VEECO INSTRUMENTS INC. Cautionary Statement Regarding Forward Looking Statements
Our discussion below constitutes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this Report, the words "believes," "anticipates," "expects," "estimates," "targets," "plans," "intends," "will," and similar expressions related to the future are intended to identify forward-looking statements. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results. You should not place undue reliance on any forward-looking statements, which speak only as of the dates they are made.
Executive Summary
We are an innovative manufacturer of semiconductor process equipment. Our proven ion beam, laser annealing, lithography, MOCVD and single wafer etch & clean technologies play an integral role in the fabrication and packaging of advanced semiconductor devices. With equipment designed to optimize performance, yield and cost of ownership, Veeco holds leading technology positions in the markets we serve. To learn more about Veeco's systems and service offerings, visit www.veeco.com.
COVID-19 Update
As a result of the continued COVID-19 pandemic, governmental authorities and businesses continue to implement numerous and constantly evolving measures to limit the spread of the virus, such as travel bans and restrictions, limits on gatherings, quarantines, shelter-in-place orders, vaccine mandates, and business shutdowns. We have important manufacturing operations in theU.S. andSingapore , and sales and support operations inChina ,Germany ,Japan ,Malaysia ,Philippines ,Singapore ,South Korea ,Thailand ,Taiwan and theUnited Kingdom , all of which continue to be affected by the COVID-19 pandemic. Measures providing for business shutdowns generally exclude certain essential services, and those essential services include critical infrastructure and the businesses that support that critical infrastructure. Our operations are considered part of the critical and essential infrastructure defined by applicable government authorities, and, although governmental measures to contain the pandemic may be modified or extended, our manufacturing facilities remain open. We believe our diverse product offerings and the critical nature of certain of our products for infrastructure continue to insulate us, to some extent, from the ongoing adverse effects of the pandemic; however, a prolonged economic downturn will adversely affect our customers, which could have a material adverse effect on our revenues, particularly if customers from whom we derive a significant amount of revenue reduce or delay purchases to mitigate the impacts of the pandemic or fail to make payments to us on time or at all. We serve a global and highly interconnected customer base across theAsia-Pacific region ,Europe , andNorth America . Our net sales to customers located outside ofthe United States represented approximately 70% of our total net sales for the three months endedMarch 31, 2022 , and 62% and 68% for the years endedDecember 31, 2021 and 2020, respectively, and we expect that net sales to customers outsidethe United States will continue to represent a significant percentage of our total net sales. As a result, our business will be adversely impacted by further deterioration in global economic conditions, particularly in markets inAsia andEurope . We are also seeing the effects of the macroeconomic inflationary cost environment and supply chain disruptions due to strained transportation capacity, labor shortages, and high global demand. These effects include longer lead times and increased costs. We are taking proactive steps to manage the impact on our business, including buying in advance and re-sourcing components on a more frequent basis. We continue to monitor our global supply chain and may experience additional disruptions in future periods, which could cause challenges in our ability to obtain raw materials or components required to manufacture our products.
Like many in our industry, we are managing through the effects of the COVID-19 pandemic. Although the full extent of the COVID-19 pandemic's impact on our business, results of operations, supply chain, and growth cannot be predicted
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or quantified, we proactively identified potential challenges to our business
and have been executing business continuity activities to manage disruptions in
our business and continue to provide critical infrastructure to our customers.
In response to the pandemic, we continue or intend to take the following steps,
among others, to keep our employees safe, minimize the spread of the virus, and
serve our customers:
maintain flexible health and safety protocols in response to local
? circumstances at our manufacturing facilities, including extensively and
frequently disinfecting our facilities and providing protective equipment;
? continue remote working arrangements for employees that do not need to be
physically present on the manufacturing floor or at customer facilities;
implement virtual meetings, customer demos, and factory acceptances where
? feasible to enable customers to review data and performance of their system in
our factory remotely via live video;
? perform service and support activities remotely where feasible to resolve
customer issues and enable our customers to maintain their operations;
proactively identify gaps in our supply chain and re-source components in order
? to maintain our customer shipment commitments and mitigate single points of
failure;
monitor our IT systems and implementing contingency and disaster recovery plans
? to support our IT infrastructure to ensure that our systems remain continuously
operative; and
? continue to monitor and, if necessary, reduce our operating expenses and
capital expenditures to maintain financial flexibility and profit margins.
