Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-16244
VEECO INSTRUMENTS INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
11-2989601
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
Terminal DrivePlainview, New York
11803
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s telephone number, including area code:
(516) 677-0200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
VECO
The NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).Yes ☒ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 1, 2023, there were 56,345,525 shares of the registrant’s common stock outstanding.
INDEX
Safe Harbor Statement
1
PART I—FINANCIAL INFORMATION
4
Item 1. Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
30
Item 3. Quantitative and Qualitative Disclosures about Market Risk
38
Item 4. Controls and Procedures
39
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
41
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
42
SIGNATURES
43
This quarterly report on Form 10-Q (the “Report”) contains 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. Discussions containing such forward-looking statements may be found in Part I - Items 1, 2, and 3 hereof, as well as within this Report generally. In addition, 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.
In addition, the preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates and assumptions are based on knowledge of current events, including the potential impact of the COVID-19 pandemic on our business, and planned actions to be undertaken in the future, they may ultimately differ from actual results. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. All estimates and assumptions are subject to a number of risks and uncertainties that could cause actual results to differ materially from these estimates and assumptions.
The risks and uncertainties of Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco,” the “Company,” “we,” “us,” and “our,” unless the context indicates otherwise) include, without limitation, those set forth under the heading “Risk Factors” in Part 1, Item 1A of our 2022 Form 10-K, and the following:
Risks Related to Our Business and Industry
Risks Associated with Operating a Global Business
Risks Related to Intellectual Property and Cybersecurity
Financial, Accounting, and Capital Markets Risks
2
General Risk Factors
Consequently, such forward looking statements and estimates should be regarded solely as the current plans and beliefs of Veeco. We do not undertake any obligation to update any forward looking statements to reflect future events or circumstances after the date of such statements.
3
Veeco Instruments Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share amounts)
June 30,
December 31,
2023
2022
Assets
(unaudited)
Current assets:
Cash and cash equivalents
$
180,524
154,925
Restricted cash
437
547
Short-term investments
105,875
147,488
Accounts receivable, net
130,140
124,221
Contract assets
20,490
16,507
Inventories
244,470
206,908
Prepaid expenses and other current assets
27,218
18,305
Total current assets
709,154
668,901
Property, plant, and equipment, net
111,993
107,281
Operating lease right-of-use assets
25,611
26,467
Intangible assets, net
48,192
23,887
Goodwill
214,964
181,943
Deferred income taxes
115,314
116,349
Other assets
3,219
3,355
Total assets
1,228,447
1,128,183
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
63,212
52,049
Accrued expenses and other current liabilities
61,823
56,031
Customer deposits and deferred revenue
156,700
127,223
Income taxes payable
563
2,432
Current portion of long-term debt
—
20,169
Total current liabilities
282,298
257,904
6,878
1,285
Long-term debt
274,335
254,491
Long-term operating lease liabilities
32,838
33,581
Other liabilities
19,498
3,098
Total liabilities
615,847
550,359
Stockholders' equity:
Preferred stock, $0.01 par value; 500,000 shares authorized; no shares issued and outstanding.
Common stock, $0.01 par value; 120,000,000 shares authorized; 56,337,933 shares issued and outstanding at June 30, 2023 and 51,660,409 shares issued and outstanding at December 31, 2022
564
517
Additional paid-in capital
1,189,051
1,078,180
Accumulated deficit
(578,380)
(501,801)
Accumulated other comprehensive income
1,365
928
Total stockholders' equity
612,600
577,824
Total liabilities and stockholders' equity
See accompanying Notes to the Consolidated Financial Statements.
Consolidated Statements of Operations
(in thousands, except per share amounts)
Three months ended June 30,
Six months ended June 30,
Net sales
161,641
163,999
315,145
320,425
Cost of sales
94,131
99,732
185,618
190,146
Gross profit
67,510
64,267
129,527
130,279
Operating expenses, net:
Research and development
27,384
26,016
54,945
50,133
Selling, general, and administrative
23,822
22,950
46,449
45,844
Amortization of intangible assets
2,123
2,505
4,235
5,009
Other operating expense (income), net
493
(27)
404
(47)
Total operating expenses, net
53,822
51,444
106,033
100,939
Operating income
13,688
12,823
23,494
29,340
Interest income
2,420
213
4,494
302
Interest expense
(3,052)
(2,848)
(5,928)
(5,740)
Other income (expense), net
(97,091)
Income (loss) before income taxes
(84,035)
10,188
(75,031)
23,902
Income tax expense (benefit)
533
1,548
917
Net income (loss)
(85,320)
9,655
(76,579)
22,985
Income (loss) per common share:
Basic
(1.61)
0.19
(1.48)
0.46
Diluted
0.18
0.43
Weighted average number of shares:
52,861
49,697
51,764
49,702
59,455
59,521
5
Consolidated Statements of Comprehensive Income
(in thousands)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available-for-sale securities
(224)
470
(1,043)
Change in currency translation adjustments
(39)
(48)
(33)
(51)
Total other comprehensive income (loss), net of tax
(272)
(1,094)
Total comprehensive income (loss)
(85,359)
9,383
(76,142)
21,891
6
Consolidated Statements of Cash Flows
Cash Flows from Operating Activities
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization
12,435
12,749
Non-cash interest expense
514
477
778
(18)
Share-based compensation expense
14,959
10,759
Loss on extinguishment of debt
97,091
Provision for bad debts
490
Changes in operating assets and liabilities:
Accounts receivable and contract assets
(10,145)
(16,346)
(44,540)
(5,873)
(5,633)
8,231
Accounts payable and accrued expenses
9,099
(17,613)
29,048
11,424
Income taxes receivable and payable, net
(1,869)
(263)
Other, net
(513)
1,657
Net cash provided by (used in) operating activities
25,135
28,169
Cash Flows from Investing Activities
Capital expenditures
(10,836)
(15,420)
Acquisition of businesses, net of cash acquired
(30,373)
Proceeds from the sale of investments
112,895
23,335
Payments for purchases of investments
(69,320)
(33,876)
Net cash provided by (used in) investing activities
2,366
(25,961)
Cash Flows from Financing Activities
Proceeds from issuance of 2029 Notes, net of issuance costs
223,202
Extinguishment of Convertible Notes
(218,991)
Proceeds (net of tax withholdings) from option exercises and employee stock purchase plan
2,619
2,129
Restricted stock tax withholdings
(8,801)
(7,115)
Net cash provided by (used in) financing activities
(1,971)
(4,986)
Effect of exchange rate changes on cash and cash equivalents
(41)
Net increase (decrease) in cash, cash equivalents, and restricted cash
25,489
(2,829)
Cash, cash equivalents, and restricted cash - beginning of period
155,472
120,472
Cash, cash equivalents, and restricted cash - end of period
180,961
117,643
Supplemental Disclosure of Cash Flow Information
Interest paid
6,628
5,037
Income taxes paid
2,983
1,083
Non-cash activities
Capital expenditures included in accounts payable and accrued expenses
3,938
6,464
Net transfer of inventory to property, plant and equipment
4,328
237
Right-of-use assets obtained in exchange for lease obligations
630
258
7
Notes to the Consolidated Financial Statements
Note 1 — Basis of Presentation
The accompanying unaudited Consolidated Financial Statements of Veeco have been prepared in accordance with U.S. GAAP as defined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 270 for interim financial information and with the instructions to Rule 10-01 of Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements as the interim information is an update of the information that was presented in Veeco’s most recent annual financial statements. For further information, refer to Veeco’s Consolidated Financial Statements and Notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”). In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal, recurring nature.
Veeco reports interim quarters on a 13-week basis ending on the last Sunday of each quarter. The fourth quarter always ends on the last day of the calendar year, December 31. The 2023 interim quarters end on April 2, July 2, and October 1, and the 2022 interim quarters ended on April 3, July 3, and October 2. These interim quarters are reported as March 31, June 30, and September 30 in Veeco’s interim consolidated financial statements.
The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, actual results may differ from these estimates.
Revenue Recognition
Revenue is recognized upon the transfer of control of the promised product or service to the customer in an amount that reflects the consideration the Company expects to receive in exchange for such product or service. The Company’s contracts with customers generally do not contain variable consideration. In the rare instances where variable consideration is included, the Company estimates the amount of variable consideration and determines what portion of that, if any, has a high probability of significant subsequent revenue reversal, and if so, that amount is excluded from the transaction price. The Company’s contracts with customers frequently contain multiple deliverables, such as systems, upgrades, components, spare parts, installation, maintenance, and service plans. Judgment is required to properly identify the performance obligations within a contract and to determine how the revenue should be allocated among the performance obligations. The Company also evaluates whether multiple transactions with the same customer or related parties should be considered part of a single contract based on an assessment of whether the contracts or agreements are negotiated or executed within a short time frame of each other or if there are indicators that the contracts are negotiated in contemplation of one another.
