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VECO > SEC Filings for VECO > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for VEECO INSTRUMENTS INC

Form 10-K for VEECO INSTRUMENTS INC


28-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

Veeco Instruments Inc. (together with its consolidated subsidiaries, "Veeco", the "Company", "we", "us", and "our", unless the context indicates otherwise) creates process equipment that enables technologies for a cleaner and more productive world. We design, manufacture and market equipment primarily sold to make LEDs and hard-disk drives, as well as for concentrator photovoltaics, power semiconductors, wireless components, and micro-electro-mechanical systems ("MEMS").

Veeco develops highly differentiated, "best-in-class" process equipment for critical performance steps. Our products feature leading technology, low cost-of-ownership and high throughput. Core competencies in advanced thin film technologies, over 300 patents, and decades of specialized process know-how helps us to stay at the forefront of these demanding industries.

Veeco's LED & Solar segment designs and manufactures metal organic chemical vapor deposition ("MOCVD") and molecular beam epitaxy ("MBE") systems and components sold to manufacturers of LEDs, wireless components, power semiconductors, and concentrator photovoltaics, as well as for R&D applications. Our ALD technology is used by the manufacturers of OLED displays and has further applications in the semiconductor and solar markets.

Veeco's Data Storage segment designs and manufactures systems used to create thin film magnetic heads ("TFMH"s) that read and write data on hard disk drives. These include ion beam etch, ion beam deposition, diamond-like carbon, physical vapor deposition, chemical vapor deposition, and slicing, dicing and lapping systems. While our systems are primarily sold to hard drive customers, they also have applications in optical coatings, MEMS and magnetic sensors, and extreme ultraviolet ("EUV") lithography.

As of December 31, 2013, Veeco had approximately 800 employees to support our customers through product and process development, training, manufacturing, and sales and service sites in the U.S., South Korea, Taiwan, China, Singapore, Japan, Europe and other locations.

Veeco Instruments Inc. was organized as a Delaware corporation in 1989.

Summary of Results for 2013

Selected financial highlights include:

Revenue decreased 35.7% to $331.7 million in 2013 from $516.0 million in 2012. LED & Solar revenues decreased 31.2% to $249.7 million from $363.2 million in 2012. Data Storage revenues decreased 46.3% to $82.0 million from $152.8 million in 2012;

Orders were down 15.4%, to $331.6 million in 2013, compared to $391.9 million in 2012;

Our gross margin decreased, to 31.1%, in 2013 compared to 41.7% in 2012. Gross margins in LED & Solar decreased from 40.9% in 2012 to 28.0%. Data Storage gross margins also decreased from 43.7% to 40.4%.

Our selling, general and administrative expenses increased to $85.5 million, from $73.1 million in 2012. Selling, general and administrative expenses were 25.8% of net sales in 2013, compared to 14.2% in 2012;

Our research and development expenses decreased to $81.4 million from $95.2 million in 2012. Research and development expenses were 24.5% of net sales in 2013, compared to 18.4% in 2012;

Net income (loss) from continuing operations in 2013 was $(42.3) million compared to $26.5 million in 2012;

Diluted net income (loss) from continuing operations per share in 2013 was $(1.09) compared to $0.68 in 2012.


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Outlook

As we begin 2014, it is unclear when business conditions may improve for Veeco.

We are seeing some positive signs in our MOCVD business. LED customer facility utilization rates are stable and at a high level. It is clear that LED lighting adoption is accelerating. Some of our key customers are currently contemplating capacity additions. However, it remains difficult to accurately predict if, and when, a turnaround will happen and to what extent we will see growth in our MOCVD business. Competitive pricing pressure, which had a dramatic effect on our gross margins in 2013, is also difficult to predict. Our focus is to introduce next-generation products that will offer our customers additional value, and that, combined with potentially higher volumes, could help restore gross margins in MOCVD.

Our new ALD business was acquired as a "pre-revenue" business and thus decreased our earnings in 2013. The timing of production ALD orders from our key customer could have a significant impact on our expected revenue growth and potential return to profitability.

While Data Storage orders increased 8.4% from the prior year period and low growth is expected in hard drives, our customers have excess manufacturing capacity and they have only been making select technology purchases. Future demand for our Data Storage products is unclear.

