Veeco Instruments Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also provides unaudited fourth-quarter comparisons. Veeco designs and sells thin-film process equipment, primarily for LED/OLED manufacturing and data storage, through its LED & Solar and Data Storage segments. Amounts below are in U.S. dollars.
Financial performance
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $331.7 million | $516.0 million |
| Gross profit / margin | $103.1 million / 31.1% | $215.1 million / 41.7% |
| Operating income (loss) | $(71.8) million | $37.2 million |
| Net income (loss) from continuing operations | $(42.3) million | $26.5 million |
| Diluted continuing-operations EPS | $(1.09) | $0.68 |
| Cash from operating activities | $0.7 million | $112.0 million |
| Capital expenditures | $9.2 million | $25.0 million |
Revenue fell 35.7% year over year. LED & Solar sales declined 31.2% to $249.7 million; Data Storage sales declined 46.3% to $82.0 million. Orders fell 15.4% to $331.6 million; year-end backlog was $143.3 million versus $150.2 million. Book-to-bill was 1.0, compared with 0.76 in 2012.
Fourth quarter: Net sales were $73.2 million versus $106.8 million in Q4 2012; gross profit was $15.6 million versus $38.7 million. Continuing-operations net loss was $22.1 million, compared with a $8.6 million loss a year earlier. The filing does not provide a quarterly cash-flow figure.
Liquidity, debt and other metrics
At December 31, 2013, cash and cash equivalents were $210.8 million and short-term investments were $281.5 million; restricted cash was $2.7 million. Working capital was $485.5 million, down from $632.2 million. Long-term debt, including the current portion, was $2.1 million, principally a facility mortgage. Management said cash, investments and projected operating cash flow should cover working-capital needs and contractual obligations for the next 12 months.
Cash declined by $173.8 million during 2013. Investing activities used $168.1 million, including $71.5 million for the Synos acquisition and increased short-term investments. Contractual commitments included $60.3 million of purchase commitments due within one year, partly offset by $9.4 million of supplier deposits, and $8.1 million of operating lease payments.
Material changes and notable items
- Weakness in LED and data-storage equipment demand, customer capacity overhang and pricing pressure drove lower sales and margins. LED & Solar gross margin fell to 28.0% from 40.9%; Data Storage gross margin fell to 40.4% from 43.7%.
- SG&A increased 16.9% to $85.5 million, including professional fees for a revenue-accounting review and costs of the acquired ALD business. R&D expense declined 14.4% to $81.4 million.
- Veeco acquired Synos Technology on October 1, 2013, entering fast-array atomic layer deposition (ALD) for OLED and other applications. Acquisition-date consideration was $102.3 million, net of cash acquired, including $33.5 million fair value for contingent consideration. Of up to $115 million of potential contingent payments, $5 million was earned and paid in 2013; additional amounts depend on purchase-order milestones and 2014 revenue and gross-margin targets. Synos contributed $0.4 million of revenue and a $6.5 million pretax loss after acquisition.
- 2013 included $1.5 million of restructuring expense and $1.2 million of asset impairment. Veeco recorded a $28.9 million income-tax benefit, including a $32.4 million domestic benefit and a $3.5 million foreign provision. A negotiated foreign tax incentive remained uncertain; cumulative additional tax provisions were $4.9 million and could be reversed if criteria are renegotiated successfully.
- Management reported that a previously disclosed material weakness in revenue-recognition and related-cost controls was remediated by year-end; management and the auditor concluded internal control over financial reporting was effective. Synos was excluded from the annual control assessment and auditor evaluation.
Outlook, risks and contingencies
Management said at the start of 2014 that the timing and scale of recovery remained uncertain and anticipated continued losses in the near term. It cited stable, high LED customer utilization and accelerating LED-lighting adoption, but said capacity additions and pricing were difficult to predict. ALD production orders from a key customer could materially affect growth and a return to profitability. Data Storage demand also remained unclear despite an 8.4% year-over-year increase in orders.
Management’s 2014 priorities were new products for LED lighting, flexible OLED encapsulation and emerging technologies; manufacturing cost reductions; process improvements; and stronger product differentiation and customer value. No quantified earnings or revenue guidance was provided.
Key risks include cyclical end markets, persistent MOCVD overcapacity and reduced Chinese government incentives, customer cancellations or delays, concentrated customers and geography, reliance on limited suppliers and outsourcing partners, export licensing and foreign-exchange exposure, and uncertain adoption of LED lighting and OLED technology. Five largest customers represented 42% of 2013 sales; customers in China, Taiwan and South Korea represented 62%.
A product-liability lawsuit alleges injury while cleaning a Veeco MBE system. Veeco disputes the claims, cannot estimate any possible loss, and believes any recovery would be covered by insurance. The filing also describes environmental matters for which Veeco cites indemnification and does not consider a material loss probable. Ernst & Young issued an unqualified opinion on the financial statements and on internal control, subject to the stated exclusion of Synos from the control assessment.
Important facts for investors to verify
- Whether MOCVD capacity utilization, customer capital spending and pricing improve enough to restore segment margins.
- Whether Synos meets purchase-order and 2014 revenue/gross-margin milestones, and the resulting contingent payments and ALD commercial demand.
- Cash generation and working-capital trends, including the effect of purchase commitments and cash held overseas.
- Customer and regional concentration, backlog quality, and the potential for order cancellations or rescheduling.
- Progress on revenue-recognition controls at Synos, the foreign tax incentive negotiations, and the outcome of the MBE product-liability case.