When there are separate units of accounting, the Company allocates revenue to each performance obligation on a relative stand-alone selling price basis. The stand-alone selling prices are determined based on the prices at which the Company separately sells the systems, upgrades, components, spare parts, installation, maintenance, and service plans. For items that are not sold separately, the Company estimates stand-alone selling prices generally using an expected cost plus margin approach.
Most of the Company’s revenue is recognized at a point in time when the performance obligation is satisfied. The Company considers many facts when evaluating each of its sales arrangements to determine the timing of revenue recognition, including its contractual obligations and the nature of the customer’s post-delivery acceptance provisions. The Company’s system sales arrangements, including certain upgrades, generally include field acceptance provisions that may include functional or mechanical test procedures. For many of these arrangements, a customer source inspection of the system is performed in the Company’s facility, test data is sent to the customer documenting that the system is functioning to the agreed upon specifications prior to delivery, or other quality assurance testing is performed
8
Notes to the Consolidated Financial Statements - continued
internally to ensure system functionality prior to shipment. Historically, such source inspection or test data replicates the field acceptance provisions that are performed at the customer’s site prior to final acceptance of the system. When the Company objectively demonstrates that the criteria specified in the contractual acceptance provisions are achieved prior to delivery either through customer testing or the Company’s historical experience of its tools meeting specifications, transfer of control of the product to the customer is considered to have occurred and revenue is recognized upon system delivery since there is no substantive contingency remaining related to the acceptance provisions at that date. For new products, new applications of existing products, or for products with substantive customer acceptance provisions where the Company cannot objectively demonstrate that the criteria specified in the contractual acceptance provisions have been achieved prior to delivery, revenue and the associated costs are deferred. The Company recognizes such revenue and costs upon obtaining objective evidence that the acceptance provisions can be achieved, assuming all other revenue recognition criteria have been met.
In certain cases the Company’s contracts with customers contain a billing retention, which is billed by the Company and payable by the customer when field acceptance provisions are completed. Revenue recognized in advance of the amount that has been billed is recorded as a contract asset on the Consolidated Balance Sheets.
The Company recognizes revenue related to maintenance and service contracts over time based upon the respective contract term. Installation revenue is recognized over time as the installation services are performed. The Company recognizes revenue from the sales of components, spare parts, and specified service engagements at a point in time, which is typically consistent with the time of delivery in accordance with the terms of the applicable sales arrangement.
The Company may receive customer deposits on system transactions. The timing of the transfer of goods or services related to the deposits is either at the discretion of the customer or generally expected to be within one year from the deposit receipt. As such, the Company does not adjust transaction prices for the time value of money. Incremental direct costs incurred related to the acquisition of a customer contract, such as sales commissions, are expensed as incurred since the expected amortization period is one year or less.
The Company has elected to treat shipping and handling costs as a fulfillment activity, and the Company includes such costs in cost of sales when the Company recognizes revenue for the related goods. Taxes assessed by governmental authorities that are collected by the Company from a customer are excluded from revenue.
Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Each quarter the Company assesses the valuation and recoverability of all inventories: materials (raw materials, spare parts, and service inventory); work-in-process; and finished goods. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its estimated net realizable value if less than cost. The Company evaluates usage requirements by analyzing historical usage, anticipated demand, alternative uses of materials, and other qualitative factors. Unanticipated changes in demand for the Company’s products may require a write down of inventory, which would be reflected in cost of sales in the period the revision is made. Inventory acquired as part of a business combination is recorded at fair value on the date of acquisition.
9
Note 2 — Income Per Common Share
Basic income per share is calculated by dividing net income by the weighted average number of shares outstanding during the period. Diluted income per share is calculated by dividing net income available to common shareholders by the weighted average number of shares used to calculate basic income per share plus the weighted average number of common share equivalents outstanding during the period. The dilutive effect of outstanding options to purchase common stock and share-based awards is considered in diluted income per share by application of the treasury stock method. The dilutive effect of performance share units is included in diluted income per common share if the performance targets have been achieved, or would have been achieved if the reporting date was the end of the contingency period. Finally, the Company includes the dilutive effect of shares issuable upon conversion of its Notes in the calculation of diluted income per share using the if-converted method. The Company has the option for the 2025 and 2027 Notes to settle the conversion value in any combination of cash or shares, and as such, the maximum number of shares issuable are included in the dilutive share count if the effect would be dilutive. The Company must settle the principal amount of the 2029 Notes in cash, and has the option to settle any excess of the conversion value over the principal amount in any combination of cash or shares. As such, the Company only includes the excess shares that may be issuable above the principal amount of the 2029 Notes in the dilutive share count, if the effect would be dilutive.
The computations of basic and diluted income per share for the three and six months ended June 30, 2023 and 2022 are as follows:
Numerator:
Interest expense associated with convertible notes
1,273
2,546
Net income (loss) available to common shareholders
10,928
25,531
Denominator:
Basic weighted average shares outstanding
Effect of potentially dilutive share-based awards
816
877
Dilutive effect of convertible notes
8,942
Diluted weighted average shares outstanding
Net income per common share:
Common share equivalents excluded from the diluted weighted average shares outstanding since the Company incurred a net loss and their effect would be antidilutive
838
N/A
674
Potentially dilutive shares excluded from the diluted calculation as their effect would be antidilutive
743
987
763
645
Potential shares to be issued for settlement of the convertible notes excluded from the diluted calculation as their effect would be antidilutive
8,868
6,025
11,722
10
Note 3 — Business Combination
Epiluvac
On January 31, 2023, the Company acquired Epiluvac AB, a privately held manufacturer of chemical vapor deposition (CVD) epitaxy systems that enable silicon carbide (SiC) applications in the electric vehicle market. This acquisition is expected to accelerate penetration into the emerging, high-growth SiC equipment market. The results of Epiluvac’s operations have been included in the consolidated financial statements since the date of acquisition.
The acquisition date fair value of the consideration totaled $56.4 million, net of cash acquired, which consisted of the following:
Acquisition Date
(January 31, 2023)
Cash paid, net of cash acquired
30,373
Contingent consideration
26,055
Acquisition date fair value
56,428
The purchase agreement included performance milestones that, if achieved, could trigger additional payments to the original selling shareholders. The aggregate fair value of the contingent consideration arrangement at the acquisition date was $26.1 million. During the three months ended June 30, 2023, the Company recognized approximately $0.3 million of additional contingent consideration, for total contingent consideration of $26.4 million as of June 30, 2023, of which $9.8 million was included in “Accrued expenses and other current liabilities” and $16.6 million was included within “Other liabilities” on the Consolidated Balance Sheet as of June 30, 2023. The contingent arrangements include payments up to $15.0 million based on the timely completion of certain defined milestones tied to strategic targets, and up to $20.0 million based on the percentage of orders received during the defined Earn-out period. The Earn-out period is four years after the closing date of the acquisition, or earlier if certain conditions are met.
The Company estimated the fair value of the contingent consideration by assigning probabilities and discount factors to each of the various defined performance milestones, while using a Monte-Carlo simulation model to determine the most likely outcome for payments to be based on value of orders received. These fair value measurements are based on significant inputs not observable in the market and thus represent a Level 3 measurement as defined in ASC 820. The discount rate used was 5.54% for the strategic target and order value related contingent payments. The rate was determined based on the nature of the milestone, the risks and uncertainties involved and the time period until the milestone was measured. The determination of the various probabilities and discount factors is highly subjective, requires significant judgment and is influenced by a number of factors, including the adoption of SiC technology. While the use of SiC is expected to grow in the near future, it is difficult to predict the rate at which SiC will be adopted by the market and thus would impact the sales of our equipment.
11
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
Accounts receivable
247
391
Prepaid expense and other current assets
381
Property, plant, and equipment
736
Intangible assets
28,540
Total identifiable assets acquired
30,295
656
429
5,723
80
Total liabilities assumed
6,888
Net identifiable assets acquired
23,407
33,021
Net assets acquired
The gross contractual value of the acquired accounts receivable is the amount expected to be collected by the Company, and therefore is also considered its fair value. Goodwill generated from the acquisition is primarily attributed to expected synergies from future growth and strategic advantages provided through the expansion of product offerings as well as assembled workforce and is not expected to be deductible for income tax purposes.
The classes of intangible assets acquired, and the estimated useful life of each class is presented in the table below:
Amount
Useful life
Technology
28,020
15
years
Customer relationships
460
Backlog
60
1.5
Intangible assets acquired
The Company determined the estimated fair value of the identifiable intangible assets based on various factors including cost, discounted cash flow, income method, loss-of-revenue/income method, and relief-from-royalty method in determining the purchase price allocation.
For the three and six months ended June 30, 2023, the Company incurred approximately $0.2 million and $0.9 million, respectively, of acquisition related costs, included within “Selling, general, and administrative” in the Consolidated Statement of Operations. Epiluvac’s results of operations were immaterial to the Company’s Consolidated Statement of Operations for the three and six months ended June 30, 2023. Additionally, the pro forma Consolidated Statement of Operations as if Epiluvac had been acquired as of January 1, 2022 would not be materially different from the Company’s actual Consolidated Statement of Operations for the three and six months ended June 30, 2023 or 2022.