While these steps have been effective so far, there could be additional challenges ahead that may impact either our operations or those of our customers, which could have a negative effect on our financial performance, including productivity and capacity impacts as a result of the ongoing pandemic. We expect these measures to continue until we determine that the COVID-19 pandemic is adequately contained for the purposes of our business, and we may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers and suppliers. As a result, we may incur additional expenses in future periods in response to the pandemic, which could adversely affect our financial position, results of operations, or cash flows. In addition, we may revise our approach to these initiatives or take additional actions to meet the needs of our employees and customers, and mitigate the impact of the pandemic on our business.
Business Update
We categorize our revenue by the end-markets into which we sell. Our four end-markets are: Semiconductor; Compound Semiconductor; Data Storage; and Scientific & Other.
Sales in the Semiconductor market grew significantly both from the prior quarter and from the year ago quarter, driven by our laser annealing systems for logic devices, lithography systems for Advanced Packaging and multipleIon Beam deposition chambers for EUV mask blanks. We continue to build momentum for our laser annealing solutions with advanced node logic customers and have been named production tool of record for an application step with a third leading-edge logic customer. We continue to innovate and have been working with DRAM manufacturers and existing logic customers on their next manufacturing nodes. We also continue to deliver our laser annealing systems to trailing node logic manufacturers. Our lithography systems for Advanced Packaging are aligned with longer-term growth of FOWLP and other Advanced Packaging applications. We view our AP lithography product line as a key enabler for our customers as they seek to improve device performance. Additionally, the ongoing adoption of EUV Lithography for advanced node, semiconductor manufacturing continues to drive demand for our mask blank systems. During the first quarter, we announced that a third customer has entered the EUV mask blank market by ordering an ion beam deposition system from us. Overall, our technology and market strategy are well aligned with trends such as artificial intelligence, 28
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mobile connectivity and high-performance computing that drive the Semiconductor market. We expect continued growth in this market.
We address the Compound Semiconductor market with a broad portfolio of technologies including primarily Wet Processing and MOCVD, along with MBE andIon Beam , all of which have been developed to support emerging applications such as 5G driven RF device/filter manufacturing, Gallium Nitride power electronics, and photonics applications including edge-emitting lasers and micro-LEDs. Sales in the Compound Semiconductor market increased over the prior quarter and from the year ago quarter. We shipped systems for RF Devices, power electronics and micro-LED applications such as augmented & virtual reality and large displays, and we expect future growth to come from MOCVD and other system shipments in the Photonics market. Sales in the Data Storage market have been growing for several years, primarily driven by shipments ofIon Beam systems. Demand for ourIon Beam products was driven by cloud-based storage growth. In order to be successful, hard disk drive manufacturers are required increase drive capacity by manufacturing drives with an increasing number of heads and increasing aerial density. After multiple years of customers accelerating their capacity additions, we expect a period of slowing capacity adds by our data storage customers, resulting in an expected revenue decline in our data storage business in 2022 from recent levels. With data proliferation forecasted to continue to grow, however, we feel confident about the long-term prospects of our Data Storage business and are optimistic 2023 will be a growth year. Sales in the Scientific & Other market are largely driven by sales to governments, universities, and research institutions. Revenue increased both over the prior quarter and from the year ago quarter. We are seeing near term strength due to pent-up demand in this market, but expect long-term growth to be in line with GDP. Macroeconomic challenges across the industry, including in particular supply chain constraints, have been well publicized. Parts shortages have required that we plan further ahead than usual, and we have undertaken efforts to increase our purchase commitments to secure critical components in a timely manner. While we have been able to meet our financial targets for the quarter and fulfil our customers' most critical demands, material lead times continue to be a challenge with respect to our supply chain, limiting our ability to fulfil some of our customers' demands in a timely manner, as many of our peers have also been experiencing. Additionally, we are experiencing increasing labor, logistics, and material costs, creating additional gross margin pressures. We expect supply shortages and related challenges to persist during 2022, and we continue to monitor our supply chain and work with our suppliers to identify and mitigate potential gaps in an effort to ensure continuity of supply. Overall, given strong backlog in our semiconductor and compound semiconductor markets, along with our customer engagements and order activity, we continue to expect revenue growth in 2022, despite the ongoing supply chain challenges, as we make progress toward our long-term financial target model. 29 Table of Contents Results of Operations
For the three months ended
The following table presents revenue and expense line items reported in our
Consolidated Statements of Operations for the indicated periods in 2022 and 2021
and the period-over-period dollar and percentage changes for those line items.
