Veeco(VECO) - 2018 Q4 - Annual Report

PART I Business Overview Veeco Instruments Inc. is a leading manufacturer of semiconductor and thin-film process equipment, focusing on MOCVD, MBE, lithography, laser annealing, ion beam, and single-wafer etch and clean technologies - Veeco is a leading manufacturer of innovative semiconductor and thin-film process equipment, with products including MOCVD, MBE, lithography, laser annealing, ion beam, and single-wafer etch and clean technologies[11] - The company focuses on innovation, penetrating new markets through sales channels and application support, and enhancing profitability by optimizing manufacturing costs[12] Business Description and Overview Veeco, founded in 1989 and headquartered in Plainview, New York, is a leading manufacturer of semiconductor and thin-film process equipment - Veeco, founded in 1989 and headquartered in Plainview, New York, is a leading manufacturer of semiconductor and thin-film process equipment[11] - Company technology plays a critical role in manufacturing advanced semiconductor devices such as LEDs, communication and 3D sensing lasers, and mobile RF filters[11] Markets The company's products are sold into four primary markets: advanced packaging, MEMS and RF filters; LED lighting, display and compound semiconductors; front-end semiconductors; and scientific and industrial - Company products are sold into four primary markets: advanced packaging, MEMS and RF filters; LED lighting, display and compound semiconductors; front-end semiconductors; and scientific and industrial[12] Advanced Packaging, MEMS & RF Filters This market is driven by demand for higher performance, smaller size, and lower power consumption in mobile devices, consumer electronics, and high-performance computing - Advanced packaging market is driven by demand for higher performance, smaller size, and lower power consumption in mobile devices, consumer electronics, and high-performance computing[15] - Veeco's lithography and Precision Surface Processing (PSP) wet etch and clean systems play a role in advanced packaging[15] - RF filters are one of the fastest-growing MEMS applications, benefiting the company's PSP, IBE, and MBE systems[17] LED Lighting, Display & Compound Semiconductor The LED industry has experienced multiple growth cycles, with future growth expected from compound semiconductor markets like optoelectronics, 3D sensing, Micro-LED displays, 5G RF infrastructure, and power electronics - LED industry has experienced multiple growth cycles, with future growth expected from optoelectronics, 3D sensing, Micro-LED displays, 5G RF infrastructure, and power electronics compound semiconductor markets[18] - Company's MOCVD technology is central to GaN-based LED manufacturing, but general lighting and backlight markets are not expected to contribute significantly to future revenue[19][20] - GaN-based power electronics devices are expected to achieve higher performance through MOCVD systems, and the company anticipates benefiting from their transition from development to production[23] Front-End Semiconductor This market involves early process steps for forming transistors on silicon, where Veeco's laser spike annealing and ion beam etch systems are critical - Front-end semiconductor market involves early process steps for forming transistors on silicon[26] - Company's Laser Spike Annealing (LSA) systems enable precise doping in semiconductor manufacturing, and Ion Beam Etch (IBE) is used for STT-MRAM applications[26] - Ion Beam Deposition (IBD) products have been used to manufacture extreme ultraviolet (EUV) photomasks, with future growth dependent on overall adoption of EUV lithography technology[26] Scientific & Industrial This market encompasses advanced materials research and diverse manufacturing applications, including high-power fiber lasers, infrared detectors, and hard disk drive thin-film magnetic heads - Scientific and industrial market includes advanced materials research and broad manufacturing applications such as high-power fiber lasers, infrared detectors, hard disk drive (HDD) thin-film magnetic heads, and optical coatings[28] - MBE systems are used for materials science research and specialized product manufacturing, while IBD tools are used to produce high-quality optical thin films[29][30] System Products Veeco offers a comprehensive portfolio of advanced process equipment, including MOCVD, lithography, wet etch, laser annealing, ion beam, MBE, 3D wafer inspection, and ALD systems Metal Organic Chemical Vapor Deposition Systems Veeco is a leading supplier of MOCVD systems for manufacturing GaN-based and As/P-based devices, offering cost savings through high uptime and wafer uniformity - Veeco is a leading supplier of MOCVD systems for manufacturing GaN-based and As/P-based devices such as LEDs and power electronics products[32] - TurboDisc EPIK series MOCVD systems provide cost savings to customers through high uptime, low maintenance costs, and excellent wafer uniformity[32] - Propel™ PowerGaN™ MOCVD systems support the development of efficient GaN-based power electronics devices with 200mm technology and single-wafer reactor technology[32] Advanced Packaging Lithography The company leads the advanced packaging lithography equipment market, optimizing productivity for 200mm and 300mm applications with industry-low cost of ownership - Company is a leader in the advanced packaging lithography equipment market, with products designed to optimize productivity for 200mm and 300mm advanced packaging applications[33] - Tools support applications such as RDLs, copper pillars, micro-bumps, FOWLP, interposers, and TSVs, offering the industry's lowest cost of ownership[33] Precision Surface Processing Systems (Wet Etch and Clean) Veeco provides single-wafer wet etch and clean systems targeting high-growth areas in advanced packaging, MEMS, LED, and compound semiconductor markets - Offers single-wafer wet etch and clean, surface preparation systems, targeting high-growth areas in advanced packaging, MEMS, LED, and compound semiconductor markets[34] - WaferStorm platform utilizes ImmJET™ technology, and WaferEtch platform provides high uniformity, selective etching, and significantly reduces cost of ownership for TSV backside thinning[34] Laser Annealing Systems Laser Spike Annealing (LSA) systems address the need for millisecond annealing in CMOS logic ICs, while next-generation MELT technology targets nanosecond thermal annealing for advanced logic devices - Laser Spike Annealing (LSA) systems meet industry demand for millisecond annealing, addressing challenges in manufacturing ultra-shallow junctions and highly activated source/drain contacts in CMOS logic integrated circuits[35] - Company has developed next-generation Melt Annealing (MELT) technology for