12
Note 4 — Assets
Investments
Short-term investments are generally classified as available-for-sale and reported at fair value, with unrealized gains and losses, net of tax, presented as a separate component of stockholders’ equity under the caption “Accumulated other comprehensive income” in the Consolidated Balance Sheets. These securities may include U.S. treasuries, government agency securities, corporate debt, and commercial paper, all with maturities of greater than three months when purchased. All realized gains and losses and unrealized losses resulting from declines in fair value that are other than temporary are included in “Other operating expense (income), net” in the Consolidated Statements of Operations.
Fair value is the price that would be received for an asset or the amount paid to transfer a liability in an orderly transaction between market participants. Veeco classifies certain assets based on the following fair value hierarchy:
Level 1: Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and
Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Veeco has evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions or estimation methodologies could have a significant effect on the estimated fair value amounts.
13
The following table presents the portion of Veeco’s assets that were measured at fair value on a recurring basis at June 30, 2023 and December 31, 2022:
Level 1
Level 2
Level 3
Total
June 30, 2023
Cash equivalents
Certificate of deposits and time deposits
57,432
Commercial paper
11,475
Money market cash
50,846
108,278
119,753
U.S. treasuries
12,041
Government agency securities
60,054
Corporate debt
13,020
20,760
93,834
December 31, 2022
61,135
405
61,540
62,849
27,366
41,591
15,682
84,639
There were no transfers between fair value measurement levels during the three and six months ended June 30, 2023.
14
At June 30, 2023 and December 31, 2022, the amortized cost and fair value of available-for-sale securities consist of:
Gross
Amortized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
12,133
(92)
60,262
(208)
13,108
(88)
106,263
(388)
63,331
(482)
27,464
(98)
42,006
(415)
148,483
(995)
Available-for-sale securities in a loss position at June 30, 2023 and December 31, 2022 consist of:
Continuous Loss Position
for Less than 12 Months
for 12 Months or More
4,681
(4)
7,361
60,053
8,312
(21)
4,708
(67)
73,046
(233)
12,069
(155)
39,791
(84)
23,057
(398)
22,528
(86)
4,838
(12)
19,693
(138)
21,898
(277)
82,012
(308)
49,793
(687)
The contractual maturities of securities classified as available-for-sale at June 30, 2023 were as follows:
Due in one year or less
99,537
99,192
Due after one year through two years
6,726
6,683
Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. There were no realized gains or losses, or unrealized losses from declines in fair value that are other than temporary, for the six months ended June 30, 2023 and 2022.
Accounts Receivable
Accounts receivable is presented net of an allowance for doubtful accounts of $1.0 million and $0.7 million at June 30, 2023 and December 31, 2022 respectively. The Company considered its current expectations of future economic conditions when estimating its allowance for doubtful accounts.
Inventories at June 30, 2023 and December 31, 2022 consist of the following:
Materials
152,494
134,940
Work-in-process
80,446
68,765
Finished goods
11,530
3,203
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets primarily consist of supplier deposits, prepaid value-added tax, lease deposits, prepaid insurance, prepaid licenses, and other receivables. The Company had deposits with its suppliers of $13.4 million and $9.4 million at June 30, 2023 and December 31, 2022, respectively.
Property, Plant, and Equipment
Property, plant, and equipment at June 30, 2023 and December 31, 2022 consist of the following:
Land
5,061
Building and improvements
64,151
64,198
Machinery and equipment (1)
166,764
155,533
Leasehold improvements
55,008
54,764
Gross property, plant, and equipment
290,984
279,556
Less: accumulated depreciation and amortization
178,991
172,275
Net property, plant, and equipment
For the three and six months ended June 30, 2023, depreciation expense was $4.0 million and $8.2 million, respectively, and $4.0 million and $7.7 million, respectively, for the comparable 2022 periods.
16
Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. The following table presents the changes in goodwill balances for the six months ended June 30, 2023:
Gross carrying
Accumulated
amount
impairment
Net amount
Balance at December 31, 2022
430,331
248,388
Acquisition
Balance at June 30, 2023
463,352
Intangible Assets
Intangible assets consist of purchased technology, customer relationships, patents, trademarks and tradenames, licenses, and backlog, and are initially recorded at fair value. Long-lived intangible assets are amortized over their estimated useful lives in a method reflecting the pattern in which the economic benefits are consumed or amortized on a straight-line basis if such pattern cannot be reliably determined. The Company continues to assess potential triggering events related to the value of its intangible assets and concluded that there were no indicators of impairment during the three and six months ended June 30, 2023.
The components of purchased intangible assets were as follows:
Amortization
Carrying
and
Net
Impairment
355,928
319,420
36,508
327,908
316,918
10,990
146,925
136,528
10,397
146,465
135,415
11,050
Trademarks and tradenames
30,910
29,666
1,244
29,063
1,847
Other
3,746
3,703
3,686
537,509
489,317
508,969
485,082
Other intangible assets primarily consist of patents, licenses, and backlog.
17
Note 5 — Liabilities
Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities at June 30, 2023 and December 31, 2022 consist of:
Payroll and related benefits
21,358
30,044
9,791
Warranty
8,577
8,601
Operating lease liabilities
3,615
3,333
Interest
1,351
2,853
Professional fees
3,443
2,102
Sales, use, and other taxes
2,708
2,027
10,980
7,071
Warranties are typically valid for one year from the date of system final acceptance. The Company estimates the costs that may be incurred under the warranty which are determined by analyzing specific product and historical configuration statistics and regional warranty support costs and are affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. Changes in product warranty reserves for the six months ended June 30, 2023 include:
Balance - December 31, 2022
Warranties issued
3,084
Addition from Epiluvac acquisition
49
Consumption of reserves
(3,484)
Changes in estimate
327
Balance - June 30, 2023
Customer Deposits and Deferred Revenue
Customer deposits totaled $136.6 million and $110.2 million at June 30, 2023 and December 31, 2022, respectively. Deferred revenue represents amounts billed, other than deposits, in excess of the revenue that can be recognized on a particular contract at the balance sheet date. Changes in deferred revenue were as follows:
16,990
Deferral of revenue
8,241
Recognition of unearned revenue
(5,111)
20,120
18
As of June 30, 2023, the Company has approximately $274.8 million of remaining performance obligations on contracts with an original estimated duration of one year or more, of which approximately 66% is expected to be recognized within one year, with the remaining amounts expected to be recognized between one to three years. The Company has elected to exclude disclosures regarding remaining performance obligations that have an original expected duration of one year or less.
Convertible Senior Notes
2023 Notes
On January 10, 2017, the Company issued $345.0 million of 2.70% convertible senior unsecured notes due 2023 (the “2023 Notes”). The Company received net proceeds, after deducting underwriting discounts and fees and expenses payable by the Company, of approximately $335.8 million. The 2023 Notes bear interest at a rate of 2.70% per year, payable semiannually in arrears on January 15 and July 15 of each year, commencing on July 15, 2017. The 2023 Notes had a maturity date of January 15, 2023, unless earlier purchased by the Company, redeemed, or converted.
On May 18, 2020, in connection with the completion of a private offering of $125.0 million aggregate principal amount of 3.75% convertible senior notes due 2027 described below, the Company repurchased and retired approximately $88.3 million in aggregate principal amount of its outstanding 2023 Notes, with a carrying amount of $78.1 million, for approximately $81.2 million of cash.
Additionally, on November 11, 2020, the Company entered into a privately negotiated exchange agreement with a holder of its outstanding 2023 Notes, under which the Company agreed to retire $125.0 million in aggregate original principal amount of the 2023 Notes, with a carrying amount of $113.1 million, in exchange for the issuance of $132.5 million in aggregate principal amount of new 3.50% convertible senior notes due 2025 described below, which had a fair value that approximated the principal amount of new notes issued.
Finally, on November 5, 2021, the Company entered into a privately negotiated note purchase agreement with a holder of its outstanding 2023 Notes, under which the Company agreed to repurchase and retire approximately $111.5 million in aggregate original principal amount of the 2023 Notes, with a carrying amount of $105.5 million, for cash consideration of approximately $115.6 million, and approximately $1.0 million of accrued and unpaid interest.
The 2023 notes that remained outstanding matured on January 15, 2023 and were paid in cash and settled by the Company at that time.
2025 Notes
On November 17, 2020, as part of the privately negotiated exchange agreement described above, the Company issued $132.5 million of 3.50% convertible senior notes due 2025 (the “2025 Notes”). The 2025 Notes bear interest at a rate of 3.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, commencing on July 15, 2021. The 2025 Notes mature on January 15, 2025, unless earlier purchased by the Company, redeemed, or converted.
