Veeco Instruments Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The report was signed November 3, 2013, following a delayed filing related to the company’s accounting review.
Business context
Veeco designs and sells process equipment through its LED & Solar segment, including MOCVD and MBE systems, and its Data Storage segment, which serves hard-drive and related markets. Results were pressured by LED-industry equipment overcapacity, weak hard-drive demand, and customers’ restrained capital spending.
Financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $97.4 million | $136.5 million | $159.2 million | $276.5 million |
| Gross margin | 35.6% | 44.9% | 35.9% | 45.8% |
| Operating income (loss) | $(6.8) million | $15.1 million | $(26.4) million | $36.1 million |
| Net income (loss) | $(4.1) million | $11.8 million | $(14.2) million | $28.2 million |
| Diluted earnings (loss) per share | $(0.11) | $0.30 | $(0.37) | $0.73 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $13.8 million | $60.3 million |
Q2 sales fell 28.6% year over year; bookings declined 17.3% to $84.8 million. Q2 segment sales were $75.9 million for LED & Solar (down 12.5%) and $21.5 million for Data Storage (down 56.8%). The Q2 book-to-bill ratio was 0.87; backlog was $140.6 million at June 30, versus $150.2 million at year-end 2012. The six-month book-to-bill ratio was 0.97, with bookings down 28.1% to $155.2 million.
Gross margin deterioration reflected lower selling prices, reduced volumes, fewer final acceptances, and weaker product mix. SG&A and R&D expenses decreased in dollars, but rose as a share of sales. Six-month restructuring charges were $0.5 million.
Liquidity, debt and cash flow
At June 30, cash and cash equivalents were $241.5 million and short-term investments were $340.3 million; together these totaled $581.9 million. Restricted cash was $3.4 million. Current assets were $744.0 million and current liabilities $123.8 million. Total debt was approximately $2.3 million, comprising $0.3 million current and $2.0 million long-term. Six-month operating cash flow was $13.8 million; capital expenditures were $6.0 million. Cash declined $143.0 million, largely because net purchases of short-term investments used $148.3 million, rather than reflecting equivalent operating cash consumption.
Outlook, risks and unusual items
- Management reported limited near-term visibility, continuing LED equipment digestion and MOCVD pricing pressure, and weak Data Storage end-market demand. It said these conditions and low volumes had pushed the company into losses; no numerical earnings or revenue guidance is provided.
- The company’s review of more than 100 multiple-element sales arrangements identified prior-period revenue, related-cost, and warranty-accounting errors. Management concluded the errors were not material to prior periods, individually or in aggregate, and stated the filed statements comply with U.S. GAAP.
- Management identified material weaknesses in revenue-recognition controls and concluded internal control over financial reporting and disclosure controls were ineffective. Remediation included new revenue-recognition personnel, training, revised practices, documentation, and system improvements.
- Veeco disclosed notice from Nasdaq that its listing could be suspended if outstanding periodic reports were not filed by November 4, 2013. The filing states the stock could then trade over the counter.
- On October 1, 2013, Veeco acquired Synos Technology for an initial $70 million, with up to $115 million additional contingent consideration tied to milestones. The report says September 30 cash and investments totaled $573.0 million and that $70 million was used to close the acquisition.
- A product-liability lawsuit alleges injury involving an MBE system. Veeco intends to defend the case; it recorded no reserve because the potential loss was not considered probable or estimable. The filing also identifies market cyclicality, customer concentration, order cancellations, supplier reliance, foreign-exchange exposure, and execution of outsourcing as risks.
Important facts for investors to verify
- Whether revenue-recognition control weaknesses were remediated and whether subsequent filings or audit work identified further accounting adjustments.
- Whether Nasdaq listing compliance was restored and all delinquent reports were filed by the stated deadline.
- Subsequent sales, bookings, backlog quality and cancellations, especially for MOCVD and Data Storage, and the trajectory of margins and cash generation.
- Synos acquisition performance, milestone conditions, and potential earn-out payments of up to $115 million.
- Developments in the MBE product-liability lawsuit and any resulting financial exposure.