Veeco Instruments Inc. — Q2 2014 Form 10-Q
Business context and period. Veeco designs and sells process equipment serving LED and solar, OLED, and data-storage markets. This unaudited report covers the quarter and six months ended June 30, 2014; the company reports interim quarters on a 13-week basis.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $95.1m | $97.4m | $186.0m | $159.2m |
| Gross profit / margin | $30.7m / 32.2% | $34.6m / 35.6% | $64.5m / 34.7% | $57.2m / 35.9% |
| Operating income (loss) | ($15.8m) | ($6.8m) | $2.9m | ($26.4m) |
| Net income (loss) | ($15.2m) | ($4.1m) | $3.9m | ($14.2m) |
| Diluted EPS | ($0.39) | ($0.11) | $0.10 | ($0.37) |
- Quarterly revenue mix: LED & Solar sales were $77.2m, up 1.6%; Data Storage sales were $18.0m, down 16.4%. Quarterly orders rose 22.6% to $104.0m; book-to-bill was 1.09. Backlog was $162.8m at June 30, versus $143.3m at year-end 2013.
- Six-month revenue mix: LED & Solar sales increased 25.1% to $147.9m, while Data Storage declined 7.1% to $38.1m. Orders increased 33.1% to $206.6m; six-month book-to-bill was 1.11.
- Q2 gross margin fell 3.4 percentage points year over year. Management attributed LED & Solar margin pressure mainly to product mix, lower average selling prices, and fewer final acceptances; Data Storage margins were affected by lower volume.
- Q2 operating expenses increased 12.3% to $46.6m, including higher SG&A and amortization and $0.8m of restructuring costs. Six-month operating income and net income include a $29.4m gain from reversing Synos acquisition contingent consideration; without this nonrecurring gain, the reported six-month profit would be materially different.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $232.3m, short-term investments $252.2m, and restricted cash $0.5m—$485.0m combined, compared with $495.1m at December 31, 2013.
- Operating activities used $16.8m in the first half of 2014, versus providing $13.8m in the prior-year period. The principal use included a $32.7m increase in accounts receivable; inventory reduction and increases in accruals, customer deposits, and deferred revenue partly offset cash uses.
- Investing activities provided $31.0m, mainly from net liquidation of short-term investments; financing activities provided $7.1m, including $9.1m from stock-option exercises. Cash increased $21.5m during the period.
- Total debt was approximately $2.0m, principally a mortgage bearing 7.91% interest and due in 2020. The company reported $43.7m of unused credit lines. Management said cash and short-term investments plus projected operating cash flow should cover working-capital and other requirements for the next 12 months.
- $154.9m of cash was held outside the U.S.; $127.3m offshore could incur significant U.S. taxes if repatriated. Management stated that it intends to permanently reinvest certain offshore funds abroad.
Outlook, changes and notable items
- Management expected second-half 2014 orders to exceed first-half orders, primarily due to MOCVD demand, while warning that customer expansion timing could make quarterly orders unpredictable. LED fab utilization had improved and LED lighting adoption was accelerating, but management had not seen sustained improvement in other businesses.
- Management targeted an approximately 10% reduction in operating expenses by year-end 2014 and said improved conditions, growth initiatives, and lower expenses could support improved profitability in 2015. No specific revenue or earnings guidance was provided.
- The ALD business acquired in 2013 was expected to weigh on 2014 results; Veeco received no ALD orders from its key customer in the first half. Data Storage demand remained uncertain amid customer excess capacity and selective purchases.
- Veeco reversed the $29.4m fair-value liability for Synos earn-out consideration after specified milestones were not met or were judged unlikely. A separate 2014 revenue and margin-based contingency, with a maximum potential payment of $75m, remained contractually outstanding; management did not expect it to be met.
- Restructuring included consolidation of the Fort Collins facility into Plainview and notification of approximately 49 employees of termination. Additional actions announced after quarter-end were expected to cost approximately $3.9m, all during the remainder of 2014; earlier restructuring actions also carried estimated additional costs of $1.1m in the rest of 2014 and $0.1m in 2015.
- Veeco began liquidating its Japan subsidiary and expected substantial completion by year-end. It anticipated recognizing the approximately $3.5m cumulative translation adjustment balance in income upon liquidation; timing and final impact were not specified.
- Risks include cyclical and concentrated end markets, uncertain LED adoption and customer investment timing, competitive pricing, backlog cancellations, supplier dependence, customer concentration, foreign-exchange exposure, and the possibility of inventory or asset impairment. A product-injury lawsuit involving an MBE system sought unspecified damages; Veeco said it would defend the case and could not estimate any loss, while believing any recovery would be covered by insurance.
Investor verification priorities
- Assess the sustainability of the first-half profit by separating the $29.4m contingent-consideration reversal from recurring operating performance.
- Track MOCVD bookings, customer capacity additions, ALD production orders, and whether backlog converts to revenue; backlog may be cancelled or modified.
- Monitor gross margins, especially LED & Solar product mix and pricing, and execution of the announced expense reductions and restructuring.
- Review operating cash conversion and receivables collection, plus the availability and tax implications of offshore cash.
- Confirm the outcome of the remaining Synos earn-out contingency, Japan subsidiary liquidation and CTA recognition, and the MBE lawsuit.