Veeco Instruments Inc. — Q3 2021 Form 10-Q
Business context and period. Veeco develops, manufactures, sells, and supports semiconductor and thin-film process equipment. This filing covers the quarter and nine months ended September 30, 2021; the comparable periods are 2020. The company reports one operating segment and serves Semiconductor, Compound Semiconductor, Data Storage, and Scientific & Other markets. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $150.2 | $112.1 | $430.3 | $315.2 |
| Gross profit | $63.2 | $49.1 | $178.3 | $137.5 |
| Gross margin | 42% | 44% | 41% | 44% |
| Operating income | $16.4 | $7.0 | $39.1 | $12.0 |
| Operating margin | 10.9% | 6.2% | 9.1% | 3.8% |
| Net income (loss) | $9.0 | $0.6 | $17.8 | $(8.3) |
| Diluted EPS | $0.17 | $0.01 | $0.33 | $(0.17) |
- Q3 sales increased 34% year over year; nine-month sales rose 37%. Q3 Semiconductor sales more than doubled to $76.3 million, while Compound Semiconductor and Scientific & Other sales declined 12% and 24%, respectively. Nine-month sales increased in all four end markets.
- Gross profit grew, but gross margin fell by two percentage points in both comparisons, primarily due to product and regional sales mix and higher spending to support activity.
- Nine-month operating cash flow was $50.6 million, compared with $27.6 million in 2020. Capital expenditures were $31.5 million versus $3.3 million; investing cash outflow was $57.1 million. Cash, cash equivalents, restricted cash, and short-term investments totaled $336.2 million at September 30, 2021, versus $320.1 million at year-end 2020.
- At September 30, current assets were $653.5 million and current liabilities $187.2 million. Long-term debt carrying value was $331.9 million; the three convertible note issues had $389.2 million aggregate principal outstanding. Total liabilities were $562.5 million.
Changes, outlook, and key considerations
- Management said demand remained strong and expects Semiconductor to be the primary source of growth in 2022 and beyond. No numeric revenue or earnings guidance was provided. Semiconductor sales grew 127% in Q3, driven by laser annealing, advanced-packaging lithography, and EUV mask-blank systems. Management cited a repeat multi-system order from a leading outsourced semiconductor assembly and test customer.
- Data Storage sales increased 6% in Q3 and 27% year to date, but management expects revenue to decline from recent levels after customers accelerated capacity additions. Scientific & Other showed signs of recovery; management expects that market to grow more in line with GDP.
- Supply-chain disruptions, constrained transportation, labor shortages, and inflation were raising lead times and costs. Veeco said it was buying components in advance and re-sourcing suppliers; further disruptions could affect manufacturing and shipments. COVID-19 impacts remain uncertain.
- Management expects higher capital spending for the new San Jose facility and duplicate operating costs during the transition over the next several quarters. It believes cash, investments, and operating cash flow will meet projected needs for the next 12 months, including debt interest, purchase commitments, and lease payments.
- Purchase commitments were $141.6 million, substantially all due within one year. The company also reported $34.5 million of operating lease liabilities and $5.4 million of outstanding bank guarantees and standby letters of credit.
- In October 2021, Veeco agreed to a $15.0 million class-action settlement related to the Ultratech acquisition, subject to court approval and class-member opt-out rights. The amount was recorded as a current liability and an insurance receivable; the filing says insurers will fund the settlement. A separate derivative suit had been dismissed, with the plaintiff appealing.
- The 2027 convertible notes were convertible by holders through December 31, 2021 under the applicable stock-price test. Veeco noted that cash settlement of conversions or repurchases could affect liquidity. Adoption of a new convertible-debt accounting standard in Q1 2022 was expected to reduce non-cash interest expense and increase diluted shares.
- U.S. deferred tax assets remained fully offset by a valuation allowance. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether strong Semiconductor demand converts into shipments and revenue, and how much growth is offset by expected Data Storage declines.
- Gross-margin trajectory amid product mix, regional mix, inflation, and supply-chain costs.
- Execution, total cost, and timing of the San Jose facility transition and related capital expenditures and duplicate expenses.
- Cash-flow conversion and working-capital needs, particularly inventory growth and the $141.6 million purchase commitments.
- Convertible-note conversion, settlement, and dilution exposure, including the 2027 notes’ conversion status and 2023 maturity.
- Final court approval and insurance recovery for the $15.0 million settlement, and the outcome of the derivative-action appeal.