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VECO > SEC Filings for VECO > Form 10-Q on 4-Nov-2013All Recent SEC Filings

Show all filings for VEECO INSTRUMENTS INC

Form 10-Q for VEECO INSTRUMENTS INC


4-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

Veeco Instruments Inc. (together with its consolidated subsidiaries, "Veeco", the "Company", "we", "us", and "our", unless the context indicates otherwise) creates Process Equipment that enables technologies for a cleaner and more productive world. We design, manufacture and market equipment to make light emitting diodes ("LED"s) and hard-disk drives, as well as for concentrator photovoltaics, power semiconductors, wireless components, and micro-electromechanical systems ("MEMS").

Veeco develops highly differentiated, "best-in-class" Process Equipment for critical performance steps. Our products feature leading technology, low cost-of-ownership and high throughput. Core competencies in advanced thin film technologies, over 200 patents, and decades of specialized process know-how helps us to stay at the forefront of these demanding industries.

Veeco's LED & Solar segment designs and manufactures metal organic chemical vapor deposition ("MOCVD") and molecular beam epitaxy ("MBE") systems and components sold to manufacturers of LEDs, wireless components, power semiconductors, and concentrator photovoltaics, as well as to R&D applications.

Veeco's Data Storage segment designs and manufactures systems used to create thin film magnetic heads ("TFMH"s) that read and write data on hard disk drives. These include ion beam etch, ion beam deposition, diamond-like carbon, physical vapor deposition, chemical vapor deposition, and slicing, dicing and lapping systems. While our systems are primarily sold to hard drive customers, they also have applications in optical coatings, MEMS and magnetic sensors, and extreme ultraviolet ("EUV") lithography.

As of September 30, 2013, Veeco's approximately 780 employees support our customers through product and process development, training, manufacturing, and sales and service sites in the U.S., South Korea, Taiwan, China, Singapore, Japan, Europe and other locations.

Veeco Instruments was organized as a Delaware corporation in 1989.

Highlights of the Second Quarter of 2013



          Revenue was $97.4 million, a 28.6% decrease from the second quarter
of 2012.

          Bookings were $84.8 million, a 17.3% decrease from the second quarter
of 2012.

          Net (loss) income from continuing operations was $(4.1) million, or

$(0.11) per share, compared to $11.0 million, or $0.28 per share, in the second quarter of 2012.

Gross margins were 35.6%, compared to 44.9% in the second quarter of 2012.

Table of Contents

Outlook

Through the first nine months of 2013, we have not seen any clear signs that customer overcapacity in our MOCVD business and weak end-market demand in our Data Storage segment will improve in the near term. Our customers continue to guard spending tightly and limit capacity expansions. The LED industry is still in an equipment digestion period and near term visibility remains limited. With few MOCVD deals available, we have also experienced increased pricing pressure. In our Data Storage segment, our hard drive customers are experiencing weak end-market demand which has resulted in excess manufacturing capacity, therefore they are only making select technology purchases. While our overall bookings have continued to decline in 2013, bookings in our Data Storage segment have been relatively flat for the first nine months of 2013 compared to the first nine months of 2012.

While the Company has been actively working to reduce costs during this extended business downturn, pricing pressure and persistent low volumes in MOCVD represent significant headwinds and have caused the Company to move to a loss in 2013.

Our outlook discussion above constitutes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Our expectations regarding future results are subject to risks and uncertainties. Our actual results may differ materially from those anticipated.

You should not place undue reliance on any forward-looking statements, which speak only as of the dates they are made.

Results of Operations:

Three Months Ended June 30, 2013 and 2012

Consistent with prior years, we report interim quarters, other than fourth quarters which always end on December 31, on a 13-week basis ending on the last Sunday within such period. The interim quarter ends are determined at the beginning of each year based on the 13-week quarters. The 2013 interim quarter ends were March 31, June 30 and September 29. The 2012 interim quarter ends are April 1, July 1 and September 30. For ease of reference, we report these interim quarter ends as March 31, June 30, and September 30 in our interim condensed consolidated financial statements.

