VEECO INSTRUMENTS INC, 10-K filed on 2/21/2018
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2017
Feb. 14, 2018
Jun. 30, 2017
Document and Entity Information
 
 
 
Entity Registrant Name
VEECO INSTRUMENTS INC 
 
 
Entity Central Index Key
0000103145 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 1,328,017,475 
Entity Common Stock, Shares Outstanding
 
48,156,865 
 
Document Fiscal Year Focus
2017 
 
 
Document Fiscal Period Focus
FY 
 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 279,736 
$ 277,444 
Restricted cash
847 
 
Short-term investments
47,780 
66,787 
Accounts receivable, net
98,866 
58,020 
Inventories
120,266 
77,063 
Deferred cost of sales
16,060 
6,160 
Prepaid expenses and other current assets
33,437 
16,034 
Total current assets
596,992 
501,508 
Property, plant, and equipment, net
85,058 
60,646 
Intangible assets, net
369,843 
58,378 
Goodwill
307,131 
114,908 
Deferred income taxes
2,953 
2,045 
Other assets
25,310 
21,047 
Total assets
1,387,287 
758,532 
Current liabilities:
 
 
Accounts payable
50,318 
22,607 
Accrued expenses and other current liabilities
60,339 
33,201 
Customer deposits and deferred revenue
108,953 
85,022 
Income taxes payable
3,846 
2,311 
Current portion of long-term debt
 
368 
Total current liabilities
223,456 
143,509 
Deferred income taxes
36,845 
13,199 
Long-term debt
275,630 
826 
Other liabilities
10,643 
6,403 
Total liabilities
546,574 
163,937 
Stockholders' equity:
 
 
Preferred stock, $0.01 par value; 500,000 shares authorized; no shares issued and outstanding
   
   
Common stock, $0.01 par value; 120,000,000 shares authorized; 48,229,251 and 40,714,790 shares issued at December 31, 2017 and December 31, 2016, respectively; 48,144,416 and 40,588,194 shares outstanding at December 31, 2017 and December 31, 2016, respectively.
482 
407 
Additional paid-in capital
1,053,079 
763,303 
Accumulated deficit
(213,376)
(168,583)
Accumulated other comprehensive income
1,812 
1,777 
Treasury stock, at cost, 84,835 and 126,596 shares at December 31, 2017 and 2016, respectively.
(1,284)
(2,309)
Total stockholders' equity
840,713 
594,595 
Total liabilities and stockholders' equity
$ 1,387,287 
$ 758,532 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2017
Dec. 31, 2016
Consolidated Balance Sheets
 
 
Preferred stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
500,000 
500,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Common stock, authorized shares
120,000,000 
120,000,000 
Common stock, shares issued
48,229,251 
40,714,790 
Common stock, shares outstanding
48,144,416 
40,588,194 
Treasury stock, shares
84,835 
126,596 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Consolidated Statements of Operations
 
 
 
Net sales
$ 484,756 
$ 332,451 
$ 477,038 
Cost of sales
300,438 
199,593 
299,797 
Gross profit
184,318 
132,858 
177,241 
Operating expenses, net:
 
 
 
Research and development
81,987 
81,016 
78,543 
Selling, general, and administrative
100,250 
77,642 
90,188 
Amortization of intangible assets
35,475 
19,219 
27,634 
Restructuring
11,851 
5,640 
4,679 
Acquisition costs
17,786 
 
 
Asset impairment
1,139 
69,520 
126 
Other, net
(392)
223 
(697)
Total operating expenses, net
248,096 
253,260 
200,473 
Operating income (loss)
(63,778)
(120,402)
(23,232)
Interest income
2,335 
1,180 
1,050 
Interest expense
(19,457)
(222)
(464)
Income (loss) before income taxes
(80,900)
(119,444)
(22,646)
Income tax expense (benefit)
(36,107)
2,766 
9,332 
Net income (loss)
$ (44,793)
$ (122,210)
$ (31,978)
Income (loss) per common share:
 
 
 
Basic (in dollars per share)
$ (1.01)
$ (3.11)
$ (0.80)
Diluted (in dollars per share)
$ (1.01)
$ (3.11)
$ (0.80)
Weighted average number of shares:
 
 
 
Basic (in shares)
44,174 
39,340 
39,742 
Diluted (in shares)
44,174 
39,340 
39,742 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Consolidated Statements of Comprehensive Income (Loss)
 
 
 
Net income (loss)
$ (44,793)
$ (122,210)
$ (31,978)
Available-for-sale securities:
 
 
 
Change in net unrealized gains or losses
(7)
(6)
(49)
Reclassification adjustments for net (gains) losses included in net loss
 
18 
 
Net unrealized gain (loss) on available-for-sale securities
(7)
12 
(49)
Minimum pension liability:
 
 
 
Change in minimum pension liability
 
 
15 
Reclassification adjustments for net (gains) losses included in net loss
 
866 
 
Net changes related to minimum pension liability
 
866 
15 
Currency translation adjustments:
 
 
 
Change in currency translation adjustments
42 
(19)
(87)
Reclassification adjustments for net (gains) losses included in net loss
 
(430)
 
Net changes related to currency translation adjustments
42 
(449)
(87)
Other comprehensive income (loss), net of tax
35 
429 
(121)
Total comprehensive income (loss)
$ (44,758)
$ (121,781)
$ (32,099)
Consolidated Statements of Stockholders' Equity (USD $)
In Thousands, unless otherwise specified
Common Stock
Treasury Stock
Additional Paid-in Capital
Retained Earnings (Accumulated Deficit)
Accumulated Other Comprehensive Income
Total
Balance at the beginning of the period at Dec. 31, 2014
$ 404 
 
$ 750,139 
$ (13,080)
$ 1,469 
$ 738,932 
Balance (in shares) at Dec. 31, 2014
40,360 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net loss
 
 
 
(31,978)
 
(31,978)
Other comprehensive income (loss), net of tax
 
 
 
 
(121)
(121)
Share-based compensation expense
 
 
17,986 
 
 
17,986 
Net issuance under employee stock plans
 
(988)
 
 
(982)
Net issuance under employee stock plans (in shares)
636 
 
 
 
 
 
Purchases of common stock
 
(9,222)
 
 
 
