Veeco Instruments Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; filed August 8, 2022. Amounts below are in millions except per-share data. Veeco develops and sells semiconductor and thin-film process equipment and reports one operating segment.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $164.0 | $146.3 | $320.4 | $280.1 |
| Gross profit | $64.3 | $60.2 | $130.3 | $115.1 |
| Gross margin | 39% | 41% | 41% | 41% |
| Operating income | $12.8 | $13.3 | $29.3 | $22.7 |
| Net income | $9.7 | $6.3 | $23.0 | $8.8 |
| Diluted EPS | $0.18 | $0.12 | $0.43 | $0.17 |
| Operating cash flow | Not provided by quarter | $28.2 | $20.7 |
Q2 sales rose 12% year over year, while net income increased 52%. Six-month sales rose 14% and net income increased 160%. Q2 operating income was slightly lower year over year despite higher sales, as operating expenses grew and gross margin contracted. Six-month operating income improved 29%.
Sales mix was led by Semiconductor: Q2 revenue was $97.5 million, up 82% year over year. Compound Semiconductor sales were $31.1 million, up 28%; Data Storage was $21.5 million, down 59%; and Scientific & Other was $13.8 million, down 16%.
For the first half, operating cash flow was $28.2 million. Capital expenditures were $15.4 million, implying cash flow after capital expenditures of approximately $12.7 million (calculated from reported figures), versus approximately $11.6 million in the prior-year period.
Liquidity, debt and balance sheet
- Cash, restricted cash and short-term investments totaled $230.8 million at June 30, 2022, compared with $224.7 million at year-end 2021. Current assets were $569.3 million and current liabilities $200.3 million.
- Debt carrying value was $274.2 million, including $20.1 million classified as current. Notes had total principal of $277.7 million: $20.2 million due 2023, $132.5 million due 2025 and $125.0 million due 2027.
- The $150 million revolving credit facility had no borrowings outstanding. Veeco reported access to a potential $75 million increase, subject to conditions and lender commitments.
- Management said cash, investments and projected operating cash flow should cover working capital and obligations for the next 12 months, including note interest, purchase commitments and lease payments.
Material changes and management commentary
- Q2 growth was driven principally by Semiconductor and Compound Semiconductor, while the sharp Data Storage decline partially offset it. Sales rose in EMEA and China but fell in the United States.
- Management said Q2 gross margin declined primarily due to higher logistics costs and spending on service infrastructure, capacity expansion and customer evaluation systems. For the first half, margins were broadly flat: favorable product and regional mix was offset by these cost pressures.
- Research and development spending increased 15% in Q2 and 13% for the first half, mainly due to personnel-related investment in new technology and applications. SG&A also increased, and duplicate costs from the San Jose facility transition were expected to continue for several quarters.
- Adoption of ASU 2020-06 on January 1, 2022 reduced non-cash interest expense and changed diluted EPS accounting to include convertible-note shares under the if-converted method. The company reported Q2 diluted EPS of $0.18; under legacy accounting it would have been $0.14. Adoption did not materially affect cash flows or debt-covenant compliance.
Outlook, risks and contingencies
- Management continued to expect revenue growth in 2022, citing strong semiconductor and compound semiconductor backlog, customer engagement and order activity. It expected continued Semiconductor market growth.
- Management expected Data Storage revenue to decline in 2022 from recent levels as customers slow capacity additions, but anticipated 2023 growth over 2022 based on order activity and long lead times.
- Supply constraints, longer component lead times, inflation, labor and logistics costs remained significant risks. Management expected supply shortages and related challenges to persist through 2022 and said they could constrain timely customer shipments and pressure margins.
- COVID-19 continued to affect the company, customers and global operations; the duration and financial effects remained uncertain. Other disclosed risks include sales timing and cyclicality, customer concentration, export controls and U.S.-China trade tensions, foreign exchange exposure, and dependence on limited or sole-source suppliers.
- Purchase commitments were $252.1 million, substantially all due within one year. Outstanding bank guarantees and standby letters of credit were $7.8 million. Lease liabilities totaled $35.9 million.
- A $15.0 million class-action settlement received final court approval in June 2022 and was funded by insurers. A separate derivative-action settlement, including $0.3 million of fees funded by insurance and governance-related changes, remained subject to court approval. Veeco said other proceedings were not expected to have a material adverse effect.
- U.S. deferred tax assets remained fully offset by a valuation allowance. Management said release of a significant portion could become possible within 12 months if sufficient positive evidence emerges; a release would reduce tax expense in the period recorded.
Important facts for investors to verify
- Whether supply-chain availability, purchase commitments and cost inflation allow Veeco to meet its 2022 growth outlook without further margin pressure.
- Whether Semiconductor and Compound Semiconductor growth offsets the expected 2022 Data Storage decline, and whether the stated 2023 Data Storage recovery materializes.
- The cash and liquidity impact of the $252.1 million purchase commitments, the $20.2 million 2023 note maturity and other near-term obligations.
- Convertible-note dilution and conversion status, particularly the 2027 Notes, which were convertible through September 30, 2022 under the stated conditions.
- Any developments in the derivative-action settlement approval and the timing or evidence required for a potential valuation-allowance release.