The following table shows our Condensed Consolidated Statements of Operations, percentages of sales, and comparisons between the three months ended June 30, 2013 and 2012 (dollars in thousands):

Table of Contents

                                  Three months ended                   Dollar and Percentage
                                       June 30,                                Change
                             2013                    2012                 Period to Period
Net sales             $ 97,435      100.0 %  $ 136,547      100.0 %  $      (39,112 )     (28.6 )%
Cost of sales           62,795       64.4       75,293       55.1           (12,498 )     (16.6 )
Gross profit            34,640       35.6       61,254       44.9           (26,614 )     (43.4 )
Operating expenses
(income):
Selling, general
and administrative      19,779       20.3       20,893       15.3            (1,114 )      (5.3 )
Research and
development             20,870       21.4       23,910       17.5            (3,040 )     (12.7 )
Amortization               855        0.9        1,185        0.9              (330 )     (27.8 )
Other, net                 (52 )     (0.1 )        146        0.1              (198 )           *
Total operating
expenses                41,452       42.5       46,134       33.8            (4,682 )     (10.1 )
Operating (loss)
income                  (6,812 )     (7.0 )     15,120       11.1           (21,932 )           *
Interest income,
net                        236        0.2          329        0.2               (93 )     (28.3 )
(Loss) income from
continuing
operations before
income taxes            (6,576 )     (6.7 )     15,449       11.3           (22,025 )           *
Income tax
(benefit)
provision               (2,495 )     (2.6 )      4,438        3.3            (6,933 )           *
(Loss) income from
continuing
operations              (4,081 )     (4.2 )     11,011        8.1           (15,092 )           *

Discontinued
operations:
Income from
discontinued
operations before
income taxes                 -          -        1,219        0.9            (1,219 )           *
Income tax
provision                    -          -          412        0.3              (412 )           *
Income from
discontinued
operations                   -          -          807        0.6              (807 )           *
Net (loss) income     $ (4,081 )     (4.2 )% $  11,818        8.7 %  $      (15,899 )           *



* Not Meaningful

Net Sales and Bookings



The following is an analysis of net sales by segment and by region (dollars in
thousands):



                                                  Sales                                   Dollar and
                                       Three months ended June 30,                    Percentage Change
                          2013     Percent of Total     2012      Percent of Total     Period to Period
Segment Analysis
LED & Solar             $ 75,933               77.9 % $  86,778               63.6 % $    (10,845 ) (12.5 )%
Data Storage              21,502               22.1 %    49,769               36.4 %      (28,267 ) (56.8 )%
Total                   $ 97,435              100.0 % $ 136,547              100.0 % $    (39,112 ) (28.6 )%
Regional Analysis
Americas                $ 12,644               13.0 % $  23,815               17.4 % $    (11,171 ) (46.9 )%
Europe, Middle East
and Africa                 6,930                7.1 %    12,573                9.2 %       (5,643 ) (44.9 )%
Asia Pacific              77,861               79.9 %   100,159               73.4 %      (22,298 ) (22.3 )%
Total                   $ 97,435              100.0 % $ 136,547              100.0 % $    (39,112 ) (28.6 )%

Table of Contents

Our LED & Solar segment sales decreased in 2013 primarily due to industry overcapacity following over two years of strong customer investments. Our Data Storage sales decreased in 2013 due to customer fabrication facility overcapacity and weak hard drive demand. Our Data Storage sales in 2012 were favorably impacted by the replacement of equipment at one of our customer's site that was damaged by the floods in Thailand. By region, net sales decreased in Asia Pacific, primarily due to a significant decrease in MOCVD sales in China resulting from industry overcapacity. Net sales in the Americas (less than 1% is outside U.S.) and Europe, Middle East and Africa ("EMEA") also decreased, due to reduced end-market demand resulting from the weak global economy. We believe that there will continue to be period-to-period variations in the geographic distribution of sales.

Bookings decreased 17.3% to $84.8 million from $102.5 million in the prior year period, primarily attributable to a 24.8% decrease in LED & Solar bookings, principally driven by a decline in MOCVD bookings due to industry overcapacity. Since hitting a peak in second quarter of 2011, Veeco's bookings have slowed dramatically. Data Storage bookings increased 5.7% from the prior year period. Customers remain hesitant to make further investments as end-user hard drive demand has slowed. We continue to experience weak overall market conditions due to overcapacity in all of our businesses.