Our results of operations are reported as one business segment, represented by
our single operating segment.
Three Months Ended March 31, Change
2022 2021 Period to Period
(dollars in thousands)
Net sales $ 156,426 100% $ 133,714 100% $ 22,712 17%
Cost of sales 90,413 58% 78,800 59% 11,613 15%
Gross profit 66,013 42% 54,914 41% 11,099 20%
Operating expenses, net:
Research and development 24,117 15% 21,844 16% 2,273 10%Selling, general, and administrative 22,894 15% 20,255 15%
2,639 13%
Amortization of intangible assets 2,504 2% 3,354 3% (850) (25)%
Other operating expense (income), net (19) - 46 - (65) *
Total operating expenses, net 49,496 32% 45,499 34% 3,997 9%
Operating income 16,517 11% 9,415 7% 7,102 75%
Interest income (expense), net (2,803) (2)% (6,623) (5)% 3,820 (58)%
Income before income taxes 13,714 9% 2,792 2% 10,922 *
Income tax expense (benefit) 384 - 298 - 86 29% Net income$ 13,330 9%$ 2,494 2%$ 10,836 * * Not meaningful Net Sales
The following is an analysis of sales by market and by region:
Three Months Ended March 31, Change
2022 2021 Period to Period
(dollars in thousands)
Sales by end-market
Semiconductor $ 77,620 49% $ 51,631 39% $ 25,989 50%
Compound Semiconductor 37,109 24% 24,751 18% 12,358 50%
Data Storage 21,595 14% 40,980 31% (19,385) (47)%
Scientific & Other 20,102 13% 16,352 12% 3,750 23%
Total $ 156,426 100% $ 133,714 100% $ 22,712 17%
Sales by geographic region
United States $ 47,471 30% $ 45,162 34% $ 2,309 5%
EMEA 21,425 14% 13,625 10% 7,800 57%
China 30,381 19% 20,007 15% 10,374 52%
Rest of APAC 56,922 37% 54,877 41% 2,045 4%
Rest of World 227 - 43 - 184 *
Total $ 156,426 100% $ 133,714 100% $ 22,712 17%
* Not meaningful
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Sales increased for the three months ended March 31, 2022 against the comparable
prior year period, primarily in the Semiconductor and Compound Semiconductor
markets, partially offset by a decline in the Data Storage market. By geography,
sales increased across all regions. Sales in the Rest of APAC region for the
three months ended March 31, 2022 included sales in Singapore and Taiwan of
$23.9 million and $17.2 million , respectively. Sales in the Rest of APAC region
for the three months ended March 31, 2021 included sales in Taiwan , South Korea ,
and Thailand of $18.6 million , $10.8 million , and $9.2 million , respectively. We
expect there will continue to be year-to-year variations in our future sales
distribution across markets and geographies. In light of the global nature of
our business, we are impacted by conditions in the various countries in which we
and our customers operate.
Gross Profit
For the three months ended March 31, 2022 , gross profit increased against the
comparable prior period primarily due to an increase in sales volume, as well as
a slight increase in gross margins. Gross margins increased principally due to
product and region mix of sales in the period, partially offset by increased
logistics costs, as well as an increase in spending as we invested in service
infrastructure and capacity expansion to meet the growing demands for our
semiconductor product lines and supporting our evaluation systems at customers.
We expect our gross margins to fluctuate each period due to product mix and
other factors.
Research and Development
The markets we serve are characterized by continuous technological development and product innovation, and we invest in various research and development initiatives to maintain our competitive advantage and achieve our growth objectives. Research and development expenses increased for the three months endedMarch 31, 2022 against the comparable prior period primarily due to personnel-related expenses as we invest in new research and development and additional applications for our technology in order to be well positioned to capitalize on emerging global megatrends and support longer term growth in Semiconductor and Compound Semiconductor markets. However, expenses as a percentage of revenue have decreased when compared to the prior period.
