Veeco Instruments Inc. — Q1 2022 Form 10-Q
Business context and period. Veeco develops and manufactures semiconductor and thin-film process equipment. This unaudited report covers the three months ended March 31, 2022, compared with the same period in 2021. Veeco reports as one operating segment.
Financial performance and liquidity
Amounts are in millions of dollars except per-share data. Margins are calculated from reported figures.
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $156.4 | $133.7 |
| Gross profit / margin | $66.0 / 42.2% | $54.9 / 41.1% |
| Operating income / margin | $16.5 / 10.6% | $9.4 / 7.0% |
| Net income | $13.3 | $2.5 |
| Diluted EPS | $0.24 | $0.05 |
| Cash provided by operations | $24.8 | $10.5 |
| Capital expenditures | $10.9 | $2.0 |
- Sales increased 17% year over year. Gross profit rose 20%; gross margin improved about 1.1 percentage points. Operating expenses increased 9%.
- Net interest expense fell to $2.8 million from $6.6 million, primarily because adoption of ASU 2020-06 reduced non-cash convertible-note interest and the 2023 Notes had been partly repurchased in 2021.
- At March 31, cash and cash equivalents were $127.6 million, restricted cash $0.7 million, and short-term investments $103.3 million: $231.6 million combined. Current assets were $570.0 million and current liabilities $220.7 million.
- Debt had $277.7 million principal outstanding and $273.9 million net carrying value, including $20.2 million principal of 2023 Notes due January 2023. The $150 million revolving facility was undrawn. No debt covenant breach is reported.
- Operating cash flow improved year over year; inventory and prepaid asset increases partly offset working-capital cash inflows. Approximate operating cash flow less capital expenditures was $13.9 million, versus $8.5 million in Q1 2021.
Material changes versus prior year
- Semiconductor sales rose 50% to $77.6 million and Compound Semiconductor sales rose 50% to $37.1 million. Data Storage sales fell 47% to $21.6 million; Scientific & Other increased 23% to $20.1 million.
- Growth in semiconductor and compound semiconductor markets more than offset reduced Data Storage revenue. Sales outside the U.S. represented approximately 70% of total sales, versus 66% in Q1 2021.
- ASU 2020-06 adoption on January 1, 2022 changed convertible-note accounting. It increased reported Q1 basic EPS by $0.05 and diluted EPS by $0.04 relative to legacy accounting; it did not materially affect cash flows or debt-covenant compliance. The new if-converted method also increased diluted weighted-average shares.
- Capital spending increased substantially, primarily for the build-out of Veeco’s new San Jose facility. The company expects temporary duplicate operating expenses during the facility transition.
Outlook, commentary, and risks
- Management expects revenue growth in 2022, citing strong semiconductor and compound semiconductor backlog, customer engagement, and order activity; it did not provide a specific revenue or earnings forecast in the supplied filing text.
- Veeco expects Data Storage revenue to decline in 2022 after several years of customer capacity additions, while expressing optimism that the market will return to growth in 2023. It expects continued growth in Semiconductor and anticipates Compound Semiconductor growth from MOCVD and photonics shipments.
- Supply shortages, longer component lead times, transportation constraints, labor shortages, and inflation are increasing costs and constraining timely customer fulfillment and margins. Management expects these challenges to persist during 2022; purchase commitments totaled $235.4 million, substantially all due within one year.
- COVID-19 continues to create operational and demand uncertainty. The filing also cites the conflict in Ukraine and trade/export-control exposure among risks to global supply and operations. Customer concentration, cyclical markets, order timing, and potential backlog changes may affect results.
- Management believes operating cash flow and available cash and investments are sufficient for projected needs over the next 12 months, including debt interest, purchase commitments, and leases.
- A $15.0 million class-action settlement relating to the Ultratech acquisition was recorded as a liability and is expected to be funded by insurance, subject to court approval. In April 2022, Veeco reached an agreement in principle to settle a related derivative action; proposed $0.3 million fees and expenses are also expected to be insured and require court approval.
Important facts for investors to verify
- Whether supply constraints, rising input costs, and the $235.4 million of purchase commitments affect shipment timing, revenue recognition, and margins.
- Actual 2022 performance against management’s directional growth outlook, including the anticipated Data Storage downturn and potential 2023 recovery.
- The terms, conversion status, and repayment or refinancing plans for the $20.2 million 2023 Notes maturity and other convertible notes; monitor revolving-credit covenant compliance.
- Court approval and insurance coverage for both legal settlements, and any resulting cash or operating impact.
- The effect of the San Jose facility transition and elevated capital expenditures on future costs and cash generation.