Veeco Instruments Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted. Veeco designs and sells process equipment, primarily for LED/wireless/solar markets and data storage.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $99.3 | $132.7 | $258.5 | $409.2 |
| Gross profit / margin | $30.3 / 30.5% | $49.9 / 37.6% | $87.5 / 33.8% | $176.4 / 43.1% |
| Operating income (loss) | $(9.9) | $7.5 | $(36.4) | $43.5 |
| Continuing operations net income (loss) | $(6.0) | $7.7 | $(20.2) | $35.2 |
| Net income (loss) per diluted share | $(0.16) | $0.30 | $(0.52) | $1.03 |
- Revenue and margins: Q3 sales fell 25.2% year over year. LED & Solar sales declined 24.2% and Data Storage sales declined 28.1%. Lower MOCVD demand and pricing, fewer final acceptances, and weaker Data Storage volume pressured margins.
- Cash flow: Operating cash flow was $4.6 million for the first nine months, versus $105.8 million a year earlier. Capital expenditures were $8.0 million. Cash and cash equivalents were $247.7 million at September 30, down from $384.6 million at year-end 2012; short-term investments were $322.5 million.
- Liquidity and debt: Current assets were $715.8 million and current liabilities $97.9 million. Total debt was approximately $2.2 million, including a mortgage at 7.91% due January 2020. Management said available cash and projected operating cash flow were expected to cover working capital and other requirements for the next 12 months.
- Bookings and backlog: Q3 bookings rose 9.3% to $91.5 million, but nine-month bookings fell 17.7% to $246.7 million. Book-to-bill was 0.92 for Q3 and 0.95 year to date. Backlog was $132.2 million, down from $150.2 million at December 31, 2012; backlog is subject to cancellation or modification.
Material changes and management commentary
- For the first nine months, sales fell 36.8%; LED & Solar sales declined 31.3% and Data Storage sales declined 49.0%. The prior-year Data Storage comparison benefited from equipment replacement after Thailand floods at a customer site.
- Operating expenses declined 6.8% year to date, including lower R&D and restructuring costs, but SG&A rose 8.3%, partly due to professional fees for an accounting review completed in October 2013. The company recorded $1.8 million of restructuring charges year to date.
- The tax benefit was $15.6 million for the first nine months, including effects of foreign tax-rate differences and R&D tax credits. The 2012 comparison included $4.8 million of after-tax discontinued-operations income, principally gains from the previously disposed Metrology business; there was no discontinued-operations income in 2013.
- Management reported persistent customer overcapacity, constrained investment, weak Data Storage end-market demand, limited near-term visibility, and pricing pressure in MOCVD. It said these conditions contributed to losses in 2013 and did not identify clear near-term signs of recovery. No quantified earnings or revenue guidance is provided in the supplied filing text.
- On October 1, 2013, after quarter-end, Veeco acquired Synos Technology for an initial $70 million, with contingent earn-out payments of up to $115 million if milestones are met by December 31, 2014. Veeco said it used $70 million of cash to close the acquisition.
Risks, contingencies, and unusual matters
- Internal controls: Management concluded disclosure controls and internal control over financial reporting were not effective as of September 30, 2013 because of material weaknesses in revenue-recognition controls, including deficiencies in staffing, review of foreign subsidiary customer orders, and accounting for multiple-element arrangements. Remediation actions were underway; effectiveness was not yet established.
- Legal matter: A California product-liability lawsuit alleges injuries while cleaning a Veeco MBE system. Veeco intends to defend the case and has insurance that may apply, but recorded no reserve because a loss was not considered probable or estimable.
- Market and operating risks: The filing highlights cyclicality, customer concentration, cancellations or changes to backlog, supplier dependence, foreign-exchange exposure, competition, technology shifts, and potential inventory obsolescence. The company also disclosed a significant accounting review and risks associated with its material control weaknesses.
- Market sensitivity: Veeco estimated that a 100-basis-point interest-rate increase could reduce the fair value of its $322.5 million investment portfolio by about $2.9 million. Management estimated a 10% foreign-exchange move would have an immaterial income-statement effect under its hedging strategy.
Important facts for investors to verify
- Whether MOCVD demand, customer capacity utilization, pricing, and bookings improve, and whether backlog converts to revenue without cancellations.
- Progress in remediating revenue-recognition control weaknesses and whether subsequent filings report effective controls or identify accounting adjustments.
- Synos integration, cash use, purchase accounting, and any earn-out liability or payments tied to performance milestones.
- Cash generation and working-capital trends, particularly given low year-to-date operating cash flow and the post-quarter acquisition.
- Developments in the MBE product-liability lawsuit, including insurance coverage and any change in the company’s loss assessment.