Selling, General, and Administrative
Selling, general, and administrative expenses increased for the three months endedMarch 31, 2022 against the comparable prior period primarily due to higher variable expenses associated with the increase in revenue, profitability, and order in-take. However, expenses as a percentage of revenue have remained flat when compared to the prior year period. Given the uncertainty regarding the impacts on our business resulting from the COVID-19 pandemic, we are focused on the proactive management of expenses. In future periods, we may incur additional selling, general and administrative expenses to support our responses to the COVID-19 pandemic. In addition, we are currently experiencing duplicate operating expenses for the transition from our existing facility inSan Jose, California to our new leased facility, and will continue to do so until this transition is completed over the next several quarters.
Amortization Expense
Amortization expense decreased compared to the comparable prior year period primarily due to changes in amortization expense to reflect expected cash flows of certain intangible assets, as well as certain other intangible assets becoming fully amortized in 2021.
Interest Income (Expense)
We recorded net interest expense of$2.8 million for the three months endedMarch 31, 2022 , compared to$6.6 million for the comparable prior year period. The decrease in interest expense was primarily related to the adoption of ASU 2020-06, as non-cash charges related to the amortization of debt discount and transaction costs of the 2023 Notes, 2025 Notes, and 2027 Notes decreased approximately$3.3 million for the three months endedMarch 31, 2022 against the comparable prior period. Additionally, cash interest expense on the Notes decreased approximately$0.8 million from the comparable prior period due to the partial repurchase of the 2023 Notes inNovember 2021 . 31 Table of Contents Income Taxes At the end of each interim reporting period, we estimate the effective income tax rate expected to be applicable for the full year. This estimate is used to determine the income tax provision or benefit on a year-to-date basis and may change in subsequent interim periods. Our tax expense for the three months endedMarch 31, 2022 was$0.4 million , compared to$0.3 million for the comparable prior year period. The 2022 tax expense included an expense of$0.3 million related to our non-U.S. operations and$0.1 million related to our domestic operations, compared to the comparable period in 2021 when the expense included a$0.2 million expense related to our non-U.S. operations and$0.1 million related to our domestic operations. For the three months endedMarch 31, 2022 and 2021, the Company'sU.S. deferred tax assets are fully offset by a valuation allowance since the Company cannot conclude that it is more likely than not that these future benefits will be realized. The domestic tax expense for both periods is primarily attributable to the tax amortization of indefinite-lived intangible assets that is not available to offsetU.S. deferred tax assets. The foreign tax expense for both periods is primarily attributable to non-U.S operations profits and foreign withholding taxes on unremitted earnings, offset by the amortization of intangible assets.
Liquidity and Capital Resources
Our cash and cash equivalents, restricted cash, and short-term investments are
as follows:
March 31, December 31,
2022 2021
(in thousands)
Cash and cash equivalents $ 127,624 $ 119,747
Restricted cash 688 725
Short-term investments 103,277 104,181
Total $ 231,589 $ 224,653 AtMarch 31, 2022 andDecember 31, 2021 , cash and cash equivalents of$52.5 million and$38.3 million , respectively, were held outsidethe United States . As ofMarch 31, 2022 , we had$14.3 million of accumulated undistributed earnings generated by our non-U.S. subsidiaries for which theU.S. repatriation tax has been provided and did not require the use of cash due to the use of net operating loss carryforwards. Approximately$5.7 million of undistributed earnings will be subject to foreign withholding taxes if distributed back tothe United States . We believe that our projected cash flow from operations, combined with our cash and short-term investments, will be sufficient to meet our projected working capital requirements, contractual obligations, and other cash flow needs for the next twelve months, including scheduled interest payments on our convertible senior notes, purchase commitments, and payments in respect of operating leases. Although there is uncertainty related to the anticipated impact of the COVID-19 outbreak on our future results, we believe our business model, our current cash and short-term investments, and our proactive management of expenses, leave us well-positioned to manage our business through this crisis as it continues
to
unfold.
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A summary of the cash flow activity for the three months ended
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