Veeco Instruments Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Veeco develops and sells thin-film process equipment for semiconductor, compound semiconductor, LED, advanced packaging, and scientific and industrial markets. Comparisons below are to the corresponding 2017 periods unless otherwise noted. Dollar amounts are in millions, except per-share data.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $126.8 | $129.3 | $443.1 | $336.0 |
| Gross profit / margin | $46.4 / 36.6% | $50.5 / 39.1% | $158.5 / 35.8% | $120.9 / 36.0% |
| Operating income (loss) | $(3.9) | $(21.5) | $(276.5) | $(56.9) |
| Net income (loss) | $(9.0) | $(23.7) | $(262.4) | $(42.9) |
| Diluted loss per share | $(0.19) | $(0.51) | $(5.55) | $(1.00) |
| Operating cash flow | Not separately provided | Not separately provided | $(39.4) | $15.3 |
Q3 sales declined 2%; lower volume and less favorable product and geographic mix reduced gross margin. Q3 net loss narrowed year over year as operating expenses fell, including lower SG&A and amortization. For the nine-month period, sales rose 32%, largely reflecting the Ultratech acquisition (completed May 2017) and increased LED-related sales. The YTD loss was driven primarily by a $252.3 million non-cash impairment charge on Ultratech-related intangible assets; excluding that unusual charge, reported operating results would be substantially different.
Liquidity, debt and cash flow
- At September 30, cash and cash equivalents, restricted cash, and short-term investments totaled $266.4, down from $328.4 at December 31, 2017. Current assets were $540.9 and current liabilities $171.7.
- YTD operating cash outflow was $39.4, versus $15.3 generated in the prior-year period. Management cited higher inventory and lower customer deposits and deferred revenue as important working-capital uses. Cash and restricted cash declined $66.2 during the period.
- Convertible senior notes had $345.0 principal outstanding, a $284.4 net carrying value, a 2.70% coupon, and a January 2023 maturity. The company reported no principal payments during the period.
- Management stated that cash, short-term investments, and projected operating cash flow should meet working-capital needs, contractual obligations, and scheduled note interest for the next 12 months.
Operating trends and outlook
- Q3 orders fell to $100.3 from $161.9; book-to-bill was 0.8. Backlog was $275.5 at quarter-end, down from $305.1 at June 30. Nine-month orders were $386.9 versus $391.9, with a 0.9 book-to-bill ratio.
- LED Lighting, Display & Compound Semiconductor orders remained soft as customers absorbed added capacity and competition in China intensified. Veeco said it did not expect significant near-term new orders in this market in China and could not say when general-lighting and backlighting orders would recover.
- Management cited potential demand drivers in advanced packaging, EUV mask-blank equipment, VCSELs, 5G, power electronics, and data storage. It reported two additional orders for its low-defect ion-beam deposition system for EUV mask-blank production.
- Restructuring included reductions affecting approximately 40 employees and consolidation of advanced-packaging and 3D-inspection operations into San Jose, expected to finish in Q1 2019. A further reduction affected approximately 35 employees; management expected that initiative to be completed by year-end and generate about $5 million in annualized savings. An additional $1–$2 million of restructuring costs was expected over the next few quarters.
Material items, risks and contingencies
- The $252.3 million impairment followed lower projected Ultratech results, reflecting weaker smartphone-related FOWLP demand, slower adoption of the technology, and delays in Chinese 28nm facility build-outs expected to support laser anneal sales. Amortization expense is expected to be lower following the impairment.
- Goodwill was $307.1 million. An October 1, 2018 impairment test found estimated fair value exceeded carrying value by approximately $60 million; management warned that a sustained share-price decline could lead to a future goodwill impairment.
- Veeco disclosed a recently discovered, apparently sophisticated cyberattack. The investigation was ongoing, and the company said the extent, potential information exposure, costs, and business impact were not yet known.
- Three purported class actions relating to disclosures in the Ultratech acquisition registration statement and prospectus are expected to be consolidated. Veeco considers them without merit and intends to contest them.
- Purchase commitments totaled $114.0 million, substantially due within one year. The company also identified customer concentration, cyclical and uncertain markets, order and backlog variability, export restrictions, acquisition integration, and foreign currency exposure as risks. It reported a $100 million share-repurchase authorization; $14.3 million had been used by September 30.
Important facts for investors to verify
- Whether orders, book-to-bill, and backlog stabilize after the sharp Q3 order decline, particularly in LED markets and China.
- Whether the Ultratech impairment assumptions prove adequate and whether weaker FOWLP adoption or delayed Chinese investment triggers further asset impairment.
- The eventual scope, costs, and possible customer or legal consequences of the cyberattack.
- Cash conversion and working-capital trends, including inventory levels and customer deposits, against the company’s liquidity assessment.
- Progress on restructuring, expected savings, and remaining implementation costs, as well as the outcome of the Ultratech-related lawsuits.