Veeco Instruments Inc. — Q1 2020 Form 10-Q
Business context and reporting period. Veeco designs, manufactures, and supports thin-film process equipment used in semiconductor and related markets. This unaudited filing covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019. The company reports one operating segment.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $104.5 | $99.4 | Up 5% |
| Gross profit / gross margin | $46.4 / 44% | $34.7 / 35% | Margin up about 9 percentage points |
| Operating income (loss) | $4.6 | ($14.1) | Improved $18.7 |
| Net income (loss) | ($0.6) | ($18.5) | Improved $18.0 |
| Diluted loss per share | ($0.01) | ($0.40) | Improved |
| Net cash used in operating activities | ($2.4) | ($22.3) | Lower cash use |
- Higher sales and gross margin, together with lower operating expenses, drove the improvement in operating results. Management attributed the gross-margin increase to product and geographic mix, lower inventory reserves, and lower manufacturing expenses.
- Research and development expense fell 18% to $19.2 million; selling, general, and administrative expense fell 8% to $18.3 million. Cost reductions and restructuring contributed to lower expenses.
- Sales by end market: Scientific & Industrial $49.1 million, up 23%; Front-End Semiconductor $31.4 million, up 39%; LED Lighting, Display & Compound Semiconductor $15.4 million, up 14%; and Advanced Packaging, MEMS & RF Filters $8.6 million, down 63%.
- Cash and cash equivalents were $162.3 million, restricted cash $0.7 million, and short-term investments $79.4 million at March 31, totaling $242.4 million. Total current assets were $500.5 million and current liabilities $128.5 million.
- Long-term debt had a carrying value of $303.4 million; the convertible notes’ principal amount was $345.0 million. The notes bear 2.70% interest and mature January 15, 2023. Net interest expense was $4.9 million.
- Operating cash outflow reflected a $27.8 million use from accounts receivable and contract assets, partly offset by changes in payables and accrued expenses. Investing activities provided $35.2 million, mainly from net investment sales; capital expenditures were $1.1 million.
Material changes and management outlook
- Revenue increased 5% year over year, but market performance diverged: strong Scientific & Industrial and Front-End Semiconductor sales were partly offset by the steep decline in Advanced Packaging, MEMS & RF Filters.
- Management said gross margins are expected to fluctuate and does not expect margins in coming quarters to be as high as Q1 2020. No numerical revenue or earnings guidance is provided.
- Veeco’s manufacturing facilities remained open and largely at or near full capacity, and the company reported no significant supply-chain interruptions to date. Approximately 52% of its global workforce was working remotely. Management warned that pandemic-related disruption, customer delays or nonpayment, supply constraints, and added response costs could hurt future results.
- Management believes cash, investments, and projected operating cash flow are sufficient for working capital and obligations over the next 12 months, including note interest, leases, and purchase commitments. The filing stresses substantial uncertainty about COVID-19’s duration and impact.
- Purchase commitments were $76.2 million, substantially all due within one year. Veeco reported no material off-balance-sheet arrangements apart from disclosed purchase commitments and guarantees.
- After quarter-end, Veeco completed the sale of a non-core product line for approximately $11.4 million; 15% of the price is held in escrow for 18 months. The disposal was not classified as discontinued operations. The assets had a prior-year impairment charge of $4.0 million.
- Veeco reported no goodwill or intangible-asset impairment indicators in Q1. It added COVID-19 as a risk factor; other risk factors were reported as not materially changed from the 2019 Form 10-K.
- Two shareholder matters related to the Ultratech acquisition remained pending. Veeco said it is defending them and does not believe the resolution of legal proceedings will materially affect its financial position, results, or cash flows.
Important facts for investors to verify
- Whether COVID-19 affects customer orders, acceptance and installation, collections, supply availability, or operating costs beyond the quarter.
- Whether the Q1 gross-margin improvement is sustainable, given management’s expectation that future quarterly margins may be lower.
- Accounts-receivable collection and operating cash flow: receivables rose to $84.3 million from $45.7 million at year-end, while Q1 operating cash flow remained negative.
- The timing and terms of the $76.2 million in purchase commitments, and the company’s capacity to meet these and other obligations if demand weakens.
- The $345.0 million principal amount of convertible notes due in 2023, including potential repayment, conversion, and dilution implications.
- Completion proceeds and escrow terms for the post-quarter product-line sale, and developments in the Ultratech-related litigation.