Veeco Instruments Inc. — 2015 Form 10-K
Business context and reporting period. Veeco designs and supports thin-film process equipment used in manufacturing LEDs, power electronics, advanced packaging, MEMS/RF devices, data-storage products, and scientific and industrial applications. This annual filing covers the fiscal year ended December 31, 2015; comparisons below are to fiscal 2014 unless noted. Veeco reports as one operating and reportable segment.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $477.0 million | $392.9 million |
| Gross profit / margin | $177.2 million / 37.2% | $134.9 million / 34.3% |
| Operating income (loss) | $(23.2) million | $(79.2) million |
| Net income (loss) | $(32.0) million | $(66.9) million |
| Diluted loss per share | $(0.80) | $(1.70) |
| Cash provided by operating activities | $15.8 million | $42.1 million |
- Sales increased 21.4%. Advanced Packaging, MEMS & RF sales rose to $61.9 million from $11.4 million, primarily reflecting the acquired PSP business. Lighting, Display & Power Electronics remained the largest market at $291.1 million.
- Gross margin improved, with management citing PSP sales and mix, better Scientific & Industrial margins, and $4.6 million of forfeited customer deposits recognized in revenue and gross profit. The 2014 comparison included acquisition-related inventory step-up costs.
- Cash, cash equivalents, and short-term investments totaled $385.3 million at year-end, compared with $391.4 million in 2014. Working capital was $379.9 million versus $387.3 million. Total debt was $1.5 million, including $1.2 million long-term debt.
- Capital expenditures were $13.9 million. Inventory increased to $77.5 million from $61.5 million; customer deposits and deferred revenue declined to $76.2 million from $96.0 million.
- Fourth-quarter sales were $106.5 million, down from $140.7 million in the third quarter; the company recorded a fourth-quarter net loss of $9.8 million, following third-quarter net income of $5.3 million.
Material changes and management outlook
- Orders fell 25% to $384.4 million; book-to-bill declined to 0.8 from 1.3. Year-end backlog fell to $186.0 million from $286.7 million, including $7.7 million of backlog adjustments for orders no longer meeting booking criteria.
- Management attributed weaker bookings mainly to LED oversupply amid softer TV backlighting demand and a Chinese economic slowdown. It expected these factors to continue weighing on MOCVD demand into 2016, while noting limited visibility on when LED demand would improve.
- Veeco described possible longer-term opportunities from LED general-lighting adoption, GaN-on-silicon power devices, and advanced packaging. PSP performance was ahead of management’s expectations; the company reported production orders for fan-out wafer-level packaging and expanded engagements for 3D through-silicon-via applications. These are opportunities, not quantified financial guidance.
- Data-storage demand was expected to remain weak and orders to fluctuate, as HDD customers focused on selective technology purchases rather than significant capacity expansion.
- Veeco recorded $4.7 million of 2015 restructuring expense, including facility closure and workforce reductions. It closed its Hyeongok-ri, South Korea facility and reduced employees and temporary staff in response to LED-market weakness. The 2014 period included $58.2 million of asset impairment and a $29.4 million non-cash gain from reversing ALD contingent consideration.
Risks, contingencies, and other disclosures
- Customer and geographic concentration are significant: the five largest customers represented 55% of 2015 sales, and customers in China represented 50.8%. San’an Optoelectronics and KAISTAR Lighting each exceeded 10% of sales.
- The business is cyclical and exposed to customer order delays or cancellations, changing LED demand and Chinese government subsidies, competition and pricing pressure, long sales cycles, and technology transitions. Supplier concentration and outsourcing—including manufacture of substantially all MOCVD systems—create supply and execution risks.
- At year-end, contractual purchase commitments were $92.7 million, all due within one year; $14.6 million of supplier deposits offset these commitments. Outstanding bank guarantees and letters of credit totaled $2.9 million. Management said it expected cash, investments, and operating cash flow to cover projected needs for the next 12 months.
- Of cash and cash equivalents, $135.3 million was held outside the United States. Veeco stated that $109.6 million held abroad could incur significant U.S. tax if repatriated and that it intended to permanently reinvest certain foreign balances.
- The company reported a $9.3 million income-tax expense despite a pretax loss, principally reflecting foreign taxes and inability to recognize U.S. deferred tax assets. It maintained a valuation allowance against U.S. deferred tax assets.
- A product-injury lawsuit was settled in the first quarter of 2016 without admission of wrongdoing; the settlement was expected to be covered by insurance and not materially affect results. Veeco reported no other legal proceedings expected to have a material adverse effect.
- Management and the independent auditor concluded that internal control over financial reporting was effective at December 31, 2015. The auditor issued an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Whether LED market weakness, customer investment delays, and the low book-to-bill and backlog levels persisted into 2016.
- Whether PSP’s growth and advanced-packaging opportunities translated into sustained orders, revenue, and margins.
- Customer concentration, China exposure, customer-deposit trends, and collectability of concentrated receivables.
- Inventory valuation and the company’s ability to manage $92.7 million of purchase commitments as demand changes.
- Cash availability, repatriation tax implications, deferred-tax-asset valuation allowance, and the pace of share repurchases under the $100 million authorization.