Veeco Instruments Inc. — Q1 2013 Form 10-Q
Business context and reporting period. Veeco designs and manufactures process equipment for LED, solar, wireless, semiconductor and data-storage markets. This report covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012. The filing was signed November 3, 2013, after a substantial reporting delay related to an accounting review.
Financial performance and liquidity
- Revenue: $61.8 million, down 55.8% from $139.9 million. LED & Solar revenue fell 55.7% to $42.3 million; Data Storage revenue fell 56.1% to $19.5 million.
- Profitability: Gross profit was $22.6 million and gross margin was 36.5%, versus $65.3 million and 46.7% a year earlier. Operating loss was $19.6 million, compared with operating income of $20.9 million. Net loss was $10.1 million, or $0.26 per diluted share, versus net income of $16.4 million, or $0.42 per diluted share.
- Expenses and tax: Operating expenses were $42.2 million, down 4.8%; the reduction was far smaller than the revenue decline. The $9.4 million income tax benefit included research-credit benefits and foreign tax-rate effects. Restructuring charges were $0.5 million.
- Cash flow: Operating activities provided $10.5 million, down from $41.6 million. Capital expenditures were $1.6 million. Investing activities used $172.1 million, mainly reflecting net purchases of short-term investments; cash and cash equivalents declined $161.4 million to $223.1 million.
- Liquidity and debt: Short-term investments were $362.7 million and restricted cash was $2.1 million at quarter-end; cash, short-term investments and restricted cash totaled $587.9 million. Current assets were $742.3 million and current liabilities $118.8 million. Total debt was approximately $2.3 million, including a $2.1 million long-term balance; the mortgage bears 7.91% interest.
- Orders: Bookings were $70.4 million, down 37.9%; book-to-bill was 1.14. Backlog was $156.7 million at March 31, versus $150.2 million at December 31, 2012. Backlog may be cancelled or modified.
Changes versus the prior comparable period
- Weak end-market demand and overcapacity sharply reduced sales in both segments. The LED equipment downturn, particularly in MOCVD, drove much of the decline; Data Storage was affected by weak hard-drive demand and customer manufacturing overcapacity.
- LED & Solar gross margin decreased to 33.1% from 47.3%, reflecting lower volumes, selling prices and final acceptances. Data Storage margin decreased to 44.0% from 45.3%.
- Bookings fell most sharply in LED & Solar, down 49.5%; Data Storage bookings declined 3.7%. Asia-Pacific sales fell 60.9%, largely due to lower MOCVD sales in China.
Outlook, risks and unusual items
- Management reported limited near-term visibility, continued customer spending restraint, MOCVD overcapacity and pricing pressure, and weak Data Storage demand. It said these conditions and low volumes had pushed the company into a loss in 2013. The filing provides no specific numerical earnings or revenue guidance.
- Accounting review and controls: A review of more than 100 multiple-element sales arrangements identified prior-period revenue, related-cost and warranty accounting errors. Management concluded the errors were not material, individually or in aggregate, to 2012 or other prior periods. However, management identified material weaknesses in revenue-recognition controls and concluded internal control over financial reporting and disclosure controls were ineffective as of March 31, 2013. Remediation measures included hiring revenue-accounting personnel, training and improving contract review and procedures.
- Filing status: The company was not current with required SEC filings. Nasdaq had notified Veeco that its listing could be suspended if outstanding reports were not filed by November 4, 2013; delisting could adversely affect trading.
- Subsequent acquisition: On October 1, 2013, Veeco acquired Synos Technology for an initial $70 million, with up to $115 million additional consideration tied to milestones, for a maximum potential price of $185 million. Management stated September 30 liquidity and projected operating cash generation should cover needs for the next 12 months, including contractual obligations.
- Legal matter: A product-injury lawsuit filed in April 2013 seeks unspecified damages. Veeco disputes the claims and intends to defend itself; no reserve was recorded because the loss was not considered probable or estimable. Insurance may apply.
- Other principal risks include cyclical and concentrated markets, customer cancellations, reliance on limited suppliers and customers, foreign-market exposure, technological change, and possible inventory obsolescence. Management said it believed a 100-basis-point interest-rate increase could reduce the March 31 investment portfolio’s fair value by about $2.3 million.
Important facts for investors to verify
- Whether the company filed all overdue reports by Nasdaq’s November 4, 2013 deadline and maintained its listing.
- Progress and independent validation of remediation for material weaknesses, particularly controls over customer contracts and multiple-element revenue recognition.
- Whether MOCVD demand, pricing, bookings and LED & Solar margins stabilized, and whether Data Storage customers resumed investment.
- Synos acquisition performance, milestone conditions and any resulting earn-out payments, alongside post-acquisition liquidity and cash generation.
- Developments in the injury lawsuit, insurance coverage and any new loss estimates or reserves.