(9,222)
Purchase of common stock (in shares)
 
469 
 
 
 
 
Balance at the end of the period at Dec. 31, 2015
410 
(9,222)
767,137 
(45,058)
1,348 
714,615 
Balance (in shares) at Dec. 31, 2015
40,996 
469 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net loss
 
 
 
(122,210)
 
(122,210)
Cumulative effect of change in accounting principle - adoption of ASU 2016-09
 
 
1,315 
(1,315)
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
429 
429 
Share-based compensation expense
 
 
15,741 
 
 
15,741 
Net issuance under employee stock plans
(3)
19,948 
(20,890)
 
 
(945)
Net issuance under employee stock plans (in shares)
(281)
(1,072)
 
 
 
 
Purchases of common stock
 
(13,035)
 
 
 
(13,035)
Purchase of common stock (in shares)
 
730 
 
 
 
 
Balance at the end of the period at Dec. 31, 2016
407 
(2,309)
763,303 
(168,583)
1,777 
594,595 
Balance (in shares) at Dec. 31, 2016
40,715 
127 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net loss
 
 
 
(44,793)
 
(44,793)
Other comprehensive income (loss), net of tax
 
 
 
 
35 
35 
Share-based compensation expense
 
 
24,396 
 
 
24,396 
Net issuance under employee stock plans
4,043 
(9,795)
 
 
(5,749)
Net issuance under employee stock plans (in shares)
313 
(245)
 
 
 
 
Stock issuance for business acquisition
72 
 
228,800 
 
 
228,872 
Stock issuance for business acquisition (in shares)
7,201 
 
 
 
 
 
Convertible Senior Notes, equity component
 
 
46,375 
 
 
46,375 
Purchases of common stock
 
(3,018)
 
 
 
(3,018)
Purchase of common stock (in shares)
 
203 
 
 
 
 
Balance at the end of the period at Dec. 31, 2017
$ 482 
$ (1,284)
$ 1,053,079 
$ (213,376)
$ 1,812 
$ 840,713 
Balance (in shares) at Dec. 31, 2017
48,229 
85 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Cash Flows from Operating Activities
 
 
 
Net income (loss)
$ (44,793)
$ (122,210)
$ (31,978)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
50,095 
32,650 
39,850 
Non-cash interest expense
10,446 
 
 
Deferred income taxes
(33,875)
940 
2,648 
Share-based compensation expense
24,396 
15,741 
17,986 
Asset impairment
1,139 
69,520 
126 
Provision for bad debts
99 
171 
43 
Gain on sale of lab tools
 
 
(1,261)
Gain on cumulative translation adjustment
 
(430)
 
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
4,520 
(8,667)
10,715 
Inventories and deferred cost of sales
6,336 
(5,389)
(12,312)
Prepaid expenses and other current assets
(10,204)
6,726 
(39)
Accounts payable and accrued expenses
12,197 
(24,202)
9,470 
Customer deposits and deferred revenue
19,096 
8,807 
(20,738)
Income taxes receivable and payable, net
775 
547 
759 
Long-term income tax liability
(4,877)
 
 
Other, net
(1,204)
1,952 
520 
Net cash provided by (used in) operating activities
34,146 
(23,844)
15,789 
Cash Flows from Investing Activities
 
 
 
Acquisitions of businesses, net of cash acquired
(401,828)
 
(68)
Capital expenditures
(24,272)
(11,479)
(13,887)
Proceeds from the sale of investments
348,927 
152,301 
88,647 
Payments for purchases of investments
(282,947)
(103,394)
(85,838)
Proceeds from held for sale assets
2,284 
9,512 
3,068 
Other
 
(230)
1,000 
Net cash provided by (used in) investing activities
(357,836)
46,710 
(7,078)
Cash Flows from Financing Activities
 
 
 
Proceeds (net of tax withholdings) from option exercises and employee stock purchase plan
2,992 
1,656 
2,233 
Restricted stock tax withholdings
(8,741)
(2,601)
(3,215)
Purchases of common stock
(2,869)
(13,349)
(8,907)
Proceeds from long-term debt borrowings
335,752 
 
 
Principal payments on long-term debt
(1,194)
(340)
(314)
Net cash provided by (used in) financing activities
325,940 
(14,634)
(10,203)
Effect of exchange rate changes on cash and cash equivalents
42 
(20)
(87)
Net increase (decrease) in cash and cash equivalents
2,292 
8,212 
(1,579)
Cash and cash equivalents - beginning of period
277,444 
269,232 
270,811 
Cash and cash equivalents - end of period
279,736 
277,444 
269,232 
Supplemental Disclosure of Cash Flow Information
 
 
 
Interest paid
4,675 
225 
485 
Income taxes paid
1,939 
1,669 
7,091 
Non-cash operating and financing activities
 
 
 
Net transfer of inventory to property, plant and equipment
$ (97)
$ 1,827 
 
Significant Accounting Policies
Significant Accounting Policies

 

Note 1 — Significant Accounting Policies

 

(a) Description of Business

 

Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco,” or the “Company”) operates in a single segment: the development, manufacture, sales, and support of semiconductor process equipment primarily sold to make electronic devices.

 

(b) Basis of Presentation

 

The accompanying audited Consolidated Financial Statements of the Company have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). The Company reports interim quarters on a 13-week basis ending on the last Sunday of each period, which is determined at the start of each year. The Company’s fourth quarter always ends on the last day of the calendar year, December 31. During 2017 the interim quarters ended on April 2, July 2, and October 1, and during 2016 the interim quarters ended on April 3, July 3, and October 2. The Company reports these interim quarters as March 31, June 30, and September 30 in its interim consolidated financial statements.

 

(c) Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, these estimates may ultimately differ from actual results. Significant items subject to such estimates and assumptions include: (i) the best estimate of selling price for the Company’s products and services; (ii) allowances for doubtful accounts; (iii) inventory obsolescence; (iv) the useful lives and expected future cash flows of property, plant, and equipment and identifiable intangible assets; (v) the fair value of the Company’s reporting unit and related goodwill; (vi) the fair value, less cost to sell, of assets held for sale; (vii) investment valuations and the valuation of derivatives, deferred tax assets, and assets acquired in business combinations; (viii) the recoverability of long-lived assets; (ix) liabilities for product warranty and legal contingencies; (x) share-based compensation; and (xi) income tax uncertainties. Actual results could differ from those estimates.