nanosecond thermal annealing in 7nm and below advanced logic devices to improve source/drain contact resistance[36] Ion Beam Deposition and Etch Systems NEXUS IBD systems deposit high-purity thin films, NEXUS IBE systems etch precise features, and SPECTOR systems are for high-precision optical coatings - NEXUS IBD systems are used for depositing high-purity thin films, and NEXUS IBE systems are used for etching precise complex features, primarily in data storage, semiconductor, and telecommunications equipment manufacturing[37] - SPECTOR ion beam sputtering systems are developed for high-precision optical coatings, offering advanced optical thickness monitoring and productivity[38] Molecular Beam Epitaxy Systems Veeco is a leading global supplier of MBE systems for precise atomic-layer thin crystal deposition, critical for compound semiconductor device manufacturing and various applications - Veeco is a leading global supplier of MBE systems for precise deposition of atomic-layer thin crystal layers, a critical step in compound semiconductor device manufacturing[38][39] - MBE systems are applied in high-power fiber lasers, infrared detectors, mobile phones, radar systems, high-efficiency solar cells, and fundamental materials science research[39] 3D Wafer Inspection Systems Superfast 3D wafer inspection systems, based on coherent gradient sensing, detect patterned wafer defects in 3D integration schemes to improve lithography and deposition processes - Superfast 3D wafer inspection systems, based on coherent gradient sensing (CGS), are used to detect patterned wafer defects in 3D integration schemes (such as vertical NAND, HAR DRAM, logic FinFET) to improve lithography and deposition processes[40] Atomic Layer Deposition and Other Deposition Systems Veeco offers a full suite of ALD systems for scientific and industrial market applications, including optics, semiconductors, MEMS, nanostructures, and biomedicine - Veeco offers a full suite of ALD systems for scientific and industrial market applications such as optics, semiconductor/nanoelectronics, MEMS, nanostructures, and biomedicine[41] Sales and Service The company sells products and services globally through facilities in the US, Europe, and Asia Pacific, with service revenue consistently contributing to net sales - Company sells products and services globally through facilities in the US, Europe, and Asia Pacific[42] Service Revenue as a Percentage of Net Sales | Year | Parts, Upgrades, Service, and Support as % of Net Sales | | :--- | :--- | | 2018 | 28% | | 2017 | 27% | | 2016 | 28% | Customers Veeco sells to a diverse global customer base, including LED, MEMS, OSAT, HDD, and semiconductor manufacturers, but relies on a few major customers for a significant portion of sales - Company products are sold to numerous global LED, MEMS, OSAT, HDD, and semiconductor manufacturers, as well as research centers and universities[43] - Company relies on a few major customers, with sales to Focus Lighting Tech Co. exceeding 10% of total net sales in 2018, and OSRAM Opto Semiconductors exceeding 10% in 2017 and 2016[43][44] Research and Development R&D activities focus on timely creation of new products and enhancement of existing ones to maintain competitive position and align with customer needs - R&D activities focus on timely creation of new products and enhancement of existing products to maintain competitive position and align with customer needs[45] Suppliers The company outsources some functions, including manufacturing of certain systems, while retaining internal manufacturing capabilities - Company outsources some functions to third parties, including manufacturing of certain systems, but retains a degree of internal manufacturing capability[46] Backlog The company's backlog decreased from $334.3 million in 2017 to $288.3 million in 2018, influenced by new accounting standards and order reclassification Backlog Changes | Date | Backlog Amount (Millions of US Dollars) | | :--- | :--- | | December 31, 2018 | 288.3 | | December 31, 2017 | 334.3 | - In 2018, backlog increased by approximately $2.9 million due to the adoption of ASC Topic 606, while decreasing by approximately $6.0 million due to orders no longer meeting booking criteria[47] Competition The company faces intense competition across all its markets from established and smaller rivals, some with greater resources, with customer choices driven by system performance and cost - Company faces intense competition in all its served markets from established and smaller competitors, some with stronger financial, engineering, and marketing resources[48] - Key factors for customer tool selection include system performance, precision, repeatability, ease of use, reliability, cost of ownership, and technical service and support[48] - Major competitors include AMEC, Aixtron, Applied Materials, and Canon[49] Intellectual Property The company's success relies partly on proprietary technology, holding over 800 patents, but its business success primarily depends on employee expertise, innovation, and customer satisfaction - Company's success partly relies on proprietary technology, holding over 800 US and international patents and pending applications[50] - Company believes no single patent or license is critical to its operations, with business success primarily dependent on employee technical expertise, innovation, customer satisfaction, and experience[51] Employees As of December 31, 2018, Veeco had 1,043 employees across various departments and maintains good employee relations with plans to attract and retain talent Employee Composition as of December 31, 2018 | Department | Number of Employees | | :--- | :--- | | Manufacturing and Test | 302 | | Sales and Marketing | 95 | | Service and Product Support | 221 | | Engineering and R&D | 281 | | Information Technology, Administrative, and Finance | 144 | | Total | 1,043 | - Company believes its employee relations are good and has adequate plans to attract, motivate, and retain employees[52] Available Information The company's SEC filings, including 10-K, 10-Q, 8-K, and proxy statements, are freely available on its investor relations website - Company's SEC filings, including 10-K, 10-Q, 8-K, and proxy statements, are freely available on the company website's investor relations section[53] Risk Factors The company faces multiple risks, including market volatility, global operations and trade policy uncertainties, cybersecurity threats, intellectual property protection challenges, stock price fluctuations, financial performance impacts, operational and supply chain disruptions, M&A integration difficulties, increasingly complex regulatory compliance, environmental health and safety liabilities, and uncontrollable events like natural disasters - Volatile market conditions, technology