Business context and reporting period
Veeco Instruments Inc. designs and sells process equipment, principally MOCVD and MBE systems for LED and related markets, and thin-film equipment for hard-disk-drive manufacturing. This Form 10-K covers the fiscal year ended December 31, 2011; fourth-quarter figures are included below. Amounts are U.S. dollars.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $979.1 million | $930.9 million |
| Gross profit / margin | $474.3 million / 48.4% | $449.5 million / 48.3% |
| Operating income / margin | $276.3 million / 28.2% | $303.3 million / 32.6% |
| Continuing-operations income | $190.5 million | $277.2 million |
| Net income attributable to Veeco, including discontinued operations | $128.0 million | $361.8 million |
| Diluted EPS, continuing operations | $4.63 | $6.52 |
| Orders / book-to-bill | $817.9 million / 0.84 | $1,121.5 million / 1.20 |
| Backlog at year-end | $332.9 million | $535.4 million |
Fourth-quarter 2011 revenue was $191.7 million, versus $299.8 million in fourth-quarter 2010; gross profit was $83.1 million versus $155.2 million. Continuing-operations income was $23.6 million versus $103.4 million, and net income attributable to Veeco was $20.3 million versus $197.2 million.
Cash from operating activities was $115.4 million, down from $194.2 million. Cash and cash equivalents were $217.9 million, short-term investments $273.6 million, and restricted cash $0.6 million at year-end. Working capital was $587.1 million. Total debt was $2.7 million, consisting of a mortgage; the convertible notes were retired during 2011. The company said available cash, investments, and operating cash flows should cover projected needs and contractual obligations for the next 12 months.
LED & Solar revenue rose 4.1% to $827.8 million; Data Storage revenue rose 11.8% to $151.3 million. R&D expense increased 69.6% to $96.6 million, or 9.9% of sales. SG&A was $95.1 million, or 9.7% of sales. The continuing-operations tax provision rose to $81.6 million from $19.5 million.
Material changes versus the prior comparable period
- Revenue grew 5.2%, but orders fell 27.1%; MOCVD bookings weakened sharply in the second half as LED equipment demand softened amid industry overcapacity.
- Operating income declined 8.9% and continuing-operations income declined 31.3%, reflecting much higher R&D spending, other operating expenses, and a higher tax provision.
- Total net income fell substantially, principally because 2010 included a $156.3 million pre-tax gain on the Metrology divestiture, while 2011 included losses and exit costs from discontinued CIGS operations.
- Veeco recorded $69.8 million of pre-tax discontinued-operation charges associated with the CIGS exit, including inventory write-offs, contract settlement costs, and asset and goodwill impairments. It also repurchased $162.1 million of stock and repaid $105.8 million of debt.
- Backlog declined by $202.5 million year over year and included $38.1 million of order cancellations during 2011.
Outlook, risks, contingencies, and unusual items
Management forecast first-quarter 2012 revenue of $115–$140 million and EPS of $0.04–$0.25. It expected full-year 2012 revenue of $500–$600 million, a 38%–48% decline, primarily due to reduced MOCVD purchases. Management saw no near-term improvement in LED equipment conditions, while expecting growth in Data Storage and MBE; it cautioned that Data Storage orders could fluctuate.
Key risks include the cyclical and concentrated customer base, continuing LED/MOCVD overcapacity, reduced Chinese government incentives, customer cancellations and shipment delays, dependence on outsourcing partners and limited-source suppliers, and substantial geographic exposure. China represented 66.4% of 2011 sales; the five largest customers represented 41% of sales. Backlog is subject to cancellation or modification. Natural disasters and supply-chain disruption are additional risks; Japan’s earthquake and tsunami and Thailand’s floods affected the industry in 2011.
Contractual commitments totaled $110.8 million, including $91.1 million of purchase commitments, largely due within one year. Environmental matters included potential remediation exposure of up to $250,000 at the Plainview facility, with indemnification for amounts above that level; management did not consider a material loss probable. The company reported no other legal proceedings expected to materially affect its financial position, results, or cash flows. Management and the auditor reported effective internal control over financial reporting; the financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Whether MOCVD orders, customer utilization, and the 2012 revenue outlook developed as management expected.
- Whether backlog cancellations, deposits, and purchase commitments create inventory, supplier-liability, or cash-flow exposure.
- The sustainability of margins and profits as R&D spending remains elevated and revenue declines.
- The composition and realizability of discontinued CIGS costs, tax effects, and any further impairment or exit charges.
- Customer and China concentration, customer credit exposure, and reliance on government incentives and outsourced manufacturing.
- Liquidity and capital allocation after debt retirement and substantial share repurchases; the filing reports operating cash flow separately from investment purchases and sales.