Veeco Instruments Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unless stated otherwise, amounts below are in millions of U.S. dollars. Veeco designs, manufactures, and supports semiconductor process equipment and reports one operating segment.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $97.8 | $157.8 | $197.2 | $316.4 |
| Gross profit / margin | $36.3 / 37.1% | $55.4 / 35.1% | $71.0 / 36.0% | $112.1 / 35.4% |
| Operating income (loss) | $(11.2) | $(261.2) | $(25.3) | $(272.6) |
| Net income (loss) | $(15.6) | $(237.6) | $(34.1) | $(253.5) |
| Basic and diluted loss per share | $(0.33) | $(5.02) | $(0.72) | $(5.35) |
Q2 revenue fell 38% year over year; six-month revenue also fell 38%. Lower sales volume reduced gross profit, while improved product and regional mix lifted gross margin. Results in 2018 included a $252.3 million non-cash intangible-asset impairment charge, so the substantially smaller reported losses in 2019 are not a like-for-like indication of operating improvement. Q2 2019 operating expenses also included $0.6 million of restructuring costs.
- Sales mix: Q2 Scientific & Industrial sales rose 74% to $47.2 million and Front-End Semiconductor sales rose 35% to $24.5 million. LED Lighting, Display & Compound Semiconductor sales fell 89% to $9.7 million; Advanced Packaging, MEMS & RF Filters fell 34% to $16.4 million.
- Geography: Q2 China sales fell 72% to $19.7 million, while U.S. sales rose 21% to $39.8 million. Management attributed the largest regional decline largely to lower LED-related sales in China.
- Cash flow: Operating cash use was $8.1 million for the first half, versus $57.4 million used in the prior-year period. Investing cash use was $42.0 million, including net purchases of investments and $6.4 million of capital expenditures. Financing cash use was $0.5 million.
Liquidity, debt, and balance sheet
At June 30, cash and cash equivalents were $161.7 million, restricted cash $0.7 million, and short-term investments $84.5 million, totaling $246.9 million in liquid resources, down from $261.3 million at year-end 2018. Current assets were $491.5 million and current liabilities $149.2 million, or approximately $342.3 million of working capital. The approximate current ratio was 3.3.
Long-term debt had a carrying value of $293.6 million; the related convertible notes have $345.0 million principal, a 2.70% coupon, and mature in January 2023. Total liabilities were $464.8 million and stockholders’ equity $411.0 million. Management said projected operating cash flow and cash and short-term investments should cover working-capital needs, contractual obligations, and other cash requirements for the next 12 months, including scheduled note interest.
Changes, outlook, and risks
- Management cited lower sales in LED, Display & Compound Semiconductor as the principal reason for the revenue decline, partly offset by Scientific & Industrial and Front-End Semiconductor growth. Pricing was not a significant driver.
- Management reported limited Q2 sales in LED/Display/Compound Semiconductor, and said it did not expect significant new orders for that market in China in the near future. It cited pilot and beta-system activity for compound-semiconductor applications, including ROY LEDs and photonics, as potential future opportunities. The filing provides no numeric revenue or earnings guidance.
- Veeco continued restructuring to streamline operations, improve efficiency, and reduce costs. The company had announced approximately 40 employee reductions associated with consolidation of certain operations into San Jose.
- The filing identifies U.S.–China trade measures, export controls, tariffs, and difficulty obtaining export licenses as material risks. Management described uncertainty around affected inventory and warned of possible shipment delays, order cancellations, carrying costs, or losses. International sales were 60% of Q2 revenue and 63% for the first half.
- Other notable risks include cyclical and unfavorable market conditions, concentrated customers and regions, order and revenue timing, customer cancellation of backlog, competition, technology changes, and possible asset impairments.
- Veeco is defending consolidated securities class-action litigation and a stayed derivative action related to disclosures surrounding the Ultratech acquisition. The company said other ordinary-course proceedings were not expected to materially affect its financial position, results, or cash flows.
Additional commitments included $84.5 million of purchase commitments, substantially all due within one year, and $11.6 million of recognized operating lease liabilities. The company reported $7.9 million of outstanding bank guarantees and letters of credit. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue stabilizes and margins hold as market and geographic mix shift, particularly given the sharp decline in China and LED-related sales.
- Export-license availability, U.S.–China trade developments, and potential consequences for affected inventory, customer orders, and shipments.
- Cash burn, conversion of customer deposits and deferred revenue, and the ability to fund purchase commitments while servicing the 2023 convertible notes.
- Progress and costs of restructuring, and whether future operating results require further impairment charges.
- Developments in the Ultratech-related lawsuits and the customer acceptance and timing risks associated with remaining performance obligations of approximately $65.1 million.