Veeco Instruments Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Veeco designs and manufactures semiconductor and thin-film process equipment and reports as one operating segment.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $161.6m | $164.0m | $315.1m | $320.4m |
| Gross profit / margin | $67.5m / 41.8% | $64.3m / 39.2% | $129.5m / 41.1% | $130.3m / 40.7% |
| Operating income / margin | $13.7m / 8.5% | $12.8m / 7.8% | $23.5m / 7.5% | $29.3m / 9.2% |
| Net income (loss) | $(85.3)m | $9.7m | $(76.6)m | $23.0m |
| Diluted EPS | $(1.61) | $0.18 | $(1.48) | $0.43 |
| Operating cash flow | Six-month figure: $25.1m | Prior-year six-month figure: $28.2m |
Q2 sales declined 1% year over year, while gross margin improved, primarily due to sales mix and favorable spending. The six-month operating income decline reflected higher operating expenses, including increased R&D investment.
Balance sheet, liquidity and debt
- At June 30, cash and cash equivalents were $180.5m, restricted cash $0.4m, and short-term investments $105.9m, totaling $286.8m, versus $303.0m at year-end 2022.
- Inventory rose to $244.5m from $206.9m at year-end; customer deposits and deferred revenue increased to $156.7m from $127.2m.
- Debt carrying value was $274.3m; principal outstanding was $281.5m: $26.5m of 2025 Notes, $25.0m of 2027 Notes, and $230.0m of 2029 Notes. No borrowings were outstanding on the $150m revolving credit facility.
- Six-month investing cash flow was positive $2.4m, including $30.4m spent net of cash acquired for Epiluvac and $10.8m of capital expenditures. Financing cash flow was a use of $2.0m.
- Management stated available cash, investments, and projected operating cash flow should cover working capital and other expected needs for the next 12 months.
Material changes and unusual items
- Net loss included a $97.1m loss on extinguishment of convertible notes: $16.5m related to the 2025 Notes and $80.6m to the 2027 Notes. The charge arose from May 2023 debt exchanges and is not representative of operating income.
- Veeco issued $230m of 2.875% convertible notes due 2029, receiving $223.2m net proceeds, and used about $198.8m toward cash and share settlements of portions of the 2025 and 2027 Notes. The settlements included issuance of approximately 4.5m common shares.
- Veeco acquired Epiluvac, a silicon-carbide epitaxy systems business, on January 31 for $56.4m including contingent consideration. The company expects the acquisition to support entry into the SiC equipment market, with revenue expected to begin in 2024; acquired results were immaterial in the reported periods.
Markets, outlook and risks
- Q2 sales by end market: Semiconductor $106.3m, up 9%; Compound Semiconductor $24.1m, down 23%; Data Storage $13.9m, down 35%; Scientific & Other $17.4m, up 26% year over year.
- China accounted for $50.0m, or 31%, of Q2 sales, versus $28.5m a year earlier. Management said some China backlog may be affected by export rules, although it believed the substantial majority would not be negatively affected.
- Management maintained full-year 2023 revenue guidance of $630m–$670m, citing backlog visibility. It expects Semiconductor revenue growth in 2023, and Data Storage growth based on backlog shipment timing.
- Management cited ongoing supply constraints and elevated lead times, labor and material cost inflation, customer requests for cancellations or shipment/payment delays, and softer demand in certain shorter-lead-time products. It expected supply challenges to persist through 2023, though lead times to improve in the second half.
- Other key exposures include semiconductor cyclicality, customer and geographic concentration, competition and technology change, foreign exchange, and U.S.–China export controls. Convertible-note conversions or repurchases and credit-facility covenants could affect liquidity. The 2027 Notes were conditionally convertible through September 30, 2023.
- Purchase commitments were $235.5m, substantially due within one year. Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect. Disclosure controls were deemed effective; acquired-business control integration was ongoing.
Important facts for investors to verify
- Whether 2023 revenue guidance of $630m–$670m remained achievable as supply constraints, customer delays, and market softness evolved.
- How much China backlog required export licenses or was exposed to changing U.S. restrictions, and the resulting sales impact.
- Whether inventory growth and $235.5m of purchase commitments can be converted into timely shipments and cash collections.
- The cash, share dilution, and refinancing implications of convertible-note conversions, maturities, and the revolving-credit covenants.
- The timing and commercial contribution of Epiluvac’s SiC business, including the assumptions underlying contingent consideration.