Veeco Instruments Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; filed October 29, 2014. Amounts are in U.S. dollars. Veeco supplies process equipment primarily to LED/OLED and data-storage manufacturers.
Financial performance and liquidity
- Q3 revenue: $93.3 million, down 6.0% year over year. Gross profit was $32.6 million; gross margin improved to 34.9% from 30.5%.
- Q3 earnings: Operating loss was $17.5 million versus $9.9 million; net loss was $14.0 million, or $0.35 per diluted share, versus $6.0 million, or $0.16 per share.
- Nine-month revenue: $279.3 million, up 8.0%. Gross profit was $97.0 million and gross margin was 34.7%, versus 33.8%.
- Nine-month earnings: Operating loss was $14.6 million and net loss was $10.0 million, compared with operating loss of $36.4 million and net loss of $20.2 million in 2013. The 2014 results include a $29.4 million noncash gain from reversing Synos acquisition contingent consideration; the reported improvement therefore does not reflect operating performance alone.
- Cash flow: Operations used $6.6 million in the first nine months, versus providing $4.6 million in 2013. Investing provided $52.6 million, mainly from net liquidation of short-term investments; financing provided $7.3 million.
- Liquidity and debt: Cash and cash equivalents were $264.0 million and short-term investments $223.0 million at September 30; together with restricted cash, liquidity totaled $487.4 million. Total debt was approximately $1.9 million. Management said available cash and projected operating cash flow should cover requirements for the next 12 months. About $135.7 million of cash held offshore would incur significant U.S. taxes if repatriated.
Material changes and business trends
- Q3 LED & Solar sales rose 2.5% to $76.9 million; Data Storage sales fell 32.2% to $16.5 million. For the first nine months, LED & Solar sales increased 16.3% to $224.8 million, while Data Storage declined 16.5% to $54.5 million.
- Q3 orders rose 17.3% to $107.3 million, led by LED & Solar orders, up 26.4%; Data Storage orders fell 19.9%. Book-to-bill was 1.15. Backlog was $176.8 million, up from $143.3 million at December 31, 2013; orders may be canceled or modified.
- Q3 gross margin improved with LED & Solar product mix and warranty costs, but Data Storage margin weakened with lower volume. SG&A rose 10.5%, R&D rose 5.1%, and amortization increased substantially, in part due to the 2013 ALD acquisition.
- Liquidity included a roughly $20 million net operating loss carryback refund claim recorded in current assets; the company expected collection within 12 months.
Outlook, risks, and unusual items
- Management said LED fab utilization and lighting adoption were improving and described MOCVD trends as favorable, while cautioning that major customer expansions and quarterly orders are unpredictable. Competitive pricing pressure remained a concern.
- Veeco did not expect ALD production orders in 2014; management said the acquired, pre-revenue ALD business had weighed on earnings. Data Storage demand remained uncertain amid customer excess capacity and selective purchases.
- Management expected business improvements, growth initiatives, and lower expenses to help profitability improve in 2015; the filing provides no quantified earnings guidance. Restructuring and facility consolidations were intended to reduce costs.
- Restructuring included consolidating Ft. Collins and Camarillo into Plainview and notifying 93 employees of termination. Further severance and lease charges were expected, primarily in Q4 2014.
- Q3 included $2.9 million of asset impairment charges. Japan subsidiary liquidation was completed in October 2014; Veeco expected to recognize an approximately $3.1 million gain in Q4, including release of accumulated currency translation adjustments.
- The Synos earn-out liability was reversed after milestones were not met or were considered unlikely. A remaining contractual contingency could require payment of up to $75 million, but management did not expect it to be met.
- Risks include industry cyclicality, customer and regional concentration, order and revenue timing, backlog changes, pricing and subsidies, supply constraints, foreign currency and export exposure, and technology and competition. A product-liability lawsuit was pending; Veeco said it could not estimate potential loss and believed any recovery would be covered by insurance. Management reported disclosure controls were effective and no material change in internal controls.
Important facts for investors to verify
- Whether MOCVD bookings and backlog convert to shipments and revenue, and whether customer order timing or cancellations change materially.
- How much of the nine-month earnings improvement depends on the noncash Synos contingent-consideration reversal, and whether the remaining earn-out is ultimately payable.
- Whether the expected 2015 profitability improvement is achieved, given ongoing Data Storage weakness, ALD costs, pricing pressure, and restructuring expenses.
- Collection of the approximately $20 million tax refund, access to offshore cash, and the realized Q4 gain from the Japan liquidation.
- Whether restructuring costs and asset impairments exceed expectations, and whether the pending product-liability litigation creates any uninsured exposure.