Veeco Instruments Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; unaudited. Veeco makes process equipment primarily for LED and hard-disk-drive manufacturers. Its reporting segments are LED & Solar and Data Storage. Amounts below are in U.S. dollars; financial-statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $136.5 | $264.8 | $276.5 | $519.5 |
| Gross margin | 44.9% | 51.1% | 45.8% | 51.3% |
| Operating income | $15.1 | $83.0 | $36.1 | $170.2 |
| Continuing-operations income | $11.0 | $56.3 | $27.5 | $114.3 |
| Net income, including discontinued operations | $11.8 | $19.2 | $28.2 | $71.8 |
| Diluted EPS | $0.30 | $0.45 | $0.73 | $1.68 |
| Operating cash flow | Not separately presented | Not separately presented | $60.6 | $75.3 |
Q2 revenue fell 48.4% year over year, chiefly as LED & Solar sales declined 60.4%; Data Storage sales rose 9.0%, partly reflecting replacement shipments after customer facilities in Thailand were flooded. For the first half, LED & Solar sales decreased 58.0% and Data Storage increased 9.9%. Management attributed the LED & Solar contraction mainly to a 64.3% decline in Q2 MOCVD reactor shipments amid industry overcapacity. Q2 regional sales fell 52.6% in Asia Pacific, 26.5% in the Americas and 40.0% in EMEA.
Lower sales volume, lower average selling prices and unfavorable product mix reduced Q2 LED & Solar gross margin to 42.7% from 51.2%; Data Storage margin declined to 48.6% from 50.5% on product mix. SG&A fell 23.9% to $20.9 million following cost controls, while R&D was broadly flat at $23.9 million. As a share of revenue, however, SG&A rose to 15.3% and R&D to 17.5% because sales contracted.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $317.0 million and short-term investments were $221.8 million, totaling $538.9 million; restricted cash was another $0.9 million.
- Current assets were $764.5 million against current liabilities of $145.1 million. Total debt was approximately $2.5 million, including a mortgage bearing 7.91% interest and due January 2020.
- First-half operating cash flow was $60.6 million. Investing activities provided $37.4 million, including investment-sale proceeds and $3.8 million from discontinued-segment asset sales; capital expenditures were $16.6 million. Financing activities provided $1.7 million. Cash increased $99.1 million to $317.0 million.
- Inventory declined to $90.7 million from $113.4 million at year-end. Purchase commitments outstanding were $87.3 million. Management said existing cash and operating cash generation should cover projected working capital, other cash needs and contractual obligations for the next 12 months.
Orders, outlook and material developments
- Q2 bookings were $102.5 million, down 67% year over year; book-to-bill was 0.75. Backlog was $240.8 million, down from $332.9 million at December 31, 2011. Backlog adjustments of $30.4 million in Q2 related to orders that no longer met booking criteria. Customer deposits and advance billings were $52.0 million.
- Management forecast Q3 2012 revenue of $120–$140 million and GAAP EPS of $0.12–$0.29. It tightened full-year 2012 revenue guidance to $520–$560 million.
- Management said MOCVD bookings had stabilized, but customer buying patterns had not clearly turned; LED customers remained cautious and recovery timing was uncertain. Data Storage and MBE orders also fell sequentially in Q2. Assuming macroeconomic conditions did not worsen, management anticipated a gradual order recovery in the second half, while maintaining lean infrastructure and low discretionary spending and continuing next-generation product development.
- Management cited positive LED-lighting trends, including lower prices, more lamp products and greater consumer awareness, but noted continued expected MOCVD selling-price pressure. Key risks include industry cyclicality and overcapacity, subsidy changes, customer concentration and cancellations, supplier constraints, demand forecasting, technology adoption, and macroeconomic weakness.
- Discontinued operations included a $1.4 million gain in Q2 from sale of former Metrology assets held for sale. The CIGS solar systems business had been discontinued in 2011; the 2011 comparison included substantial exit charges, including inventory write-offs and contract-settlement costs. First-half 2012 net income also benefited from the absence of those prior-year discontinued-operation losses.
- After quarter-end, on July 2, Veeco invested an additional $10.3 million in an OLED equipment company, bringing its ownership to 12.0%. The filing reported no material change to previously disclosed risk factors; management said ordinary-course legal matters were not expected to materially affect financial position, results or cash flows.
Investor facts to verify
- Whether MOCVD bookings and customer utilization translate into an actual order recovery, and whether full-year guidance is achieved.
- Backlog quality, including cancellations or modifications, and the conversion of the $240.8 million backlog into revenue.
- Whether gross margins stabilize despite anticipated MOCVD price pressure and the weak product mix.
- The cash-flow and return implications of the post-quarter $10.3 million OLED investment, and the company’s $87.3 million purchase commitments.
- Potential inventory, goodwill or other asset impairment exposure if demand remains weak; the filing provides no impairment charge for the period.