Veeco(VECO) - 2023 Q2 - Quarterly Report

Safe Harbor Statement This statement outlines that the report includes forward-looking statements, subject to various risks and uncertainties, requiring management estimates - This report contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially. The preparation of financial statements requires management to make estimates and assumptions based on current events, which may differ from actual results[9][10] - The company identifies several categories of risks, including those related to its business and industry (e.g., U.S.-China trade policy, competition, technological change), global operations, intellectual property, cybersecurity, and financial markets[11][14][18] PART I—FINANCIAL INFORMATION Financial Statements The company reported a net loss of $85.3 million for Q2 2023, a significant decrease from a net income of $9.7 million in Q2 2022, primarily due to a $97.1 million loss on debt extinguishment. Total assets increased to $1.23 billion from $1.13 billion at year-end 2022, driven by an acquisition and changes in working capital. Cash flow from operations remained positive at $25.1 million for the first six months of 2023 Consolidated Financial Statements Consolidated Balance Sheet Highlights (unaudited) | Account | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $180,524 | $154,925 | | Inventories | $244,470 | $206,908 | | Goodwill | $214,964 | $181,943 | | Total Assets | $1,228,447 | $1,128,183 | | Liabilities & Equity | | | | Customer deposits and deferred revenue | $156,700 | $127,223 | | Long-term debt | $274,335 | $254,491 | | Total Liabilities | $615,847 | $550,359 | | Total Stockholders' Equity | $612,600 | $577,824 | Consolidated Statement of Operations Highlights (unaudited) | Metric | Q2 2023 (in thousands) | Q2 2022 (in thousands) | Six Months 2023 (in thousands) | Six Months 2022 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $161,641 | $163,999 | $315,145 | $320,425 | | Gross profit | $67,510 | $64,267 | $129,527 | $130,279 | | Operating income | $13,688 | $12,823 | $23,494 | $29,340 | | Other income (expense), net | $(97,091) | $— | $(97,091) | $— | | Net income (loss) | $(85,320) | $9,655 | $(76,579) | $22,985 | | Diluted EPS | $(1.61) | $0.18 | $(1.48) | $0.43 | Consolidated Statement of Cash Flows Highlights (Six Months Ended June 30, unaudited) | Cash Flow Activity | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $25,135 | $28,169 | | Net cash provided by (used in) investing activities | $2,366 | $(25,961) | | Net cash provided by (used in) financing activities | $(1,971) | $(4,986) | | Net increase (decrease) in cash | $25,489 | $(2,829) | Note 3 — Business Combination - On January 31, 2023, Veeco acquired Epiluvac AB, a manufacturer of CVD epitaxy systems for silicon carbide (SiC) applications, to accelerate its entry into the high-growth SiC equipment market[47] Epiluvac Acquisition Consideration (Jan 31, 2023) | Component | Fair Value (in thousands) | | :--- | :--- | | Cash paid, net of cash acquired | $30,373 | | Contingent consideration | $26,055 | | Total Acquisition Date Fair Value | $56,428 | - The acquisition generated $33.0 million in goodwill, primarily attributed to expected synergies and strategic advantages, and $28.5 million in intangible assets, mainly technology with a 15-year useful life[50][51] Note 5 — Liabilities - On May 19, 2023, the company issued $230.0 million of 2.875% Convertible Senior Notes due 2029[82] - Proceeds from the 2029 Notes were used to repurchase and retire approximately $106.0 million of the 2025 Notes and $100.0 million of the 2027 Notes. This resulted in a total loss on debt extinguishment of $97.1 million, recorded in "Other income (expense), net"[79][81] Carrying Value of Convertible Notes (June 30, 2023) | Note Series | Principal Amount (in thousands) | Net Carrying Value (in thousands) | | :--- | :--- | :--- | | 2025 Notes | $26,500 | $26,351 | | 2027 Notes | $25,000 | $24,642 | | 2029 Notes | $230,000 | $223,343 | | Total | $281,500 | $274,335 | Note 10 — Segment Reporting and Geographic Information - Veeco operates as a single reportable segment, developing and manufacturing semiconductor and thin film process equipment. The company serves four primary end-markets: Semiconductor, Compound Semiconductor, Data Storage, and Scientific & Other[115][116][117][118][119] Sales by End-Market (in thousands) | End-Market | Q2 2023 | Q2 2022 | Change YoY | | :--- | :--- | :--- | :--- | | Semiconductor | $106,275 | $97,521 | +9% | | Compound Semiconductor | $24,066 | $31,122 | -23% | | Data Storage | $13,945 | $21,548 | -35% | | Scientific & Other | $17,355 | $13,808 | +26% | | Total | $161,641 | $163,999 | -1% | Sales by Geographic Region (in thousands) | Region | Q2 2023 | Q2 2022 | Change YoY | | :--- | :--- | :--- | :--- | | United States | $35,739 | $57,940 | -38% | | EMEA | $17,511 | $27,234 | -36% | | China | $49,986 | $28,497 | +75% | | Rest of APAC | $58,320 | $49,345 | +18% | | Total | $161,641 | $163,999 | -1% | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses ongoing macroeconomic challenges, including supply chain constraints, inflation, and China-export regulations. Despite a 1% YoY revenue decline in Q2 2023, the company saw strong growth in the Semiconductor market (up 9%) and in China (up 75%). A significant net loss was recorded due to a one-time charge for debt extinguishment. The company maintains its full-year 2023 revenue guidance of $630 million to $670 million, supported by its current backlog Business Update - The company is navigating macroeconomic challenges including supply chain constraints, inflation, and heightened China-export regulations. While supply chain issues are improving, lead times remain elevated and are expected to persist through 2023[124][125] - The Semiconductor market grew 9% YoY in Q2, driven by record laser annealing system revenue. The company expects revenue growth