Veeco Instruments Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; amounts are in U.S. dollars. Veeco designs and sells semiconductor process equipment across LED, compound semiconductor, advanced packaging, scientific and industrial, and front-end semiconductor markets. Results include Ultratech from its May 26, 2017 acquisition.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $131.9M | $85.5M | $341.3M | $238.8M |
| Gross profit / margin | $53.1M / 40% | $33.5M / 39% | $126.0M / 37% | $96.9M / 41% |
| Operating income (loss) | ($18.9M) | ($68.7M) | ($51.8M) | ($115.2M) |
| Net income (loss) | ($21.9M) | ($69.6M) | ($39.2M) | ($117.2M) |
| Diluted loss per share | ($0.47) | ($1.78) | ($0.91) | ($2.99) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $15.3M | ($24.3M) |
Revenue rose 54% in Q3 and 43% year to date, reflecting improved LED-sector conditions and Ultratech sales. Q3 sales increased in all market categories; nine-month growth was particularly strong in LED Lighting, Display & Compound Semiconductor (up 76%) and Front-End Semiconductor. Year-to-date gross margin declined, which Veeco attributed to Ultratech inventory fair-value step-up charges and sales mix. Orders were $161.9M in Q3 and $391.9M year to date; book-to-bill was 1.2 and 1.1, respectively. Backlog was $299.2M at quarter-end, versus $269.5M at June 30 and $209.2M at December 31, 2016.
Balance sheet and liquidity
- At September 30, 2017, cash and cash equivalents were $235.3M and short-term investments were $85.9M, totaling $321.1M, down from $344.2M at year-end 2016.
- Current assets were $602.6M and current liabilities $231.3M. Working capital was approximately $371.3M.
- Long-term debt had a $272.8M net carrying value, against $345.0M principal, for 2.70% convertible senior notes due January 2023. The notes’ reported fair value was $330.9M.
- Nine-month investing cash outflow was $386.8M, primarily reflecting $399.5M net cash paid for Ultratech and $17.4M of capital expenditures. Financing provided $329.3M, primarily from the notes issuance.
- Management said available cash, investments, and projected operating cash flow should fund working capital, contractual commitments, and other needs for the next 12 months. $194.7M of cash was held outside the U.S.; the company noted potential U.S. tax costs on repatriation of some foreign cash.
Material developments, outlook, and risks
- Ultratech acquisition: Completed May 26 for preliminary consideration of $633.4M, including $404.5M cash net of acquired cash and 7.2M Veeco shares. Ultratech contributed $21.2M of Q3 revenue and a $21.6M pre-tax operating loss for the quarter. Purchase accounting remained preliminary; acquired intangible assets were $346.9M and goodwill $193.6M.
- Unusual charges and tax: Q3 included $5.0M restructuring, $0.8M acquisition costs, and $12.5M intangible amortization. Nine-month acquisition costs were $16.3M. The prior-year comparison includes major impairment charges ($56.0M in Q3 and $69.7M year to date), so the narrower losses do not reflect operating improvement alone. The 2017 nine-month tax benefit of $25.0M included a nonrecurring benefit associated with the convertible-note tax accounting and a $6.3M benefit from remeasuring a foreign tax position.
- Management outlook: Veeco said MOCVD demand and backlog had improved, but expected profits from increased sales could be partly offset by lower margins in a competitive market; it warned gross margins may decline beyond 2017. Advanced-packaging sales had slowed amid delayed fan-out wafer-level packaging adoption and weak smartphone sales, though management described longer-term positioning positively. No specific revenue or earnings guidance was provided.
- Costs and commitments: The company expected another $1M–$5M of restructuring costs over the next few quarters and $2M–$5M of 2017 capital spending for facility consolidation. Purchase commitments totaled $151.7M, substantially due within one year.
- Legal and operating risks: Ultratech shareholders sought appraisal of 440,100 shares; Veeco intends to contest. Veeco was defending a patent suit in China brought by AMEC; the court suspended the case pending a patent invalidation proceeding. Separately, after the quarter, a U.S. court granted Veeco a preliminary injunction in its patent case against SGL Carbon. The filing reported no material change to previously disclosed risk factors. Backlog may be canceled or modified, and the business remains exposed to cyclical demand, customer and geographic concentration, competition, and technology changes.
Most important facts for investors to verify
- Whether backlog converts to shipments and revenue, and whether order momentum and book-to-bill remain above 1.
- Post-acquisition operating performance and integration costs, including final purchase accounting and the sustainability of Ultratech’s contribution.
- Gross-margin trajectory, particularly MOCVD pricing and the effects of competitive conditions and purchase-accounting charges.
- Cash available for operations after acquisition spending, foreign-cash restrictions or repatriation costs, and scheduled note interest; also assess potential conversion-related dilution.
- Resolution and financial exposure, if any, from the appraisal and patent proceedings, plus the timing and amount of remaining restructuring and purchase commitments.