Our book-to-bill ratio for the three months ended June 30, 2013, which is calculated by dividing bookings recorded in a given time period by revenue recognized in the same time period, was .87 to 1. Our backlog as of June 30, 2013 was $140.6 million, compared to $150.2 million as of December 31, 2012. During the three months ended June 30, 2013, we recorded backlog adjustments of approximately $3.4 million related principally to orders that no longer met our booking criteria. Our backlog consists of orders for which we received a firm purchase order, a customer-confirmed shipment date within twelve months and a deposit, where required. As of June 30, 2013, we had customer deposits of $27.4 million.

Gross Profit



Gross profit in dollars and gross margin for the periods indicated were as
follows (dollars in thousands):



                                Three months ended
                                     June 30,           Dollar and Percentage Change
                                 2013         2012            Period to Period
Gross profit - LED & Solar    $    26,349   $ 37,077   $         (10,728 )       (28.9 )%
Gross margin                         34.7 %     42.7 %
Gross profit - Data Storage   $     8,291   $ 24,177   $         (15,886 )       (65.7 )%
Gross margin                         38.6 %     48.6 %
Gross profit - Total Veeco    $    34,640   $ 61,254   $         (26,614 )       (43.4 )%
Gross margin                         35.6 %     44.9 %

LED & Solar gross margins decreased primarily due to lower average selling prices and fewer final acceptances partially offset by lower plant and service spending associated with reduced volumes and cost reductions in response to lower business levels. We anticipate a continuing weak business environment resulting in persistent selling price pressure in our MOCVD business. Data Storage gross margins decreased primarily due to a significant reduction in volume and a sales mix of lower margin products partially offset by reduced plant and service spending.

Selling, General and Administrative Expenses



Selling, general and administrative expenses for the periods indicated were as
follows (dollars in thousands):



                                            Three months ended
                                                 June 30,                 Dollar and Percentage Change
                                           2013             2012                Period to Period
Selling, general and administrative    $      19,779    $     20,893    $           (1,114 )         (5.3 )%
Percent of sales                                20.3 %          15.3 %

Table of Contents

Selling, general and administrative expenses decreased primarily as a result of a reduction in bonus and profit sharing and commission expense from the reduced level of business in each of our segments and cost control measures put into place in response to weak market conditions resulting in lower personnel-related costs and other discretionary expenses. These reductions were partially offset by professional fees associated with our accounting review.

Research and Development Expenses



Research and development expenses for the periods indicated were as follows
(dollars in thousands):



                             Three months ended
                                  June 30,            Dollar and Percentage Change
                              2013         2012             Period to Period
Research and development   $    20,870   $ 23,910   $          (3,040 )         (12.7 )%
Percent of sales                  21.4 %     17.5 %

Research and development expense decreased as the Company strategically focuses on product development in areas of high-growth for future end-market opportunities in our LED & Solar segment.

Income Taxes



Income tax (benefit) provision for the periods indicated were as follows
(dollars in thousands):



                                        Three months ended
                                             June 30,                    Dollar and Percentage Change
                                       2013             2012                   Period to Period
Income tax (benefit) provision     $      (2,495 )  $      4,438    $                   (6,933 )            *
Effective tax rate                         (37.9 )%         28.7 %



* Not Meaningful

Our provision for income taxes consists of U.S. federal, state and local and foreign taxes in amounts necessary to align our year-to-date tax provision with the effective tax rate we expect to achieve for the full year.

For the three months ended June 30, 2013, the Company had an effective tax benefit rate of 37.9% and recorded an income tax benefit of $2.5 million from continuing operations. The tax benefit rate was higher than the statutory tax rate primarily due to tax rate differences in the foreign jurisdictions in which the Company operates and an income tax benefit related to the generation of current year research and development tax credits.

For the three months ended June 30, 2012, the Company had an effective tax rate of 28.7% and recorded a provision for income taxes of $4.4 million from continuing operations. The effective tax rate was lower than the statutory tax rate primarily due to tax rate differences in the foreign jurisdictions in which the Company operates and an income tax benefit related to the manufacturer's deduction under IRC Section 199.

