Veeco Instruments Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014 (the company’s 13-week quarter ended March 30, reported as March 31). Comparisons are with the three months ended March 31, 2013. Unless noted, amounts are in U.S. dollars.
Business context and operating results
Veeco designs and sells process equipment primarily for LED and solar-related applications and data storage. The LED & Solar segment includes MOCVD, MBE and ALD systems; Data Storage equipment serves hard-drive and related markets.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $90.8 million | $61.8 million |
| Gross profit / gross margin | $33.8 million / 37.2% | $22.6 million / 36.5% |
| Operating income (loss) | $18.6 million | $(19.6) million |
| Net income (loss) | $19.2 million | $(10.1) million |
| Diluted earnings (loss) per share | $0.48 | $(0.26) |
| Operating cash flow | $(18.4) million | $10.5 million |
Revenue grew 47.0%, primarily from LED & Solar, whose sales increased 67.2% to $70.8 million. Data Storage sales rose 3.1% to $20.1 million. Asia Pacific accounted for 80.0% of sales. Total orders increased 45.7% to $102.6 million; book-to-bill was 1.13 and backlog was $154.8 million at quarter-end.
Earnings quality: Q1 operating income included a $29.4 million gain from reversing the estimated fair value of Synos acquisition contingent consideration. Excluding that gain, operating results would have been an approximately $10.7 million loss. Thus, reported net income does not reflect a return to underlying operating profitability.
Margins, expenses, cash, debt and liquidity
- Total gross margin improved 0.7 percentage points. LED & Solar margin rose to 37.4% from 33.1%, primarily on higher volume; Data Storage margin fell to 36.5% from 44.0%, largely due to product mix.
- SG&A was $21.7 million, up 10.3% year over year, while R&D declined 4.7% to $19.8 million. Amortization increased to $2.9 million, mainly due to acquired ALD intangibles.
- Operating cash use of $18.4 million reflected, among other factors, a $26.9 million increase in receivables and a $7.4 million decrease in payables; inventory reduction and higher accrued expenses/customer deposits partly offset these uses. Cash and equivalents increased to $214.7 million.
- Cash, restricted cash and short-term investments totaled $482.8 million at March 31, down from $495.1 million at December 31, 2013. Management stated these resources and projected operating cash flows should cover working-capital needs and contractual obligations for the next 12 months.
- Total debt was approximately $2.1 million, principally a mortgage bearing 7.91% interest and due January 2020. Purchase commitments were $85.5 million.
- Approximately $158.9 million of cash and equivalents was held outside the U.S.; $117.5 million offshore could incur significant U.S. taxes if repatriated. The company reported no expected near-term need to repatriate funds.
Outlook, notable items and risks
- Management expected Q2 2014 orders to be similar to or better than Q1, but warned MOCVD expansions may make orders uneven and said it lacked visibility into the second half. Management anticipated losses would continue in the near term.
- LED fab utilization had improved and customers were beginning to place capacity-expansion orders. However, competitive pricing pressure remained difficult to predict.
- The acquired ALD business was pre-revenue; management expected it to weigh on 2014 performance. Veeco received no Q1 ALD orders from its key customer, and timing of production orders could materially affect growth and profitability.
- Data Storage orders were low; customers had excess capacity and were making selective purchases. Future demand was unclear and orders were expected to be lumpy.
- Veeco reversed the $29.4 million recorded contingent-consideration liability after determining milestones were unmet or unlikely. A second milestone contingency remains contractually outstanding, with a maximum potential payment of $75 million; management said it was unlikely to be met.
- The company announced consolidation of its Ft. Collins facility into Plainview, notified approximately 49 employees of termination, and recorded $0.4 million of restructuring charges. It expected about $1.3 million of additional charges in the remainder of 2014.
- A product-liability lawsuit alleges injuries involving an MBE system. Veeco intends to defend the case, cannot estimate a possible loss, and believes any recovery would be covered by insurance. Other ordinary-course proceedings were not expected to have a material adverse effect.
- Key risks include cyclicality and customer concentration, order timing and backlog cancellation, subsidy changes, pricing competition, supplier dependence, foreign-exchange exposure, and uncertain LED/ALD market adoption. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether LED/MOCVD demand and orders sustain the Q1 increase, and whether reported backlog converts to revenue without cancellation or delay.
- Underlying profitability excluding the one-time $29.4 million contingent-consideration gain, alongside margins and restructuring costs.
- Whether the Synos earn-out contingency can still trigger payments despite the reversal of the recorded liability, and the status of the ALD customer’s production orders.
- Receivables collection and operating cash flow trends, offshore cash accessibility and tax consequences, and ability to meet $85.5 million of purchase commitments.
- Developments in the product-liability litigation and the expected timing and cost of the facility consolidation.