in this market to outpace overall wafer fab equipment spending in 2023[130] - The company acquired SiC technology in January 2023 to enter the high-growth SiC power epitaxy equipment market, driven by electric vehicles, with revenue expected to start in 2024[131] - Despite current industry challenges in Data Storage, the company expects revenue growth in 2023 based on existing backlog[132] - The company reaffirms its full-year 2023 revenue guidance to be in the range of $630 million to $670 million[134] Results of Operations Q2 2023 vs Q2 2022 Results of Operations (in thousands) | Line Item | Q2 2023 | Q2 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $161,641 | $163,999 | $(2,358) | (1)% | | Gross profit | $67,510 | $64,267 | $3,243 | 5% | | Gross Margin | 42% | 39% | +3pp | - | | Operating income | $13,688 | $12,823 | $865 | 7% | | Other income (expense), net | $(97,091) | $— | $(97,091) | N/A | | Net income (loss) | $(85,320) | $9,655 | $(94,975) | N/A | - Q2 2023 gross profit increased by 5% YoY to $67.5 million, with gross margin improving to 42% from 39%, primarily due to favorable product mix and spending[140] - Research and development expenses increased 5% YoY in Q2 2023 due to increased personnel-related costs for new initiatives in Semiconductor and Compound Semiconductor markets[141] - A loss on debt extinguishment of $97.1 million ($16.5 million for 2025 Notes and $80.6 million for 2027 Notes) was recorded in Q2 2023 following the repurchase and retirement of portions of these notes[145][147] Liquidity and Capital Resources Liquidity Position (in thousands) | Component | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $180,524 | $154,925 | | Short-term investments | $105,875 | $147,488 | | Total | $286,836 | $302,960 | - Net cash provided by operating activities was $25.1 million for the first six months of 2023, compared to $28.2 million in the prior year period. The change was mainly due to increases in inventories and accounts receivable, partially offset by higher customer deposits[166] - Cash from investing activities was a net inflow of $2.4 million in the first half of 2023, compared to a $26.0 million outflow in the same period of 2022. This was driven by net investment activity, partially offset by the $30.4 million cash used for the Epiluvac acquisition[167] - Financing activities used $2.0 million in cash, reflecting the net effect of issuing $223.2 million in 2029 Notes and using $219.0 million for the extinguishment of other convertible notes[168] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk exposures relate to interest rates on its investment portfolio and currency exchange rates. A 100 basis point increase in interest rates would decrease the fair value of its $105.9 million fixed-income portfolio by approximately $0.6 million. Currency exchange risk is considered immaterial as most international sales are denominated in U.S. dollars - The company's investment portfolio of fixed-income securities, valued at $105.9 million, is subject to interest rate risk. A hypothetical 100 basis point increase in interest rates would result in a $0.6 million decrease in the portfolio's fair value[172] - Sales to customers outside the U.S. accounted for approximately 78% of total net sales in Q2 2023. However, currency exchange risk is limited as only about 3% of total net sales were denominated in currencies other than the U.S. dollar[176] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023. The company is currently integrating the newly acquired Epiluvac AB business into its overall internal control over financial reporting process - The company's principal executive and financial officers evaluated and concluded that disclosure controls and procedures are effective as of June 30, 2023[178] - Following the acquisition of Epiluvac AB on January 31, 2023, the company is in the process of integrating the acquired business into its internal control over financial reporting[179] PART II—OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings arising in the normal course of business but does not believe their ultimate resolution will have a material adverse effect on its financial position, operations, or cash flows - The company does not expect that the resolution of various legal proceedings from the normal course of business will have a material adverse effect on its consolidated financial position, results of operations, or cash flows[181] Risk Factors There have been no material changes to risk factors previously disclosed, except for an update related to the company's debt facilities. The covenants and restrictions in the 2025, 2027, and 2029 Convertible Notes and the revolving credit facility may limit the company's ability to raise funds, respond to business changes, or make required cash payments upon conversion or repurchase, potentially impacting liquidity - A risk factor was updated to reflect the restrictions, covenants, and repurchase provisions of the company's current debt facilities (2025, 2027, and 2029 Notes, and revolving credit facility)[183] - These debt facilities contain covenants that may limit the ability to incur additional debt, sell assets, or merge, potentially precluding responses to changing business conditions. Failure to comply could result in default and debt acceleration[185] - The company may be required to make cash payments if holders elect to convert their notes (as is currently possible for the 2027 Notes) or upon a fundamental change, which could adversely impact liquidity if sufficient cash is not available[187] Unregistered Sales of Equity Securities and Use of Proceeds None Defaults Upon Senior Securities None Mine Safety Disclosures Not Applicable Other Information None Exhibits This section lists the exhibits filed with the report, including the Indenture for the 2029 Notes, an amendment to the Loan and Security Agreement, CEO/CFO certifications, and XBRL data files