Veeco Instruments Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports unaudited fourth-quarter results. Veeco develops, manufactures, sells, and supports semiconductor and thin-film process equipment, serving Semiconductor, Compound Semiconductor, Data Storage, and Scientific & Other markets.
Financial performance and liquidity
- Revenue: FY2020 net sales were $454.2 million, up 8% from $419.3 million in 2019. Gross profit was $194.3 million, or 42.8% of sales, compared with $158.2 million, or 37.7%, in 2019.
- Profitability: Operating income was $22.6 million versus an operating loss of $39.6 million. Net loss narrowed to $8.4 million from $78.7 million; diluted loss per share was $0.17 versus $1.66. Net interest expense rose to $23.2 million from $17.4 million.
- Fourth quarter: Sales were $138.9 million versus $113.2 million in Q4 2019; gross profit was $56.8 million versus $45.0 million. Net loss was $0.1 million versus $32.9 million.
- Market mix: Data Storage sales rose 47% to $123.3 million and Compound Semiconductor rose 26% to $107.9 million. Semiconductor sales fell 6% to $165.9 million; Scientific & Other fell 23% to $57.0 million.
- Cash flow: Operating activities generated $43.0 million, compared with $7.4 million used in 2019. Capital expenditures were $6.8 million, down from $10.9 million.
- Liquidity: Cash and cash equivalents were $129.6 million; short-term investments were $189.8 million; restricted cash was $0.7 million. Working capital was $440.3 million, up from $357.7 million.
- Debt: Convertible-note principal totaled $389.2 million at year-end: $131.7 million due 2023, $132.5 million due 2025, and $125.0 million due 2027. Net carrying value was $321.1 million. The company reported $13.8 million of non-cash interest expense related to debt discounts and issuance costs.
- Orders: Backlog increased to $366.0 million from $267.6 million at year-end 2019.
Changes and notable items
- Higher sales and gross margin, alongside lower operating expenses, helped return Veeco to operating profitability. Management attributed the margin improvement primarily to higher production activity and lower inventory-reserve and warranty expense.
- Data Storage and Compound Semiconductor drove revenue growth; declines in Semiconductor and Scientific & Other partially offset that growth. Sales to China decreased 19% to $57.6 million.
- Veeco issued $125.0 million of 3.75% convertible notes due 2027 and exchanged $125.0 million principal of 2023 notes for $132.5 million of 3.50% notes due 2025. It also repurchased $88.3 million principal of 2023 notes for approximately $81.2 million cash. These transactions contributed to a $7.8 million loss on debt extinguishment.
- Veeco completed the sale of a non-core product line for approximately $11.4 million and recorded an additional $0.3 million impairment in 2020. The product line had generated a $4.0 million impairment in 2019.
Outlook, risks, and contingencies
- Outlook: Management expected near-term growth through 2021 from laser annealing, 5G RF, and Data Storage products, and identified Semiconductor and Compound Semiconductor as longer-term growth opportunities. It cited a healthy backlog and investment in R&D, evaluation tools, inventory, and service capacity. The filing provides no numerical revenue or earnings guidance.
- Investment and costs: A new San Jose manufacturing facility is expected to require $30–$40 million in build-out capital expenditures over two years, with duplicate operating costs during the transition. A February 2021 lease for the facility runs through 2037, subject to renewal options.
- Key risks: COVID-19 could disrupt demand, customer purchases, service, staffing, and supply chains. Other significant exposures include semiconductor-equipment cyclicality, long and uncertain sales and qualification cycles, customer concentration, reliance on limited suppliers, and U.S.–China export controls and trade restrictions. Seagate accounted for more than 10% of sales in 2020 and 2019; 68% of 2020 sales were to customers outside the United States.
- Debt and liquidity risks: Note conversions or fundamental-change repurchases may require substantial cash unless Veeco elects share settlement; the company cautions that funding such payments may be difficult. Outstanding purchase commitments were $126.4 million, substantially all due within one year.
- Legal matters: Veeco is defending consolidated securities litigation and a related derivative action concerning disclosures associated with its Ultratech acquisition. Management stated that other ordinary-course proceedings are not expected to have a material adverse effect.
- Accounting and controls: The auditor identified inventory valuation, including estimates of anticipated demand for $145.9 million of inventory, as a critical audit matter. Management and the auditor concluded internal control over financial reporting was effective at December 31, 2020; the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Whether backlog converts to shipments and revenue on schedule, and whether customer cancellations or delays increase.
- Whether operating cash generation continues as receivables and inventory rise; inventory valuation and customer collections warrant monitoring.
- The cash, dilution, and refinancing implications of the convertible notes, including conversion terms and capped-call coverage.
- Progress and total cost of the San Jose facility expansion, including the transition period’s duplicate operating expenses.
- Effects of export-license restrictions, customer concentration, and COVID-19 on sales, especially in China and other international markets.
- Developments in the Ultratech-related litigation and any resulting financial exposure.