 

(d) Principles of Consolidation

 

The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. Companies acquired during each reporting period are reflected in the results of the Company effective from their respective dates of acquisition through the end of the reporting period.

 

(e) Foreign Currencies

 

Assets and liabilities of the Company’s foreign subsidiaries that operate using local functional currencies are translated using the exchange rates in effect at the balance sheet date. Results of operations are translated using monthly average exchange rates. Adjustments arising from the translation of the foreign currency financial statements of the Company’s subsidiaries into U.S. dollars, including intercompany transactions of a long-term nature, are reported as currency translation adjustments in “Accumulated other comprehensive income” in the Consolidated Balance Sheets. Foreign currency transaction gains or losses are included in “Other, net” in the Consolidated Statements of Operations.

 

(f) Revenue Recognition

 

The Company recognizes revenue when all of the following criteria have been met: persuasive evidence of an arrangement exists with a customer; delivery of the specified products has occurred or services have been rendered; prices are contractually fixed or determinable; and collectability is reasonably assured. Revenue is recorded including shipping and handling costs and excluding applicable taxes related to sales.

 

Contracts with customers frequently contain multiple deliverables, such as systems, upgrades, components, spare parts, maintenance, and service plans. Judgment is required to properly identify the accounting units of the multiple-element arrangements and to determine how the revenue should be allocated among the accounting units. The Company also evaluates whether multiple transactions with the same customer or related parties should be considered part of a single, multiple-element arrangement based on an assessment of whether the contracts or agreements are negotiated or executed within a short time frame of each other or if there are indicators that the contracts are negotiated in contemplation of one another. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria have been met in order to recognize revenue in the appropriate accounting period.

 

When there are separate units of accounting, the Company allocates revenue to each element based on the following selling price hierarchy: vendor-specific objective evidence (“VSOE”) if available; third party evidence (“TPE”) if VSOE is not available; or the best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. The Company uses BESP for the elements in its arrangements. The maximum revenue recognized on a delivered element is limited to the amount that is not contingent upon the delivery of additional items.

 

The Company considers many facts when evaluating each of its sales arrangements to determine the timing of revenue recognition including its contractual obligations, the customer’s creditworthiness, and the nature of the customer’s post-delivery acceptance provisions. The Company’s system sales arrangements, including certain upgrades, generally include field acceptance provisions that may include functional or mechanical test procedures. For the majority of the arrangements, a customer source inspection of the system is performed in the Company’s facility or test data is sent to the customer documenting that the system is functioning to the agreed upon specifications prior to delivery. Historically, such source inspection or test data replicates the field acceptance provisions that are performed at the customer’s site prior to final acceptance of the system. When the Company objectively demonstrates that the criteria specified in the contractual acceptance provisions are achieved prior to delivery, revenue is recognized upon system delivery since there is no substantive contingency remaining related to the acceptance provisions at that date, subject to the retention amount constraint described below for certain contracts. For new products, new applications of existing products, or for products with substantive customer acceptance provisions where the Company cannot objectively demonstrate that the criteria specified in the contractual acceptance provisions have been achieved prior to delivery, revenue and the associated costs are deferred and fully recognized upon the receipt of final customer acceptance, assuming all other revenue recognition criteria have been met.

 

The Company’s system sales arrangements, including certain upgrades, generally do not contain provisions for the right of return, forfeiture, refund, or other purchase price concession. In the rare instances where such provisions are included, all revenue is deferred until such rights expire. The sales arrangements generally include installation. The installation process is not deemed essential to the functionality of the equipment since it is not complex; it does not require significant changes to the features or capabilities of the equipment or involve constructing elaborate interfaces or connections subsequent to factory acceptance. The Company has a demonstrated history of consistently completing installations in a timely manner and can reliably estimate the costs of such activities. Most customers engage the Company to perform the installation services, although there are other third-party providers with sufficient knowledge who could complete these services. Based on these factors, installation is deemed to be inconsequential or perfunctory relative to the system sale as a whole, and as a result, installation service is not considered a separate element of the arrangement. As such, the Company records the cost of the installation at the earlier of the time of revenue recognition for the system or when installation services are performed.

 

In certain cases the Company’s products are sold with a billing retention, typically 10% of the sales price, which is billed by the Company and payable by the customer when field acceptance provisions are completed. The amount of revenue recognized upon delivery of a system or upgrade, if any, is limited to the lower of i) the amount billed that is not contingent upon acceptance provisions or ii) the value of the arrangement consideration allocated to the delivered elements, if such sale is part of a multiple-element arrangement.

 

The Company recognizes revenue related to maintenance and service contracts ratably over the applicable contract term. The Company recognizes revenue from the sales of components, spare parts, and specified service engagements at the time of delivery in accordance with the terms of the applicable sales arrangement.

 

Incremental direct costs incurred related to the acquisition of a customer contract, such as sales commissions, are expensed as incurred, even if the related revenue is deferred in accordance with the above policy.

 

(g) Warranty Costs

 

The Company typically provides standard warranty coverage on its systems for one year from the date of final acceptance by providing labor and parts necessary to repair the systems during the warranty period. The Company accounts for the estimated warranty cost when revenue is recognized on the related system. Warranty cost is included in “Cost of sales” in the Consolidated Statements of Operations. The estimated warranty cost is based on the Company’s historical experience with its systems and regional labor costs. The Company calculates the average service hours by region and parts expense per system utilizing actual service records to determine the estimated warranty charge. The Company updates its warranty estimates on a semiannual basis when the actual product performance or field expense differs from original estimates.

 

(h) Shipping and Handling Costs

 

Shipping and handling costs are expenses incurred to move, package, and prepare the Company’s products for shipment and to move the products to a customer’s designated location. These costs are generally comprised of payments to third-party shippers. Shipping and handling costs are included in “Cost of sales” in the Consolidated Statements of Operations.

 

(i) Research and Development Costs

 

Research and development costs are expensed as incurred and include charges for the development of new technology and the transition of existing technology into new products or services.

 

(j) Advertising Expense

 

The cost of advertising is expensed as incurred and totaled $0.9 million, $0.8 million, and $0.9 million for the years ended December 31, 2017, 2016, and 2015, respectively.

