Veeco Instruments Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. The report was signed November 3, 2013, following a prolonged filing delay tied to an accounting review. Veeco designs and manufactures process equipment, principally for LED and solar applications (including MOCVD and MBE systems) and data storage.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $132.7 million | $268.0 million | $409.2 million | $787.5 million |
| Gross profit / margin | $49.9 million / 37.6% | $124.9 million / 46.6% | $176.4 million / 43.1% | $391.2 million / 49.7% |
| Operating income | $7.5 million | $73.9 million | $43.5 million | $244.1 million |
| Continuing-operations income | $7.7 million | $52.6 million | $35.2 million | $166.9 million |
| Net income | $11.8 million | $35.9 million | $40.0 million | $107.7 million |
| Diluted EPS | $0.30 | $0.90 | $1.03 | $2.57 |
- Revenue and segments: Q3 sales fell 50.5% year over year. LED & Solar sales declined 57.7%, mainly from a 69.5% drop in MOCVD reactor shipments amid industry overcapacity; Data Storage sales were nearly flat, down 0.8%. Nine-month sales declined 48.0%; LED & Solar fell 57.9%, while Data Storage rose 6.8%.
- Orders and backlog: Q3 bookings were $83.7 million, down 37.1%; book-to-bill was 0.63. Nine-month bookings fell 55.6% to $299.6 million, with a 0.73 book-to-bill ratio. Backlog was $180.8 million at September 30, versus $332.9 million at December 31, 2011; the company recorded cancellations and other backlog adjustments.
- Margins and expenses: Lower volumes, selling prices and product mix weighed on margins. Q3 included $7.2 million of expense for slow-moving items; nine-month expense was $7.8 million. Q3 SG&A declined to $13.9 million, while R&D was $25.8 million. Restructuring charges were $2.0 million in Q3 and $2.1 million year to date.
- Cash flow and liquidity: Nine-month operating cash flow was $105.8 million, versus $60.1 million in 2011, helped by reductions in receivables and inventory. Cash and equivalents were $387.0 million and short-term investments $185.7 million at September 30, 2012; current assets were $758.2 million and current liabilities $129.8 million. Management said available cash and operating cash generation were expected to cover projected needs for the next 12 months.
- Debt: Long-term debt, including its current portion, was approximately $2.5 million, primarily a mortgage at 7.91% due January 2020. The convertible notes had been repaid or converted in 2011.
Material changes, unusual items and outlook
- Veeco’s review of more than 100 multiple-element customer arrangements identified prior-period errors, primarily in revenue, related costs and warranty accounting. Management deemed the errors not material individually or in aggregate. In Q3 2012, it recorded corrections that increased revenue by $5.4 million and continuing-operations income by $0.5 million.
- Q3 discontinued-operations income was $4.1 million, including a $5.4 million pre-tax gain from completing the sale of former Metrology assets in China. Thus, reported net income includes a material contribution from discontinued operations.
- During Q3, Veeco invested an additional $10.3 million in an OLED equipment company. On October 1, 2013, it acquired Synos Technology for an initial $70 million, with up to $115 million of additional earn-out payments if milestones are met.
- Management’s later-period commentary in the filing said that through the first nine months of 2013 it saw no clear near-term improvement in MOCVD overcapacity or weak Data Storage demand. It cited limited LED-industry visibility, MOCVD pricing pressure and low volumes, and said the downturn had moved the company to a loss in 2013. No specific earnings guidance is provided.
- Management reported material weaknesses in revenue-recognition controls, including inadequate expertise, review of foreign-subsidiary customer documentation, and controls over identifying and accounting for multiple-element arrangements. Disclosure controls and internal control over financial reporting were deemed ineffective as of September 30, 2012. Remediation included new revenue-recognition personnel, training, contract and process improvements, and additional external support.
- Veeco was not current with required SEC filings. Nasdaq had notified the company that its listing could be suspended if outstanding reports were not filed by November 4, 2013. A product-liability lawsuit related to alleged injuries while cleaning an MBE system was disclosed; the company intended to defend it and had not recorded a reserve because loss was not considered probable or estimable.
Important facts for investors to verify
- Whether the revenue-recognition control weaknesses were remediated and whether later filings or audits identified further adjustments.
- Whether Veeco filed all delinquent reports by the Nasdaq deadline and maintained its listing.
- Whether MOCVD bookings, pricing, backlog and inventory reserves improved after the reported downturn.
- The cash, debt and liquidity position after the Synos acquisition, including any earn-out payments.
- The outcome and potential financial exposure of the MBE product-liability lawsuit.