Veeco Instruments Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted. The 2018 results include Ultratech, acquired in May 2017, while Q1 2017 does not include Ultratech’s pre-acquisition results. This limits year-over-year comparability.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $158.6 | $94.5 |
| Gross profit / margin | $56.7 / 35.7% | $34.5 / 36.5% |
| Operating income (loss) | $(11.4) | $(5.5) |
| Net income (loss) | $(15.8) | $1.6 |
| Diluted EPS | $(0.34) | $0.04 |
| Cash from operations | $(11.8) | $6.3 |
| Capital expenditures | $2.3 | $4.2 |
- Sales rose 68% year over year, driven by increased LED-related shipments and Ultratech revenue. Sales grew across all end markets; pricing was not a significant factor.
- Gross margin declined to 35.7% from 36.5%, which management attributed mainly to product mix in the LED market. Operating expenses rose 70% to $68.1 million, including $13.5 million of intangible amortization, $2.7 million of restructuring, and $1.3 million of acquisition costs.
- Net loss widened despite higher sales. Net interest expense increased to $4.6 million from $3.3 million, mainly because the convertible notes were outstanding for the full 2018 quarter. The income tax benefit was $0.2 million versus $10.5 million in Q1 2017, contributing to the earnings comparison.
Liquidity, debt and orders
- At March 31, cash and cash equivalents were $245.5 million, restricted cash $0.8 million, and short-term investments $65.1 million, totaling $311.5 million. Total current assets were $583.4 million and current liabilities $208.6 million.
- Cash, cash equivalents and restricted cash decreased $34.2 million during the quarter. Operating cash outflow was $11.8 million; investing cash outflow was $22.6 million, largely reflecting net purchases of investments.
- Convertible senior notes had $345.0 million principal outstanding, a 2.70% coupon and a January 2023 maturity; net carrying value was $278.5 million. The company reported no new debt borrowings or principal repayments in the quarter.
- Orders were $154.5 million, compared with $107.3 million; book-to-bill was 1.0 versus 1.1. Backlog was $331.1 million, down from $334.3 million at December 31, 2017.
- Purchase commitments totaled $160.4 million, substantially all due within one year. Management said cash, short-term investments and projected operating cash flow should cover working capital, contractual obligations and other needs for the next 12 months, including scheduled note interest.
Business context, outlook and material developments
- Veeco makes and supports thin-film process equipment for semiconductor and related markets. Q1 sales by end market were LED Lighting, Display & Compound Semiconductor $89.9 million; Scientific & Industrial $32.0 million; Advanced Packaging, MEMS & RF Filters $27.2 million; and Front-End Semiconductor $9.5 million.
- China represented $75.4 million, or 47%, of sales. Sales outside the United States were approximately 85% of total sales. Management cited growth opportunities in advanced packaging, 3D sensing, 5G, power electronics and front-end semiconductor applications.
- Management expected gross margins in the second half of 2018 to exceed those in the first half, due to a projected shift in LED product mix. The filing does not provide specific full-year revenue or earnings guidance.
- Veeco adopted ASC 606 retrospectively on January 1, 2018. The new standard changes timing for certain system-sale acceptance retentions and recognizes installation revenue as installation is performed. Q1 2017 comparative figures were adjusted; adoption had no cash-flow impact.
- The 2017 Ultratech acquisition increased amortization and added operating costs; integration and restructuring continued. Q1 restructuring expense included approximately $0.2 million of non-cash accelerated share-based compensation.
Risks, contingencies and other notable items
- Veeco identified cyclical and volatile end markets, order and revenue timing, customer and geographic concentration, potential order cancellations, competition, rapid technological change, supplier dependence, foreign-government incentives, export controls, foreign exchange exposure, and acquisition integration among its risks.
- A Delaware appraisal action concerning 440,100 Ultratech shares remained pending; trial was scheduled for December 2018. Approximately $2.7 million related to appraisal proceedings was accrued. Veeco said it intended to contest the claim.
- Patent disputes involving AMEC and SGL were settled in February 2018, with the related legal actions dismissed or withdrawn and affected business processes resumed. The company said other ordinary-course legal matters were not expected to have a material adverse effect.
- The U.S. tax effects of the 2017 Tax Act remained under evaluation in some areas, including GILTI; the company said it could not yet reasonably estimate the GILTI effect or had selected an accounting policy for it. U.S. deferred tax assets were fully offset by a valuation allowance.
- Disclosure controls were reported effective as of March 31, 2018. The filing reported no material changes to risk factors from the 2017 Form 10-K.
Important facts for investors to verify
- How much of reported sales and order growth reflects Ultratech and how much represents organic growth; the acquisition makes the year-over-year comparison less comparable.
- Whether the expected second-half margin improvement materializes, given Q1’s lower gross margin and the stated dependence on LED product mix.
- Cash conversion and working-capital trends, particularly receivables and the decline in customer deposits and deferred revenue that contributed to operating cash outflow.
- Order, backlog and book-to-bill trends, including potential cancellations or modifications and the timing of revenue recognition.
- The outcome and potential financial impact of the Ultratech appraisal action, as well as the eventual tax treatment of GILTI and other provisional Tax Act effects.
- Debt obligations and committed spending, including $345.0 million principal on the 2023 convertible notes and $160.4 million in purchase commitments.