 

(k) Accounting for Share-Based Compensation

 

Share-based awards exchanged for employee services are accounted for under the fair value method. Accordingly, share-based compensation cost is measured at the grant date based on the fair value of the award. The expense for awards is recognized over the employee’s requisite service period (generally the vesting period of the award). The Company has elected to treat awards with only service conditions and with graded vesting as one award. Consequently, the total compensation expense is recognized straight-line over the entire vesting period, so long as the compensation cost recognized at any date at least equals the portion of the grant date fair value of the award that is vested at that date.

 

The Company uses the Black-Scholes option-pricing model to compute the estimated fair value of option awards, as well as purchase rights under the Employee Stock Purchase Plan. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected option term, and risk-free interest rates. See Note 15, “Stock Plans,” for additional information.

 

In addition to stock options, restricted share awards (“RSAs”) and restricted stock units (“RSUs”) with time-based vesting, the Company issues performance share units and awards (“PSUs” and “PSAs”). Compensation cost for PSUs and PSAs is recognized over the requisite service period based on the timing and expected level of achievement of the performance targets. A change in the assessment of the probability of a performance condition being met is recognized in the period of the change in estimate. At the conclusion of the performance period, the number of shares granted may vary based on the level of achievement of the performance targets.

 

See Note 1(u), “Recently Adopted Accounting Standards,” for additional information concerning the Company’s early adoption of Accounting Standards Update (“ASU”) 2016-09: Stock Compensation: Improvements to Employee Share-Based Payment Accounting.

 

(l) Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rate is recognized in income in the period that includes the enactment date.

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “2017 Tax Act”), which makes broad and complex changes to the U.S. tax code. Certain income tax effects of the 2017 Tax Act are reflected in the Company’s financial results in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”), which provides SEC staff guidance regarding the application of Accounting Standards Codification Topic 740 Income Taxes (“ASC 740”). See Note 17, “Income Taxes,” for further information on the financial statement impact of the 2017 Tax Act.

 

Because of the complexity of the new global intangible low-taxed income (“GILTI”) rule, the Company is continuing to evaluate this provision of the 2017 Tax Act and the application of ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI, and if so, what the impact will be. This assessment depends not only on the Company’s current structure and estimated future results of global operations, but also on its intent and ability to modify its structure and/or business. The Company is not yet able to reasonably estimate the effect of this provision of the 2017 Tax Act; therefore, the Company has not made any adjustments related to potential GILTI tax in its consolidated financial statements and has not made a policy election decision regarding whether to record deferred taxes on GILTI.

 

(m) Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, investments, derivative financial instruments used in hedging activities, and accounts receivable. The Company invests in a variety of financial instruments and, by policy, limits the amount of credit exposure with any one financial institution or commercial issuer. The Company has not experienced any material credit losses on its investments.

 

The Company maintains an allowance reserve for potentially uncollectible accounts for estimated losses resulting from the inability of its customers to make required payments. The Company evaluates its allowance for doubtful accounts based on a combination of factors. In circumstances where specific invoices are deemed to be uncollectible, the Company provides a specific allowance for bad debt against the amount due to reduce the net recognized receivable to the amount reasonably expected to be collected. The Company also provides allowances based on its write-off history. The allowance for doubtful accounts totaled $0.3 million at December 31, 2017 and 2016.

 

To further mitigate the Company’s exposure to uncollectable accounts, the Company may request certain customers provide a negotiable irrevocable letter of credit drawn on a reputable financial institution. These irrevocable letters of credit are typically issued to mature between zero and 90 days from the date the documentation requirements are met, typically when a system ships or upon receipt of final acceptance from the customer. The Company, at its discretion, may monetize these letters of credit on a non-recourse basis after they become negotiable, but before maturity. The fees associated with the monetization are included in “Selling, general, and administrative” in the Consolidated Statements of Operations and were insignificant for the years ended December 31, 2017, 2016, and 2015.

 

(n) Fair Value of Financial Instruments

 

The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses reflected in the consolidated financial statements approximate fair value due to their short-term maturities. The fair value of debt for footnote disclosure purposes, including current maturities, if any, is estimated using recently quoted market prices of the instrument, or if not available, a discounted cash flow analysis based on the estimated current incremental borrowing rates for similar types of instruments.

 

(o) Cash, Cash Equivalents, and Short-Term Investments

 

All financial instruments purchased with an original maturity of three months or less at the time of purchase are considered cash equivalents. Such items may include liquid money market accounts, U.S. treasuries, government agency securities, and corporate debt. Investments that are classified as cash equivalents are carried at cost, which approximates fair value. The Company’s cash and cash equivalents includes $12.5 million and $1.5 million of cash equivalents at December 31, 2017 and 2016, respectively.

 

A portion of the Company’s cash and cash equivalents is held by its subsidiaries throughout the world, frequently in each subsidiary’s respective functional currency, which is typically the U.S. dollar. Approximately 77% and 54% of cash and cash equivalents were maintained outside the United States at December 31, 2017 and 2016, respectively.

 

Marketable securities are generally classified as available-for-sale for use in current operations, if required, and are reported at fair value, with unrealized gains and losses, net of tax, presented as a separate component of stockholders’ equity under the caption “Accumulated other comprehensive income.” These securities can include U.S. treasuries, government agency securities, corporate debt, and commercial paper, all with maturities of greater than three months when purchased. All realized gains and losses and unrealized losses resulting from declines in fair value that are other than temporary are included in “Other, net” in the Consolidated Statements of Operations. The specific identification method is used to determine the realized gains and losses on investments.

 

(p) Inventories

 

Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The Company assesses the valuation of all inventories, including manufacturing raw materials, work-in-process, and finished goods, each quarter. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its estimated net realizable value if less than cost. Estimates of net realizable value include, but are not limited to, management’s forecasts related to the Company’s future manufacturing schedules, customer demand, technological and/or market obsolescence, general market conditions, possible alternative uses, and ultimate realization of excess inventory. If future customer demand or market conditions are less favorable than the Company’s projections, additional inventory write-downs may be required and would be reflected in cost of sales in the period the revision is made. Inventory acquired as part of a business combination is recorded at fair value on the date of acquisition. See Note 5, “Business Combinations,” for additional information.

