Veeco Instruments Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise.
Business context and results
Veeco designs and manufactures equipment for LED and solar production and data storage. Its reporting segments are LED & Solar and Data Storage. The company discontinued its CIGS solar systems business during the quarter.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $268.0 | $277.1 | $787.5 | $631.1 |
| Gross margin | 46.6% | 49.6% | 49.7% | 46.6% |
| Operating income | $73.9 | $98.2 | $244.1 | $193.1 |
| Income from continuing operations | $52.6 | $93.7 | $166.9 | $173.8 |
| Net income, including discontinued operations | $35.9 | $86.2 | $107.7 | $164.6 |
| Diluted EPS | $0.90 | $2.04 | $2.57 | $3.91 |
Q3 revenue declined 3.3% year over year, while orders fell 52.2% to $133.1 million (book-to-bill 0.50). LED & Solar revenue was down 3.6% and Data Storage revenue down 1.1%. Q3 sales were heavily concentrated in China: $174.4 million, about 65% of total revenue. Nine-month revenue increased 24.8%, but orders declined 18.4% to $674.8 million (book-to-bill 0.86). Backlog was $389.2 million at quarter-end, versus $535.4 million at December 31, 2010; Q3 cancellations and other adjustments reduced backlog by $34.3 million.
Q3 operating income and continuing-operations income fell despite only modestly lower sales. Lower gross margin reflected product mix, and R&D expense rose $11.2 million year over year to $26.4 million. For the nine-month period, improved sales volume lifted gross margin, but higher operating expenses and a substantially higher tax provision contributed to lower continuing-operations income.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $60.1 million, down from $187.9 million in 2010. Management attributed the decrease in part to working-capital changes, including inventory and prepaid-asset increases, lower accrued liabilities and lower income taxes payable.
- Capital expenditures were $47.5 million; cash paid for an acquisition was $28.3 million. Financing used $252.2 million, including $162.1 million of share repurchases and $105.7 million of debt repayments.
- At September 30, cash and equivalents were $213.2 million and short-term investments were $212.7 million. Restricted cash of $22.9 million was held in escrow and released on October 6, 2011. Current assets were $761.0 million and current liabilities $195.7 million.
- Long-term debt was $2.7 million, principally a mortgage; the convertible notes had been fully converted or repaid during the first half of 2011. Debt extinguishment charges were $3.3 million for the nine months.
Outlook, commentary and risks
Management forecast Q4 2011 revenue of $175–$215 million and GAAP EPS of $0.46–$0.78. Full-year guidance was revenue of $963 million–$1.0 billion and GAAP EPS of $4.49–$4.79. Management expected orders to remain depressed for several quarters, citing weak LED backlighting demand, low factory utilization, data-storage customer spending delays, planned industry consolidation and macroeconomic concerns. It expected to remain profitable in 2012 through variable costs and lower spending, while identifying a multi-year LED-lighting opportunity and an expectation of more than 5,000 MOCVD reactors from 2011–2015.
The CIGS exit generated $69.8 million of charges in the first nine months, including inventory write-offs, contract settlements, impairment, goodwill write-off, lease costs and severance; discontinued operations reported a $59.2 million net loss for the period. Veeco cited risks including China credit tightening, possible withdrawal of government incentives, order cancellations, customer and supplier concentration, industry cyclicality, outsourcing and supply interruptions, and foreign-exchange and macroeconomic exposure. Management said existing cash and expected operating cash flow should cover projected requirements for the next 12 months. It reported disclosure controls effective and did not expect pending legal matters to have a material adverse effect.
Key facts for investors to verify
- Whether order intake, book-to-bill and backlog stabilize after the sharp Q3 decline, particularly for China and Taiwan MOCVD demand.
- Whether Q4 and full-year revenue and GAAP EPS guidance were achieved, and how the anticipated 2012 slowdown affected profitability.
- The cash and earnings impact of CIGS discontinuation, including any further settlements, inventory exposure or impairment charges.
- Cash conversion and working-capital trends, including inventory, customer deposits and the release of the $22.9 million escrow.
- Capital allocation after completion of the $200 million repurchase program and repayment/conversion of the notes.