Business Context and Reporting Period
Company: Veeco Instruments Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: Veeco designs, manufactures, and markets equipment for the production of light emitting diodes (LEDs), solar panels, and hard-disk drives. The company operates through two primary segments: LED & Solar (MOCVD, MBE, and CIGS systems) and Data Storage (ion beam etch/deposition and dicing systems). The 2010 fiscal year marked a record-breaking period for the company, driven by a rapid recovery in global capital spending and accelerated growth in the HB LED market.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net Sales | $933.2 million | $282.4 million | +230.5% |
| Gross Profit | $443.8 million | $111.2 million | +299.0% |
| Gross Margin | 47.6% | 39.4% | +820 bps |
| Operating Income | $277.6 million | ($4.7 million) loss | Turnaround |
| Net Income (Continuing Ops) | $260.5 million | ($14.2 million) loss | Turnaround |
| Net Income (Total) | $361.8 million | ($15.6 million) loss | Turnaround |
| Diluted EPS (Total) | $8.51 | ($0.48) | N/A |
| Cash from Operations | $194.2 million | $59.0 million | +229.2% |
| Cash & Equivalents (End of Period) | $245.1 million | $148.5 million | +65.0% |
| Backlog (End of Period) | $555.0 million | $377.3 million | +47.1% |
Debt & Liquidity: As of December 31, 2010, the company held $105.6 million in convertible subordinated notes (classified as current due to conversion terms) and $2.9 million in mortgage notes. Total working capital was $640.1 million. The company generated significant cash from operations and the sale of its Metrology segment.
Material Changes vs. Prior Period
- Revenue Surge: Net sales increased 231% year-over-year. The LED & Solar segment drove this growth with a 289% increase in sales ($797.9 million), while Data Storage sales rose 75% ($135.3 million).
- Profitability Turnaround: The company shifted from an operating loss of $4.7 million in 2009 to an operating income of $277.6 million in 2010. This was fueled by volume increases, higher average selling prices, and improved gross margins (48% vs. 39% in 2009).
- Discontinued Operations: The company sold its Metrology business to Bruker Corporation in October 2010. This resulted in a pre-tax gain on disposal of $156.3 million, contributing significantly to the total net income of $361.8 million.
- Expense Management: While SG&A and R&D expenses increased in absolute dollars to support growth, they decreased as a percentage of net sales. SG&A dropped from 22% to 10% of sales, and R&D dropped from 15% to 8% of sales.
- Backlog Adjustments: Net backlog adjustments of $10.7 million occurred in 2010, primarily due to order adjustments in the Solar and MBE businesses.
Guidance, Outlook, and Risks
Outlook: Management forecasts 2011 revenues to exceed $1 billion, citing a starting backlog of $555 million and anticipated strong bookings in the first half of 2011. The company expects continued growth in the HB LED industry due to backlighting and general illumination applications, as well as growth in the Data Storage segment.
Key Risks:
- Outsourcing Dependence: Veeco outsources the manufacture of substantially all new MOCVD and data storage systems. Failure of outsourcing partners to perform could disrupt operations.
- Customer Concentration: The top five customers accounted for 52% of total net sales in 2010. LG Innotek and Seoul OptoDevice each accounted for over 10% of sales.
- Government Subsidies: A significant portion of MOCVD orders in China relies on government subsidies. Reduction or elimination of these incentives could adversely affect future order rates.
- Backlog Cancellations: Customer purchase orders are subject to cancellation or modification, which could lead to decreased sales and inventory write-downs.
- Export Controls: Approximately 90% of sales are generated outside the U.S. The company is subject to U.S. export regulations, particularly for shipments to China, which can delay revenue recognition.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of earnings by analyzing results excluding the $156.3 million one-time gain from the Metrology segment sale.
- Backlog Quality: Assess the stability of the $555 million backlog, specifically regarding the $10.2 million in order adjustments related to Solar and MBE businesses.
- Convertible Debt: Review the terms of the $105.6 million convertible notes, which are classified as current liabilities and subject to conversion if stock prices remain above 130% of the conversion price.
- Customer Concentration: Monitor the financial health and order patterns of the top five customers, who represent over half of total revenue.
- Outsourcing Execution: Evaluate the company's ability to manage third-party manufacturing partners to meet the high demand for MOCVD systems without quality or delivery delays.