 

(q) Business Combinations

 

The Company allocates the fair value of the purchase consideration of the Company’s acquisitions to the tangible assets, intangible assets, including in-process research and development (“IPR&D”), if any, and liabilities assumed, based on estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred. See Note 5, “Business Combinations,” for additional information.

 

(r) Goodwill and Indefinite-Lived Intangibles

 

Goodwill is an asset representing the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is measured as the excess of the consideration transferred over the net fair value of identifiable assets acquired and liabilities assumed. Intangible assets with indefinite useful lives are measured at their respective fair values on the acquisition date. Intangible assets related to IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated R&D efforts. If and when development is complete, the associated assets would be deemed long-lived and would then be amortized based on their respective estimated useful lives at that point in time. Goodwill and indefinite-lived intangibles are not amortized into results of operations but instead are evaluated for impairment. The Company performs the evaluation in the fourth quarter of each year or more frequently if impairment indicators arise.

 

The Company may first perform a qualitative assessment of whether it is more likely than not that the reporting unit’s fair value is less than its carrying amount, and, if so, the Company then quantitatively compares the fair value of the reporting unit to its carrying amount. If the fair value exceeds the carrying amount, goodwill is not impaired. If the carrying amount exceeds fair value, the Company then records an impairment loss equal to the difference, up to the carrying value of goodwill.

 

The Company determines the fair value of its reporting unit based on a reconciliation of the fair value of the reporting unit to the Company’s adjusted market capitalization. The adjusted market capitalization is calculated by multiplying the average share price of the Company’s common stock for the last ten trading days prior to the measurement date by the number of outstanding common shares and adding a control premium.

 

(s) Long-Lived Assets and Cost Method Investment

 

Long-lived intangible assets consist of purchased technology, customer relationships, patents, trademarks and tradenames, covenants not-to-compete, and backlog and are initially recorded at fair value. Long-lived intangibles are amortized over their estimated useful lives in a method reflecting the pattern in which the economic benefits are consumed or straight-lined if such pattern cannot be reliably determined.

 

Property, plant, and equipment are recorded at cost. Depreciation expense is calculated based on the estimated useful lives of the assets by using the straight-line method. Amortization of leasehold improvements is recognized using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.

 

Long-lived assets and cost method investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, a recoverability test is performed utilizing undiscounted cash flows expected to be generated by that asset or asset group compared to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models or, when available, quoted market values, and third-party appraisals.

 

(t) Recent Accounting Pronouncements

 

The FASB issued ASU 2014-09, as amended: Revenue from Contracts with Customers, which has been codified as Accounting Standards Codification 606 (“ASC 606”). ASC 606 requires the Company’s revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. ASC 606 outlines a five-step model to make the revenue recognition determination and requires new financial statement disclosures. Publicly-traded companies are required to adopt ASC 606 for reporting periods beginning after December 15, 2017. The most significant financial statement impacts of adopting ASC 606 will be the elimination of the constraint on revenue associated with the billing retention related to the receipt of customer final acceptance as well as the identification of installation services as a performance obligation. The elimination of the constraint on revenue related to customer final acceptance, which is usually about 10 percent of a system sale, will generally be recognized at the time the Company transfers control of the system to the customer, which is earlier than under the Company’s current revenue recognition model for certain contracts that are subject to the billing retention constraint described above. The new performance obligation related to installation services under the new standard will generally be recognized as the installation services are performed, which is later than under the Company’s current revenue recognition model. Taken together, the Company does not believe these changes will have a material impact on the consolidated financial statements. The Company plans to adopt using the full retrospective method.

 

In January 2016, the FASB issued ASU 2016-01: Financial Instruments — Overall, which requires certain equity investments to be measured at fair value, with changes in fair value recognized in net income. For equity investments without readily observable market prices, entities have the option to either measure these investments at fair value every quarter, or measure at cost adjusted for changes in observable prices minus impairment. Changes in measurement under either alternative must be recognized in net income. Publicly-traded companies are required to adopt the update for reporting periods beginning after December 15, 2017; early adoption is permitted. The Company does not expect this ASU will have a material impact on the consolidated financial statements upon adoption, and will monitor its cost method investments each reporting period for changes in observable market prices, if any, which may be material in future periods.

 

In February 2016, the FASB issued ASU 2016-02: Leases, which generally requires operating lessee rights and obligations to be recognized as assets and liabilities on the balance sheet. In addition, interest on lease liabilities is to be recognized separately from the amortization of right-of-use assets in the Statement of Operations. Further, payments of the principal portion of lease liabilities are to be classified as financing activities while payments of interest on lease liabilities and variable lease payments are to be classified as operating activities in the Statement of Cash Flows. When the standard is adopted, the Company will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early application permitted. The Company is evaluating the anticipated impact of adopting the ASU on the consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which provides guidance on eight specific cash flow issues, including debt prepayments or debt extinguishment costs. Publicly-traded companies are required to adopt the update for reporting periods beginning after December 15, 2017. This ASU will not have a material impact on the consolidated financial statements.

 

In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory, which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. Publicly-traded companies are required to adopt the update for reporting periods beginning after December 15, 2017. This ASU will not have a material impact on the consolidated financial statements.

 

The Company is also evaluating other pronouncements recently issued but not yet adopted. The adoption of these pronouncements is not expected to have a material impact on our consolidated financial statements.

 

(u) Recently Adopted Accounting Standards

 

In January 2017, the FASB issued ASU 2017-04: Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill when testing goodwill for impairment. Instead, if the carrying value of an entity’s reporting unit(s) exceeds fair value, then an impairment charge should be recorded equal to the difference. The Company has early adopted the ASU effective January 1, 2017, and it did not have a material impact on the consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09: Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payments. The Company early adopted the ASU effective January 1, 2016. Beginning in 2016, excess tax benefits and deficiencies are recognized as income tax expense or benefit in the income statement in the reporting period incurred. The Company also made an accounting policy election to account for forfeitures when they occur. The ASU transition guidance requires that this election be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period in which the ASU is adopted. Accordingly, the Company recorded a $1.3 million charge to the opening accumulated deficit balance as of January 1, 2016, with a corresponding adjustment to additional paid-in capital, resulting in no impact to the opening balance of total stockholders’ equity. In addition, the Company recorded additional deferred tax assets with an equally offsetting valuation allowance of $2.4 million.

