Veeco Instruments Inc. — Q2 2017 Form 10-Q
Business context and reporting period. This filing covers the quarter and six months ended June 30, 2017. Veeco designs and sells semiconductor process equipment. It completed its acquisition of Ultratech on May 26, 2017; Ultratech’s results are included only from that date. The acquisition added lithography, laser annealing and inspection products, expanding Veeco’s presence in advanced packaging and related markets.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $115.1 million | $75.3 million | $209.5 million | $153.4 million |
| Gross profit / margin | $38.7 million / 34% | $31.4 million / 42% | $72.9 million / 35% | $63.4 million / 41% |
| Operating loss | $27.0 million | $31.3 million | $32.9 million | $46.5 million |
| Net loss | $18.4 million | $32.1 million | $17.3 million | $47.6 million |
| Diluted loss per share | $0.43 | $0.82 | $0.42 | $1.22 |
Q2 sales rose 53% year over year, mainly on stronger Lighting, Display & Power Electronics sales and Ultratech contributions. Six-month sales increased 37%. Gross margin declined, principally because of the Ultratech inventory fair-value step-up, sales mix and, in Q2, temporary manufacturing-consolidation effects. Q2 operating expenses included $14.1 million of acquisition costs; the prior-year quarter included a $13.6 million asset impairment charge.
- Cash flow: Operating cash use was $9.6 million in the first half, versus $31.1 million used in the prior-year period. Investing cash use was $393.1 million, including $399.5 million net cash paid for Ultratech; financing provided $330.8 million, largely from the convertible notes.
- Liquidity: Cash and cash equivalents were $205.6 million and short-term investments were $97.1 million at June 30, for combined liquidity of $302.7 million, down from $344.2 million at year-end. Management said cash, investments and projected operating cash flow should cover working capital and obligations for the next 12 months.
- Debt: Veeco issued $345.0 million of 2.70% convertible senior notes due 2023. Their June 30 carrying value was $270.1 million after debt discount and issuance costs; a separate $1.0 million mortgage was classified as current. Notes bear cash interest and may be settled in cash, shares or a combination, at Veeco’s election.
- Orders and backlog: Q2 orders were $122.7 million; first-half orders were $230.0 million. Book-to-bill was 1.1 for both periods. Backlog was $269.5 million at June 30, versus $221.1 million at March 31 and $209.2 million at December 31. Backlog includes $41.6 million acquired with Ultratech and is subject to cancellation or modification.
Changes, outlook and notable items
- Lighting, Display & Power Electronics sales increased 127% in Q2 and 131% for the first half year over year, reflecting stronger LED conditions. Advanced Packaging, MEMS & RF benefited from Ultratech in Q2, while first-half sales in that market remained below the prior year. Scientific & Industrial sales declined in both comparisons.
- Management said MOCVD shipments have the potential to be higher in the second half of 2017 than in the first half, citing increased LED demand and MOCVD backlog. This is directional commentary, not quantified full-year guidance.
- Management expects another $1 million to $3 million of restructuring costs over the next few quarters and approximately $5 million to $10 million of 2017 capital expenditures related to facility consolidation.
- The first-half $23.2 million income-tax benefit included benefits related to the convertible notes’ deferred tax liability and a reassessed foreign tax position. The notes-related tax benefit is not expected to recur. U.S. deferred tax assets remain fully offset by a valuation allowance.
- Ultratech’s preliminary purchase accounting included $346.9 million of acquired intangible assets and $188.3 million of goodwill; final allocation remained subject to measurement-period adjustments. Acquisition-related costs and purchase-accounting inventory step-up weighed on reported results.
- Two shareholder lawsuits related to the Ultratech transaction were dismissed on May 28, 2017. Veeco reported no material changes to previously disclosed risk factors. Key risks include industry cyclicality, customer and geographic concentration, competition, technology shifts, government incentives, supply constraints and backlog cancellations.
Important facts for investors to verify
- Whether LED demand and the elevated MOCVD backlog translate into second-half shipments, revenue and cash collection.
- Ultratech integration progress, purchase-accounting adjustments, expected synergies and the effect of acquired intangibles and goodwill.
- Whether gross margins recover as inventory step-up and manufacturing-consolidation impacts abate.
- Cash generation relative to acquisition-related commitments, $144.5 million of purchase commitments and convertible-note interest and repayment terms.
- The sustainability of reported tax benefits, including the nonrecurring notes-related benefit and the foreign tax-position reassessment.