shifts, new competitors, production capacity, end-user demand, international trade barriers, and macroeconomic conditions may adversely affect the company's operating results[55] - Majority of company sales are from outside the US, exposing it to global business risks such as political, social, legal, trade disputes, cyberattacks, and regional economic downturns[58][59] - In November 2018, the company discovered a sophisticated computer system attack that could lead to the disclosure of proprietary and confidential information, resulting in financial, legal, and reputational damage[63] Market and Economic Conditions Risks Adverse market conditions can lead to reduced product demand, order changes, asset impairments, increased price competition, inventory obsolescence, and higher operating costs - Adverse market conditions may lead to reduced product demand, order rescheduling or cancellation, asset impairment, increased price competition, inventory obsolescence, and higher operating costs[55] Global Operations and Trade Policy Risks Operating globally, the company faces risks from foreign government favoritism, international trade disputes, diverse legal systems, regional economic downturns, and political instability - Majority of company sales are from non-US markets, facing risks such as foreign government favoritism towards local companies, international trade disputes (e.g., tariffs), differing legal systems, regional economic downturns, and political instability[58][59] Information Technology and Data Security Risks High reliance on IT systems exposes the company to risks of system disruptions, data breaches, and cyberattacks, potentially causing financial, legal, regulatory, and reputational harm - Company is highly dependent on information technology systems, facing risks of system disruptions, data breaches, and cyberattacks, which could lead to financial, legal, regulatory, and reputational damage[61][62] - In November 2018, the company discovered a highly sophisticated attack on its computer systems, potentially leading to the disclosure of proprietary and confidential information, as well as employee personal information[63] Intellectual Property Risks The company may struggle to effectively enforce and protect its intellectual property, facing risks of patent circumvention, invalidation, or reverse engineering, with outsourcing increasing technology leakage risks - Company may be unable to effectively enforce and protect its intellectual property, facing risks of patents being circumvented, invalidated, or reverse-engineered by others[65] - Outsourcing strategies increase the risk of technology leakage and misappropriation of trade secrets, and intellectual property litigation could result in significant costs and management distraction[67][68] Financial Performance and Stock Volatility Risks The company's common stock price is highly volatile, influenced by macroeconomic factors, competition, order changes, product performance, analyst expectations, strategic transactions, and litigation, potentially leading to asset impairments - Company's common stock price is highly volatile, potentially influenced by macroeconomic factors, competition, order changes, product performance, analyst expectations, strategic transactions, and litigation[70][71] - Company may need to record additional asset impairments, such as the $122.8 million goodwill impairment recorded in Q4 2018, and $252.3 million intangible asset impairment related to the Ultratech acquisition in Q2 2018[73][74] Operational and Supply Chain Risks Intense competition necessitates continuous innovation, while high dependence on consumer electronics and a concentrated customer base lead to demand volatility, long sales cycles, and risks of inventory obsolescence and supply disruptions - Company faces intense competition, requiring continuous innovation and timely new product development to remain competitive[75][77] - High dependence on sales to consumer electronics applications leads to demand volatility, and high customer concentration increases business risk[80][82] - Industry cyclicality, long and unpredictable sales cycles, customer order cancellations or modifications, and failure to accurately forecast customer demand can lead to obsolete inventory, supplier liabilities, and manufacturing disruptions[87][89][90][95] - Reliance on limited suppliers and outsourced activities may lead to supply disruptions, increased costs, and impaired operational efficiency[96][97][101] Acquisition and Integration Risks Future acquisitions and investments involve risks of integration difficulties, management distraction, loss of key employees, failure to achieve expected synergies, and potential asset impairments - Future acquisitions and investments involve risks of integration difficulties, management distraction, loss of key employees, failure to achieve expected synergies, and potential asset impairments[103] Regulatory and Legal Compliance Risks The company must comply with global laws and regulations, including privacy, labor, tax, corporate governance, and anti-corruption laws, with non-compliance potentially leading to significant fines and reputational damage - Company must comply with laws and regulations across multiple global jurisdictions, including privacy, labor laws, tax, corporate governance, and anti-corruption laws (e.g., FCPA), with non-compliance potentially leading to significant fines and reputational damage[123][124] - Changes in accounting standards or tax rules may significantly impact financial performance, such as the 2017 Tax Cuts and Jobs Act[106][107] - Company has debt in the form of convertible senior notes, which may affect its financial condition, strategic implementation, and dilute existing shareholder equity[110][112] Environmental, Health, and Safety Risks Non-compliance with EHS regulations can result in significant remediation liabilities, fines, and suspension of product development or use, while operations involving hazardous materials pose risks of fire, explosion, or environmental spills - Non-compliance with environmental, health, and safety regulations may lead to significant remediation liabilities, fines, and suspension of product development or use[125][127] - Operations involving hazardous materials pose risks of fire, explosion, or environmental spills, which could lead to operational disruptions and claims[127] Catastrophic Events and Disruptions Risks Global operations are vulnerable to natural disasters, terrorism, or other major disruptions like earthquakes, floods, or pandemics, leading to increased costs and business interruptions - Company's global operations may be affected by natural disasters, acts of terrorism, or other major disruptions (e.g., earthquakes, floods, pandemics), leading to