Veeco Instruments Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Financial statements are unaudited. Veeco designs and sells thin-film process equipment used in LED, semiconductor, MEMS, RF, scientific and industrial, and data-storage markets.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $85.5 million | $140.7 million | $238.8 million | $370.5 million |
| Gross profit / margin | $33.5 million / 39% | $54.3 million / 39% | $96.9 million / 41% | $138.5 million / 37% |
| Operating income (loss) | $(68.7) million | $6.6 million | $(115.2) million | $(13.3) million |
| Net income (loss) | $(69.6) million | $5.3 million | $(117.2) million | $(22.2) million |
| Diluted EPS | $(1.78) | $0.13 | $(2.99) | $(0.56) |
Q3 sales fell 39% year over year, principally reflecting lower Lighting, Display & Power Electronics sales and a decline in Data Storage. Gross margin held at 39%, supported by product mix and cost reductions. The nine-month margin improved despite lower sales.
Q3 included $56.0 million of net asset impairment expense. The company reported a $57.6 million gross non-cash impairment related principally to ALD assets, partly offset by a $1.6 million reversal of a prior building impairment. The ALD action included a $54.3 million impairment of purchased technology. Nine-month asset impairment expense was $69.7 million.
Cash, liquidity and debt
- Cash and cash equivalents were $274.0 million at September 30, 2016; short-term investments were $62.8 million. Combined liquidity of $336.9 million compared with $385.3 million at December 31, 2015.
- Operating cash flow was negative $24.3 million for the first nine months, versus positive $21.9 million a year earlier. Investing cash flow was positive $42.7 million, mainly from net sales of investments; financing cash flow was negative $13.6 million, including $13.3 million of share repurchases.
- Total debt was approximately $1.3 million, including a mortgage bearing 7.91% interest and due in 2020. Management stated available cash, investments, and projected operating cash flow should cover needs for the next 12 months.
- Cash and cash equivalents held outside the U.S. were $161.5 million. The company said $108.4 million held abroad could incur significant U.S. taxes if repatriated; local rules may also restrict transfers.
Changes, outlook and risks
- Q3 bookings rose to $118.0 million from $51.7 million a year earlier; book-to-bill was about 1.4. Backlog was $176.5 million, up from $144.2 million at June 30 but below $186.0 million at December 31, 2015. The nine-month backlog included a $17.6 million adjustment from a partial order cancellation.
- Nine-month bookings were $247.3 million, down from $277.3 million. Management cited weak first-half LED equipment demand, with some improvement in LED industry conditions in Q3. It noted limited long-term visibility, expected quarter-to-quarter sales variability, and generally weak Data Storage demand.
- Management expects Q4 R&D expense to decline as certain programs are completed. It expects another $4–$7 million of restructuring costs over the next few quarters and $6–$9 million of capital expenditures related to facility consolidation.
- Restructuring included terminations affecting about 50 employees, plus approximately 25 additional employees affected by the ALD investment reduction. Future amortization is expected to decline significantly after the ALD impairment.
- Purchase commitments totaled $60.1 million, substantially all due within one year. Outstanding bank guarantees and letters of credit were $5.3 million, with $59.8 million of unused capacity. Veeco did not expect ordinary-course legal proceedings to materially affect its financial position, results, or cash flows.
- Key risks include cyclic and uncertain customer demand, customer and geographic concentration, order/backlog cancellations, competition and technological change, supplier and execution risks, foreign-market exposure, currency and tax risks, and potential impairment. The company reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the Q3 improvement in LED bookings converts into shipments and revenue, given limited visibility and the history of order variability.
- Backlog quality and customer commitments, including the effects of the $17.6 million partial cancellation adjustment.
- Further costs or operational impacts from the ALD investment reduction, impairment, and planned restructuring.
- Cash availability and potential tax or regulatory costs of accessing funds held outside the United States.
- Execution of cost reductions and facility consolidation, including the expected restructuring costs and capital spending.