Veeco Instruments Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Veeco designs and manufactures equipment for LED and solar production and data storage. Financial statement amounts below are in millions of dollars unless noted. The quarter is reported as ending June 30 for convenience; the company uses 13-week interim periods.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $264.8 | $221.4 | $519.5 | $356.1 |
| Gross margin | 37.8% | 44.6% | 44.2% | 43.7% |
| Operating income | $23.7 | $59.9 | $103.3 | $85.1 |
| Income from continuing operations | $19.2 | $49.9 | $72.3 | $72.8 |
| Net income | $19.2 | $52.4 | $71.8 | $78.4 |
| Diluted EPS | $0.45 | $1.20 | $1.68 | $1.88 |
| Operating cash flow | Not presented separately | Not presented separately | $75.3 | $109.0 |
- Q2 revenue increased 19.6% year over year; first-half revenue rose 45.9%. LED & Solar generated $219.1 million of Q2 sales, up 18.0%, while Data Storage generated $45.7 million, up 27.8%.
- Q2 orders were $310.8 million, essentially unchanged from a year earlier; book-to-bill was 1.17. First-half orders fell 1.2% to $541.7 million, with a 1.04 book-to-bill. June 30 backlog was $558.2 million, versus $555.0 million at year-end 2010.
- Reported Q2 gross margin was reduced by a $33.4 million CIGS inventory write-off. Management stated Q2 margin would have been 50.4% without that write-off. First-half margin would likewise have been 50.4% excluding it.
- Q2 operating expenses included $11.1 million of restructuring and $6.2 million of asset impairment charges. The company also recorded a $3.0 million Q2 loss on extinguishment of debt.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $197.7 million and short-term investments were $380.5 million. A further $54.5 million was restricted: $22.9 million in escrow related to the Metrology sale and $31.6 million supporting bank guarantees.
- Total debt was approximately $2.8 million, principally a mortgage. Veeco repaid or converted the remaining $105.6 million of convertible notes during the first half, paying principal in cash and issuing shares for the conversion premium.
- First-half operating cash flow was $75.3 million. Capital expenditures were $31.3 million and cash paid for an acquisition was $28.3 million. Cash declined $47.5 million to $197.7 million, mainly reflecting debt repayments and other financing activity.
- Veeco acquired a privately held supplier on April 4 for $28.3 million in cash. It reported $16.4 million of acquired definite-lived intangible assets and $15.1 million of goodwill.
- During Q2, Veeco repurchased 165,288 shares for $7.8 million. Through July 26, it repurchased an additional 1.7 million shares for $71.9 million. Management said cash and operating cash generation should cover requirements for the next 12 months.
Outlook, commentary and risks
- Q3 2011 revenue guidance was $235–$285 million and EPS guidance was $0.92–$1.32. Full-year revenue guidance remained above $1 billion. Management expected Q3 bookings below Q2’s level, citing weak near-term LED end-market demand and global macroeconomic concerns, while noting active MOCVD quoting and positive customer reaction to MaxBright.
- On July 28, 2011, Veeco announced it would exit its CIGS solar systems business, citing falling costs of mainstream solar technologies, lower-than-expected CIGS market acceptance and technical scaling challenges. The plan was expected to affect about 80 employees. Veeco expected $21–$28 million of Q3 severance, contract-settlement and other restructuring payments, and planned to report the business as discontinued operations in Q3.
- China accounted for approximately 66% of first-half revenue, compared with 29% in full-year 2010. Veeco warned that tighter Chinese credit could delay customer financing, shipments and revenue. Other stated risks include order and revenue timing, backlog cancellations, customer and supplier concentration, industry cyclicality, foreign-government incentives, outsourcing execution and competition.
- Metrology-sale proceeds include $22.9 million held in escrow for one year against specified potential claims. Veeco said it could not be certain it would receive the escrowed proceeds. The company reported no legal proceedings expected to materially affect its financial position, results or cash flows.
Most important facts for investors to verify
- Whether Q3 revenue and EPS guidance, and full-year revenue guidance above $1 billion, were achieved; monitor bookings and book-to-bill against the stated Q3 slowdown.
- The final cash and income-statement effects of the CIGS exit, including the estimated $21–$28 million of Q3 payments and treatment as discontinued operations.
- Whether China’s credit conditions or customer financing delays affected orders, shipments, backlog conversion or the unusually high China revenue concentration.
- Cash and investment balances after the post-quarter $71.9 million share repurchases, and the company’s capacity to meet purchase commitments and bank guarantees.
- Resolution of the Metrology-sale escrow and any changes to contingent claims or the related held-for-sale liability.