On May 19, 2023, in connection with the completion of a private offering of $230.0 million aggregate principal amount of 2.875% convertible senior notes due 2029 described below, the Company repurchased and retired approximately $106.0 million in aggregate principal amount of its outstanding 2025 Notes, with a carrying amount of $105.4 million, for approximately $106.0 million of cash and 0.7 million shares of the Company’s common stock. The Company accounted for the partial settlement of the 2025 Notes as an extinguishment, and as such, recorded a loss on
19
extinguishment of approximately $16.5 million for the three and six months ended June 30, 2023, which is included in the “Other income (expense), net” in the Consolidated Statements of Operations.
2027 Notes
On May 18, 2020, the Company completed a private offering of $125.0 million of 3.75% convertible senior notes due 2027 (the “2027 Notes”). The Company received net proceeds of approximately $121.9 million, after deducting underwriting discounts and fees and expenses payable by the Company. Additionally, the Company used approximately $10.3 million of cash to purchase capped calls, discussed below. The 2027 Notes bear interest at a rate of 3.75% per year, payable semiannually in arrears on June 1 and December 1 of each year, commencing on December 1, 2020. The 2027 Notes mature on June 1, 2027, unless earlier purchased by the Company, redeemed, or converted.
On May 19, 2023, in connection with the completion of a private offering of $230.0 million aggregate principal amount of 2.875% convertible senior notes due 2029 described below, the Company repurchased and retired approximately $100.0 million in aggregate principal amount of its outstanding 2027 Notes, with a carrying amount of $98.5 million, for approximately $92.8 million of cash and 3.8 million shares of the Company’s common stock. The Company accounted for the partial settlement of the 2027 Notes as an extinguishment, and as such, recorded a loss on extinguishment of approximately $80.6 million for the three and six months ended June 30, 2023, which is included in the “Other income (expense), net” in the Consolidated Statements of Operations.
2029 Notes
On May 19, 2023, the Company completed a private offering of $230.0 million of 2.875% convertible senior notes due 2029 (the “2029 Notes”). The Company received net proceeds of approximately $223.2 million, after deducting underwriting discounts and fees and expenses payable by the Company. Additionally, the Company used approximately $198.8 million of net proceeds from the offering to fund the cash portion of the 2025 Notes and 2027 Notes extinguishments described above and the remainder for general corporate purposes. The 2029 Notes bear interest at a rate of 2.875% per year, payable semiannually in arrears on June 1 and December 1 of each year, commencing on December 1, 2023. The 2029 Notes mature on June 1, 2029, unless earlier purchased by the Company, redeemed, or converted. The Company will settle any conversions of the 2029 Notes by paying cash up to the aggregate principal amount of the 2029 Notes to be converted, and paying or delivering either cash, shares of Company’s common stock, or a combination of cash and shares of common stock at the Company’s election, in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal amount of the 2029 Notes being converted.
The 2025 Notes, 2027 Notes, and 2029 Notes (collectively, the “Notes”) are unsecured senior obligations of Veeco and rank senior in right of payment to any of Veeco’s subordinated indebtedness; equal in right of payment to all of Veeco’s unsecured indebtedness that is not subordinated; effectively subordinated in right of payment to any of Veeco’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to all indebtedness and other liabilities (including trade payables) of Veeco’s subsidiaries.
The Notes are convertible at the option of the holders upon the satisfaction of specified conditions and during certain periods as described below. The initial conversion rates are 41.6667, 71.5372, and 34.21852 shares of the Company’s common stock per $1,000 principal amount of the 2025 Notes, 2027 Notes, and 2029 Notes, respectively, representing initial effective conversion prices of $24.00, $13.98, and $29.22 per share of common stock, respectively. The conversion rates may be subject to adjustment upon the occurrence of certain specified events.
Holders may convert all or any portion of their Notes, in multiples of one thousand dollar principal amount, at their option at any time prior to the close of business on the business day immediately preceding October 15, 2024, with
20
respect to the 2025 Notes, October 1, 2026, with respect to the 2027 Notes, and February 1, 2029 with respect to the 2029 Notes, only under the following circumstances:
For the calendar quarter ended June 30, 2023, the last reported sales price of the common stock during the 30 consecutive trading days, based on the criteria outlined in (i) above, was greater than 130% of the conversion price of the 2027 Notes, and as such the 2027 Notes are convertible by the holders until September 30, 2023.
Holders may convert their Notes at any time, regardless of the foregoing circumstances, on October 15, 2024 with respect to the 2025 Notes, October 1, 2026, with respect to the 2027 Notes, and February 1, 2029, with respect to the 2029 Notes, until the close of business on the business day immediately preceding the respective maturity date.
The Notes are recorded as a single unit within liabilities in the consolidated balance sheets as the conversion features within the Notes are not derivatives that require bifurcation and the Notes do not involve a substantial premium. Transaction costs of $9.2 million, $1.9 million, $3.1 million, and $6.8 million incurred in connection with the issuance of the 2023 Notes, 2025 Notes, 2027 Notes, and 2029 Notes, respectively, were recorded as direct deductions from the related debt liabilities and recognized as non-cash interest expense using the effective interest method over the expected terms of the Notes.
The carrying value of the 2023 Notes, 2025 Notes, 2027 Notes, and 2029 Notes are as follows:
Principal Amount
Unamortized transaction costs
Net carrying value
Unamortized debt discount/transaction costs
20,173
26,500
(149)
26,351
132,500
(990)
131,510
25,000
(358)
24,642
125,000
(2,019)
122,981
230,000
(6,657)
223,343
281,500
(7,165)
277,673
(3,013)
274,660
21
Total interest expense related to the 2023 Notes, 2025 Notes, 2027 Notes, and 2029 Notes is as follows:
Cash Interest Expense
Coupon interest expense - 2023 Notes
136
23
272
Coupon interest expense - 2025 Notes
737
1,159
1,896
2,318
Coupon interest expense - 2027 Notes
745
1,172
1,917
2,344
Coupon interest expense - 2029 Notes
753
Non-cash Interest Expense
Amortization of debt discount/transaction costs- 2023 Notes
24
48
Amortization of debt discount/transaction costs- 2025 Notes
77
114
194
226
Amortization of debt discount/transaction costs- 2027 Notes
70
101
175
202
Amortization of debt discount/transaction costs- 2029 Notes
141
Total Interest Expense
2,523
2,706
5,103
5,410
The Company determined the 2025 Notes, 2027 Notes, and 2029 Notes are Level 2 liabilities in the fair value hierarchy and had an estimated fair value at June 30, 2023 of $31.9 million, $49.3 million, and $257.0 million, respectively.
Capped Call Transactions
In connection with the offering of the 2027 Notes, on May 13, 2020, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”), pursuant to capped call confirmations, covering the total principal amount of the 2027 Notes for an aggregate premium of $10.3 million. The Capped Call Transactions are expected generally to reduce the potential dilution to the Company’s common stock upon any conversion of the 2027 Notes and/or offset any cash payments the Company is required to make in excess of the aggregate principal amount of converted 2027 Notes, as the case may be, with such reduction and/or offset subject to a cap based on the capped price of the Capped Call Transactions. The Capped Call Transactions exercise price is equal to the initial conversion price of the 2027 Notes, and the capped price of the Capped Call Transactions is approximately $18.46 per share and is subject to certain adjustments under the terms of the capped call confirmations.
The Capped Call Transactions are separate transactions entered into by the Company with the capped call counterparties, are not part of the terms of the 2027 Notes and do not change the holders’ rights under the 2027 Notes. Holders of the 2027 Notes do not have any rights with respect to the Capped Call Transactions. The cost of the Capped Call Transactions is not expected to be tax-deductible as the Company did not elect to integrate the Capped Call Transactions into the 2027 Notes for tax purposes. The Company used a portion of the net proceeds from the offering of the 2027 Notes to pay for the Capped Call Transactions, and the cost of the Capped Call Transactions was recorded as a reduction of the Company’s additional paid-in capital in the accompanying consolidated financial statements.
Revolving Credit Facility
On December 16, 2021, the Company entered into a loan and security agreement providing for a senior secured revolving credit facility in an aggregate principal amount of $150 million (the “Credit Facility”), including a $15 million letter of credit sublimit. The Credit Facility is guaranteed by the Company’s direct material U.S. subsidiaries, subject to customary exceptions. Borrowings under the Credit Facility are secured by a first-priority lien on substantially all of the assets of the Company, subject to customary exceptions. The Credit Facility has a term of five years, maturing on December 16, 2026, or earlier if certain liquidity measures are not met prior to the 2025 Notes maturing. Subject to certain conditions and the receipt of commitments from the lenders, the Loan and Security Agreement allows for revolving commitments under the Credit Facility to be increased by up to $75 million. The existing lenders under the Credit Facility are entitled, but not obligated, to provide such incremental commitments.
