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VECO > SEC Filings for VECO > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for VEECO INSTRUMENTS INC


8-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 Inc. was organized as a Delaware corporation in 1989.

Highlights of the Third Quarter of 2013



          Revenue was $99.3 million, a 25.2% decrease from the third quarter of
2012.

          Bookings were $91.5 million, a 9.3% increase from the third quarter
of 2012.

          Net (loss) income from continuing operations was $(6.0) million, or

$(0.16) per share, compared to $7.7 million, or $0.20 per share, in the third quarter of 2012.

Gross margins were 30.5 %, compared to 37.6 % in the third 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 September 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.

Table of Contents

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

                                   Three months ended                 Dollar and Percentage
                                     September 30,                            Change
                              2013                   2012                Period to Period
Net sales              $ 99,324     100.0 %  $ 132,715      100.0 % $      (33,391 )     (25.2 )%
Cost of sales            69,016      69.5       82,831       62.4          (13,815 )     (16.7 )
Gross profit             30,308      30.5       49,884       37.6          (19,576 )     (39.2 )
Operating expenses
(income):
Selling, general and
administrative           19,650      19.8       13,892       10.5            5,758        41.4
Research and
development              18,993      19.1       25,775       19.4           (6,782 )     (26.3 )
Amortization                855       0.9        1,477        1.1             (622 )     (42.1 )
Restructuring             1,240       1.2        2,014        1.5             (774 )     (38.4 )
Other, net                 (493 )    (0.5 )       (737 )     (0.6 )            244       (33.1 )
Total operating
expenses                 40,245      40.5       42,421       32.0           (2,176 )      (5.1 )
Operating (loss)
income                   (9,937 )   (10.0 )      7,463        5.6          (17,400 )           *
Interest income, net        192       0.2          176        0.1               16         9.1
(Loss) income from
continuing
operations before
income taxes             (9,745 )    (9.8 )      7,639        5.8          (17,384 )           *
Income tax benefit       (3,719 )    (3.7 )        (59 )     (0.0 )         (3,660 )           *
(Loss) income from
continuing
operations               (6,026 )    (6.1 )      7,698        5.8          (13,724 )           *

Discontinued
operations:
Income from
discontinued
operations before
income taxes                  -         -        5,396        4.1           (5,396 )           *
Income tax provision          -         -        1,341        1.0           (1,341 )           *
Income from
discontinued
operations                    -         -        4,055        3.1           (4,055 )           *

Net (loss) income      $ (6,026 )    (6.1 )% $  11,753        8.9 % $      (17,779 )           *



* 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 September 30,                   Percentage Change
                          2013     Percent of Total     2012      Percent of Total      Period to Period
Segment Analysis
LED & Solar             $ 75,001               75.5 % $  98,905               74.5 % $    (23,904 )    (24.2 )%
Data Storage              24,323               24.5 %    33,810               25.5 %       (9,487 )    (28.1 )%
Total                   $ 99,324              100.0 % $ 132,715              100.0 % $    (33,391 )    (25.2 )%
Regional Analysis
Americas                $ 18,536               18.7 % $  27,779               20.9 % $     (9,243 )    (33.3 )%
Europe, Middle East
and Africa                 3,822                3.8 %    16,920               12.7 %      (13,098 )    (77.4 )%
Asia Pacific              76,966               77.5 %    88,016               66.4 %      (11,050 )    (12.6 )%
Total                   $ 99,324              100.0 % $ 132,715              100.0 % $    (33,391 )    (25.2 )%

Table of Contents

Our LED & Solar segment sales decreased in 2013 primarily due to lower MOCVD sales as a result of continued industry overcapacity and customers being hesitant to make new investments. Our Data Storage sales decreased in 2013 due to customer fabrication facility overcapacity and weak hard drive demand. 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 increased 9.3% to $91.5 million from $83.7 million in the comparable prior period. LED & Solar bookings increased 8.4% and Data Storage bookings increased 13.4% from the comparable prior period. Although bookings increased from the comparable prior period, we continue to experience weak overall market conditions due to overcapacity in our customers' businesses.

Our book-to-bill ratio for the three months ended September 30, 2013, which is calculated by dividing bookings recorded in a given time period by revenue recognized in the same time period, was .92 to 1. Our backlog as of September 30, 2013 was $132.2 million, compared to $150.2 million as of December 31, 2012. During the three months ended September 30, 2013, we recorded backlog adjustments of approximately $0.5 million related 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 September 30, 2013, we had customer deposits of $24.2 million.

