Veeco Instruments Inc. — Q2 2018 Form 10-Q
Business context and reporting period. Veeco designs, manufactures, sells, and supports thin-film process equipment used in semiconductor and compound-semiconductor manufacturing. This unaudited filing covers the quarter and six months ended June 30, 2018; the comparable periods are 2017. Veeco reports one operating segment.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $157.8 million | $112.2 million | $316.4 million | $206.7 million |
| Gross profit / margin | $55.4 million / 35% | $35.8 million / 32% | $112.1 million / 35% | $70.3 million / 34% |
| Operating income (loss) | $(261.2) million | $(29.9) million | $(272.6) million | $(35.4) million |
| Net income (loss) | $(237.6) million | $(20.8) million | $(253.5) million | $(19.2) million |
| Diluted loss per share | $(5.02) | $(0.49) | $(5.35) | $(0.47) |
| Operating cash flow | Not separately reported by quarter | $(57.4) million | $(9.6) million |
- Sales rose 41% in Q2 and 53% for the first half. The filing attributes growth mainly to higher LED-related sales and the inclusion of Ultratech for a full period in 2018; pricing was not a significant driver.
- Gross margin improved year over year, reflecting sales volume and mix and the absence of the prior-year Ultratech inventory fair-value step-up charge.
- Q2 operating expenses include a $252.3 million non-cash impairment charge: $216.4 million against definite-lived intangible assets and $35.9 million against in-process research and development. The charge drove the sharply higher reported loss.
- Six-month operating cash use was $57.4 million. Working-capital movements used $76.2 million, notably from higher receivables and inventory and lower customer deposits and deferred revenue.
- At June 30, cash and cash equivalents were $196.4 million, restricted cash $0.8 million, and short-term investments $65.0 million, totaling $262.3 million. This compares with $328.4 million at December 31, 2017.
- Long-term debt had a $281.4 million carrying value; principal outstanding was $345.0 million under 2.70% convertible senior notes due January 2023. Six-month net interest expense was $9.1 million.
Material changes and operating trends
- Q2 orders were $132.1 million, up from $122.7 million a year earlier, but book-to-bill declined to 0.8 from 1.1. Backlog was $305.1 million at quarter-end, down from $331.1 million at March 31.
- For the first half, orders were $286.6 million versus $230.0 million; book-to-bill was 0.9 versus 1.1. Backlog was $305.1 million, down from $334.3 million at December 31.
- LED Lighting, Display & Compound Semiconductor remained the largest end-market: 55% of Q2 sales and 56% of first-half sales. China represented 45% and 46%, respectively, of sales for those periods.
- LED orders declined as customers absorbed recently added general-lighting and backlighting capacity; Veeco also cited increased competition in China. Advanced-packaging demand was affected by slower smartphone volumes and delayed adoption of Fan-Out Wafer Level Packaging. Chinese 28nm facility build-outs expected to support Laser Spike Anneal sales were delayed.
Outlook, risks, and unusual items
- Management expected second-half 2018 gross margins to exceed first-half margins, citing expected product mix. It also expected approximately $2 million in annualized savings from consolidating advanced-packaging lithography and 3D wafer-inspection operations in San Jose; completion was expected in Q1 2019.
- The consolidation and related cost actions included reductions of approximately 40 employees. Veeco recorded $1.7 million of related restructuring charges and expected a further $2 million to $4 million of restructuring costs over the next few quarters.
- Management said cash, short-term investments, and projected operating cash flow should cover working capital, contractual obligations, and other cash needs for the next 12 months, including scheduled note interest. Purchase commitments were $157.1 million, substantially all due within one year.
- Key risks include volatile and cyclical end markets, customer and geographic concentration, reduced Chinese government incentives or increased competition, order/backlog timing and cancellations, supplier constraints, technology changes, foreign exchange, and acquisition integration. The company reported no material changes to the risk factors in its 2017 Form 10-K.
- A putative securities class action related to statements in the Ultratech acquisition registration statement and prospectus was filed in California in June 2018. Veeco said it considered the suit without merit and intended to contest it. A separate Ultratech appraisal action was settled and dismissed with prejudice.
- The company adopted ASC 606 retrospectively from January 1, 2018; this changed revenue timing for certain customer acceptance retentions and installation services. U.S. deferred tax assets were fully offset by a valuation allowance, and the company had not yet selected an accounting policy for GILTI taxes.
Important facts for investors to verify
- Whether orders, book-to-bill, and backlog stabilize, particularly in LED markets and advanced packaging.
- Whether the Ultratech-related demand assumptions underlying the $252.3 million impairment are borne out, and whether further impairment is possible.
- Whether China and LED-market concentration, competitive pressure, and customer capacity digestion affect sales and margins.
- Whether operating cash flow improves as receivables, inventory, customer deposits, and deferred revenue change; also assess the $157.1 million purchase commitments.
- The terms, potential dilution, and repayment or conversion implications of the $345.0 million convertible notes, along with the status of the pending securities litigation.