increased costs and business interruptions[128] Unresolved Staff Comments There are no unresolved staff comments in this report - There are no unresolved staff comments in this report[129] Properties Veeco's headquarters, primary R&D, manufacturing, sales, and service facilities are located in the US, Singapore, and Taiwan, including owned and leased properties, deemed sufficient for current needs Major Owned Facilities | Location | Approximate Area (Square Feet) | Purpose | | :--- | :--- | :--- | | Plainview, NY | 80,000 | Corporate Headquarters; R&D; Sales & Service; Administration | | Somerset, NJ | 80,000 | R&D; Manufacturing; Sales & Service; Administration | | St. Paul, MN | 43,000 | R&D; Manufacturing; Sales & Service; Administration | | Somerset, NJ | 38,000 | R&D; Sales & Service; Administration | Major Leased Facilities | Location | Approximate Area (Square Feet) | Purpose | Lease Expiration | | :--- | :--- | :--- | :--- | | San Jose, CA | 100,000 | R&D; Manufacturing; Sales & Service; Administration | 2021 | | Somerset, NJ | 57,000 | Warehouse | 2022 | | Horsham, PA | 49,000 | R&D; Manufacturing; Sales & Service; Administration | 2024 | | Singapore | 23,000 | R&D; Manufacturing; Sales & Service; Administration | 2023 | | Waltham, MA | 19,000 | R&D; Sales & Service; Administration | 2023 | | Hsinchu City, Taiwan | 13,000 | Sales & Service; Administration | 2020 | - Company also leases offices in China, Germany, Japan, Malaysia, Philippines, South Korea, and the UK, and believes existing facilities are sufficient for current needs[130] Legal Proceedings The company faces two class action and derivative lawsuits related to the Ultratech acquisition, alleging false/misleading statements in the registration statement, which the company believes are without merit and will vigorously defend - In June 2018, an Ultratech shareholder filed a class action lawsuit (Wolther v. Maheshwari et al.) alleging false/misleading statements in the registration statement and prospectus related to the Ultratech acquisition, primarily concerning delays in the advanced packaging business, increased MOCVD competition in China, and intellectual property disputes[132] - In December 2018, a Veeco shareholder filed a derivative lawsuit (Vladimir Gusinsky Revocable Trust v. Peeler, et al.) alleging breach of fiduciary duty, waste of corporate assets, and unjust enrichment by current and former directors, also based on the Ultratech acquisition registration statement[133] - Company believes both lawsuits are without merit and intends to vigorously defend them; it does not believe other legal proceedings in the normal course of business will have a material adverse effect on its financial condition, results of operations, or cash flows[132][133][134] Mine Safety Disclosures Mine safety disclosures are not applicable to this report - Mine safety disclosures are not applicable to this report[135] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Veeco's common stock trades on the Nasdaq Stock Market under "VECO"; the company has not paid dividends, with future policy determined by the board. Stock repurchases were made in 2018, 2017, and 2016, with $14.3 million used from a $100 million repurchase plan authorized in 2017 - Company's common stock is listed on the Nasdaq Stock Market under the symbol "VECO" and has not paid dividends[138] Stock Repurchase Summary | Fiscal Year | Shares Repurchased (Millions) | Amount Repurchased (Millions of US Dollars) | | :--- | :--- | :--- | | 2018 | 1.0 | 11.3 | | 2017 | 0.2 | 3.0 | | 2016 | 0.7 | 13.1 | - On December 11, 2017, the Board of Directors authorized a plan to repurchase up to $100 million of common stock, with $14.3 million utilized as of December 31, 2018[139] Issuer Purchases of Equity Securities The company repurchased common stock in 2018, 2017, and 2016, utilizing $14.3 million from a $100 million repurchase plan authorized in 2017 Issuer Purchases of Equity Securities Details | Fiscal Year | Shares Repurchased (Millions) | Amount Repurchased (Millions of US Dollars) | | :--- | :--- | :--- | | 2018 | 1.0 | 11.3 | | 2017 | 0.2 | 3.0 | | 2016 | 0.7 | 13.1 | - On December 11, 2017, the Board of Directors authorized a plan to repurchase up to $100 million of common stock, with $14.3 million utilized as of December 31, 2018[139] Stock Performance Graph This section presents a comparison of the cumulative total return for Veeco's common stock against the S&P Smallcap 600 and RDG MidCap Technology indices, assuming a $100 investment on December 31, 2013 Stock Performance Comparison (Assuming $100 Investment on December 31, 2013) | Year | Veeco Instruments Inc. | S&P Smallcap 600 | RDG MidCap Technology | | :--- | :--- | :--- | :--- | | 2013 | 100.00 | 100.00 | 100.00 | | 2014 | 105.99 | 105.76 | 93.93 | | 2015 | 62.47 | 103.67 | 84.05 | | 2016 | 88.57 | 131.20 | 83.59 | | 2017 | 45.12 | 148.56 | 87.28 | | 2018 | 22.52 | 135.96 | 79.60 | Selected Financial Data The company reported selected financial data for five years ending December 31, 2018, showing net sales growth to $542 million in 2018 but an expanded net loss of $407 million, primarily due to asset impairments, with cash and total assets declining Selected Operating Data (Years Ended December 31) | Metric | 2018 (Thousands of US Dollars) | 2017 (Thousands of US Dollars) | 2016 (Thousands of US Dollars) | 2015 (Thousands of US Dollars) | 2014 (Thousands of US Dollars) | | :--- | :--- | :--- | :--- | :--- | :--- | | Net Sales | 542,082 | 475,686 | 331,702 | 477,038 | 392,873 | | Operating Income (Loss) | (415,502) | (71,868) | (120,162) | (23,232) | (79,209) | | Net Income (Loss) | (407,088) | (51,396) | (122,027) | (31,978) | (66,940) | | Basic Income (Loss) Per Share | (8.63) | (1.16) | (3.10) | (0.80) | (1.70) | | Diluted Income (Loss) Per Share | (8.63) | (1.16) | (3.10) | (0.80) | (1.70) | Selected Balance Sheet Data (As of December 31) | Metric | 2018 (Thousands of US Dollars) | 2017 (Thousands of US Dollars) | 2016 (Thousands of US Dollars) | 2015 (Thousands of US Dollars) | 2014 (Thousands of US Dollars) | | :--- | :--- | :--- | :--- | :--- | :--- | | Cash and Cash Equivalents | 212,273 | 279,736 | 277,444 | 269,232 | 270,811 | | Short-Term Investments | 48,189 | 47,780 | 66,787 | 116,050 | 120,572 | | Working Capital | 360,027 | 372,822 | 365,374 | 379,904 | 387,254 | | Total Assets | 900,816 | 1,387,475 | 763,988 | 890,789 | 929,455 | | Long-Term Debt (Less Current Installments) | 287,392 | 275,630 | 826 | 1,193 | 1,533 | | Total Stockholders' Equity | 437,775 | 840,093 | 601,704 | 714,615 | 738,932 | - Company retrospectively adopted the new revenue accounting standard (ASC 606) on January 1, 2018[144] - Ultratech was acquired in Q2 2017, and its operating results have been included in the consolidated financial statements since