Business context and reporting period
Veeco Instruments Inc. designs, manufactures, and supports thin-film process equipment used to make electronic devices. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. The company reports one operating segment and presents sales across four end markets.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $98.6M | $97.8M | $203.1M | $197.2M |
| Gross profit | $41.9M | $36.3M | $88.3M | $71.0M |
| Gross margin | 42.5% | 37.1% | 43.5% | 36.0% |
| Operating income (loss) | $0.4M | $(11.2)M | $5.0M | $(25.3)M |
| Net income (loss) | $(8.3)M | $(15.6)M | $(8.9)M | $(34.1)M |
| Diluted loss per share | $(0.17) | $(0.33) | $(0.18) | $(0.72) |
- Q2 operating margin was approximately 0.4% versus negative 11.5% a year earlier; net margin was negative 8.4% versus negative 15.9%.
- Six-month operating cash flow was $17.6M, compared with cash use of $8.1M in 2019. Capital expenditures were $2.0M. Cash and cash equivalents, restricted cash, and short-term investments totaled $301.1M at June 30, up from $245.2M at year-end 2019.
- Current assets were $538.4M and current liabilities $127.5M, implying working capital of approximately $410.9M. Long-term debt was $317.3M carrying value; outstanding note principal totaled $381.7M ($256.7M due 2023 and $125.0M due 2027).
- Q2 interest expense, net, was $5.6M; six-month net interest expense was $10.5M. The company recorded a $3.0M loss on extinguishment of debt in connection with refinancing.
Material changes versus comparable periods
- Q2 sales rose 1%, while six-month sales rose 3%. Higher Q2 Advanced Packaging, MEMS & RF Filters sales (+30%) and LED Lighting, Display & Compound Semiconductor sales (+65%) were offset in part by lower Front-End Semiconductor sales (−28%) and Scientific & Industrial sales (−8%).
- Six-month gross profit increased 24%, with margin improving to 43.5% from 36.0%. Management attributed margin improvement to sales mix and lower inventory reserves and manufacturing expenses.
- Operating expenses declined in both periods, reflecting cost-reduction and restructuring actions, lower personnel and professional fees, and reduced travel. The 2019 reorganization affected approximately 60 employees.
- In May 2020, Veeco issued $125M of 3.75% convertible notes due 2027 and used proceeds in part to repurchase $88.3M principal of its 2.70% notes due 2023 for $81.2M. It also spent $10.3M on capped calls. The new notes increased reported interest expense.
- Veeco completed the sale of a non-core product line for approximately $11.4M; net proceeds after selling costs were about $9.5M. The filing reports a $4.3M total loss on the disposal group, including prior-period impairment, and a further $0.3M impairment charge in 2020.
Outlook, management commentary, and risks
- The filing provides no numerical revenue or earnings guidance. Management said available cash, investments, and projected operating cash flow should cover working capital and contractual needs for the next 12 months, including debt interest, purchase commitments, and leases.
- COVID-19 had not caused significant supply-chain interruptions by the filing date, and manufacturing facilities remained open. However, management warned that prolonged disruption could affect demand, operations, suppliers, customer payments, and future results; approximately 52% of the workforce was working remotely. Additional pandemic-related costs or productivity impacts were possible.
- Management described Q2 Advanced Packaging demand as strong, LED/display/compound semiconductor demand as soft, and Scientific & Industrial sales as supported by data-storage demand. It cited customer activity in advanced semiconductor nodes and EUV mask blanks as potential growth drivers.
- U.S.–China trade restrictions had caused challenges closing new China orders and the loss of anticipated orders, including in MOCVD and Wet Etch & Clean. Management expected China to represent a smaller share of near-term revenue, but said the overall impact was uncertain.
- Convertible-note risks include potential cash needs on conversion or repurchase, possible liquidity pressure if conversion conditions are met, dilution, and accounting-related non-cash interest. The capped calls may reduce dilution or certain cash payments, subject to a cap.
- Other disclosed risks include customer and geographic concentration, cyclical markets, order timing and cancellations, reliance on limited or sole-source suppliers, foreign exchange, cybersecurity, and potential inventory or asset impairment. Two Ultratech-related shareholder cases remained pending; Veeco said it was defending them and did not expect other legal proceedings to materially affect its financial position, results, or cash flows.
Important facts for investors to verify
- Whether improved gross margins and operating profitability persist, given management’s warning that margins fluctuate with product mix and other factors.
- Subsequent effects of COVID-19 and U.S.–China trade restrictions on customer demand, orders, supply continuity, and revenue mix.
- Cash requirements, conversion terms, dilution exposure, and refinancing or repurchase obligations associated with the 2023 and 2027 convertible notes.
- Quality and sustainability of operating cash flow, including working-capital movements, and the company’s ability to meet $86.3M of purchase commitments, substantially due within one year.
- Outcome and potential financial effect of the Ultratech-related litigation and any additional impairment or disposal-related charges.