Table of Contents

Discontinued Operations



Discontinued operations results for the periods indicated were as follows
(dollars in thousands):



                                     Three months ended
                                          June 30,               Dollar and Percentage Change
                                    2013            2012               Period to Period
Income from discontinued
operations before income
taxes                           $          -    $       1,219    $           (1,219 )          *
Income tax provision                       -              412                  (412 )          *
Income from discontinued
operations                      $          -    $         807    $             (807 )          *



* Not Meaningful

Discontinued operations represent the results of the operations of our Metrology business, which was disposed of in 2010. The three months ended June 30, 2012 included a gain on the sale of the assets of discontinued segment held for sale.

Six months ended June 30, 2013 and 2012

The following table shows our Condensed Consolidated Statements of Operations, percentages of sales, and comparisons between the six months ended June 30, 2013 and 2012 (dollars in thousands):

                                   Six months ended                  Dollar and Percentage
                                       June 30,                              Change
                              2013                  2012                Period to Period
Net sales              $ 159,216    100.0 %  $ 276,456     100.0 % $      (117,240 )    (42.4 )%
Cost of sales            102,024     64.1      149,934      54.2           (47,910 )    (32.0 )
Gross profit              57,192     35.9      126,522      45.8           (69,330 )    (54.8 )
Operating expenses:
Selling, general and
administrative            39,427     24.8       40,666      14.7            (1,239 )     (3.0 )
Research and
development               41,607     26.1       47,216      17.1            (5,609 )    (11.9 )
Amortization               1,711      1.1        2,400       0.9              (689 )    (28.7 )
Restructuring                531      0.3           63       0.0               468            *
Other, net                   352      0.2          111       0.0               241            *
Total operating
expenses                  83,628     52.5       90,456      32.7            (6,828 )     (7.5 )
Operating (loss)
income                   (26,436 )  (16.6 )     36,066      13.0           (62,502 )          *
Interest income, net         428      0.3          532       0.2              (104 )    (19.5 )
(Loss) income from
continuing
operations before
income taxes             (26,008 )  (16.3 )     36,598      13.2           (62,606 )          *
Income tax (benefit)
provision                (11,856 )   (7.4 )      9,125       3.3           (20,981 )          *
(Loss) income from
continuing
operations               (14,152 )   (8.9 )     27,473       9.9           (41,625 )          *

Discontinued
operations:
Income from
discontinued
operations before
income taxes                   -      0.0        1,138       0.4            (1,138 )          *
Income tax provision           -      0.0          381       0.1              (381 )          *
Income from
discontinued
operations                     -      0.0          757       0.3              (757 )          *

Net (loss) income      $ (14,152 )   (8.9 )% $  28,230      10.2 % $       (42,382 )          *



* Not Meaningful

Table of Contents

Net Sales and Bookings



The following is an analysis of net sales by segment and by region (dollars in
thousands):



                                                               Sales
                                     For the six months ended           Dollar and Percentage
                                             June 30,                          Change
                                      2013             2012               Period to Period
Segment Analysis
LED & Solar                       $     118,240    $     182,352    $       (64,112 )       (35.2 )%
Data Storage                             40,976           94,104            (53,128 )       (56.5 )%
Total                             $     159,216    $     276,456    $      (117,240 )       (42.4 )%
Regional Analysis
Americas                          $      25,077    $      44,031    $       (18,954 )       (43.0 )%
Europe, Middle East and Africa           11,480           17,804             (6,324 )       (35.5 )%
Asia Pacific                            122,659          214,621            (91,962 )       (42.8 )%
Total                             $     159,216    $     276,456    $      (117,240 )       (42.4 )%

Our LED & Solar sales decreased in 2013 primarily due to industry overcapacity following over two years of strong customer investments. Our Data Storage sales decreased in 2013 due to customer fabrication facility overcapacity and weak hard drive demand. Our Data Storage sales in 2012 were favorably impacted by the replacement of equipment at one of our customer's site that was damaged by the floods in Thailand. By region, net sales decreased in Asia Pacific, primarily due to a significant decrease in MOCVD sales in China resulting from industry overcapacity. Net sales in the Americas and EMEA also decreased, due to reduced end-market demand resulting from the weak global economy. We believe that there will continue to be period-to-period variations in the geographic distribution of sales.

