Veeco Instruments Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Veeco designs, manufactures, sells, and services semiconductor and thin-film process equipment; its products serve advanced packaging, LED and compound semiconductor, front-end semiconductor, and scientific and industrial markets.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $542.1 million | $475.7 million |
| Gross profit / margin | $193.7 million / 35.7% | $176.2 million / 37.0% |
| Operating income (loss) | $(415.5) million | $(71.9) million |
| Net income (loss) | $(407.1) million | $(51.4) million |
| Operating cash flow | $(37.7) million | $35.0 million |
| Cash, cash equivalents and short-term investments | $260.5 million | $327.5 million |
FY 2018 diluted loss per share was $8.63, versus a loss of $1.16 in 2017. Cash, cash equivalents and restricted cash declined by $67.5 million during 2018. Working capital was $360.0 million at year-end.
At December 31, 2018, long-term debt had a carrying value of $287.4 million; principal due on Veeco’s 2.70% convertible senior notes is $345.0 million, maturing in January 2023. Net interest expense was $18.3 million for 2018. Management said cash, short-term investments, and projected operating cash flow should cover the next 12 months’ needs, including scheduled note interest.
Fourth quarter: Sales were $99.0 million, gross profit was $35.3 million, and net loss was $144.7 million. The quarter included a $122.8 million goodwill impairment charge.
Material changes versus the prior comparable period
- FY sales increased 14%, with growth in advanced packaging, front-end semiconductor, and scientific and industrial markets. The acquired Ultratech business contributed to the year-over-year increase.
- Gross margin declined to 35.7% from 37.0%, which management attributed primarily to product mix in the LED market.
- Operating results deteriorated sharply, largely due to $375.2 million of asset impairment charges: $252.3 million related to Ultratech intangible assets in Q2 and $122.8 million of goodwill in Q4.
- Operating cash flow shifted from $35.0 million provided in 2017 to $37.7 million used in 2018, reflecting operating asset and liability movements as well as the net loss.
- Year-end backlog fell to $288.3 million from $334.3 million. China sales rose to $194.0 million, or 36% of sales, while Rest of World sales declined 34%.
Outlook, commentary and key risks
- Management expected gross margins to improve in 2019 as lower-margin LED business became a smaller share of the mix. It did not provide quantified revenue or earnings guidance in the supplied filing text.
- Management did not expect significant near-term new China orders in LED lighting, display, and compound semiconductor applications, amid excess capacity and increased competition. It described advanced packaging opportunities as soft, while identifying interest in 3D sensing, VCSELs, laser diodes, RF devices, EUV mask blanks, and laser annealing.
- Veeco recorded restructuring charges and announced workforce reductions of approximately 40 employees related to consolidation and approximately 35 employees in additional cost actions. The latter initiative was expected to deliver about $5 million in annualized savings; the consolidation was expected to conclude in Q1 2019.
- A sophisticated cyberattack was discovered in 2018. The investigation found access to company systems over a period of years; proprietary and confidential information and employee personal information may have been compromised. The extent, impact, responsible party, and potential costs were not clear.
- Two lawsuits related to disclosures surrounding the Ultratech acquisition were pending; Veeco said it believed the claims were without merit and intended to contest them. The filing does not provide a clear estimate of potential exposure.
- Principal risks include cyclical and concentrated customer demand, order cancellations and backlog volatility, China and other international trade exposure, competition and pricing pressure, supplier and outsourcing reliance, possible further impairments, and conversion-related dilution or cash requirements on the notes.
Veeco adopted ASC 606 retrospectively beginning January 1, 2018; prior-period revenue and related results were recast. The company reported effective internal control over financial reporting, and the auditor issued unqualified opinions on the financial statements and internal control.
Important facts for investors to verify
- Whether 2019 gross-margin improvement materialized, and how rapidly lower-margin LED sales declined relative to newer compound-semiconductor applications.
- Backlog conversion, cancellations, customer deposits, and the effect of longer payment terms on operating cash flow.
- Further impairment risk, particularly given the goodwill valuation’s sensitivity to Veeco’s share price and the reduced Ultratech forecasts.
- The eventual scope, remediation costs, legal consequences, and any customer or operational effects of the cybersecurity incident.
- Cash generation and the company’s ability to meet the $345.0 million note principal at maturity, alongside potential conversion dilution.
- Developments in the Ultratech-related lawsuits and any resulting financial exposure.