were $17.0 in Q3, down 57%, and $46.8 for nine months, down 75%. The largest declines were in LED-related sales, which management attributed largely to China. United States sales increased 17% for the nine-month period; Rest of World increased 9%.
- Q3 gross margin rose to approximately 39% from 37%, while operating margin was approximately negative 7% versus negative 3%. Nine-month gross margin was approximately 37% versus 36%; operating margin was negative 11% versus negative 62%.
Outlook, risks, and other notable items
- Management provided no numerical revenue or earnings guidance in the supplied filing text. It said cash flow from operations, cash, and short-term investments should be sufficient for working capital, contractual obligations, and other cash needs over the next 12 months, including scheduled note interest.
- Management reported soft demand in Advanced Packaging and LED/Display/Compound Semiconductor. It did not expect significant new orders in the near future for the LED-related market in China. It cited potential growth opportunities in laser annealing, advanced-packaging lithography, ion-beam systems, EUV mask blanks, and MOCVD applications including VCSELs, while noting these opportunities are forward-looking.
- Scientific & Industrial sales benefited from data-storage demand and optical-coating applications. Front-End Semiconductor sales were driven by laser annealing and ion-beam deposition systems for EUV mask blanks.
- Key risks include market cyclicality and weak demand, customer and geographic concentration, U.S.-China trade restrictions and export controls, order and revenue timing, backlog cancellations, competition and rapid technological change, supplier dependence, foreign-exchange exposure, and possible asset impairments.
- Purchase commitments were $76.3, substantially all due within one year. Operating lease liabilities totaled $10.8. Outstanding bank guarantees and letters of credit were $7.8, with $66.4 of unused capacity available.
- Veeco is defending consolidated class-action securities litigation and a shareholder derivative action related to the Ultratech acquisition. The company said it does not believe other ordinary-course proceedings will materially affect its financial position, results, or cash flows; no loss estimate for the named cases is provided here.
- Restructuring charges were $1.8 in Q3 and $3.9 for nine months. The company continued cost-reduction and operational-streamlining efforts; a prior plan included consolidation into San Jose and approximately 40 employee reductions.
- The $100 million share repurchase authorization remained in effect through December 11, 2019; $14.3 million had been used by September 30, and no shares were repurchased in Q3. The filing reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether demand and order trends in China and the LED/Display/Compound Semiconductor market recover, given management’s expectation of limited near-term new orders in that market and region.
- Whether growth in Front-End Semiconductor and Scientific & Industrial can offset continued weakness in other end markets, and whether gross-margin improvement persists as product and regional mix changes.
- Cash burn, working-capital movements, and the adequacy of the $231.6 million cash and investment balance relative to purchase commitments, operating needs, and scheduled debt interest.
- The terms, potential dilution, and repayment or conversion implications of the $345.0 million convertible notes due 2023, and the status and potential exposure of the Ultratech-related litigation.
- Whether the stated 12-month liquidity outlook remains supportable if market conditions, orders, or customer acceptance and revenue timing worsen.