Veeco Instruments Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with the three months ended March 31, 2011. Veeco designs and sells process equipment, principally for LED manufacturing and data storage. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise noted.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $139.9M | $254.7M | Down 45.1% |
| Gross profit / margin | $65.3M / 46.7% | $131.0M / 51.4% | Margin down 4.7 percentage points |
| Operating income / margin | $20.9M / 15.0% | $87.2M / 34.2% | Down 76.0% |
| Income from continuing operations | $16.5M; $0.42 diluted EPS | $58.0M; $1.36 diluted EPS | Down 71.6% |
| Net income | $16.4M; $0.42 diluted EPS | $52.6M; $1.24 diluted EPS | Down 68.8% |
| Cash from operating activities | $41.9M | $74.9M | Down $33.0M |
LED & Solar revenue was $95.6M, down 55.5%, chiefly reflecting fewer MOCVD reactor shipments amid industry overcapacity. Data Storage revenue rose 10.9% to $44.3M, partly due to replacement shipments after flooding at customer facilities in Thailand. Asia Pacific accounted for $114.5M, or 81.8% of revenue; sales there fell 45.5% year over year.
Orders were $113.4M, down 50.9% year over year; book-to-bill was 0.81. Backlog was $305.3M at quarter-end versus $332.9M at December 31, 2011. Management reported approximately $1.1M of backlog adjustments and $57.7M of customer deposits and advance billings.
Cash, debt and liquidity
- Cash and cash equivalents were $275.3M at March 31, 2012, versus $217.9M at year-end; short-term investments were $247.8M versus $273.6M. Cash plus short-term investments totaled $523.2M.
- Operating cash flow was $41.9M; investing activities provided $16.3M, principally reflecting net short-term investment sales; financing activities provided $0.5M. Capital expenditures were $8.5M.
- Total reported debt was approximately $2.6M, consisting principally of a mortgage bearing 7.91% interest and due January 2020. The convertible notes had been fully converted or redeemed in 2011.
- Current assets were $758.1M and current liabilities $156.6M. Management said existing cash balances and expected operating cash flow should meet working-capital needs and contractual obligations for the next 12 months. Purchase commitments outstanding were $77.9M.
Material changes and management commentary
- LED & Solar gross margin declined to 47.3% from 51.0%, mainly due to lower volume, partly offset by cost reductions. Data Storage margin fell to 45.3% from 53.7%, primarily from unfavorable product mix.
- SG&A fell 13.8% to $19.8M following cost controls, while R&D rose 17.3% to $23.3M, reflecting continued product development. R&D rose to 16.7% of sales from 7.8% as revenue declined.
- Management cited growth in Data Storage, MBE and services, while noting LED customers remained cautious and the timing of a MOCVD-market recovery was unclear. Modest sequential growth in Q1 MOCVD bookings had not yet signaled a clear market inflection. It noted improving tool utilization in parts of Asia and continuing customer quoting activity.
Guidance, risks and unusual items
- Q2 2012 revenue guidance was $120M–$145M and GAAP EPS guidance was $0.20–$0.40. Full-year 2012 revenue was projected at $500M–$600M.
- Key risks include MOCVD industry overcapacity and uncertain LED capital spending; slower-than-expected adoption of LED general lighting; reduced government subsidies or incentives; customer order cancellations and backlog changes; demand-estimation and inventory exposure; supplier concentration and outsourcing execution; industry cyclicality, concentrated customers and regions, and shipment/revenue timing. The company also cited foreign-exchange, credit-market, technology, competition, export, and intellectual-property risks.
- The CIGS solar systems business was discontinued in 2011 and its results are presented as discontinued operations. Q1 2012 discontinued operations included a $0.05M net loss, principally related to the former Metrology business. Assets and liabilities held for sale included the remaining China Metrology matter and a $5.4M deferred gain liability.
- Management reported no material changes to previously disclosed risk factors, no significant change in internal control over financial reporting, and no expectation that ordinary-course legal proceedings would materially affect the company. A 10% foreign-exchange move was estimated to have an immaterial income-statement effect under its hedging program; a 100-basis-point rate increase could reduce investment portfolio fair value by about $1.4M.
Important facts for investors to verify
- Whether orders, book-to-bill and backlog stabilize or improve, particularly in MOCVD, and whether backlog remains subject to cancellations or modifications.
- Whether Q2 revenue and GAAP EPS guidance and the $500M–$600M full-year revenue outlook are achieved; the filing cautions that actual results may differ materially.
- Whether lower sales volumes, product mix and inventory levels affect margins, cash generation, or provisions for excess and obsolete inventory.
- Whether customer deposits and advance billings, purchase commitments, and the small remaining Metrology China assets and deferred-gain liability change materially.