 

Income (Loss) Per Share
Income (Loss) Per Share

 

Note 2 — Income (Loss) Per Share

 

The Company considers unvested share-based awards that have non-forfeitable rights to dividends prior to vesting to be participating shares, which are treated as a separate class of security from the Company’s common shares for calculating per share data. Therefore, the Company applies the two-class method when calculating income (loss) per share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. However, since the holders of the participating shares are not obligated to fund losses, participating shares are excluded from the calculation of loss per share.

 

The dilutive effect of the Convertible Senior Notes on income per share is calculated using the treasury stock method since the Company has both the current intent and ability to settle the principal amount of the Convertible Senior Notes in cash. See Note 12, “Debt,” for additional information on the Convertible Senior Notes.

 

Basic income (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares outstanding during the period under the two-class method. Diluted income per share is calculated by dividing net income by the weighted average number of shares used to calculate basic income per share plus the weighted average number of common share equivalents outstanding during the period. The dilutive effect of outstanding options to purchase common stock and non-participating share-based awards is considered in diluted income per share by application of the treasury stock method. The dilutive effect of performance share units is included in diluted income per common share in the periods the performance targets have been achieved. The computations of basic and diluted income (loss) per share for the years ended December 31, 2017, 2016, and 2015 are as follows:

 

 

 

For the year ended December 31,

 

 

 

2017

 

2016

 

2015

 

 

 

(in thousands, except per share amounts)

 

Net income (loss)

 

$

(44,793

)

$

(122,210

)

$

(31,978

)

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

Basic

 

$

(1.01

)

$

(3.11

)

$

(0.80

)

Diluted

 

$

(1.01

)

$

(3.11

)

$

(0.80

)

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

44,174

 

39,340

 

39,742

 

Effect of potentially dilutive share-based awards

 

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

44,174

 

39,340

 

39,742

 

 

 

 

 

 

 

 

 

Unvested participating shares excluded from basic weighted average shares outstanding since the securityholders are not obligated to fund losses

 

72

 

312

 

1,017

 

 

 

 

 

 

 

 

 

Common share equivalents excluded from the diluted weighted average shares outstanding since Veeco incurred a net loss and their effect would be antidilutive

 

239

 

107

 

146

 

 

 

 

 

 

 

 

 

Potentially dilutive non-participating shares excluded from the diluted calculation as their effect would be antidilutive

 

1,744

 

1,896

 

2,111

 

 

 

 

 

 

 

 

 

Maximum potential shares to be issued for settlement of Convertible Senior Notes excluded from the diluted calculation as their effect would be antidilutive

 

8,618

 

 

 

 

Fair Value Measurements
Fair Value Measurements

 

Note 3 — Fair Value Measurements

 

Fair value is the price that would be received for an asset or the amount paid to transfer a liability in an orderly transaction between market participants. The Company is required to classify certain assets and liabilities based on the following fair value hierarchy:

 

·

Level 1: Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

 

·

Level 2: Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and

 

·

Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

 

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The Company has evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions or estimation methodologies could have a significant effect on the estimated fair value amounts.

 

The following table presents the Company’s assets that were measured at fair value on a recurring basis at December 31, 2017 and 2016:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

December 31, 2017

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

Corporate debt

 

$

12,490

 

$

 

$

 

$

12,490

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

12,490

 

$

 

$

 

$

12,490

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

33,895

 

$

 

$

 

$

33,895

 

Corporate debt

 

 

10,886

 

 

10,886

 

Commercial paper

 

 

2,999

 

 

2,999

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

33,895

 

$

13,885

 

$

 

$

47,780

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

Corporate debt

 

$

 

$

1,501

 

$

 

$

1,501

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

 

$

1,501

 

$

 

$

1,501

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

40,008

 

$

 

$

 

$

40,008

 

Government agency securities

 

 

10,012

 

 

10,012

 

Corporate debt

 

 

13,773

 

 

13,773

 

Commercial paper

 

 

2,994

 

 

2,994

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

40,008

 

$

26,779

 

$

 

$

66,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company’s investments classified as Level 1 are based on quoted prices that are available in active markets. The Company’s investments classified as Level 2 are valued using observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes, or alternative pricing sources with reasonable levels of price transparency.

 

Investments
Investments

 

Note 4 — Investments

 

At December 31, 2017 and 2016 the amortized cost and fair value of marketable securities were as follows:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

 

(in thousands)

 

December 31, 2017

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

33,914

 

$

 

$

(19

)

$

33,895

 

Corporate debt

 

10,894

 

 

(8

)

10,886

 

Commercial paper

 

2,999

 

 

 

2,999

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

47,807

 

$

 

$

(27

)

$

47,780

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

40,013

 

$

 

$

(5

)

$

40,008

 

Government agency securities

 

10,020

 

 

(8

)

10,012

 

Corporate debt

 

13,780

 

 

(7

)

13,773

 

Commercial paper

 

2,994

 

 

 

2,994

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

66,807

 

$

 

$

(20

)

$

66,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities in a loss position at December 31, 2017 and 2016 were as follows:

 

 

 

December 31, 2017

 

December 31, 2016

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Estimated

 

Unrealized

 

Estimated

 

Unrealized

 

 

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

 

 

(in thousands)

 

U.S. treasuries

 

$

33,895

 

$

(19

)

$

20,002

 

$

(5

)

Government agency securities

 

 

 

10,012

 

(8

)

Corporate debt

 

10,886

 

(8

)

13,773

 

(7

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

44,781

 

$

(27

)

$

43,787

 

$

(20

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2017 and 2016, there were no short-term investments that had been in a continuous loss position for more than 12 months.

 

The maturities of securities classified as available-for-sale at December 31, 2017 were all due in one year or less. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. There were minimal realized gains or losses for the years ended December 31, 2017, 2016, and 2015.