Gross Profit



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



                                Three months ended
                                  September 30,         Dollar and Percentage Change
                                 2013         2012            Period to Period
Gross profit - LED & Solar    $    20,171   $ 35,698   $         (15,527 )       (43.5 )%
Gross margin                         26.9 %     36.1 %
Gross profit - Data Storage   $    10,137   $ 14,186   $          (4,049 )       (28.5 )%
Gross margin                         41.7 %     42.0 %
Gross profit - Total Veeco    $    30,308   $ 49,884   $         (19,576 )       (39.2 )%
Gross margin                         30.5 %     37.6 %

LED & Solar gross margins decreased primarily due to lower average selling prices, fewer final acceptances and reduced volume partially offset by reduced expenses in 2013 for slow moving items, lower plant 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.

Selling, General and Administrative Expenses



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



                                           Three months ended
                                              September 30,             Dollar and Percentage Change
                                           2013           2012                Period to Period
Selling, general and administrative    $     19,650    $    13,892    $           5,758            41.4 %
Percentage of sales                            19.8 %         10.5 %

Selling, general and administrative expenses increased from the comparable prior period primarily due to professional fees associated with our accounting review which began in the fourth quarter of 2012 and was completed in October 2013.

Table of Contents

Research and Development Expenses



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



                             Three months ended
                               September 30,          Dollar and Percentage Change
                              2013         2012             Period to Period
Research and development   $    18,993   $ 25,775   $          (6,782 )         (26.3 )%
Percentage of sales               19.1 %     19.4 %

Research and development expense decreased as the Company strategically focuses on product development in areas of high-growth for future end-markets.

Income Taxes



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



                       Three months ended
                         September 30,          Dollar and Percentage Change
                         2013         2012            Period to Period
Income tax benefit   $     (3,719 )   $ (59 )  $                 (3,660 )      *
Effective tax rate          (38.2 )%   (0.8 )%



* 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 September 30, 2013, 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 September 30, 2012, 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, an income tax benefit related to the manufacturer's deduction under IRC Section 199, and a discrete benefit relating to research and development tax credits.

Discontinued Operations



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



                                      Three months ended
                                         September 30,                 Dollar and Percentage Change
                                     2013            2012                    Period to Period
Income from discontinued
operations before income
taxes                            $          -    $       5,396    $                 (5,396 )              *
Income tax provision                        -            1,341                      (1,341 )              *
Income from discontinued
operations                       $          -    $       4,055    $                 (4,055 )              *



* Not Meaningful

Discontinued operations represent the results of the operations of our Metrology business, which was disposed of in 2010. The three months ended September 30, 2012 included a $5.4 million gain ($4.1 million net of taxes) associated with the completion of the sale of the China Assets with Bruker.

Table of Contents

Nine months ended September 30, 2013 and 2012

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

                                    Nine months ended                   Dollar and Percentage
                                      September 30,                            Change
                              2013                    2012                Period to Period
Net sales              $ 258,540     100.0 %  $ 409,171      100.0 % $      (150,631 )     (36.8 )%
Cost of sales            171,040      66.2      232,765       56.9           (61,725 )     (26.5 )
Gross profit              87,500      33.8      176,406       43.1           (88,906 )     (50.4 )
Operating expenses:
Selling, general and
administrative            59,077      22.9       54,558       13.3             4,519         8.3
Research and
development               60,600      23.4       72,991       17.8           (12,391 )     (17.0 )
Amortization               2,566       1.0        3,877        0.9            (1,311 )     (33.8 )
Restructuring              1,771       0.7        2,077        0.5              (306 )     (14.7 )
Other, net                  (141 )    (0.1 )       (626 )     (0.2 )             485       (77.5 )
Total operating
expenses                 123,873      47.9      132,877       32.5            (9,004 )      (6.8 )
Operating (loss)
income                   (36,373 )   (14.1 )     43,529       10.6           (79,902 )           *
Interest income, net         620       0.2          708        0.2               (88 )     (12.4 )
(Loss) income from
continuing
operations before
income taxes             (35,753 )   (13.9 )     44,237       10.8           (79,990 )           *
Income tax (benefit)
provision                (15,575 )    (6.0 )      9,066        2.2           (24,641 )           *
(Loss) income from
continuing
operations               (20,178 )    (7.9 )     35,171        8.6           (55,349 )           *

