Veeco Instruments Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; the filing also reports quarterly results. Veeco designs and supports thin-film process equipment used to manufacture LEDs, power electronics, wireless devices, MEMS, hard disk drives, and other semiconductor products. It reports one operating segment.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $332.5 million | $477.0 million |
| Gross profit / margin | $132.9 million / 40.0% | $177.2 million / 37.2% |
| Operating income (loss) | $(120.4) million | $(23.2) million |
| Net income (loss) | $(122.2) million | $(32.0) million |
| Diluted loss per share | $(3.11) | $(0.80) |
| Cash from (used in) operations | $(23.8) million | $15.8 million |
Sales fell 30%, chiefly because Lighting, Display & Power Electronics revenue declined 53% amid LED oversupply. China sales dropped 65% to $85.8 million. Advanced Packaging, MEMS & RF sales rose 10% and Scientific & Industrial sales rose 17%; Data Storage sales fell 11%. Gross margin improved despite lower volume, which management attributed to product and regional mix and cost reductions.
FY2016 operating results included $69.5 million of non-cash asset impairment charges, including a $57.6 million charge associated primarily with reducing investment in Atomic Layer Deposition (ALD) technology and impairments of assets held for sale and lab equipment. The third-quarter net loss was $69.6 million; fourth-quarter net sales were $93.6 million, gross profit $36.0 million, and net loss $5.0 million.
At year-end, cash and cash equivalents were $277.4 million and short-term investments $66.8 million, totaling $344.2 million, versus $385.3 million a year earlier. Working capital was $358.0 million, compared with $379.9 million. Year-end debt was $1.2 million, primarily a mortgage; this excludes the subsequent January 2017 convertible-note issuance.
Material changes and outlook
- Orders were $374.2 million, down 3%; book-to-bill was 1.1 versus 0.8 in 2015. Year-end backlog increased to $209.2 million from $186.0 million, after $17.9 million of adjustments, primarily a partial order cancellation.
- Management reported improved LED conditions in the second half of 2016 and viewed near-term MOCVD demand positively, but noted limited long-term visibility. It expected generally weak Data Storage demand. No quantified revenue or earnings guidance is provided.
- Veeco reduced planned ALD development investment and recorded the related impairment. It expects R&D expense to decline and estimated another $2–$5 million in restructuring costs over the following year. Approximately 75 employees were affected by restructuring and ALD-related actions.
- 2017 facility-consolidation capital expenditures were expected to be $9–$11 million above annual average spending. Management said available cash, investments, and projected operating cash flow should cover the next 12 months’ needs, including interest payments on the new notes.
Significant subsequent events, risks, and contingencies
- In January 2017, Veeco issued $345 million of 2.70% convertible senior notes due 2023, receiving approximately $336 million net proceeds. The initial conversion price was approximately $40.03 per share; conversion or cash settlement could affect liquidity and shareholder dilution.
- On February 2, 2017, Veeco agreed to acquire Ultratech for $21.75 cash plus 0.2675 Veeco share per Ultratech share. The stated transaction value was approximately $815 million, or $550 million enterprise value after Ultratech net cash. Closing was expected in Q2 2017, subject to shareholder, regulatory, and other conditions.
- Major risks include cyclical capital-equipment demand, changing LED economics and Chinese subsidies, concentrated customers and geography, order cancellations, and reliance on a limited number of suppliers—including a primary outsourced MOCVD manufacturer. The five largest customers represented 39% of 2016 sales; China represented about 26%.
- Veeco reported no material adverse effect expected from ordinary-course legal proceedings. A product-liability lawsuit settled in April 2016, with the settlement fully covered by insurance. Management and KPMG reported effective internal controls; KPMG gave an unqualified opinion on the financial statements.
Most important facts to verify
- Whether LED/MOCVD order recovery and backlog convert into shipments and revenue, and whether cancellations or customer delays increase.
- The sustainability of gross-margin improvement and the cash impact of restructuring, facility consolidation, and purchase commitments.
- ALD impairment assumptions and the remaining risk of further asset impairment or inventory write-downs.
- Financing, liquidity, dilution, and integration implications of the convertible notes and proposed Ultratech acquisition, including closing conditions and realized synergies.
- Customer and supplier concentration, Chinese subsidy exposure, and the repatriation constraints on foreign-held cash.