 

Cost Method Investment

 

The Company has an ownership interest of less than 20% in a non-marketable investment, Kateeva, Inc. (“Kateeva”). The Company does not exert significant influence over Kateeva and therefore the investment is carried at cost. The carrying value of the investment was $21.0 million at December 31, 2017 and 2016. The investment is included in “Other assets” on the Consolidated Balance Sheets. The investment is subject to a periodic impairment review; as there are no open-market valuations, the impairment analysis requires judgment. The analysis includes assessments of Kateeva’s financial condition, the business outlook for its products and technology, its projected results and cash flow, business valuation indications from recent rounds of financing, the likelihood of obtaining subsequent rounds of financing, and the impact of equity preferences held by Veeco relative to other investors. Fair value of the investment is not estimated unless there are identified events or changes in circumstances that could have a significant adverse effect on the fair value of the investment. No such events or circumstances are present.

 

Business Combinations
Business Combinations

 

Note 5 — Business Combinations

 

Ultratech

 

On May 26, 2017, the Company completed its acquisition of Ultratech, Inc. (“Ultratech”). Ultratech develops, manufactures, sells, and supports lithography, laser annealing, and inspection equipment for manufacturers of semiconductor devices, including front-end semiconductor manufacturing and advanced packaging. Ultratech also develops, manufactures, sells and supports ALD equipment for scientific and industrial applications. Ultratech’s customers are primarily located throughout the United States, Europe, China, Japan, Taiwan, Singapore, and Korea. The results of Ultratech’s operations have been included in the consolidated financial statements since the date of acquisition.

 

Ultratech shareholders received (i) $21.75 per share in cash and (ii) 0.2675 of a share of Veeco common stock for each Ultratech common share outstanding on the acquisition date. The acquisition date fair value of the consideration totaled $633.4 million, net of cash acquired, which consisted of the following:

 

 

 

Acquisition Date

 

 

 

(May 26, 2017)

 

 

 

(in thousands)

 

Cash consideration, net of cash acquired of $229.4 million

 

$

404,489

 

Equity consideration (7.2 million shares issued)

 

228,644

 

Replacement equity awards attributable to pre-acquisition service

 

228

 

 

 

 

 

Acquisition date fair value

 

$

633,361

 

 

 

 

 

 

 

Approximately $2.7 million of the cash merger consideration is included in “Accrued expenses and other current liabilities” on the Consolidated Balance Sheets as of December 31, 2017 related to shareholder appraisal proceedings.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:

 

 

 

Acquisition Date

 

 

 

(May 26, 2017)

 

 

 

(in thousands)

 

Short-term investments

 

$

47,161

 

Accounts receivable

 

45,465

 

Inventories

 

59,100

 

Deferred cost of sales

 

242

 

Prepaid expense and other current assets

 

7,217

 

Property, plant, and equipment

 

18,152

 

Intangible assets

 

346,940

 

Other assets

 

6,442

 

 

 

 

 

Total identifiable assets acquired

 

530,719

 

 

 

 

 

Accounts payable

 

24,291

 

Accrued expenses and other current liabilities

 

16,356

 

Customer deposits and deferred revenue

 

4,834

 

Deferred income taxes

 

32,478

 

Other liabilities

 

11,622

 

 

 

 

 

Total liabilities assumed

 

89,581

 

 

 

 

 

Net identifiable assets acquired

 

441,138

 

Goodwill

 

192,223

 

 

 

 

 

Net assets acquired

 

$

633,361

 

 

 

 

 

 

 

The gross contractual value of the acquired accounts receivable was approximately $46.0 million. The fair value of the accounts receivables is the amount expected to be collected by the Company. Goodwill generated from the acquisition is primarily attributable to expected synergies from future growth and strategic advantages provided through the expansion of product offerings as well as assembled workforce and is not expected to be deductible for income tax purposes.

 

The classes of intangible assets acquired and the estimated useful life of each class is presented in the table below:

 

 

 

Acquisition Date

 

 

 

(May 26, 2017)

 

 

 

Amount

 

Useful life

 

 

 

(in thousands)

 

 

 

Technology

 

$

158,390

 

9 years

 

Customer relationships

 

116,710

 

12 years

 

Backlog

 

3,080

 

6 months

 

In-process research and development

 

43,340

 

*

 

Trademark and tradenames

 

25,420

 

7 years

 

 

 

 

 

 

 

Intangible assets acquired

 

$

346,940

 

 

 

 

 

 

 

 

 

 

 

 

*In-process research and development will be amortized (or impaired) upon completion (or abandonment) of the development project.

 

The Company determined the estimated fair value of the identifiable intangible assets based on various factors including: cost, discounted cash flow, income method, loss-of-revenue/income method, and relief-from-royalty method in determining the purchase price allocation.

 

In-process research and development (“IPR&D”) represents the estimated fair values of incomplete Ultratech research and development projects that had not reached the commercialization stage and meet the criteria for recognition as IPR&D as of the date of the acquisition. In the future, the fair value of each project at the acquisition date will be either amortized or impaired depending on whether the projects are completed or abandoned. The fair value of IPR&D was determined using an income approach and costs to complete the project and expected commercialization timelines are considered key assumptions. This valuation approach reflects the present value of the projected cash flows that are expected to be generated by the IPR&D less charges representing the contribution of other assets to those cash flows. The value of the IPR&D was determined to be $43.3 million, approximately half of which is related to Ultratech’s lithography technologies and one-third of which is related to Ultratech’s laser annealing technologies.

 

For the year ended December 31, 2017, acquisition related costs were approximately $17.8 million, including non-cash charges of $4.2 million related to accelerated share-based compensation for employee terminations.

 

The amounts of net sales and income (loss) from operations before income taxes of Ultratech included in the Company’s Consolidated Statement of Operations for the year ended December 31, 2017 are as follows:

 

 

 

Year ended 
December 31, 2017

 

 

 

(in thousands)

 

Net sales

 

$

65,530

 

Loss before income taxes

 

$

(62,762

)

 

Loss before income taxes of Ultratech for the year ended December 31, 2017 of $62.8 million includes acquisition costs of $17.8 million, release of inventory fair value step-up related to purchase accounting of $9.6 million, amortization expense on intangible assets of $23.9 million, and restructuring charges of $3.3 million.

 

The following table presents unaudited pro forma financial information as if the acquisition of Ultratech had occurred on January 1, 2016:

 

 

 

For the year ended December 31,

 

 

 

2017

 

2016

 

 

 

(in thousands, except per share amounts)

 

Net sales

 

$

555,498

 

$

526,501

 

Loss before income taxes

 

(81,910

)

(218,023

)

Diluted earnings per share

 

$

(1.24

)

$

(4.67

)

 

The pro-forma results were calculated by combining the audited results of the Company with the stand-alone unaudited results of Ultratech for the pre-acquisition period, and adjusting for the following:

 

(i)Additional amortization expense related to identified intangible assets valued as part of the purchase price allocation that would have been incurred starting on January 1, 2016.

