Business Context and Reporting Period
Company: Veeco Instruments Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2001
Business Overview: Veeco designs and manufactures process equipment and metrology products for the data storage, semiconductor, and optical telecommunications industries. The company operates through two primary segments: Process Equipment and Industrial Metrology.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended June 30, 2001 |
3 Months Ended June 30, 2000 |
6 Months Ended June 30, 2001 |
6 Months Ended June 30, 2000 |
|---|---|---|---|---|
| Net Sales | $113,455 | $102,324 | $240,723 | $189,155 |
| Gross Profit | $53,504 | $28,995 | $112,788 | $69,363 |
| Gross Margin % | 47.2% | 28.3% | 46.9% | 36.7% |
| Operating Income | $14,708 | ($22,941) | $33,744 | ($13,785) |
| Net Income | $10,000 | ($14,026) | $22,873 | ($26,460) |
| Diluted EPS | $0.40 | ($0.60) | $0.91 | ($1.14) |
| Cash & Equivalents |
Balance Sheet (June 30, 2001) Cash: $60,241 Short-term Investments: $27,629 Total Current Assets: $355,255 Total Current Liabilities: $115,668 Long-term Debt: $13,960 |
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| Operating Cash Flow (6mo) |
Note: 2000 figures include significant non-recurring charges related to the CVC merger and accounting changes (SAB 101).
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 11% ($11.2M) for the quarter and 27% ($51.6M) for the six months compared to 2000. Growth was driven primarily by a 40% increase in U.S. process equipment sales, specifically optical telecommunications products from the Ion Tech subsidiary.
- Profitability Turnaround: The company moved from a net loss to net income. Operating income improved from a loss of $22.9M to a profit of $14.7M for the quarter. This was aided by the absence of the $33.0M in merger and restructuring charges recorded in the comparable 2000 period.
- Margin Expansion: Gross margin improved significantly to 47.2% (Q2) and 46.9% (6mo) from 28.3% and 36.7% respectively in 2000. The 2000 margins were depressed by a $15.3M non-cash inventory write-off related to the CVC merger.
- Order Backlog: New orders declined 38% to $81.5M for the quarter and 20% to $194.3M for the six months. Process equipment orders dropped 52% due to a slowdown in the optical telecommunications sector. The book-to-bill ratio for the quarter was 0.72.
- Inventory Build: Inventories increased by $35.8M during the six months ended June 30, 2001, attributed to rescheduled shipments, the impact of SAB 101 revenue recognition changes, and new product production.
Guidance, Outlook, and Risks
- Management Commentary: Management notes continued quarter-to-quarter variations in geographic sales concentration. While U.S. sales surged, Europe and Asia Pacific sales declined significantly. The company expects to continue experiencing order cancellations or rescheduling due to the weak business environment.
- Restructuring: A $1.0M restructuring charge was recorded in Q2 2001 for a workforce reduction of approximately 130 employees in response to the slowdown in orders.
- Acquisitions: On July 16, 2001 (post-period), the company acquired ThermoMicroscopes Corp. (TM) for approximately $22.0M to expand its atomic force microscope capabilities.
- Liquidity: The company entered a new $100M revolving credit facility in April 2001, replacing a $40M facility. No borrowings were outstanding as of June 30, 2001. Management believes existing cash and the new facility are sufficient for the next 12 months.
- Risks: Key risks include dependence on principal customers, cyclical nature of the data storage and telecom industries, rapid technological change, and foreign currency exchange rate fluctuations (approx. 43% of sales are foreign).
- Accounting Changes: The company adopted SFAS 133 (Derivatives) in 2001. Future adoption of SFAS 141/142 (Goodwill) in 2002 is expected to decrease amortization expense by approximately $1.6M annually.
Investor Verification Checklist
- Order Cancellations: Verify the extent of order cancellations (approx. 7% of backlog) and rescheduling in the optical telecommunications sector.
- Inventory Levels: Assess the $35.8M increase in inventory to determine if it represents future revenue or potential future write-downs.
- Geographic Concentration: Monitor the divergence between strong U.S. performance and declining sales in Europe and Asia Pacific.
- ThermoMicroscopes Integration: Evaluate the financial impact and integration progress of the July 2001 TM acquisition.
- Book-to-Bill Ratio: Track the book-to-bill ratio (0.72 in Q2) to gauge future revenue sustainability given the 38% drop in new orders.