22
Borrowings will bear interest at a floating rate which can be, at the Company’s option, either (a) an alternate base rate plus an applicable rate ranging from 0.50% to 1.25% or (b) a Secured Overnight Financing Rate (“SOFR”) (with a floor of 0.00%) for the specified interest period plus an applicable rate ranging from 1.50% to 2.25%, in each case, depending on the Company’s Secured Net Leverage Ratio (as defined in the Loan and Security Agreement). The Company will pay an unused commitment fee ranging from 0.25% to 0.35% based on unused capacity under the Credit Facility and the Company’s Secured Net Leverage Ratio. The Company may use the proceeds of borrowings under the Credit Facility to pay transaction fees and expenses, provide for its working capital needs and reimburse drawings under letters of credit and for other general corporate purposes.
The Loan and Security Agreement contains customary affirmative covenants for transactions of this type, including, among others, the provision of financial and other information to the administrative agent, notice to the administrative agent upon the occurrence of certain material events, preservation of existence, maintenance of properties and insurance, compliance with laws, including environmental laws, the provision of additional guarantees, and an affiliate transactions covenant, subject to certain exceptions. The Loan and Security Agreement contains customary negative covenants, including, among others, restrictions on the ability to merge and consolidate with other companies, incur indebtedness, refinance our existing convertible notes, grant liens or security interests on assets, make investments, acquisitions, loans, or advances, pay dividends, and sell or otherwise transfer assets.
The Loan and Security Agreement contains financial maintenance covenants that require the Borrower to maintain an Interest Coverage Ratio (as defined in the Loan and Security Agreement) of not less than 3.00 to 1.00, a Total Net Leverage Ratio (as defined in the Loan and Security Agreement) of not more than 4.50 to 1.00, and a Secured Net Leverage Ratio (as defined in the Loan and Security Agreement) of not more than 2.50 to 1.00, in each case, tested at the end of each fiscal quarter commencing with the fiscal quarter ending June 30, 2022. The Loan and Security Agreement also provides for a number of customary events of default, including, among others: payment defaults to the lenders; voluntary and involuntary bankruptcy proceedings; covenant defaults; material inaccuracies of representations and warranties; certain change of control events; material money judgments; and other customary events of default. The occurrence of an event of default could result in the acceleration of obligations and the termination of lending commitments under the Loan and Security Agreement.
No amounts were outstanding under the Credit Facility as of June 30, 2023 or December 31, 2022.
Other Liabilities
Other liabilities at June 30, 2023 and December 31, 2022 included (i) medical and dental benefits for former executives of $1.9 million and $2.0 million, respectively; (ii) asset retirement obligations of $0.9 million and $0.7 million, respectively; and (iii) contingent consideration of $16.6 million as of June 30, 2023.
Note 6 — Commitments and Contingencies
Leases
The Company’s operating leases primarily include real estate leases for properties used for manufacturing, R&D activities, sales and service, and administration, as well as certain equipment leases. Some leases may include options to renew for a period of up to 5 years, while others may include options to terminate the lease. The weighted average remaining lease term of the Company’s operating leases as of June 30, 2023 was 12 years, and the weighted average discount rate used in determining the present value of future lease payments was 5.6%.
The following table provides the maturities of lease liabilities at June 30, 2023:
Operating
Payments due by period:
1,748
2024
4,599
2025
4,086
2026
4,060
2027
3,629
Thereafter
34,245
Total future minimum lease payments
52,367
Less: Imputed interest
(15,914)
36,453
Reported as of June 30, 2023
Operating lease cost for the three and six months ended June 30, 2023 were $1.2 million and $2.6 million, respectively, and $1.8 million and $3.7 million, respectively, for the comparable 2022 periods. Variable lease cost for the three and six months ended June 30, 2023 were $0.2 million and $0.5 million respectively, and $0.5 million and $1.0 million, respectively, for the comparable 2022 periods. Additionally, the Company has an immaterial amount of short-term leases. Operating cash outflows from operating leases for the six months ended June 30, 2023 and 2022 were $3.0 million and $3.8 million, respectively.
Receivable Purchase Agreement
The Company entered into a receivable purchase agreement with a financial institution to sell certain of its trade receivables from customers without recourse, up to $20.0 million at any point in time. Pursuant to this agreement, the Company sold $9.9 million of receivables during the three months ended June 30, 2023, all of which remained outstanding as of June 30, 2023 as defined in the receivable purchase agreement, and $10.1 million was available under the agreement for additional sales of receivables. The Company did not sell any receivables under this agreement for the six months ended June 30, 2022. The net sale of accounts receivable under the agreement is reflected as a reduction of accounts receivable in the Company’s Consolidated Balance Sheet at the time of sale and any fees for the sale of trade receivables were not material for the periods presented.
Purchase Commitments
Veeco has purchase commitments of $235.5 million at June 30, 2023, substantially all of which become due within one year.
Bank Guarantees
Veeco has bank guarantees and letters of credit issued by a financial institution on its behalf as needed. At June 30, 2023, outstanding bank guarantees and standby letters of credit totaled $19.3 million, and unused bank guarantees and letters of credit of $12.6 million were available to be drawn upon.
Legal Proceedings
The Company is involved in various legal proceedings arising in the normal course of business. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows.
Note 7 — Equity
Statement of Stockholders’ Equity
The following tables present the changes in Stockholders’ Equity:
Additional
Common Stock
Paid-in
Comprehensive
Shares
Capital
Deficit
Income
51,660
Net income
8,741
Other comprehensive income (loss), net of tax
476
7,027
Net issuance under employee stock plans
33
(8,509)
Balance at March 31, 2023
51,693
1,076,698
(493,060)
1,404
585,559
7,932
Partial extinguishment of 2025 and 2027 Notes
4,460
45
102,095
102,140
185
2,326
2,328
56,338
Balance at December 31, 2021
50,653
507
1,116,921
(681,283)
1,483
437,628
Cumulative effect of change in accounting principle - adoption of ASU 2020-06
(56,801)
12,541
(44,260)
13,330
(822)
4,481
590
(6,793)
(6,787)
Balance at March 31, 2022
51,243
513
1,057,808
(655,412)
661
403,570
6,278
182
1,504
1,506
Balance at June 30, 2022
51,425
515
1,065,590
(645,757)
389
420,737
25
Accumulated Other Comprehensive Income (“AOCI”)
The following table presents the changes in the balances of each component of AOCI, net of tax:
Gains (Losses)
Foreign
on Available
Currency
for Sale
Translation
Securities
1,773
(845)
Other comprehensive income (loss)
1,740
(375)
There were minimal reclassifications from AOCI into net income for the three and six months ended June 30, 2023 and 2022.
Note 8 — Share-based Compensation
Restricted share awards are issued to employees and to members of our board of directors that are subject to specified restrictions and a risk of forfeiture. The restrictions typically lapse over one to four years and may entitle holders to dividends and voting rights. Other types of share-based compensation include performance share awards, performance share units, and restricted share units (collectively with restricted share awards, “restricted shares”), as well as options to purchase common stock.
Share-based compensation expense was recognized in the following line items in the Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022:
1,572
1,251
3,023
2,189
2,568
1,863
4,657
3,120
3,792
3,164
7,279
5,450
For the six months ended June 30, 2023, equity activity related to stock options was as follows:
Weighted
Number of
Average
Exercise Price
177
30.94
Expired
(62)
30.47
115
31.18
26
For the six months ended June 30, 2023, equity activity related to non-vested restricted shares and performance shares was as follows:
Grant Date
2,496
23.83
Granted
1,076
22.79
Performance award adjustments
183
10.59
Vested
(1,113)
16.47
Forfeited
(50)
28.01
2,592
25.66
Note 9 — Income Taxes
Income taxes are estimated for each of the jurisdictions in which the Company operates. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carryforwards. Realization of net deferred tax assets is dependent on future taxable income.
At the end of each interim reporting period, the effective tax rate is aligned with expectations for the full year. This estimate is used to determine the income tax provision on a year-to-date basis and may change in subsequent interim periods.
Income before income taxes and income tax expense (benefit) for the three and six months ended June 30, 2023 and 2022 were as follows:
(in thousands, except percentages)
Effective tax rate
(1.53)%
5.23%
(2.06)%
3.84%
The Company’s tax expense for the three and six months ended June 30, 2023 was $1.3 million and $1.5 million respectively, compared to $0.5 million and $0.9 for the comparable prior periods. For the three and six months ended June 30, 2023, the Company’s income tax expense primarily related to pre-tax income from operations excluding the loss on extinguishment of the 2025 and 2027 Notes. Pursuant to the limitation on losses from extinguishment of convertible notes under Section 249 of the Internal Revenue Code of 1986, as amended (Section 249), the Company recognized a benefit of $0.9 million associated with this loss for the three and six months ended June 30, 2023. Additionally, the income tax expense for the three and six months ended June 30, 2023 was favorably impacted by the tax benefits related to Foreign-Derived Intangible Income and research and development tax credits, as well as discrete income tax benefit for share-based compensation windfall. For the three and six months ended June 30, 2022, the effective tax rate was lower than the U.S. statutory tax rate primarily related to changes in the valuation allowance of deferred tax assets in the U.S.