Discontinued
operations:
Income from
discontinued
operations before
income taxes                   -         -        6,534        1.6            (6,534 )           *
Income tax provision           -         -        1,722        0.4            (1,722 )           *
Income from
discontinued
operations                     -         -        4,812        1.2            (4,812 )           *

Net (loss) income      $ (20,178 )    (7.9 )% $  39,983        9.8 % $       (60,161 )           *



* 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                                     Dollar and
                                      Nine months ended September 30,                    Percentage Change
                          2013      Percent of Total     2012      Percent of Total       Period to Period
Segment Analysis
LED & Solar             $ 193,241               74.7 % $ 281,257               68.7 % $     (88,016 )    (31.3 )%
Data Storage               65,299               25.3 %   127,914               31.3 %       (62,615 )    (49.0 )%
Total                   $ 258,540              100.0 % $ 409,171              100.0 % $    (150,631 )    (36.8 )%
Regional Analysis
Americas                $  43,613               16.9 % $  71,810               17.6 % $     (28,197 )    (39.3 )%
Europe, Middle East
and Africa                 15,304                5.9 %    34,724                8.5 %       (19,420 )    (55.9 )%
Asia Pacific              199,623               77.2 %   302,637               73.9 %      (103,014 )    (34.0 )%
Total                   $ 258,540              100.0 % $ 409,171              100.0 % $    (150,631 )    (36.8 )%

Our LED & Solar segment sales decreased in 2013 primarily due to lower MOCVD sales as a result of continued industry overcapacity and customers being hesitant to make new 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 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 17.7% to $246.7 million from $299.6 million in the comparable prior period, primarily attributable to a 24.1% 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 3.6% from the comparable prior 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 customers' businesses.

Our book-to-bill ratio for the nine months ended September 30, 2013, which is calculated by dividing bookings recorded in a given time period by revenue recognized in the same time period, was .95 to 1. Our backlog as of September 30, 2013 was $132.2 million, compared to $150.2 million as of December 31, 2012. During the nine months ended September 30, 2013, we recorded backlog adjustments of approximately $6.1 million, consisting of a $4.9 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 September 30, 2013, we had customer deposits of $24.2 million.

Table of Contents

Gross Profit



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



                                Nine months ended
                                  September 30,        Dollar and Percentage Change
                                2013        2012             Period to Period
Gross profit - LED & Solar    $  60,505   $ 117,960   $         (57,455 )       (48.7 )%
Gross margin                       31.3 %      41.9 %
Gross profit - Data Storage   $  26,995   $  58,446   $         (31,451 )       (53.8 )%
Gross margin                       41.3 %      45.7 %
Gross profit                  $  87,500   $ 176,406   $         (88,906 )       (50.4 )%
Gross margin                       33.8 %      43.1 %

LED & Solar gross margins decreased primarily due to lower average selling prices, fewer final acceptances and reduced volume partially offset by reduced expenses in 2013 for slow moving items, lower plant 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.

Selling, General and Administrative Expenses



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



                                            Nine months ended
                                              September 30,             Dollar and Percentage Change
                                           2013           2012                Period to Period
Selling, general and administrative    $     59,077    $    54,558    $            4,519            8.3 %
Percentage of sales                            22.9 %         13.3 %

Selling, general and administrative expenses increased primarily from professional fees associated with our accounting review partially offset by a reduction in bonus, profit sharing and commissions 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.

Research and Development Expenses



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



                             Nine months ended
                               September 30,        Dollar and Percentage Change
                              2013        2012            Period to Period
Research and development   $   60,600   $ 72,991   $         (12,391 )       (17.0 )%
Percentage of sales              23.4 %     17.8 %

Research and development expense decreased as the Company strategically focuses on product development in areas of high-growth for future end-markets.

Table of Contents

Restructuring



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



                        Nine months ended
                          September 30,         Dollar and Percentage Change
                         2013        2012             Period to Period
Restructuring         $    1,771    $ 2,077   $          (306 )           (14.7 )%
Percentage of sales          0.7 %      0.5 %



* Not Meaningful

Restructuring expense decreased from the level in the comparable prior period. We continued to take measures to improve profitability in a challenging business environment. The charge consists primarily of personnel severance and related costs.

Income Taxes



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



                                   Nine months ended
                                     September 30,        Dollar and Percentage Change
                                    2013        2012            Period to Period
Income tax (benefit) provision   $  (15,575 )  $ 9,066   $                  (24,641)     *
Effective tax rate                    (43.6 )%    20.5 %



* 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.

. . .

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