Veeco Instruments Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; quarterly figures below highlight Q4. The filing was signed February 21, 2018. Veeco develops and sells semiconductor process equipment and reports as one operating segment. Results include Ultratech from its May 26, 2017 acquisition date.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $484.8 million | $332.5 million |
| Gross profit / gross margin | $184.3 million / 38% | $132.9 million / 40% |
| Operating loss | $(63.8) million | $(120.4) million |
| Net loss | $(44.8) million | $(122.2) million |
| Operating cash flow | $34.1 million | $(23.8) million |
| Cash, restricted cash, and short-term investments | $328.4 million | $344.2 million |
| Working capital | $373.5 million | $358.0 million |
| Long-term debt carrying value | $275.6 million | $0.8 million |
Q4: Net sales were $143.4 million versus $93.6 million in Q4 2016; gross profit was $58.3 million versus $36.0 million. Net loss was $5.6 million, compared with $5.0 million. Q4 gross margin was approximately 40.7%, versus approximately 38.5% a year earlier.
Sales rose 46% year over year, reflecting improved LED industry conditions and approximately $65.5 million of Ultratech sales consolidated after the acquisition. Gross margin declined to 38% from 40%, principally due to the Ultratech inventory fair-value step-up. FY 2017 orders increased 53% to $570.7 million; book-to-bill was 1.2 versus 1.1, and year-end backlog increased to $334.3 million from $209.2 million, including $41.6 million of acquired backlog.
Cash from operations was $34.1 million; investing used $357.8 million, primarily for the $401.8 million net cash acquisition outflow, while financing provided $325.9 million, chiefly from the convertible notes. Capital expenditures were $24.3 million. Cash and short-term investments were substantial, but $214.3 million of cash and cash equivalents was held outside the United States.
Business developments and outlook
- Veeco acquired Ultratech for consideration valued at $633.4 million, including cash and approximately 7.2 million Veeco shares. The acquisition added advanced-packaging lithography, laser annealing, inspection, and ALD products. Acquisition accounting recorded $192.2 million of goodwill; goodwill and other intangible assets recorded in connection with the deal were approximately $539 million.
- LED Lighting, Display & Compound Semiconductor sales increased 75% to $253.8 million and represented 52% of sales. Front-End Semiconductor sales rose to $40.8 million from $8.3 million, largely reflecting Ultratech. Advanced Packaging, MEMS & RF Filters sales were nearly flat at $69.4 million.
- Management said advanced-packaging opportunities slowed in 2017 as customers temporarily favored lower-cost flip-chip solutions over fan-out wafer-level packaging. It cited interest in laser melt anneal systems for 7nm and 5nm applications and evaluations of 3D inspection systems.
- Management expected a product-mix shift in the LED market to reduce gross margins in the first half of 2018, with second-half margins higher than first-half margins. The filing provides no specific 2018 revenue or earnings guidance.
Material items, risks, and contingencies
- Veeco issued $345 million of 2.70% convertible senior notes due 2023, with a $40.03 initial conversion price. The notes’ $275.6 million year-end carrying value reflects unamortized discount and issuance costs; 2017 interest expense included $10.4 million of non-cash interest in the cash-flow reconciliation.
- The reported $36.1 million income tax benefit included a provisional benefit related to the 2017 Tax Act and other tax effects. The company was still evaluating portions of the law, including GILTI; it expected to finalize certain provisional amounts. U.S. deferred tax assets remained subject to a valuation allowance.
- Restructuring expense was $11.9 million and acquisition costs were $17.8 million in 2017. Ultratech’s reported post-acquisition loss before tax was $62.8 million and included acquisition costs, inventory step-up amortization, acquired-intangible amortization, and restructuring charges.
- Key exposures include cyclical customer capital spending, order delays or cancellations, dependence on concentrated customers and Asian markets, reduced Chinese subsidies for MOCVD equipment, competition, and reliance on a limited number of suppliers and outsourced manufacturing. Purchase commitments totaled $181.0 million, substantially due within one year.
- A shareholder appraisal action relating to the Ultratech merger remained pending, with trial scheduled for December 2018. Separate Veeco, AMEC, and SGL patent disputes were settled in February 2018; the parties said business processes, including sales, service, and importation, would continue. Other ordinary-course proceedings were not expected by management to have a material adverse effect.
- Management and the auditor reported effective internal control over financial reporting, but Ultratech—representing 50% of year-end assets and 14% of 2017 sales—was excluded from the internal-control assessment and audit scope.
Important facts for investors to verify
- Whether the enlarged backlog converts to revenue on schedule, given cancellation and rescheduling rights and the long, variable sales cycle.
- Whether LED product mix and the forecast first-half 2018 margin weakness develop as management described.
- Ultratech integration progress, realized synergies, and the carrying values of acquired goodwill and intangible assets.
- Cash generation and funding capacity against the $345 million notes due 2023, purchase commitments, and other obligations.
- Final tax consequences of the 2017 Tax Act, including transition-tax estimates, GILTI accounting, and deferred-tax-asset realizability.
- Developments in the Ultratech appraisal proceeding and any effects of litigation or intellectual-property claims.