the acquisition date[145] Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Veeco's financial condition and operating results for the year ended December 31, 2018, focusing on market sales performance, gross margin, operating expenses, asset impairments, interest income/expense, and income tax changes, noting significant net loss expansion due to impairments despite net sales growth - Company adopted the new revenue accounting standard ASC Topic 606 on January 1, 2018, and operating results for 2017 and 2016 have been restated under the new standard[154] 2018 vs. 2017 Operating Results Comparison | Metric (Thousands of US Dollars) | 2018 | 2017 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Net Sales | 542,082 | 475,686 | 66,396 | 14% | | Cost of Sales | 348,363 | 299,458 | 48,905 | 16% | | Gross Profit | 193,719 | 176,228 | 17,491 | 10% | | Research and Development Expenses | 97,755 | 81,987 | 15,768 | 19% | | Selling, General, and Administrative Expenses | 92,060 | 100,250 | (8,190) | (8)% | | Amortization of Intangible Assets | 32,351 | 35,475 | (3,124) | (9)% | | Restructuring Charges | 8,556 | 11,851 | (3,295) | (28)% | | Acquisition Costs | 2,959 | 17,786 | (14,827) | (83)% | | Asset Impairment | 375,172 | 1,139 | 374,033 | * | | Operating Income (Loss) | (415,502) | (71,868) | (343,634) | * | | Net Income (Loss) | (407,088) | (51,396) | (355,692) | * | - Net sales growth in 2018 was primarily due to additional sales from the Ultratech acquisition in May 2017, especially in the advanced packaging, MEMS, and RF filters markets[158] Executive Summary Veeco is a leading manufacturer of innovative semiconductor and thin-film process equipment, with its technologies playing a key role in LED and advanced semiconductor device manufacturing across four main markets - Veeco is a leading manufacturer of innovative semiconductor and thin-film process equipment, with its MOCVD, lithography, laser annealing, ion beam, and single-wafer etch and clean technologies playing a critical role in LED and advanced semiconductor device manufacturing[148] - Company revenue is categorized into four key markets: advanced packaging, MEMS and RF filters; LED lighting, display and compound semiconductors; front-end semiconductors; and scientific and industrial[149] - In 2018, the advanced packaging market was soft due to mobile supply chain overcapacity, but lithography systems for DRAM packaging performed encouragingly; the LED market saw order slowdowns due to capacity digestion and increased competition, with future focus shifting to non-general lighting applications like 3D sensors and VCSELs; the front-end semiconductor market was driven by laser annealing and LDD-IBD systems for EUV photomask production; and the scientific and industrial market was supported by ion beam systems for data storage and optical coatings, as well as MBE systems[150][151][152][153] Results of Operations The company adopted the new revenue accounting standard ASC Topic 606 on January 1, 2018, with prior years' operating results restated accordingly - Company adopted the new revenue accounting standard ASC Topic 606 on January 1, 2018, and operating results for 2017 and 2016 have been restated under the new standard[154] Years Ended December 31, 2018 and 2017 This section provides a detailed comparison of operating results for 2018 and 2017, highlighting changes in net sales, gross profit, operating expenses, and significant asset impairments 2018 vs. 2017 Operating Results Comparison | Metric (Thousands of US Dollars) | 2018 | 2017 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Net Sales | 542,082 | 475,686 | 66,396 | 14% | | Cost of Sales | 348,363 | 299,458 | 48,905 | 16% | | Gross Profit | 193,719 | 176,228 | 17,491 | 10% | | Research and Development Expenses | 97,755 | 81,987 | 15,768 | 19% | | Selling, General, and Administrative Expenses | 92,060 | 100,250 | (8,190) | (8)% | | Amortization of Intangible Assets | 32,351 | 35,475 | (3,124) | (9)% | | Restructuring Charges | 8,556 | 11,851 | (3,295) | (28)% | | Acquisition Costs | 2,959 | 17,786 | (14,827) | (83)% | | Asset Impairment | 375,172 | 1,139 | 374,033 | * | | Operating Income (Loss) | (415,502) | (71,868) | (343,634) | * | | Net Income (Loss) | (407,088) | (51,396) | (355,692) | * | Net Sales Total sales increased by 14% in 2018, primarily driven by the Ultratech acquisition and significant growth in China, though future LED market orders are not expected to increase substantially 2018 vs. 2017 Sales by Market | Market (Thousands of US Dollars) | 2018 | 2017 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Advanced Packaging, MEMS & RF Filters | 90,775 | 67,406 | 23,369 | 35% | | LED Lighting, Display & Compound Semiconductor | 249,974 | 248,615 | 1,359 | 1% | | Front-End Semiconductor | 62,582 | 40,319 | 22,263 | 55% | | Scientific & Industrial | 138,751 | 119,346 | 19,405 | 16% | | Total | 542,082 | 475,686 | 66,396 | 14% | 2018 vs. 2017 Sales by Geographic Region | Geographic Region (Thousands of US Dollars) | 2018 | 2017 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | United States | 125,659 | 93,433 | 32,226 | 34% | | China | 194,032 | 106,674 | 87,358 | 82% | | Europe, Middle East, and Africa | 89,102 | 72,979 | 16,123 | 22% | | Rest of World | 133,289 | 202,600 | (69,311) | (34)% | | Total | 542,082 | 475,686 | 66,396 | 14% | - Total sales growth in 2018 was primarily due to additional sales from the Ultratech acquisition in May 2017, especially in the advanced packaging, MEMS, and RF filters markets[158] - Sales in China grew significantly by 82%, mainly attributed to sales growth in the LED lighting, display and compound semiconductor, and front-end semiconductor markets, though new orders in the LED lighting, display and compound semiconductor market are not expected to increase significantly in the future[158] Gross Profit Gross margin decreased in 2018 due to product mix changes in the LED market, but gross profit increased by 10% due to higher sales volume, including the Ultratech acquisition - Gross margin decreased in 2018 compared to 2017, primarily due to product mix changes in the LED market, but gross profit increased by 10% due to higher sales volume, including the Ultratech acquisition[159] Research and Development R&D expenses increased by 19% in 2018 compared to 2017, primarily due to the full-year inclusion of Ultratech acquisition projects - R&D expenses increased by 19% in 2018 compared to 2017, primarily due to the full-year inclusion of Ultratech acquisition projects in R&D expenditures[160] Selling, General, and Administrative SG&A expenses decreased by 8% in 2018, offset by reduced personnel and professional service costs despite increased Ultratech acquisition-related expenses, while a November 2018 cyberattack may incur future costs - Selling, general, and administrative expenses decreased by 8% in 2018 compared to 2017; despite increased Ultratech acquisition-related costs, this was offset by reductions in personnel-related expenses (including incentive compensation) and professional service fees[161] - In November 2018, the company discovered a highly sophisticated attack on its computer systems, potentially leading to the disclosure of proprietary and confidential information, as well as employee personal information, with related costs and potential impacts possibly adversely affecting operating results and financial condition[162][163][164] Amortization Expense Amortization expense slightly decreased in 2018, as increased amortization from the Ultratech acquisition was offset by reduced amortization due to a $252.3 million intangible asset impairment in Q2 2018 - Amortization expense slightly decreased in 2018 compared to 2017; increased intangible asset amortization from the Ultratech acquisition was offset by reduced amortization due to a $252.3 million intangible asset impairment in Q2 2018[166] Restructuring Expense Restructuring expenses decreased by 28% to $8.6 million in 2018, primarily related to initiatives for streamlining operations, improving efficiency, and reducing costs, including layoffs for business integration - Restructuring expenses were $8.6 million in 2018, a 28% decrease from 2017, primarily related to initiatives for streamlining operations, improving efficiency, and reducing costs[156][167] - In Q2 2018, the company recorded $2.8 million in restructuring charges for approximately 40 layoffs to integrate advanced packaging lithography and 3D wafer inspection businesses[168] - In Q3 2018, the company further laid off approximately 35 employees, incurring $1.2 million in restructuring charges, expected to result in annual savings of approximately $5.0 million[169] Acquisition Costs Acquisition costs decreased by 83% to $3.0 million in 2018, primarily consisting of non-recurring expenses related to the Ultratech acquisition and legal/professional fees for integration activities - Acquisition costs were $3.0 million in 2018, an 83% decrease from 2017, primarily consisting of non-recurring expenses related to the Ultratech acquisition and legal and professional fees for integration activities[156][170] Asset Impairment In 2018, the company recorded $252.3 million in non-cash intangible asset impairment in Q2 due to declining Ultratech asset group performance, and $122.8 million in goodwill impairment in Q4 due to a significant stock price decline - In Q2 2018, the company recorded a $252.3 million non-cash intangible asset impairment charge due to anticipated performance decline of the Ultratech asset group[171] - In Q4 2018, the company recorded a $122.8 million goodwill impairment charge due to a significant decline in its stock price, following a goodwill impairment test[172] Interest Income (Expense) Net interest expense increased by 7% to $18.3 million in 2018, primarily due to full-year interest on convertible senior notes issued in January 2017, including $11.8 million in non-cash expenses - Net interest expense was $18.3 million in 2018, a 7% increase from 2017, primarily due to full-year interest on convertible senior notes issued in January 2017[173] - Interest expense included $11.8 million in non-cash expenses for the amortization of debt discount and issuance costs related to the convertible senior notes[173] Income Taxes Income tax benefit was $26.7 million in 2018, mainly from intangible asset impairment and the 2017 Tax Cuts and Jobs Act, while 2017 saw a $37.6 million benefit from domestic losses and the same tax act - Income tax benefit was $26.7 million in 2018, primarily including $25.2 million related to intangible asset impairment and $1.7 million related to the 2017 Tax Cuts and Jobs Act[176] - Income tax benefit was $37.6 million in 2017, primarily including $25.3 million related to domestic losses and $11.3 million related to the 2017 Tax Cuts and Jobs Act[177] - Company has finalized accounting for the 2017 Tax Cuts and Jobs Act under SAB 118, recording additional income tax benefits and deferred tax asset adjustments[174][175] Years Ended December 31, 2017 and 2016 This section details the operating results comparison for 2017 and 2016, showing significant increases in net sales and gross profit, alongside changes in operating expenses and asset impairments 2017 vs. 2016 Operating Results Comparison | Metric (Thousands of US Dollars) | 2017 | 2016 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Net Sales | 475,686 | 331,702 | 143,984 | 43% | | Cost of Sales | 299,458 | 198,604 | 100,854 | 51% | | Gross Profit | 176,228 | 133,098 | 43,130 | 32% | | Research and Development Expenses | 81,987 | 81,016 | 971 | 1% | | Selling, General, and Administrative Expenses | 100,250 | 77,642 | 22,608 | 29% | | Amortization of Intangible Assets | 35,475 | 19,219 | 16,256 | 85% | | Restructuring Charges | 11,851 | 5,640 | 6,211 | 110% | | Acquisition Costs | 17,786 | — | 17,786 | * | | Asset Impairment | 1,139 | 69,520 | (68,381) | (98)% | | Operating Income (Loss) | (71,868) | (120,162) | 48,294 | (40)% | | Net Income (Loss) | (51,396) | (122,027) | 70,631 | (58)% | Net Sales Total sales increased by 43% in 2017 compared to 2016, driven by growth in LED, front-end semiconductor, and scientific & industrial markets, along with $65.3 million from the Ultratech acquisition 2017 vs. 2016 Sales by Market | Market (Thousands of US Dollars) | 2017 | 2016 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Advanced Packaging, MEMS & RF Filters | 67,406 | 67,484 | (78) | (0)% | | LED Lighting, Display & Compound Semiconductor | 248,615 | 145,701 | 102,914 | 71% | | Front-End Semiconductor | 40,319 | 8,427 | 31,892 | 378% | | Scientific & Industrial | 119,346 | 110,090 | 9,256 | 8% | | Total | 475,686 | 331,702 | 143,984 | 43% | 2017 vs. 2016 Sales by Geographic Region | Geographic Region (Thousands of US Dollars) | 2017 | 2016 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | United States | 93,433 | 85,582 | 7,851 | 9% | | China | 106,674 | 84,604 | 22,070 | 26% | | Europe, Middle East, and Africa | 72,979 | 84,181 | (11,202) | (13)% | | Rest of World | 202,600 | 77,335 | 125,265 | 162% | | Total | 475,686 | 331,702 | 143,984 | 43% | - Total sales increased by 43% in 2017 compared to 2016, primarily due to sales growth in the LED lighting, display and compound semiconductor, front-end semiconductor, and scientific and industrial markets, as well as approximately $65.3 million in additional sales from the Ultratech acquisition in May 2017[181] - Sales in the Rest of World region grew significantly by 162%, primarily attributed to sales growth in the LED lighting, display and compound semiconductor market in Malaysia