Our priorities for 2014 include taking the steps we believe are necessary to transition us back to profitable growth. We are focused on four areas to improve our financial performance: 1) developing and launching new products that enable cost effective LED lighting, flexible OLED encapsulation and other emerging technologies; 2) executing manufacturing cost reduction programs; 3) driving process improvement initiatives to make us more efficient; and 4) improving product differentiation and customer value to stem margin erosion. We currently anticipate that our losses will continue in the near term.

Our outlook discussion above constitutes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Our expectations regarding future results are subject to risks and uncertainties. Our actual results may differ materially from those anticipated.

You should not place undue reliance on any forward-looking statements, which speak only as of the dates they are made.


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Results of Operations

Years Ended December 31, 2013 and 2012



The following table shows our Consolidated Statements of Operations, percentages
of sales and comparisons between 2013 and 2012 (dollars in thousands):



                                           Year ended                        Dollar and
                                          December 31,                    Percentage Change
                                    2013                 2012               Year to Year

Net sales                    $ 331,749    100.0 %  $ 516,020   100.0 %  $    (184,271 ) (35.7 )%
Cost of sales                  228,607     68.9 %    300,887    58.3 %        (72,280 ) (24.0 )%
Gross profit                   103,142     31.1 %    215,133    41.7 %       (111,991 ) (52.1 )%
Operating expenses:
Selling, general and
administrative                  85,486     25.8 %     73,110    14.2 %         12,376    16.9 %
Research and development        81,424     24.5 %     95,153    18.4 %        (13,729 ) (14.4 )%
Amortization                     5,527      1.7 %      4,908     1.0 %            619    12.6 %
Restructuring                    1,485      0.4 %      3,813     0.7 %         (2,328 ) (61.1 )%
Asset impairment                 1,220      0.4 %      1,335     0.3 %           (115 )  (8.6 )%
Total operating expenses       175,142     52.8 %    178,319    34.6 %         (3,177 )  (1.8 )%
Other, net                      (1,017 )   (0.3 )%      (398 )  (0.1 )%          (619 ) 155.5 %
Changes in contingent
consideration                      829      0.2 %          -     0.0 %            829       *
Operating income (loss)        (71,812 )  (21.6 )%    37,212     7.2 %       (109,024 )     *
Interest income (expense),
net                                602      0.2 %        974     0.2 %           (372 ) (38.2 )%
Income (loss) from
continuing operations
before income taxes            (71,210 )  (21.5 )%    38,186     7.4 %       (109,396 )     *
Income tax provision
(benefit)                      (28,947 )   (8.7 )%    11,657     2.3 %        (40,604 )     *
Income (loss) from
continuing operations          (42,263 )  (12.7 )%    26,529     5.1 %        (68,792 )     *

Discontinued operations:
Income (loss) from
discontinued operations
before income taxes                  -      0.0 %      6,269     1.2 %         (6,269 )     *
Income tax provision
(benefit)                            -      0.0 %      1,870     0.4 %         (1,870 )     *
Income (loss) from
discontinued operations              -      0.0 %      4,399     0.9 %         (4,399 )     *
Net income (loss)            $ (42,263 )  (12.7 )% $  30,928     6.0 %  $     (73,191 )     *



* Not Meaningful


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Net Sales



The following is an analysis of sales by segment and by region (dollars in
thousands):



                                      For the year ended
                                         December 31,                     Dollar and Percentage
                                      Percent                Percent              Change
                            2013      of total     2012      of total          Year to Year
Segment Analysis
LED & Solar               $ 249,742       75.3 % $ 363,181       70.4 %  $      (113,439 )  (31.2 )%
Data Storage                 82,007       24.7 %   152,839       29.6 %          (70,832 )  (46.3 )%
Total                     $ 331,749      100.0 % $ 516,020      100.0 %  $      (184,271 )  (35.7 )%
Regional Analysis
Asia Pacific              $ 252,199       76.0 % $ 390,995       75.8 %  $      (138,796 )  (35.5 )%
Americas (1)                 57,609       17.4 %    83,317       16.1 %          (25,708 )  (30.9 )%
Europe, Middle East and
Africa                       21,941        6.6 %    41,708        8.1 %          (19,767 )  (47.4 )%
Total                     $ 331,749      100.0 % $ 516,020      100.0 %  $      (184,271 )  (35.7 )%



(1) Less than 1% of sales included within the Americas caption above have been derived from other regions outside the United States.