27
Note 10 — Segment Reporting and Geographic Information
Veeco operates and measures its results in one operating segment and therefore has one reportable segment: the development, manufacture, sales, and support of semiconductor and thin film process equipment primarily sold to make electronic devices.
Veeco serves the following four end-markets:
Semiconductor
The Semiconductor market refers to early process steps in logic and memory applications where silicon wafers are processed. There are many different process steps in forming patterned wafers, such as deposition, etching, masking, and doping, where the microchips are created but remain on the silicon wafer. This market includes mask blank production for extreme ultraviolet (“EUV”) lithography, as well as Advanced Packaging, which refers to a portfolio of wafer-level assembly technologies that enable improved performance of electronic products, such as smartphones, high-end servers, and graphical processors.
Compound Semiconductor
The Compound Semiconductor market includes Photonics, Power Electronics, RF Filters and Amplifiers, and Solar applications. Photonics refers to light source technologies and laser-based solutions for 3D sensing, datacom and telecom applications. This includes micro-LED, laser diodes, edge emitting lasers and vertical cavity surface emitting lasers (“VCSELs”). Power Electronics refers to semiconductor devices such as rectifiers, inverters and converters for the control and conversion of electric power in applications such as fast or wireless charging of consumer electronics and automotive applications. RF power amplifiers and filters (including surface acoustic wave (“SAW”) and bulk acoustic wave (“BAW”) filters) are used in 5G communications infrastructure, smartphones, tablets, and mobile devices. They make use of radio waves for wireless broadcasting and/or communications. Solar refers to power obtained by harnessing the energy of the sun through the use of compound semiconductor devices such as photovoltaics.
Data Storage
Data Storage refers to the Hard Disk Drive (“HDD”) market, for which our systems enable customers to manufacture thin film magnetic heads for hard disk drives as part of large capacity storage applications.
Scientific & Other
Scientific & Other refers to advanced materials research and a range of manufacturing applications including optical coatings (laser mirrors, optical filters, and anti-reflective coatings).
28
Sales by end-market and geographic region for the three and six months ended June 30, 2023 and 2022 were as follows:
Sales by end-market
106,275
97,521
199,382
175,141
24,066
31,122
45,225
68,231
13,945
21,548
35,459
43,143
17,355
13,808
35,079
33,910
Sales by geographic region
United States
35,739
57,940
66,750
105,410
EMEA(1)
17,511
27,234
40,458
48,660
China
49,986
28,497
110,733
58,878
Rest of APAC
58,320
49,345
97,065
106,267
Rest of World
85
983
139
1,210
For geographic reporting, sales are attributed to the location in which the customer facility is located.
29
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, CVD, 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.
Business Update
Macroeconomic challenges across the industry have been well publicized, including supply chain constraints, an inflationary and high-interest rate environment with a potential recession ahead, heightened China-export regulations, uncertainty in the banking industry, and a forecasted decline in the semiconductor and related markets due to softness in consumer, smartphone and PC applications, all of which are contributing to a difficult environment with increased uncertainty.
Longer lead times and parts shortages and allocations 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. Our supply chain continues to improve, as evidenced by a decline in lead times and a further improvement to suppliers on time deliveries; however, material lead times remain elevated and continue to be a challenge with respect to our supply chain, limiting our ability to fulfill some of our customers’ demands in a timely manner, as many of our peers have also been experiencing. While we expect lead times to further improve in the second half of the year, we expect supply shortages and related challenges to persist throughout 2023. 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. We also continue to experience increasing labor and material costs, creating gross margin pressures.
We continue to see a slow-down in certain shorter lead time products such as advanced packaging lithography, spare parts, and upgrades, as well as instances where customers have requested order cancellations, delayed shipments, or delayed payments. Consequently, we are monitoring the situation very closely and have been taking early actions to limit the pace at which we increase spending while maintaining our growth trajectory.
Furthermore, the US Department of Commerce, Bureau of Industry and Security (“BIS”), issued China-export regulations on October 7, 2022 which broadened the requirements under which export licenses will be required, with a presumption of denial as to their issuance. In addition, certain China-based companies were added to the BIS Unverified List, and changes have been made to the BIS Entity List, further restricting sales to the named entities. Recent order activity has led to significant backlog in China, some of which may be subject to these regulations. While the export regulation landscape is fluid and evolving, we believe at this time that the substantial majority of this backlog will not be negatively affected by the new regulations.
While we work to overcome these macroeconomic challenges, we continue to serve our customers in the following four end markets: Semiconductor; Compound Semiconductor; Data Storage; and Scientific & Other.
Sales in the Semiconductor market during the second quarter grew 9% year-over-year and 14% sequentially, driven by record laser annealing system revenue and shipment of two EUV chambers. We continue to build momentum for our laser annealing solutions in advanced node logic by winning application steps. We recently received orders from several Tier 1 advanced logic customers. While our growth strategy is predominately focused on shipping systems for advanced node logic and memory applications, we have also been receiving orders and shipping systems for trailing node applications in China and other regions. As it relates to the memory market, we recently announced that a Tier 1 memory customer placed several LSA orders for high volume production of DRAM devices following a successful evaluation program. The ongoing adoption of EUV Lithography for advanced node semiconductor manufacturing continues to drive demand for our Ion Beam mask blank systems. Additionally, our lithography systems for Advanced Packaging are aligned with packaging approaches such as fan out wafer level packaging and other advanced packaging applications, while our wet processing systems are used for Photoresist Strip, Solvent Cleans, and flux removal. Overall, our technology and market strategy are well aligned with trends such as artificial intelligence, mobile connectivity and high-performance computing that drive the Semiconductor market. Based on recent order activity and our current backlog in the Semiconductor market, we expect revenue growth in 2023, outpacing wafer fab equipment spending growth, which the prevailing consensus view has forecasted to be down in 2023.
We address the Compound Semiconductor market with a broad portfolio of technologies, including Wet Processing and MOCVD, along with MBE and Ion Beam, all of which have been developed to support emerging applications such as 5G driven RF device/filter manufacturing, GaN power electronics, and photonics applications including edge-emitting lasers, specialty LEDs and micro-LEDs. Sales in the Compound Semiconductor market in Q2 2023 increased as compared to the prior quarter and declined as compared to prior year quarter. In Q2 2023, we shipped several systems for photonics applications. We continue to invest for future growth in the Compound Semiconductor market in areas like power electronics and Micro-LED. Power electronics markets are served by GaN equipment, and also by SiC epitaxy equipment. We are working to penetrate the GaN power market, which is driven by applications such as wireless charging in consumer electronics. In addition to our GaN system offerings, on January 31, 2023 Veeco acquired SiC technology to address the high-growth SiC power epitaxy equipment market, which is primarily driven by adoption of electric vehicles. With this acquisition, Veeco is accelerating its entry into this market, and expects revenue starting in 2024.
Sales in the Data Storage market in Q2 2023 declined as compared to the prior quarter and the prior year quarter. Demand for our Ion Beam products is driven by cloud-based storage. Hard disk drive manufacturers are manufacturing drives with an increasing number of magnetic heads, in addition to introducing advanced technologies requiring increased capital intensity. As reported, the hard disk drive industry experienced contraction in exabyte shipments in 2022 and 2023 with uncertainty as to the timing of a recovery; however, recent analyst and industry forecasts predict nearline hard disk drive exabyte shipments to grow at an approximate 20 to 25% CAGR over the coming years. Despite these current industry challenges, we continue to expect revenue growth in 2023 based on the ship dates of orders in our backlog.
Sales in the Scientific & Other market are largely driven by sales to governments, universities, and research institutions. We address the Scientific & Other market with several technologies, including MBE, ALD, MOCVD, Wet Processing, & IBD/IBE, which support scientific, optical coating and other applications, such as Micro-Electromechanical Systems (MEMS) applications. Sales in this market increased as compared to the quarter in the prior year, while declining as compared to the first quarter of this year. We expect sales in this market to grow in the long run, in line with GDP.
Overall, based on our current visibility supported by our backlog, we continue to expect total 2023 revenue to be in the range of $630 million to $670 million.
31
Results of Operations
For the three months ended June 30, 2023 and 2022
The following table presents revenue and expense line items reported in our Consolidated Statements of Operations for the indicated periods in 2023 and 2022 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 June 30,
Change
Period to Period
(dollars in thousands)
100%
(2,358)
(1)%
58%
61%
(5,601)
(6)%
42%
39%
3,243
5%
17%
16%
1,368
15%
14%
872
4%
1%
2%
(382)
(15)%
-
520
*
33%
31%
2,378
Operating income (loss)
8%
865
7%
Interest income (expense), net
(632)
(0)%
(2,635)
(2)%
2,003
(76)%
(60)%
0%
(52)%
6%
(94,223)
752
141%
(53)%
(94,975)
Not meaningful
Net Sales
The following is an analysis of sales by market and by region:
65%
60%
8,754
9%
19%
(7,056)
(23)%
13%
(7,603)
(35)%
11%
3,547
26%
22%
35%
(22,201)
(38)%
EMEA
(9,723)
(36)%
21,489
75%
36%
30%
8,975
18%
(898)
32
Sales decreased for the three months ended June 30, 2023 against the comparable prior year period in the Data Storage and Compound Semiconductor markets, partially offset by an increase in the Semiconductor market. By geography, sales decreased in the United States and EMEA regions, partially offset by an increase in the China region. Sales in the Rest of APAC region for the three months ended June 30, 2023 included sales in Singapore, Taiwan, and Japan of $22.9 million, $16.1 million, and $12.5 million respectively. Sales in the Rest of APAC region for the three months ended June 30, 2022 included sales in Taiwan and Japan of $28.0 million and $11.0 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 June 30, 2023, gross profit increased against the comparable prior period due to higher gross margins. Gross margins increased principally due to product mix of sales in the period and favorable spending. 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 ended June 30, 2023 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.