Bookings decreased 28.1% to $155.2 million from $215.9 million in the comparable prior period, primarily attributable to a 37.7% decrease in LED & Solar bookings, principally driven by a decline in MOCVD bookings due to industry overcapacity. Since hitting a peak in second quarter of 2011, Veeco's bookings have slowed dramatically through 2013. Data Storage bookings increased 0.7% from the prior year period. Customers remain hesitant to make further investments as end-user hard drive demand has slowed. We continue to experience weak overall market conditions due to overcapacity in all of our businesses.

Our book-to-bill ratio for the six months ended June 30, 2013, which is calculated by dividing bookings recorded in a given time period by revenue recognized in the same time period, was .97 to 1. Our backlog as of June 30, 2013 was $140.6 million, compared to $150.2 million as of December 31, 2012. During the six months ended June 30, 2013, we recorded backlog adjustments of approximately $5.6 million, consisting of a $4.4 million adjustment related to orders that no longer met our booking criteria as well as an adjustment related to foreign currency translation of $1.2 million. As of June 30, 2013, we had customer deposits of $27.4 million.

Table of Contents

Gross Profit



Gross profit in dollars and gross margin for the periods indicated were as
follows (dollars in thousands):



                                Six months ended
                                    June 30,          Dollar and Percentage Change
                                2013       2012             Period to Period
Gross profit - LED & Solar    $ 40,334   $  82,262   $         (41,928 )         (51 )%
Gross margin                      34.1 %      45.1 %
Gross profit - Data Storage   $ 16,858   $  44,260   $         (27,402 )       (61.9 )%
Gross margin                      41.1 %      47.0 %
Gross profit                  $ 57,192   $ 126,522   $         (69,330 )       (54.8 )%
Gross margin                      35.9 %      45.8 %

LED & Solar gross margins decreased primarily due to lower average selling prices, fewer final acceptances and lower volume, partially offset by lower plant and service spending associated with reduced volumes and cost reductions in response to lower business levels. We anticipate a continuing weak business environment resulting in persistent selling price pressure in our MOCVD business. Data Storage gross margins decreased primarily due to a significant reduction in volume and a sales mix of lower margin products partially offset by reduced plant spending.

Selling, General and Administrative Expenses



Selling, general and administrative expenses for the periods indicated were as
follows (dollars in thousands):



                                       Six months ended
                                           June 30,                 Dollar and Percentage Change
                                     2013             2012                Period to Period
Selling, general and
administrative                   $      39,427    $     40,666    $           (1,239 )         (3.0 )%
Percentage of sales                       24.8 %          14.7 %

Selling, general and administrative expenses decreased primarily as a result of a reduction in bonus, profit sharing and commission expense from the reduced level of business in each of our segments and cost control measures put into place in response to weak market conditions resulting in lower personnel-related costs and other discretionary expenses. These reductions were partially offset by professional fees associated with our accounting review.

Research and Development Expenses



Research and development expenses for the periods indicated were as follows
(dollars in thousands):



                             Six months ended
                                 June 30,           Dollar and Percentage Change
                             2013        2012             Period to Period
Research and development   $  41,607   $ 47,216   $          (5,609 )         (11.9 )%
Percentage of sales             26.1 %     17.1 %

Research and development expense decreased as the Company strategically focuses on product development in areas of high-growth for future end-market opportunities in our LED & Solar segment.

Table of Contents

Restructuring



Restructuring expenses for the periods indicated were as follows (dollars in
thousands):



                        Six months ended
                            June 30,           Dollar and Percentage Change
                        2013        2012             Period to Period
Restructuring         $     531    $    63   $         468              742.9 %
Percentage of sales         0.3 %      0.0 %

Restructuring expense increased as we continued to take measures to improve profitability in a challenging business environment. The charge consists of personnel severance and related costs.

Income Taxes



Income tax (benefit) provision for the periods indicated were as follows
(dollars in thousands):



                                   Six months ended
                                       June 30,           Dollar and Percentage Change
                                   2013        2012             Period to Period
Income tax (benefit) provision   $ (11,856 )  $ 9,125   $                (20,981 )       *
Effective tax rate                   (45.6 )%    24.9 %

. . .

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