Veeco Instruments Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Veeco designs, manufactures, and supports thin-film process equipment for LED, advanced packaging/MEMS/RF, scientific and industrial, and data-storage markets. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $75.3 | $131.4 | $153.4 | $229.8 |
| Gross profit | $31.4 | $49.1 | $63.4 | $84.2 |
| Gross margin | 41.7% | 37.3% | 41.3% | 36.7% |
| Operating loss | $(31.3) | $(4.0) | $(46.5) | $(19.9) |
| Net loss | $(32.1) | $(8.4) | $(47.6) | $(27.5) |
| Loss per diluted share | $(0.82) | $(0.21) | $(1.22) | $(0.69) |
Q2 sales declined 43% year over year; first-half sales declined 33%. Improved gross margins reflected product mix and cost reductions, but lower volume and $13.6 million of Q2 impairment charges contributed to sharply higher operating and net losses. Impairments comprised approximately $7.5 million on assets held for sale and $6.1 million on lab equipment.
Cash flow and liquidity: First-half operating cash flow was a use of $31.1 million, versus a source of $12.0 million in the prior-year period. Investing activities provided $33.2 million, mainly from net liquidations of investments; financing activities used $13.7 million, including $13.3 million of share repurchases. Cash and cash equivalents were $257.6 million and short-term investments were $73.2 million at June 30, totaling $330.9 million, down from $385.3 million at year-end 2015. Total debt was approximately $1.4 million, including a $1.0 million long-term balance. Management said cash, investments, and projected operating cash flow should fund needs for the next 12 months.
Cash outside the U.S. totaled $146.2 million; $105.7 million could incur significant U.S. taxes upon repatriation. Management intends to permanently reinvest specified foreign balances and noted local restrictions could limit cash movement.
Material changes and operating trends
- Lighting, Display & Power Electronics sales fell 70% in Q2 and 67% in the first half, primarily due to LED oversupply and weaker demand. China sales fell 63% in Q2 and 70% in the first half.
- Q2 Advanced Packaging, MEMS & RF sales rose 23%; Scientific & Industrial rose 10%. First-half sales rose 49% and 10%, respectively. Data Storage fell 22% in Q2 but increased 24% for the first half.
- Q2 bookings were $67.7 million, versus $123.8 million a year earlier; first-half bookings were $129.3 million, versus $225.6 million. Book-to-bill was slightly below 0.9 for Q2 and 0.8 for the first half. Backlog was $144.2 million at June 30, including a roughly $17 million adjustment for partial cancellation of a prior-period order.
- R&D expense increased as Veeco used additional contractors and personnel to advance products; SG&A decreased with lower incentive compensation and sales commissions. Intangible amortization declined as certain assets became fully amortized.
- At June 30, inventory was $90.8 million, up from $77.5 million at year-end. Customer deposits and deferred revenue were $65.8 million, down from $76.2 million.
Outlook, risks, and unusual items
- Management cited some positive signs of improving LED industry conditions and expected MOCVD demand to increase from current levels in the near term, while cautioning that long-term visibility is limited. It expected Data Storage demand to remain generally weak, with orders fluctuating quarter to quarter.
- Veeco eliminated approximately 40 positions and recorded about $2.0 million of related severance costs. It expects an additional $5–$8 million of restructuring costs over the next few quarters. It also expects $6–$9 million of additional capital expenditures over the next few quarters for facility consolidation.
- Key risks include cyclicality and uncertain demand, LED oversupply and potential reduction in government incentives, customer and geographic concentration, order/backlog cancellations, long sales cycles, supplier dependence, technology change, foreign-exchange and export risks, and possible asset impairments. The filing reported no material change in previously disclosed risk factors.
- Purchase commitments totaled $50.3 million, substantially all due within one year. Outstanding bank guarantees and letters of credit were $4.7 million, with $60.5 million of unused capacity available. A product-injury lawsuit was settled during the first half without admission of wrongdoing; insurance fully covered the settlement. Veeco said other ordinary-course legal matters were not expected to have a material adverse effect.
- No formal revenue or earnings guidance was provided. Forward-looking statements are subject to risks, and interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether LED/MOCVD demand and bookings recover, and whether the reported improvement in gross margin can persist at lower sales volumes.
- Backlog quality and the effect of the approximately $17 million partial cancellation, as well as subsequent bookings and book-to-bill trends.
- Execution and cash costs of the restructuring, expected additional capital expenditures, and progress selling the listed properties.
- Inventory levels, working-capital cash use, and the availability and practical movement of cash held outside the United States.
- The pace of cash depletion and any subsequent share repurchases. The filing reports $13.3 million of repurchases in first-half cash flows, while stating no repurchases occurred in Q2; it also notes $22.3 million of the $100 million authorization had been used as of March 31.