and additional sales from the Ultratech acquisition[181] Gross Profit Gross profit increased by 32% in 2017 due to higher sales volume, including the Ultratech acquisition, but was partially offset by a lower gross margin from selling inventory with fair value step-up related to the acquisition - Gross profit increased by 32% in 2017 compared to 2016, primarily due to higher sales volume, including the Ultratech acquisition, but was partially offset by a decrease in gross margin due to selling inventory that included a fair value step-up related to the Ultratech acquisition[182] Research and Development R&D expenses remained relatively flat in 2017, as increased projects from the Ultratech acquisition were offset by reduced investment in certain technologies and lower personnel and professional service costs - R&D expenses in 2017 were largely flat compared to 2016; increased R&D projects from the Ultratech acquisition were offset by the company's reduction in certain technology investments and decreases in personnel-related and professional service expenses[183] Selling, General, and Administrative SG&A expenses increased in 2017 due to higher costs related to the Ultratech acquisition and increased professional and legal fees - Selling, general, and administrative expenses increased in 2017 primarily due to higher costs related to the Ultratech acquisition and increased professional and legal fees[184] Amortization Expense Amortization expense increased due to additional intangible assets from the Ultratech acquisition, partially offset by reduced amortization from prior year asset impairments and fully amortized intangible assets - Amortization expense increased due to additional intangible assets from the Ultratech acquisition, partially offset by reduced amortization from certain technology asset impairments in the prior year and other intangible assets being fully amortized in 2016[185] Restructuring Expense Restructuring expenses increased by 110% to $11.9 million in 2017, primarily related to initiatives for streamlining operations, improving efficiency, and reducing costs, including layoffs and facility closures from the Ultratech acquisition integration - Restructuring expenses were $11.9 million in 2017, a 110% increase from 2016, primarily related to initiatives for streamlining operations, improving efficiency, and reducing costs, as well as layoffs and facility closure costs during the Ultratech acquisition integration process[180][186] Acquisition Costs Acquisition costs were $17.8 million in 2017, primarily non-recurring expenses related to the Ultratech acquisition, including $4.2 million in non-cash accelerated equity incentive compensation - Acquisition costs were $17.8 million in 2017, primarily non-recurring expenses related to the Ultratech acquisition, including $4.2 million in non-cash accelerated equity incentive compensation[187] Asset Impairment In 2016, the company recorded $57.6 million in non-cash impairment for reduced technology investments, $5.7 million for assets held for sale, and $6.2 million for disposed lab equipment - In 2016, the company recorded $57.6 million in non-cash impairment charges related to reduced investment in certain technologies; $5.7 million related to fair market value assessment of assets held for sale; and $6.2 million related to the disposal of certain laboratory equipment[188] Interest Income (Expense) Net interest expense was $17.1 million in 2017, including $10.4 million in non-cash interest expense, a significant change from $1.0 million in net interest income in 2016, primarily due to convertible senior notes issued in January 2017 - Net interest expense was $17.1 million in 2017, including $10.4 million in non-cash interest expense, while 2016 saw $1.0 million in net interest income, with the change primarily related to convertible senior notes issued in January 2017[189] Income Taxes Income tax benefit was $37.6 million in 2017, mainly from domestic losses and the 2017 Tax Cuts and Jobs Act, while 2016 saw a $2.8 million expense from US tax amortization and profitable overseas operations - Income tax benefit was $37.6 million in 2017, primarily including $25.3 million related to domestic losses and $11.3 million related to the 2017 Tax Cuts and Jobs Act[190] - Income tax expense was $2.8 million in 2016, primarily including $1.9 million in US tax amortization expense and $1.3 million in net tax expense from profitable overseas operations[191] Liquidity and Capital Resources The company's cash, restricted cash, and short-term investments totaled $261.3 million as of December 31, 2018, with $66.9 million held outside the US, and expects sufficient liquidity for future needs Cash and Cash Equivalents, Restricted Cash, and Short-Term Investments (Thousands of US Dollars) | Metric | December 31, 2018 | December 31, 2017 | | :--- | :--- | :--- | | Cash and Cash Equivalents | 212,273 | 279,736 | | Restricted Cash | 809 | 847 | | Short-Term Investments | 48,189 | 47,780 | | Total | 261,271 | 328,363 | - As of December 31, 2018, the company held $66.9 million in cash and cash equivalents outside the US, compared to $214.3 million in 2017[192] - Company expects its cash flows from operating activities, cash, and short-term investments to be sufficient to meet working capital needs, contractual obligations, and other cash flow requirements for the next twelve months[193] Cash Flows from Operating Activities Net cash outflow from operating activities was $37.7 million in 2018, primarily due to net loss and changes in operating assets and liabilities, contrasting with a $35.0 million inflow in 2017 Cash Flows from Operating Activities (Thousands of US Dollars) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Net Income (Loss) | (407,088) | (51,396) | | Adjustments for Non-Cash Items | 425,400 | 50,800 | | Changes in Operating Assets and Liabilities | (56,036) | 35,577 | | Net Cash from Operating Activities | (37,738) | 34,993 | - Net cash outflow from operating activities was $37.7 million in 2018, primarily due to net loss and a decrease in cash flow from changes in operating assets and liabilities[194] - Net cash inflow from operating activities was $35.0 million in 2017, primarily due to adjustments for non-cash items and an increase in cash flow from changes in operating assets and liabilities[195] Cash Flows from Investing Activities Net cash outflow from investing activities was $18.3 million in 2018, mainly for capital expenditures, net investment changes, and final Ultratech acquisition payments, a significant reduction from $357.8 million in 2017 Cash Flows from Investing Activities (Thousands of US Dollars) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Business Acquisitions (Net of Cash Acquired) | (2,662) | (401,828) | | Capital Expenditures | (12,654) | (24,272) | | Net Change in Investments | (2,981) | 65,980 | | Proceeds from Assets Held for Sale | — | 2,284 | | Net Cash from Investing Activities | (18,297) | (357,836) | - Net cash outflow from investing activities was $18.3 million in 2018, primarily for capital expenditures, net changes in investments, and the final payment for the Ultratech acquisition[196] - Net cash outflow from investing activities was $357.8 million in 2017, primarily for the Ultratech acquisition and capital expenditures[196] Cash Flows from Financing Activities Net cash outflow from financing activities was $11.5 million in 2018, mainly for stock repurchases, contrasting with a $325.9 million inflow in 2017 from convertible senior notes Cash Flows from Financing Activities (Thousands of US Dollars) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Settlement of Equity Awards (Net of Tax Withheld) | (5) | (5,749) | | Purchases of Common Stock | (11,457) | (2,869) | | Proceeds from Long-Term Debt Borrowings | — | 335,752 | | Repayments of Long-Term Debt | — | (1,194) | | Net Cash from Financing Activities | (11,462) | 325,940 | - Net cash outflow from financing activities was $11.5 million in 2018, primarily for the stock repurchase program[198] - Net cash inflow from financing activities was $325.9 million in 2017, primarily from net proceeds of convertible senior notes issued in January 2017[198] Convertible Senior Notes On January 10, 2017, the company issued $345 million of 2.70% convertible senior notes, due January 15, 2023, with net proceeds of approximately $335.8 million, and expects sufficient resources for interest payments - On January 10, 2017, the company issued $345 million of 2.70% convertible senior notes, with net proceeds of approximately $335.8 million, due January 15, 2023[199] - Company believes it has sufficient capital resources and operating cash flows to support periodic interest payments on this debt[199] Business Combination On May 26, 2017, the company completed the acquisition of Ultratech, Inc., whose operating results have been included in the consolidated financial statements since the acquisition date - On May 26, 2017, the company completed the acquisition of Ultratech, Inc., and its operating results have been included in the consolidated financial statements since the acquisition date[200] Contractual Obligations and Commitments As of December 31, 2018, total contractual obligations and commitments amounted to $490.2 million, primarily comprising long-term debt principal, debt cash interest, operating leases, and purchase commitments Contractual Obligations and Commitments as of December 31, 2018 (Thousands of US Dollars) | Type | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-Term Debt Principal Payments | 345,000 | — | — | 345,000 | — | | Debt Cash Interest | 37,648 | 9,315 | 18,630 | 9,703 | — | | Operating Leases | 16,057 | 5,143 | 7,488 | 2,878 | 548 | | Purchase Commitments | 91,466 | 91,466 | — | — | — | | Total | 490,171 | 105,924 | 26,118 | 357,581 | 548 | - Unrecognized tax benefits totaled $1.5 million as of December 31, 2018, and are not included in the table[203] - Purchase commitments are primarily for inventory required for product manufacturing, offset by $12.8 million in supplier deposits[204] Off-Balance Sheet Arrangements The company has no off-balance sheet arrangements that materially affect its financial condition, operating results, or liquidity, other than operating leases, bank guarantees, and purchase commitments - Company has no off-balance sheet arrangements that materially affect its financial condition, results of operations, or liquidity, other than operating leases, bank guarantees, and purchase commitments reflected in the aforementioned contractual obligations and commitments table[205] Application of Critical Accounting Policies The preparation of financial statements requires significant management judgment in applying and interpreting existing accounting literature or developing estimates - Preparation of financial statements requires a high degree of management judgment in applying and interpreting existing accounting literature or developing estimates[206] Revenue Recognition The company adopted ASC 606 on January 1, 2018, recognizing revenue when control transfers to customers at an amount reflecting expected consideration, with most revenue recognized at a point in time, typically upon system delivery - Company adopted ASC 606 on January 1, 2018, using the full retrospective method; revenue is recognized when control transfers to the customer, at an amount reflecting the consideration expected to be received[208][209] - Contracts typically contain multiple performance obligations, requiring judgment on revenue allocation; most revenue is recognized at a point in time when performance obligations are satisfied, with system sales revenue typically recognized upon system delivery[209][211] - Maintenance and service contract revenue is recognized over the contract term, installation revenue is recognized as services are performed, and parts and spare parts sales revenue is recognized upon delivery[213] Inventory Valuation Inventory is measured at the lower of cost or net realizable value using the FIFO method, with quarterly assessments for obsolescence or excess of estimated usage - Inventory is measured at the lower of cost or net realizable value, with cost determined using the first-in, first-out (FIFO) method; the company assesses the valuation and recoverability of all inventory quarterly, writing down obsolete or excess inventory[216] Goodwill and Intangible Assets Goodwill is tested for impairment annually in the fourth quarter or when impairment indicators arise, with fair value determined by adjusted market capitalization, while long-lived assets are tested for recoverability based on discounted cash flow or market value - Goodwill is tested for impairment at least annually in the beginning of the fourth quarter, or when impairment indicators arise; the company determines the fair value of reporting units based on adjusted market capitalization[217][218] - Long-lived assets, including identifiable intangible assets, are tested for recoverability when impairment indicators arise, with fair value determined based on discounted cash flow models or market values[219] - Intangible assets related to in-process research and development (IPR&D) projects are considered indefinite-lived until R&D is completed or abandoned[221] Income Taxes The company uses the balance sheet method for income tax accounting, reflecting deferred taxes for temporary differences and net operating loss carryforwards, and records a valuation allowance to reduce deferred tax assets to their likely realizable amount - Company accounts for income taxes using the balance s