Veeco Instruments Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; financial amounts below are in U.S. dollars unless stated otherwise. The interim financial statements are unaudited. Veeco designs and sells thin-film process equipment serving lighting, display and power electronics; advanced packaging, MEMS and RF; scientific and industrial; and data storage markets.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $78.0 million | $98.3 million |
| Gross profit / gross margin | $32.0 million / 41% | $35.1 million / 36% |
| Operating loss | $15.3 million | $15.8 million |
| Net loss | $15.5 million; $0.40 per diluted share | $19.1 million; $0.48 per diluted share |
| Operating cash flow | $(18.8) million | $4.3 million |
| Capital expenditures | $4.0 million | $4.8 million |
Gross margin and per-share figures are as reported. At March 31, cash and cash equivalents were $243.7 million and short-term investments were $105.0 million, totaling $348.7 million, down from $385.3 million at year-end 2015. Total debt was approximately $1.5 million, including $0.3 million current and $1.1 million long-term. Current assets were $517.5 million and current liabilities $157.1 million (a calculated current ratio of about 3.3). Operating cash use reflected the net loss and working-capital outflows, including higher receivables and prepaid assets and lower payables, accrued liabilities, customer deposits and deferred revenue.
Changes versus Q1 2015
- Sales fell 21%, primarily because of a sharp decline in Lighting, Display & Power Electronics, reflecting oversupply of LED units. China sales fell 80%; EMEA sales rose 230%.
- By end market, Lighting, Display & Power Electronics sales declined 64% to $22.9 million. Advanced Packaging, MEMS & RF grew 77% to $23.3 million; Data Storage grew 134% to $16.9 million; Scientific & Industrial grew 9% to $14.9 million.
- Gross profit declined 9%, but gross margin improved to 41% from 36%, attributed to product mix, cost reductions and customer transition to newer EPIK 700 MOCVD systems.
- SG&A fell 13%, while R&D rose 19% to $22.1 million, reflecting development contractors, personnel costs and depreciation. Lower amortization and restructuring costs also reduced operating expenses.
- Net loss narrowed by $3.6 million, partly due to lower income tax expense ($0.5 million versus $3.4 million); the company did not recognize a tax benefit on domestic pretax losses.
- Bookings were $61.6 million; book-to-bill was slightly below 0.8. Backlog declined to $169.3 million from $186.0 million at December 31, 2015.
Liquidity, outlook, risks and notable items
- Management believes operating cash flow, cash and short-term investments will cover projected working-capital needs, contractual obligations and other cash requirements for the next 12 months. However, $105.8 million of cash held outside the U.S. could incur significant U.S. taxes if repatriated; local restrictions may also limit cash movement.
- Management described continued LED market uncertainty and weak near-term demand, with limited visibility on when LED demand will strengthen. It expects LED equipment needs over several years as lighting penetration and emerging applications grow, but did not provide numerical guidance.
- Management expects measured equipment investment in Advanced Packaging, MEMS & RF as customers emphasize technology over capacity, and generally weak Data Storage investment. Scientific & Industrial demand is diverse but can vary substantially by quarter.
- Key risks include industry cyclicality, customer concentration, technology changes and competition, order and revenue timing, possible backlog cancellations, supplier and demand-planning exposure, foreign-government incentives affecting MOCVD demand, and global, currency and export-control risks.
- Purchase commitments were $81.8 million, substantially due within one year. Outstanding bank guarantees and letters of credit were $3.7 million. A product-injury lawsuit was settled during the quarter; the settlement is expected to be fully covered by insurance and not materially affect results.
- Veeco repurchased $13.3 million of shares in Q1 under a $100 million authorization; $22.3 million had been used by March 31. It also early adopted share-based compensation accounting guidance, including a $1.3 million opening accumulated-deficit charge offset by additional paid-in capital, with no effect on opening total equity.
Important facts for investors to verify
- Whether LED oversupply and China-related demand weakness continue, and how bookings, book-to-bill and backlog develop.
- Whether improved gross margins persist despite lower sales and higher R&D spending, and whether operating cash flow recovers.
- The availability and practical accessibility of overseas cash, including potential repatriation taxes, and the company’s cash use for repurchases and commitments.
- How customer acceptance terms and revenue-recognition judgments affect the timing of reported sales.