Veeco Instruments Inc. — Q2 2015 Form 10-Q
Business context and reporting period. Veeco designs and sells thin-film process equipment used to manufacture electronic components, including LEDs, power and RF devices, displays, and hard disk drives. This unaudited report covers the quarter and six months ended June 30, 2015; the company reports interim quarters on a 13-week basis. Veeco reports one operating segment.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages. Comparisons are with the corresponding 2014 period.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $131.4 | $95.1 | $229.8 | $186.0 |
| Gross profit / margin | $49.1 / 37% | $30.7 / 32% | $84.2 / 37% | $64.5 / 35% |
| Operating income (loss) | $(4.0) | $(15.8) | $(19.9) | $2.9 |
| Net income (loss) | $(8.4) | $(15.2) | $(27.5) | $3.9 |
| Diluted earnings (loss) per share | $(0.21) | $(0.39) | $(0.69) | $0.10 |
| Operating cash flow | Not separately presented | Not separately presented | $12.0 | $(16.8) |
- Q2 trend: Sales increased 38%; gross margin improved to 37% from 32%. The operating and net losses narrowed year over year, but Veeco remained loss-making.
- First-half trend: Sales rose 24%, but the company moved from prior-year operating and net income to operating and net losses. Operating expenses included $15.9 million of intangible amortization, versus $5.8 million a year earlier. The 2014 period also included a $29.4 million non-cash gain from reversal of ALD contingent consideration.
- Cash flow and investment: First-half operating cash flow was $12.0 million; investing cash flow was $31.3 million, largely reflecting net liquidation of short-term investments. Capital expenditures were $7.5 million. Cash and cash equivalents increased to $313.9 million.
- Liquidity and debt: Cash, short-term investments, and restricted cash totaled $396.3 million at June 30, versus $391.9 million at year-end; there was no restricted cash at June 30. Total debt was approximately $1.7 million, including a $1.4 million long-term portion. Management said projected operating cash flow and cash and short-term investments should meet needs for the next 12 months.
- Working capital: Current assets were $605.8 million and current liabilities $222.3 million. Customer deposits and deferred revenue were $128.6 million; accounts receivable was $83.1 million and inventory plus deferred cost of sales was $87.9 million.
Material changes and management commentary
- Q2 sales growth came from all reported markets. Lighting, Display & Power Electronics sales increased 24% to $82.1 million; Advanced Packaging, MEMS & RF increased to $13.8 million from $1.8 million, reflecting the December 2014 acquisition of Veeco Precision Surface Processing (PSP). Scientific & Industrial and Data Storage sales also increased in the quarter.
- For the first half, Advanced Packaging, MEMS & RF sales increased to $27.0 million from $2.6 million, while Data Storage declined 19% to $24.7 million. The company attributed growth primarily to PSP and sales into RF and Lighting; pricing was not a significant driver.
- PSP was performing ahead of management’s target plans, with positive momentum in advanced packaging applications. Veeco reported that its EPIK 700 MOCVD system was performing well against expectations and that successful demonstrations across multiple customers enabled revenue recognition upon shipment to begin toward the end of Q2.
- Q2 bookings were $123.8 million versus $104.0 million a year earlier; the quarter’s book-to-bill ratio was slightly below 1.0. Backlog was $278.8 million, down from $288.9 million at March 31. First-half bookings were $225.6 million versus $206.6 million, with book-to-bill approximately 1.0.
- Management anticipated improved overall business levels in the second half of 2015, driven primarily by Lighting, Display & Power Electronics. No numeric full-year sales or earnings guidance is provided in the supplied filing text.
Outlook, risks, contingencies, and unusual items
- Management described Data Storage as a mature market facing near-term softness in personal computers and a longer-term shift from hard disk drives to solid-state drives. It did not expect significant new capacity investment by hard disk drive customers; future demand and orders remain uncertain and may fluctuate.
- Key business risks include industry cyclicality, dependence on concentrated customers and regions, technology changes and competition, the timing of orders and revenue recognition, potential backlog cancellations, supplier and manufacturing dependence, and possible changes to foreign government subsidies and incentives affecting MOCVD demand.
- The first-half tax provision was $7.9 million despite a pretax loss. Veeco said it did not recognize a current domestic tax benefit because the losses were not considered realizable; foreign operations were profitable. This tax treatment contributed to the net loss.
- Veeco recognized customer deposits forfeited as sales: $1.1 million in Q2 and $4.1 million in the first half. First-half restructuring expense was $3.0 million, related to facility closures and ALD spending reductions, including the planned closure of the Hyeongok-ri, South Korea facility. Management did not expect significant additional accruals for these restructuring activities.
- Purchase commitments totaled $123.4 million, substantially all due within one year. Outstanding bank guarantees and letters of credit totaled $36.2 million; an additional $30.9 million of letters of credit was available to be drawn upon. A product-liability lawsuit alleges injury involving a molecular beam epitaxy system; Veeco intends to defend the case, could not estimate potential loss, and said any recovery from Veeco would be fully covered by insurance. Other routine proceedings were not expected to have a material adverse effect.
- Of $246.7 million of cash and cash equivalents held outside the U.S., $134.6 million would incur significant U.S. income taxes if repatriated. Veeco stated its intention to permanently reinvest certain foreign balances and said local regulations could restrict cash movement. The filing also identifies foreign exchange, interest-rate, export-control, cyber, environmental, and natural-disaster risks.
Important facts for investors to verify
- Whether the anticipated second-half improvement materialized, and the subsequent trend in bookings, book-to-bill, and backlog.
- How much sales growth and profitability depend on PSP and EPIK 700 shipments, and whether these products sustain expected demand and margins.
- Whether Data Storage weakness, customer concentration, subsidy changes, or order timing affect future sales and cancellations.
- The effects of the domestic tax valuation allowance and potential tax costs of repatriating foreign cash.
- Cash conversion and working-capital requirements, including inventory and deferred cost of sales, customer deposits, and the $123.4 million of purchase commitments.
- Progress and remaining costs for restructuring, and any developments in the product-liability lawsuit or other contingencies.