LED & Solar segment sales decreased in 2013 primarily due to lower MOCVD sales as a result of continued industry manufacturing overcapacity and our customer's hesitancy to make new investments. Data Storage sales decreased in 2013 due to customer fabrication facility overcapacity and weak hard drive demand. Our Data Storage sales in 2012 were favorably impacted by the replacement of equipment at one of our customer's sites that was damaged by the floods in Thailand. By region, net sales decreased in Asia Pacific ("APAC"), primarily due to a significant decrease in MOCVD sales in China resulting from industry manufacturing overcapacity. Net sales in the Americas and Europe, Middle East and Africa ("EMEA") also decreased, due to reduced end-market demand resulting from the weak global economy. We believe that there will continue to be year-to-year variations in the geographic distribution of sales.

Orders decreased 15.4% to $331.6 million from $391.9 million in the prior year, primarily attributable to a 22.1% decrease in LED & Solar orders, principally driven by a decline in MOCVD orders due to industry manufacturing overcapacity. Since hitting a peak in the second quarter of 2011, our orders have slowed dramatically. While Data Storage orders increased 8.4% from the prior year period and low growth is expected in hard drives, our customers have excess manufacturing capacity and they have only been making select technology purchases. We continue to experience weak overall market conditions due to overcapacity in all of our businesses.

Our book-to-bill ratio for 2013, which is calculated by dividing orders recorded in a given time period by revenue recognized in the same time period, was 1 to 1 compared to 0.76 to 1 in 2012. Our backlog as of December 31, 2013 was $143.3 million, compared to $150.2 million as of December 31, 2012. During the year ended December 31, 2013, we recorded backlog adjustments of approximately $6.8 million, consisting of a $5.6 million adjustment related to orders that no longer met our bookings criteria as well as an adjustment related to foreign currency translation of $1.2 million. For certain sales arrangements we require a deposit for a portion of the sales price before shipment. As of December 31, 2013 and 2012, we had customer deposits of $27.5 million and $32.7 million, respectively.


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Gross Profit



                                   Year ended
                                  December 31,          Dollar and Percentage Change
(dollars in thousands)          2013        2012                Year to Year
Gross profit - LED & Solar    $  69,998   $ 148,383   $          (78,385 )       (52.8 )%
Gross margin                       28.0 %      40.9 %
Gross profit - Data Storage   $  33,144   $  66,750   $          (33,606 )       (50.3 )%
Gross margin                       40.4 %      43.7 %
Gross profit - Total Veeco    $ 103,142   $ 215,133   $         (111,991 )       (52.1 )%
Gross margin                       31.1 %      41.7 %

LED & Solar gross margins decreased primarily due to lower average selling prices, reduced volume and fewer final acceptances partially offset by cost reductions associated with reduced volumes and reduced expenses in 2013 for slow moving inventory items. Data Storage gross margins decreased primarily due to a significant reduction in volume.

Operating Expenses



                                               Year ended
                                              December 31,             Dollar and Percentage Change
(dollars in thousands)                    2013           2012                  Year to Year
Selling, general and administrative    $    85,486    $    73,110    $           12,376           16.9 %
Percentage of sales                           25.8 %         14.2 %

Selling, general and administrative expenses increased primarily from professional fees associated with our review of our revenue accounting that began in 2012 and completed in October 2013, partially offset by a reduction in bonus and profit sharing expense and increased cost control measures put into place in response to weak market conditions, which resulted in lower personnel-related costs and discretionary expenses. The addition of our ALD business in the fourth quarter of 2013 has also contributed to an increase in our selling, general and administrative expenses.

                               Year ended
                              December 31,        Dollar and Percentage Change
(dollars in thousands)       2013       2012              Year to Year
Research and development   $ 81,424   $ 95,153   $         (13,729 )       (14.4 )%
Percentage of sales            24.5 %     18.4 %

Research and development expense decreased as we sharpened our focus on product development in areas of anticipated high-growth. We selectively funded certain product development activities which resulted in reduced spending for project materials and professional consultants as well as lower personnel and personnel-related costs.

