Veeco Instruments Inc. — Q1 2019 Form 10-Q
Business context and period: Veeco designs, manufactures, and supports thin-film process equipment used in semiconductor and related industries. This unaudited report covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. Amounts below are in millions of dollars unless noted.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Net sales | $99.4 | $158.6; down 37% |
| Gross profit / margin | $34.7 / 34.9% | $56.7 / 35.7% |
| Operating income (loss) / margin | $(14.1) / (14.2)% | $(11.4) / (7.2)% |
| Net income (loss) / diluted EPS | $(18.5) / $(0.40) | $(15.8) / $(0.34) |
| Operating cash flow | $(22.3) | $(11.8) |
| Capital expenditures | $2.2 | $2.3 |
| Cash, restricted cash, and short-term investments | $237.5 at March 31, 2019 | $261.3 at December 31, 2018 |
| Long-term debt carrying value | $290.5 | $287.4 at December 31, 2018 |
| Current assets / current liabilities | $498.8 / $150.0 | $520.1 / $160.1 at December 31, 2018 |
Operating cash use reflected the net loss and unfavorable working-capital movements, including decreases in accounts payable and accrued expenses and in customer deposits and deferred revenue, and increases in receivables and prepaid expenses. Cash and investments declined by $23.8 million from year-end. The $345.0 million principal amount of 2.70% convertible senior notes matures January 15, 2023; the carrying value is net of unamortized discount and costs.
Material changes and drivers
- Sales fell primarily because LED Lighting, Display & Compound Semiconductor revenue declined 85% to $13.6 million, including a steep reduction in China sales. China revenue was $10.2 million, down 87% year over year.
- Other markets partly offset the decline: Front-End Semiconductor sales rose 139% to $22.6 million, and Scientific & Industrial sales rose 25% to $40.1 million. Advanced Packaging, MEMS & RF Filters sales declined 15% to $23.1 million.
- Gross margin slipped to 34.9% from 35.7%, which management attributed to product and regional sales mix as well as lower volume. Operating loss widened despite lower operating expenses.
- R&D fell 4% and SG&A fell 25%, primarily due to personnel and professional-fee savings from efficiency and cost-reduction initiatives. Intangible amortization decreased 69%, reflecting the 2018 impairment of intangible assets.
Outlook, risks, and unusual items
- Management said cash, short-term investments, and projected operating cash flow should be sufficient for working capital, contractual obligations, and other needs over the next 12 months, including scheduled note interest. No specific revenue or earnings guidance is provided.
- Veeco does not expect significant new orders in the near future for the LED Lighting, Display & Compound Semiconductor market in China. Management cited potential demand in areas including 3D sensors, VCSELs, laser diodes, RF devices, advanced packaging, and EUV-related equipment, while noting sales may vary across markets and geographies.
- Remaining performance obligations on contracts with original durations of at least one year were approximately $68.5 million; about 65% was expected to be recognized within one year. Purchase commitments were $90.5 million, substantially all due within one year.
- The company recorded $1.4 million of restructuring charges in Q1, continuing efforts to streamline operations, including a previously announced consolidation and reductions of approximately 40 employees.
- Two shareholder-related lawsuits concerning disclosures about the Ultratech acquisition remain pending; one derivative case is stayed. Veeco said it is defending the matters and does not believe other ordinary-course legal matters will materially affect its financial position, results, or cash flows.
- Veeco adopted lease accounting standard ASC 842 on January 1, 2019, recognizing approximately $14.2 million each of right-of-use assets and lease liabilities at adoption, with no reported impact on earnings or cash flows. Management reported disclosure controls were effective at March 31, 2019.
- Key stated risks include cyclical and unfavorable markets, customer and geographic concentration, trade restrictions, order timing and cancellations, competition, technology changes, supplier dependence, foreign exchange, and convertible-debt-related risks. The filing reports no material changes to the risk factors in the 2018 Form 10-K.
Important facts for investors to verify
- Whether the sharp decline in China and LED-related demand stabilizes, and how the company’s statement about limited near-term China orders develops.
- Whether improved Front-End Semiconductor and Scientific & Industrial sales can offset weakness in other markets, and whether mix or volume pressures continue to weigh on margins.
- Cash burn, working-capital trends, and management’s 12-month liquidity assessment, especially against $90.5 million of purchase commitments.
- The terms, potential dilution, and eventual cash obligations associated with the $345.0 million convertible notes, as well as developments in the Ultratech-related litigation.