Veeco Instruments Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 21, 2020. Veeco makes semiconductor and thin-film process equipment, serving front-end semiconductor, advanced packaging/MEMS/RF, LED/display/compound semiconductor, and scientific/industrial markets. Results are reported as one operating segment.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $419.3 million | $542.1 million | Down 23% |
| Gross profit / margin | $158.2 million / 37.7% | $193.7 million / 35.7% | Profit down 18%; margin improved |
| Operating income (loss) | $(39.6) million | $(415.5) million | Loss narrowed |
| Net income (loss) | $(78.7) million | $(407.1) million | Loss narrowed |
| Diluted loss per share | $(1.66) | $(8.63) | Loss per share narrowed |
| Cash from operations | $(7.4) million | $(37.7) million | Use of cash decreased |
Annual gross margin improved mainly from sales mix, including exiting low-margin commoditized LED sales in China, partly offset by higher inventory reserves. Revenue by market was: Front-End Semiconductor $120.1 million (up 92%); Advanced Packaging, MEMS & RF Filters $66.9 million (down 26%); LED Lighting, Display & Compound Semiconductor $72.8 million (down 71%); and Scientific & Industrial $159.5 million (up 15%).
Q4 detail: 2019 Q4 sales were $113.2 million versus $99.0 million in Q4 2018; gross profit was $45.0 million versus $35.3 million. Net loss was $32.9 million versus $144.7 million, with the prior-year quarter burdened by substantial impairments.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $129.3 million and short-term investments $115.3 million at year-end, totaling $245.2 million including $0.7 million of restricted cash; the comparable total was $261.3 million.
- Working capital was $357.7 million, compared with $360.0 million. Total assets were $818.1 million and equity $374.5 million.
- Convertible notes had $345.0 million principal, 2.70% coupon, and maturity in January 2023; net carrying value was $300.1 million. FY2019 interest expense included $12.7 million of non-cash debt discount and transaction-cost amortization.
- Investing cash outflow was $75.9 million, principally reflecting net purchases of investments and $10.9 million of capital expenditures. Management said cash, investments, and projected operating cash flow should cover expected needs for the next 12 months, including note interest.
Material changes, outlook, and risks
- Sales fell sharply in LED/display/compound semiconductor, particularly China, and in advanced packaging; front-end semiconductor and scientific/industrial sales grew. China sales declined 63% to $71.1 million. Management did not expect significant near-term new China orders in the LED/display/compound semiconductor market.
- Management cited momentum in EUV mask-blank equipment and laser annealing, while advanced-packaging opportunities remained soft amid excess mobile supply-chain capacity. Compound-semiconductor priorities include 3D sensing, lasers, RF, and power applications. No quantified company-wide revenue or earnings guidance is provided in the filing.
- Backlog declined to $267.6 million from $288.3 million. Management cautioned that orders can be canceled, rescheduled, or removed from backlog criteria.
- FY2019 unusual charges included a $21.0 million non-cash impairment of the Kateeva investment and a $4.0 million impairment related to a non-core product line classified as held for sale. The disposal group had $11.2 million of assets at year-end. Restructuring expense was $6.4 million; 2019 reorganizations affected approximately 60 employees.
- FY2018 comparability was affected by $375.2 million of asset impairment, including $252.3 million related to Ultratech intangible assets and $122.8 million of goodwill impairment. Thus, the substantial year-over-year narrowing in losses does not by itself indicate a return to profitability.
- Key risks include semiconductor-equipment cyclicality, concentrated customers and regions, U.S.-China trade and export-license restrictions, supply-chain dependence, inventory obsolescence, and competition. The filing also cites the then-recent coronavirus outbreak as a potential disruption risk.
- Veeco disclosed an unresolved 2018 cyberattack whose extent and potential operational impact remained unclear. It was defending consolidated securities class-action litigation and a related derivative action arising from disclosures about the Ultratech acquisition; management did not expect other ordinary-course proceedings to materially affect results.
Important facts for investors to verify
- Whether EUV and other front-end semiconductor orders convert into sustained shipments and revenue, and whether growth offsets weakness in other markets.
- Backlog quality, cancellations, customer deposits, and the significant inventory balance of $133.1 million; inventory valuation was identified as a critical audit matter.
- Cash generation and liquidity relative to the $345.0 million note principal due in 2023, scheduled interest, and purchase commitments of $63.3 million, mostly due within one year.
- Progress and terms of the planned sale of the held-for-sale product line, and any further impairment or restructuring charges.
- Developments in export licensing and U.S.-China trade policy, customer concentration, the cyberattack investigation, and the Ultratech-related litigation.
KPMG issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2019.