                            Year ended
                           December 31,         Dollar and Percentage Change
(dollars in thousands)    2013      2012                Year to Year
Amortization             $ 5,527   $ 4,908   $           619               12.6 %
Percentage of sales          1.7 %     1.0 %

Amortization expense increased primarily due to additional amortization associated with intangible assets acquired as part of our acquisition of Synos during the fourth quarter of 2013, partially offset by certain intangible assets becoming fully amortized.


Table of Contents

                              Year ended
                             December 31,         Dollar and Percentage Change
(dollars in thousands)     2013        2012               Year to Year
Restructuring            $    1,485   $ 3,813   $          (2,328 )         (61.1 )%
Percentage of sales             0.4 %     0.7 %

During 2013, we recorded $1.5 million in personnel severance and related costs principally resulting from the transition from a direct sales presence to a distributor in one of our international sales offices and the consolidation of certain sales, business and administrative functions. During 2012, we took measures to improve profitability, including a reduction in discretionary expenses, realignment of our senior management team and consolidation of certain sales, business and administrative functions. As a result of these actions, we recorded a restructuring charge in 2012 consisting of $3.0 million in personnel severance and related costs, $0.4 million in equity compensation and related costs and $0.4 million in other severance costs resulting from a headcount reduction of 52 employees.

                            Year ended
                           December 31,        Dollar and Percentage Change
(dollars in thousands)    2013      2012               Year to Year
Asset impairment         $ 1,220   $ 1,335   $           (115 )           (8.6 )%
Percentage of sales          0.4 %     0.3 %

During 2013, we recorded asset impairment charges in LED & Solar of $0.9 million related to certain lab tools carried in property, plant and equipment which we are holding for sale and $0.3 million related to another asset carried in Other assets. During 2012, we recorded an asset impairment charge related to a license agreement in our Data Storage segment.

Income Taxes



                                      Year ended
                                     December 31,         Dollar and Percentage Change
(dollars in thousands)             2013        2012               Year to Year
Income tax provision (benefit)   $ (28,947 ) $ 11,657   $                (40,604 )     *
Effective tax rate                    40.7 %     30.5 %



* Not Meaningful

The 2013 net benefit for income taxes included a $3.5 million provision relating to our foreign operations and $32.4 million benefit relating to our domestic operations. The 2012 provision for income taxes included $8.3 million relating to our foreign operations and $3.4 million relating to our domestic operations. Our 2013 effective tax rate is higher than the statutory rate as a result of the jurisdictional mix of earnings in our foreign locations, an income tax benefit related to the generation of current year research and development tax credits and legislation enacted in the first quarter of 2013 which extended the Federal Research and Development Credit for both the 2012 and 2013 tax years.

During the fourth quarter of 2012, we determined that we may not meet the criteria required to receive a certain incentive tax rate pursuant to a negotiated tax holiday in one foreign jurisdiction. Although we are continuing to negotiate the criteria for the incentive, for financial reporting purposes we have recorded additional tax provisions of $0.9 million and $4.0 million in 2013 and 2012, respectively, totaling $4.9 million, which represents the cumulative effect of calculating the tax provision using the incentive tax rate as compared to the foreign country's statutory rate. If we successfully renegotiate the incentive criteria, this additional tax provision could be reversed as a future benefit in the period in which the negotiations are finalized.

During 2012, we recorded an income tax expense of $1.9 million related to discontinued operations, with no comparable amount in 2013. In addition, we recorded a current tax benefit of $2.1 million related to equity-based compensation in 2012 for which no current tax benefit was recorded in 2013.


Table of Contents

Discontinued Operations



                                         Year ended
                                        December 31,                  Dollar and Percentage Change
(dollars in thousands)              2013            2012                      Year to Year
Income (loss) from
discontinued operations
before income taxes             $           -    $     6,269    $                 (6,269 )         *
Income tax provision
(benefit)                                   -          1,870                      (1,870 )         *
Income (loss) from
discontinued operations         $           -    $     4,399    $                 (4,399 )         *



* Not Meaningful

Discontinued operations represent the results of the operations of our disposed Metrology segment, which was sold to Bruker on October 7, 2010, and our CIGS solar systems business, which was discontinued on September 27, 2011. The 2012 results included a $1.4 million gain ($1.1 million net of taxes) on the sale of the assets of discontinued segment held for sale and a $5.4 million gain ($4.1 million net of taxes) associated with the closing of the sale to Bruker.


