Business context and reporting period
Veeco Instruments designs and sells process equipment used mainly in LED manufacturing (LED & Solar) and hard-disk-drive manufacturing (Data Storage), with additional applications in semiconductors, MEMS and OLED. This Form 10-K covers the fiscal year ended December 31, 2012; quarterly figures below are unaudited. The report was signed November 3, 2013, after a substantial delay related to a revenue-recognition review.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $516.0 million | $979.1 million |
| Gross profit / margin | $215.1 million / 41.7% | $474.3 million / 48.4% |
| Operating income / margin | $37.2 million / 7.2% | $276.3 million / 28.2% |
| Income from continuing operations | $26.5 million; diluted EPS $0.68 | $190.5 million; diluted EPS $4.63 |
| Net income, including discontinued operations | $30.9 million | $128.0 million |
| Operating cash flow | $112.0 million | $115.4 million |
| Cash and cash equivalents at year-end | $384.6 million | $217.9 million |
| Short-term investments / working capital | $192.2 million / $632.2 million | $273.6 million / $587.1 million |
| Total debt, including current portion | $2.4 million | $2.7 million |
2012 investing cash flow was $48.3 million provided and financing cash flow was $5.6 million provided; cash increased $166.6 million. Debt was principally a mortgage bearing 7.91% interest, with final payment due in 2020.
LED & Solar revenue fell 56.1% to $363.2 million; Data Storage revenue rose 1.0% to $152.8 million. Services revenue grew 27% to about $123 million. Orders fell 52.1% to $391.9 million, book-to-bill was 0.76, and year-end backlog declined to $150.2 million from $332.9 million. Five largest customers represented 34% of revenue; 55% of sales went to China, Taiwan and South Korea.
For Q4 2012, revenue was $106.8 million versus $191.7 million in Q4 2011; gross profit was $38.7 million, and the company reported a continuing-operations loss of $8.6 million and total net loss of $9.1 million.
Material changes versus the prior period
- Revenue dropped 47.3%, primarily as LED equipment demand contracted after substantial industry capacity expansion and resulting MOCVD overcapacity. MOCVD reactor shipments fell 62% year over year.
- Gross margin fell 6.7 percentage points. Management cited lower volume and selling prices, mix effects, and approximately $9.6 million of slow-moving inventory charges.
- Operating income fell 86.5%; continuing-operations income declined 86.1%. SG&A expense decreased, but rose as a share of sales; R&D remained near the prior-year dollar level and increased to 18.4% of revenue.
- Operating cash flow remained broadly stable despite sharply lower earnings, supported in part by favorable working-capital movements and inventory reduction.
Outlook, risks and unusual items
- Management reported limited near-term visibility: LED equipment demand remained weak, MOCVD pricing pressure increased, and Data Storage customers limited capacity spending. The filing gives no quantified 2013 earnings or revenue guidance; it says persistent low MOCVD volumes and pricing pressure had contributed to a loss in 2013.
- During a review of more than 100 multiple-element arrangements, Veeco identified revenue, related-cost and warranty accounting errors. Management concluded the errors were not material to the current or prior periods; cumulative continuing-operations income through 2011 had been overstated by $0.6 million, and adjustments were recorded in 2012. The review followed contract-documentation questions involving certain South Korean transactions.
- Management and the auditor found material weaknesses in revenue-recognition controls; management concluded both internal control over financial reporting and disclosure controls were ineffective at December 31, 2012. The auditor issued an adverse opinion on internal controls but an unqualified opinion on the financial statements. Remediation included new revenue-accounting personnel, training and process changes; effectiveness had not yet been established.
- Late SEC filings created a stated risk of Nasdaq suspension or delisting if outstanding reports were not filed by November 4, 2013. The company also said its March and June 2013 Form 10-Q filings were still to come.
- Other notable items: $3.8 million of restructuring charges and a $1.3 million asset impairment; a $4.0 million additional tax provision relating to a foreign tax incentive whose conditions were under negotiation; and a subsequent October 2013 Synos acquisition for $70 million, with up to $115 million additional consideration tied to milestones.
- Risks include cyclicality, customer and geographic concentration, cancellations and backlog changes, government incentive reductions, outsourcing and single-source suppliers, export controls, foreign-exchange exposure, and potential further asset impairment. A product-liability lawsuit filed in 2013 sought unspecified damages; Veeco disputed the claims and recorded no reserve because the loss was not considered probable or estimable.
Important facts for investors to verify
- Whether subsequent filings were completed on time, Nasdaq listing status, and remediation of the revenue-recognition control weaknesses.
- Subsequent revenue, orders, backlog, margins and cash generation, especially MOCVD demand, pricing and customer utilization.
- Customer concentration, customer creditworthiness, backlog cancellations and inventory exposure.
- Synos integration, purchase accounting and the conditions for any earn-out payment of up to $115 million.
- Outcome of negotiations over the foreign tax incentive and any further accounting, tax, legal or impairment charges.