Selling, General, and Administrative
Selling, general, and administrative expenses remained flat for the three months ended June 30, 2023 against the comparable prior period. Given the uncertainty regarding the impacts on our business resulting from the general macroeconomic environment, we are focused on the proactive management of expenses.
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 2022.
Interest Income (Expense)
We recorded net interest expense of $0.6 million for the three months ended June 30, 2023, compared to $2.6 million for the comparable prior year period. The decrease in net interest expense was primarily related to an increase of interest income of approximately $2.4 million due to a more favorable interest rate environment for the three months ended June 30, 2023, against the comparable prior year period.
Other Income (Expense)
On May 19, 2023, in connection with the completion of a private offering of $230.0 million aggregate principal amount of 2.875% convertible senior notes, we repurchased and retired approximately $106.0 million in aggregate principal amount of our outstanding 2025 Notes, with a carrying amount of $105.4 million, for approximately $106.0 million of cash and 0.7 million shares of our common stock for the 2025 Notes. Also, we repurchased and retired approximately $100.0 million in aggregate principal amount of our outstanding 2027 Notes; with a carrying amount of $98.5 million, for approximately $92.8 million of cash and 3.8 million shares of our common stock for the 2027 Notes. We accounted for the partial settlement of the 2025 Notes and 2027 Notes as an extinguishment, and as such, recorded a loss on
extinguishment of approximately $16.5 million and $80.6 million, respectively, for the three months ended June 30, 2023.
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 ended June 30, 2023 was $1.3 million, compared to $0.5 million for the comparable prior period. For the three months ended June 30, 2023, we incurred income tax expense primarily related to pre-tax income from operations excluding the loss on extinguishment of the 2025 and 2027 Notes. Pursuant to Section 249 limitation on losses from extinguishment of convertible notes, we recognized a benefit of $0.9 million associated with this loss for the three months ended June 30, 2023. Additionally, the $1.3 million of income tax expense for the three months ended June 30, 2023 was favorably impacted by the tax benefits related to Foreign-Derived Intangible Income and research and development tax credits. For the three months ended June 30, 2022, the effective tax rate was lower than the U.S. statutory tax rate primarily related to changes in the valuation allowance of deferred tax assets in the U.S.
For the six months ended June 30, 2023 and 2022
Six Months Ended June 30,
(5,280)
59%
(4,528)
41%
(752)
4,812
10%
605
(774)
451
34%
32%
5,094
(5,846)
(20)%
(1,434)
(5,438)
4,004
(74)%
(31)%
(24)%
(98,933)
631
69%
(99,564)
34
64%
55%
24,241
21%
(23,006)
(34)%
(7,684)
(18)%
1,169
3%
(38,660)
(37)%
(8,202)
(17)%
51,855
88%
(9,202)
(9)%
(1,071)
Sales decreased for the six months ended June 30, 2023 against the comparable prior year period in the Compound Semiconductor and Data Storage markets, partially offset by an increase in the Semiconductor market. By geography, sales decreased in the United States, Rest of APAC, and EMEA regions, partially offset by an increase in the China region. Sales in the Rest of APAC region for the six months ended June 30, 2023 included sales in Taiwan, Singapore, Japan, and Thailand of $34.1 million, $25.8 million, $16.9 million, and $10.4 million respectively. Sales in the Rest of APAC region for the six months ended June 30, 2022 included sales in Taiwan, Singapore and Japan of $45.2 million and $25.9 million, and $15.2 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.
For the six months ended June 30, 2023, gross profit remained flat against the comparable prior period. Gross margins also remained flat, as favorable spending was offset by a decrease in sales volume and product mix of sales in the period. We expect our gross margins to fluctuate each period due to product mix and other factors.
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 six months ended June 30, 2023 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.
Selling, general, and administrative expenses remained flat for the six months ended June 30, 2023 against the comparable prior period. Given the uncertainty regarding the impacts on our business resulting from the general macroeconomic environment, we are focused on the proactive management of expenses.
35
We recorded net interest expense of $1.4 million for the six months ended June 30, 2023, compared to $5.4 million for the comparable prior year period. The decrease in net interest expense was primarily related to an increase of interest income of approximately $4.5 million due to a more favorable interest rate environment for the six months ended June 30, 2023, against the comparable prior year period.
On May 19, 2023, in connection with the completion of a private offering of $230.0 million aggregate principal amount of 2.875% convertible senior notes, we repurchased and retired approximately $106.0 million in aggregate principal amount of our outstanding 2025 Notes; with a carrying amount of $105.4 million, for approximately $106.0 million of cash and 0.7 million shares of our common stock for the 2025 Notes. Also, we repurchased and retired approximately $100.0 million in aggregate principal amount of our outstanding 2027 Notes; with a carrying amount of $98.5 million, for approximately $92.8 million of cash and 3.8 million shares of our common stock for the 2027 Notes. We accounted for the partial settlement of the 2025 Notes and 2027 Notes as an extinguishment, and as such, recorded a loss on extinguishment of approximately $16.5 million and $80.6 million, respectively, for the six months ended June 30, 2023.
Our tax expense for the six months ended June 30, 2023 was $1.5 million, compared to $0.9 million for the comparable prior period. For the six months ended June 30, 2023, we incurred income tax expense primarily related to pre-tax income from operations excluding the loss on extinguishment of the 2025 and 2027 Notes. Pursuant to Section 249 limitation on losses from extinguishment of convertible notes, we recognized a benefit of $0.9 million with this loss for the six months ended June 30, 2023. Additionally, the $1.5 million of income tax expense for the six months ended June 30, 2023 was favorably impacted by the tax benefits related to Foreign-Derived Intangible Income and research and development tax credits, as well as a discrete income tax benefit for share-based compensation windfall. For the six months ended June 30, 2022, the effective tax rate was lower than the U.S. statutory tax rate primarily related to changes in the valuation allowance of deferred tax assets in the U.S.
Liquidity and Capital Resources
Our cash and cash equivalents, restricted cash, and short-term investments are as follows:
286,836
302,960
At June 30, 2023 and December 31, 2022, cash and cash equivalents of $38.8 million and $28.4 million, respectively, were held outside the United States. As of June 30, 2023, we had $19.8 million of accumulated undistributed earnings
36
generated by our non-U.S. subsidiaries for which the U.S. tax has previously been provided. Approximately $8.5 million of undistributed earnings will be subject to foreign withholding taxes if distributed back to the United States and we accrued $0.9 million for foreign withholding taxes for the undistributed earnings.
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.
A summary of the cash flow activity for the six months ended June 30, 2023 and 2022 is as follows:
Non-cash items:
Changes in operating assets and liabilities
(24,553)
(18,783)
Net cash provided by operating activities was $25.1 million for the six months ended June 30, 2023 and was due to net loss of $76.6 million and adjustments for non-cash items of $126.3 million, partially offset by a decrease in cash flow from changes in operating assets and liabilities of $24.6 million. The changes in operating assets and liabilities were largely attributable to increases in inventories, accounts receivables, and contract assets; partially offset by increases in customer deposits, accounts payable, and accrued expenses.
Acquisitions of businesses, net of cash acquired
Changes in investments, net
43,575
(10,541)
The cash provided by investing activities during the six months ended June 30, 2023 was primarily attributable to net investment activity, partially offset by the net cash used in the acquisition of Epiluvac, and capital expenditures. The cash used in investing activities during the six months ended June 30, 2022 was mainly due to a high level of capital expenditures during 2022 associated with the continued build-out of our newly leased facility in San Jose, California, which is substantially complete at this time.
37
Settlement of equity awards, net of withholding taxes
(6,182)
The cash used in financing activities for the six months ended June 30, 2023 was related to the partial repurchase of the 2025 Notes and 2027 Notes, repayment of the 2023 Notes, as well as cash used to settle taxes related to employee equity programs, partially offset by proceeds from issuance of 2029 Notes.