Table of Contents

Years Ended December 31, 2012 and 2011



The following table shows our Consolidated Statements of Operations, percentages
of sales and comparisons between 2012 and 2011 (dollars in thousands):



                                         Year ended                       Dollar and
                                        December 31,                   Percentage Change
                                 2012                 2011               Year to Year
Net sales                  $ 516,020   100.0 %  $ 979,135   100.0 %  $    (463,115 ) (47.3 )%
Cost of sales                300,887    58.3 %    504,801    51.6 %       (203,914 ) (40.4 )%
Gross profit                 215,133    41.7 %    474,334    48.4 %       (259,201 ) (54.6 )%
Operating expenses:
Selling, general and
administrative                73,110    14.2 %     95,134     9.7 %        (22,024 ) (23.2 )%
Research and development      95,153    18.4 %     96,596     9.9 %         (1,443 )  (1.5 )%
Amortization                   4,908     1.0 %      4,734     0.5 %            174     3.7 %
Restructuring                  3,813     0.7 %      1,288     0.1 %          2,525   196.0 %
Asset impairment               1,335     0.3 %        584     0.1 %            751   128.6 %
Total operating expenses     178,319    34.6 %    198,336    20.3 %        (20,017 ) (10.1 )%
Other, net                      (398 )  (0.1 )%      (261 )  (0.0 )%          (137 )  52.5 %
Operating income (loss)       37,212     7.2 %    276,259    28.2 %       (239,047 ) (86.5 )%
Interest income
(expense), net                   974     0.2 %       (824 )  (0.1 )%         1,798       *
Loss on extinguishment
of debt                            -     0.0 %     (3,349 )  (0.3 )%         3,349       *
Income (loss) from
continuing operations
before income taxes           38,186     7.4 %    272,086    27.8 %       (233,900 ) (86.0 )%
Income tax provision
(benefit)                     11,657     2.3 %     81,584     8.3 %        (69,927 ) (85.7 )%
Income (loss) from
continuing operations         26,529     5.1 %    190,502    19.5 %       (163,973 ) (86.1 )%

Discontinued operations:
Income (loss) from
discontinued operations
before income taxes            6,269     1.2 %    (91,885 )  (9.4 )%        98,154       *
Income tax provision
(benefit)                      1,870     0.4 %    (29,370 )  (3.0 )%        31,240       *
Income (loss) from
discontinued operations        4,399     0.9 %    (62,515 )  (6.4 )%        66,914       *
Net income (loss)          $  30,928     6.0 %  $ 127,987    13.1 %  $     (97,059 ) (75.8 )%



* Not Meaningful


Table of Contents

Net Sales



The following is an analysis of sales by segment and by region (dollars in
thousands):



                                        For the year ended
                                           December 31,                       Dollar and Percentage
                                      Percent of               Percent of            Change
                            2012        total        2011        total            Year to Year
Segment Analysis
LED & Solar               $ 363,181         70.4 % $ 827,797         84.5 % $      (464,616 )   (56.1 )%
Data Storage                152,839         29.6 %   151,338         15.5 %           1,501       1.0 %
Total                     $ 516,020        100.0 % $ 979,135        100.0 % $      (463,115 )   (47.3 )%
Regional Analysis
Asia Pacific              $ 390,995         75.8 % $ 820,883         83.8 % $      (429,888 )   (52.4 )%
Americas (1)                 83,317         16.1 %   100,635         10.3 %         (17,318 )   (17.2 )%
Europe, Middle East and
Africa                       41,708          8.1 %    57,617          5.9 %         (15,909 )   (27.6 )%
Total                     $ 516,020        100.0 % $ 979,135        100.0 % $      (463,115 )   (47.3 )%



(1) Less than 1%, of sales included within the United States caption above has been derived from other regions within the Americas.

By segment, LED & Solar sales decreased from the prior year primarily due to a 62.0% decrease in MOCVD reactor shipments as a result of industry overcapacity following over two years of strong customer investments. Data Storage sales increased slightly from the prior year, primarily due to an increase in shipments to replace equipment destroyed by flooding in customer facilities in Thailand offset by reduced demand due to our customers' hesitancy to add manufacturing capacity during weak global economic conditions. By region, net sales decreased in APAC, primarily due to lower MOCVD sales to LED customers. . . .

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