Veeco Instruments Inc. — Q3 2015 Form 10-Q
Business context and reporting period. Veeco designs and sells thin-film process equipment used in LED, display, power electronics, advanced packaging, MEMS/RF, scientific and industrial, and data-storage markets. This filing covers the quarter and nine months ended September 30, 2015; financial figures are unaudited. Comparisons are with the corresponding 2014 periods.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $140.7 million | $93.3 million | $370.5 million | $279.3 million |
| Gross profit / margin | $54.3 million / 39% | $32.6 million / 35% | $138.5 million / 37% | $97.0 million / 35% |
| Operating income (loss) | $6.6 million | $(17.5) million | $(13.3) million | $(14.6) million |
| Net income (loss) | $5.3 million | $(14.0) million | $(22.2) million | $(10.0) million |
| Diluted EPS | $0.13 | $(0.35) | $(0.56) | $(0.26) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $21.9 million | $(6.6) million |
- Q3 revenue rose 51% year over year; gross margin improved to 39%, and the company returned to quarterly operating and net income.
- Nine-month revenue increased 33%, but the net loss widened. The 2015 period included $9.4 million of income tax expense despite a pretax loss; management cited valuation limits on domestic tax benefits and taxes on domestic deferred tax liabilities and foreign income.
- At September 30, cash and cash equivalents were $334.1 million and short-term investments were $68.9 million, totaling $403.0 million. Current assets were $563.5 million versus current liabilities of $164.1 million.
- Total debt was approximately $1.6 million, consisting of a mortgage bearing 7.91% interest and due in 2020. Nine-month capital expenditures were $11.1 million.
Material changes and operating trends
- Revenue growth reflected the December 2014 acquisition of Veeco Precision Surface Processing (PSP), sales of EPIK 700 systems, and higher sales in several markets. PSP revenue contributed notably to Advanced Packaging, MEMS & RF, which reached $13.5 million in Q3 versus $0.9 million a year earlier. Management said PSP was performing ahead of plan.
- Q3 bookings fell to $51.7 million from $107.3 million a year earlier; book-to-bill was 0.37. Backlog declined from $278.8 million at the start of the quarter to $186.7 million at quarter-end. Nine-month bookings were $277.3 million versus $313.9 million, with book-to-bill of 0.75.
- China generated 58% of Q3 revenue, up from 18% a year earlier. For the nine months, China represented 52% of sales versus 36%. Sales to customers outside the U.S. were approximately 86% of Q3 revenue and 82% for the nine-month period.
- Nine-month operating expenses included $21.8 million of intangible amortization, up from $9.0 million, mainly due to PSP acquired intangibles. The 2014 comparison included a $29.4 million noncash gain from reversing Synos acquisition contingent consideration; 2015 had no such gain.
- Nine-month gross profit also benefited from $4.6 million of forfeited customer deposits recognized as sales, partly offset by a $1.3 million inventory fair-value step-up related to PSP.
Outlook, risks and contingencies
- Management expects LED equipment demand to remain weak in the near term, citing LED-unit oversupply, reduced TV backlighting demand, and economic weakness in China. It reported limited visibility into when LED demand may recover. It expects longer-term LED lighting adoption to support additional capacity purchases as conditions improve, but provided no quantified guidance.
- Data-storage customers are not expected to make significant new-capacity investments; orders may continue to fluctuate. Management cited positive momentum in advanced packaging as a potential growth opportunity.
- Management believes operating cash flow and cash and short-term investments will cover projected working capital and obligations for the next 12 months. However, $142.4 million of foreign-held cash would incur significant U.S. taxes if repatriated, and local restrictions may affect movement of cash.
- Purchase commitments were $103.1 million, substantially all due within one year. Outstanding bank guarantees and letters of credit were $17.1 million. The company reported no material off-balance-sheet arrangements beyond disclosed leases, guarantees, and purchase commitments.
- A product-injury lawsuit seeks unspecified damages. Veeco considers the claim without merit, intends to defend it, and cannot estimate a possible loss; it believes any recovery against it would be covered by insurance. Other ordinary-course proceedings are not expected to have a material adverse effect.
- On October 28, 2015, the board authorized up to $100 million of share repurchases over two years. The program is discretionary and may be changed or suspended.
Important facts for investors to verify
- Whether LED-market weakness and China-related uncertainty persist, and how they affect bookings, backlog, and future revenue.
- How much growth and profitability are attributable to PSP and EPIK 700 sales, and whether PSP’s performance remains ahead of plan.
- The sustainability of Q3 profitability given the nine-month net loss, tax expense, and acquisition-related amortization.
- Cash accessibility, near-term purchase commitments, and any effect of foreign-cash repatriation taxes or local restrictions.
- Developments in the product-liability lawsuit and execution of the discretionary share-repurchase authorization.