We have $26.5 million outstanding principal balance of 3.50% convertible senior notes that bear interest at a rate of 3.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, and mature on January 15, 2025, unless earlier purchased by the Company, redeemed, or converted. In addition, we have $25.0 million outstanding principal balance of 3.75% convertible senior notes that bear interest at a rate of 3.75% per year, payable semiannually in arrears on June 1 and December 1 of each year, and mature on June 1, 2027, unless earlier purchased by the Company, redeemed, or converted. The 2027 Notes are currently convertible by shareholders until June 30, 2023. In addition, we have $230.0 million outstanding principal balance of 2.875% convertible senior notes that bear interest at a rate of 2.875% per year, payable semiannually in arrears on June 1 and December 1 of each year, and mature on June 1, 2029, unless earlier purchased by the Company, redeemed, or converted.
We believe that we have sufficient capital resources and cash flows from operations to support scheduled interest payments on these debts. In addition, we have access to a $150.0 million revolving credit facility (including an ability to request an additional $75.0 million, for a total commitment of no more than $225.0 million) to provide for our working capital needs and reimburse drawings under letters of credit and for other general corporate purposes. The Company has no immediate plans to draw down on the facility, which expires in December of 2026. Interest under the facility is variable based on the Company’s secured net leverage ratio and is expected to bear interest based on SOFR plus a range of 150 to 225 basis points, if drawn. There is a yearly commitment fee of 25 to 35 basis points, based on the Company’s secured net leverage ratio, charged on the unused portion of the Facility.
Contractual Obligations and Commitments
We have commitments under certain contractual arrangements to make future payments for goods and services. These contractual arrangements secure the rights to various assets and services to be used in the future in the normal course of business. We expect to fund these contractual arrangements with cash generated from operations in the normal course of business.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates primarily relates to our investment portfolio. We centrally manage our investment portfolios considering investment opportunities and risks, tax consequences, and overall financing strategies. Our investment portfolio includes fixed-income securities with a fair value of approximately $105.9 million at June 30, 2023. These securities are subject to interest rate risk and, based on our investment portfolio at June 30, 2023, a 100 basis point increase in interest rates would result in a decrease in the fair value of the portfolio of $0.6 million. While an increase in interest rates may reduce the fair value of the investment portfolio, we will not realize the losses in the Consolidated Statements of Operations unless the individual fixed-income securities are sold prior to recovery or the loss is determined to be other-than-temporary.
Currency Exchange Risk
We conduct business on a worldwide basis and, as such, a portion of our revenues, earnings, and net investments in foreign affiliates is exposed to changes in currency exchange rates. The economic impact of currency exchange rate movements is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions, and other factors. These changes, if material, could cause us to adjust our financing and operating strategies. Consequently, isolating the effect of changes in currency does not incorporate these other important economic factors.
Changes in currency exchange rates could affect our foreign currency denominated monetary assets and liabilities and forecasted cash flows. We may enter into monthly forward derivative contracts from time to time with the intent of mitigating a portion of this risk. We only use derivative financial instruments in the context of hedging and not for speculative purposes and have not historically designated our foreign exchange derivatives as hedges. Accordingly, changes in fair value from these contracts are recorded as “Other, net” in our Consolidated Statements of Operations. We execute derivative transactions with highly rated financial institutions to mitigate counterparty risk.
Our net sales to customers located outside of the United States represented approximately 78% and 79% of our total net sales for the three and six months ended June 30, 2023, respectively, 65% and 67% for the comparable 2022 periods. We expect that net sales to customers outside the United States will continue to represent a large percentage of our total net sales. Our sales denominated in currencies other than the U.S. dollar represented approximately 3% of total net sales for both the three and six months ended June 30, 2023 and 2022.
A 10% change in foreign exchange rates would have an immaterial impact on the consolidated results of operations since most of our sales outside the United States are denominated in U.S. dollars.
Evaluation of Disclosure Controls and Procedures
Our principal executive and financial officers have evaluated and concluded that our disclosure controls and procedures are effective as of June 30, 2023. The disclosure controls and procedures are designed to ensure that the information required to be disclosed in this report filed under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to our principal executive and financial officers as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
On January 31, 2023, we completed the acquisition of Epiluvac AB and are integrating the acquired business into our overall internal control over financial reporting process. Management is in the process of assessing the internal control over financial reporting and is implementing or revising internal controls where necessary. See Note 3 to the Consolidated Financial Statements – Business Combinations, for further details. There were no other changes in internal control for the quarter ended June 30, 2023 that have materially affected or are reasonably likely to materially affect internal control over financial reporting.
Information regarding risk factors appears in the Safe Harbor Statement at the beginning of this quarterly report on Form 10-Q and in Part I — Item 1A of our 2022 Form 10-K. There have been no material changes from the risk factors previously disclosed, except as follows:
Our current debt facilities, including our 3.50% Convertible Senior notes due 2025 (the “2025 Notes”), our 3.75% Convertible Notes due 2027 (the “2027 Notes”), and our 2.875% Convertible Notes due 2029 (the “2029 Notes”) (the 2025 Notes, 2027 Notes, and 2029 Notes together the “Notes”), and our revolving credit facility (the “Credit facility”), contains certain restrictions, covenants and repurchase provisions that may limit our ability to raise the funds necessary to meet our working capital needs, which may include the cash conversion of the Notes or repurchase of the Notes for Cash upon a fundamental change.
As of June 30, 2023, we had $26.5 million in principal amounts outstanding in 2025 Notes, $25.0 million in principal amounts outstanding in 2027 Notes, and $230.0 million in principal amounts outstanding in 2029 Notes. In addition, as of June 30, 2023 we had an undrawn senior secured revolving credit facility in an aggregate principal amount of $150.0 million, including a $15.0 million letter of credit sublimit.
These debt facilities contain certain covenant and other restrictions that may limit our ability to, among other things, incur additional debt or create liens, sell certain assets, and merge or consolidate with third parties, which may, in turn, preclude us from responding to changes in business and economic conditions, engaging in transactions that might otherwise be beneficial to us, or obtaining additional financing. Our ability to comply with some of these covenants is dependent on our future performance, which will be subject to many factors, some of which are beyond our control such as prevailing economic conditions. In addition, our failure to comply with these covenants could result in a default under the Notes or Credit Facility, which could accelerate the debt. If any of our debt is accelerated, we may not have sufficient funds available to repay such debt, which could materially and negatively affect our financial condition and results of operation.
In addition, our ability to repurchase or to pay cash upon conversion of the Notes, or maturity of the Credit Facility, may be limited by law, by regulatory authority or by agreements governing our indebtedness that exist at the time of repurchase, conversion, or maturity. Our failure to settle the debt as required would constitute a default under the applicable debt facility and could also lead to a default under the other debt facilities. If the payment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness.
Finally, holders of the Notes will have the right to require us to repurchase all or any portion of their Notes upon the occurrence of a fundamental change before the maturity date. Additionally, in the event the conditional conversion features of the 2025 Notes, 2027 Notes, and 2029 Notes are triggered (as is currently the case for the 2027 Notes through September 30, 2023), holders of Notes will be entitled to convert the Notes at any time during specified periods at their option. If one or more holders elect to convert the Notes, or if a fundamental change occurs before maturity, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Notes being converted, which could adversely impact our liquidity. Additionally, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of the Notes surrendered therefor or pay cash with respect to the Notes being converted. In addition, even if holders do not elect to convert the Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which could result in a material reduction of our net working capital.
None.
Not Applicable.
Unless otherwise indicated, each of the following exhibits has been filed with the Securities and Exchange Commission by Veeco under File No. 0-16244.
Exhibit
Incorporated by Reference
Filed orFurnished
Number
Exhibit Description
Form
Filing Date
Herewith
4.1
Indenture, dated as of May 19, 2023, between Veeco Instruments Inc. and U.S. Bank Trust Company, National Association, as trustee.
8-K
5/22/2023
4.2
Form of 2.875% Convertible Senior Notes due 2029 (included in Exhibit 4.1).
10.1
First Amendment to Loan and Security Agreement, dated as of May 19, 2023, by and among Veeco Instruments Inc., as borrower, the guarantors party thereto, the lenders from time to time party thereto and HSBC Bank USA, National Association, as administrative agent, collateral agent, joint lead arranger, and joint bookrunner, Barclays bank PLC, as joint lead arranger and joint bookrunner, and Santander Bank, N.A.
31.1
Certification of Chief Executive Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of the Securities and Exchange Act of 1934.
31.2
Certification of Chief Financial Officer pursuant to Rule 13a—14(a) or Rule 15d—14(a) of the Securities and Exchange Act of 1934.
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.XSD
XBRL Schema.
**
101.PRE
XBRL Presentation.
101.CAL
XBRL Calculation.
101.DEF
XBRL Definition.
101.LAB
XBRL Label.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* Filed herewith
** Filed herewith electronically
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 7, 2023.
Veeco Instruments Inc.
By:
/s/ WILLIAM J. MILLER, Ph.D.
William J. Miller, Ph.D.
Chief Executive Officer
/s/ JOHN P. KIERNAN
John P. Kiernan
Senior Vice President and Chief Financial Officer