 

(ii)Additional depreciation expense for the property, plant, and equipment fair value adjustments that would have been incurred starting on January 1, 2016.

 

(iii)All acquisition related costs incurred by the Company as well as by Ultratech pre-acquisition have been removed from the year ended December 31, 2017 and included in the year ended December 31, 2016, as such expenses would have been incurred in the first quarter following the acquisition.

 

(iv)All amortization of inventory step-up has been removed from the year ended December 31, 2017 and recorded in the year ended December 31, 2016, as such costs would have been incurred as the corresponding inventory was sold.

 

(v)Additional interest expense related to the Convertible Senior Notes (see Note 12, “Debt”) as if they had been issued on January 1, 2016.

 

(vi)Income tax expense (benefit) was adjusted for the impact of the above adjustments for each period.

 

(vii)All shares issued in connection with the acquisition were considered outstanding as of January 1, 2016 for purposes of calculating diluted earnings per share.

 

Goodwill and Intangible Assets
Goodwill and Intangible Assets

 

Note 6 — Goodwill and Intangible Assets

 

Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. The following table presents the changes in goodwill balances during the years indicated:

 

 

 

Gross carrying

 

Accumulated

 

 

 

 

 

amount

 

impairment

 

Net amount

 

 

 

(in thousands)

 

Balance at December 31, 2015 and 2016

 

$

238,108

 

$

123,200

 

$

114,908

 

Acquisition

 

192,223

 

 

192,223

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

$

430,331

 

$

123,200

 

$

307,131

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company performs its annual goodwill impairment test at the beginning of the fourth quarter each year. As the Company maintains a single goodwill reporting unit, it determines the fair value of its reporting unit based upon the Company’s adjusted market capitalization. The adjusted market capitalization is calculated by multiplying the average share price of the Company’s common stock for the last ten trading days prior to the measurement date by the number of outstanding common shares and adding a control premium. The annual test performed at the beginning of the fourth quarter of fiscal 2016 and 2017 did not result in any potential impairment as the fair value of the reporting unit was determined to exceed the carrying amount of the reporting unit.

 

As a result of a significant decline in the Company’s stock price during the fourth quarter, the Company determined it was appropriate to perform an interim goodwill impairment test as of the end of the fourth quarter. The Company determined the fair value of its reporting unit using both the adjusted market capitalization approach noted above, and a market approach, which was based on a review of comparable companies’ market-derived trailing twelve month revenue multiples. Both approaches indicated the fair value exceeded the carrying amount of the reporting unit and no impairment of goodwill existed at December 31, 2017. The valuation of goodwill will continue to be subject to changes in the Company’s market capitalization and observable market control premiums.

 

The components of purchased intangible assets were as follows:

 

 

 

 

 

December 31, 2017

 

December 31, 2016

 

 

 

Weighted

 

 

 

Accumulated

 

 

 

 

 

Accumulated

 

 

 

 

 

Average Remaining

 

Gross

 

Amortization

 

 

 

Gross

 

Amortization

 

 

 

 

 

Amortization

 

Carrying

 

and

 

Net

 

Carrying

 

and

 

Net

 

 

 

Period

 

Amount

 

Impairment

 

Amount

 

Amount

 

Impairment

 

Amount

 

 

 

(in years)

 

(in thousands)

 

Technology

 

8.0

 

$

307,588

 

$

133,121

 

$

174,467

 

$

149,198

 

$

113,904

 

$

35,294

 

Customer relationships

 

11.4

 

164,595

 

39,336

 

125,259

 

47,885

 

28,659

 

19,226

 

In-process R&D

 

 

43,340

 

 

43,340

 

 

 

 

Trademarks and tradenames

 

6.4

 

30,910

 

4,321

 

26,589

 

2,590

 

1,948

 

642

 

Indefinite-lived trademark

 

 

 

 

 

2,900

 

 

2,900

 

Other

 

2.0

 

3,686

 

3,498

 

188

 

2,026

 

1,710

 

316

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

9.2

 

$

550,119

 

$

180,276

 

$

369,843

 

$

204,599

 

$

146,221

 

$

58,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other intangible assets primarily consist of patents, licenses, and backlog.

 

During 2016, the Company decided to reduce future investments in certain technologies and, as a result, recorded a non-cash impairment charge of $54.3 million for the related intangible purchased technology. The impairment charge was based on projected cash flows that required the use of unobservable inputs, and was recorded in “Asset impairment” in the Consolidated Statements of Operations.

 

Based on the intangible assets recorded at December 31, 2017, and assuming no subsequent additions to or impairment of the underlying assets, the remaining estimated annual amortization expense, excluding in-process R&D, is expected to be as follows:

 

 

 

Amortization

 

 

 

(in thousands)

 

2018

 

$

54,128

 

2019

 

57,071

 

2020

 

54,382

 

2021

 

40,959

 

2022

 

26,009

 

Thereafter

 

93,954

 

 

 

 

 

Total

 

$

326,503

 

 

 

 

 

 

 

Inventories
Inventories

 

Note 7 — Inventories

 

Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Inventories consist of the following:

 

 

 

December 31,

 

 

 

2017

 

2016

 

 

 

(in thousands)

 

Materials

 

$

59,919

 

$

46,457

 

Work-in-process

 

37,222

 

25,250

 

Finished goods

 

23,125

 

5,356

 

 

 

 

 

 

 

Total

 

$

120,266

 

$

77,063

 

 

 

 

 

 

 

 

 

 

Property, Plant, and Equipment and Assets Held for Sale
Property, Plant, and Equipment and Assets Held for Sale

 

Note 8 — Property, Plant, and Equipment and Assets Held for Sale

 

Property and equipment, net, consist of the following:

 

 

 

December 31,

 

Average

 

 

 

2017

 

2016

 

Useful Life

 

 

 

(in thousands)

 

 

 

Land

 

$

5,669

 

$

5,669

 

N/A

 

Building and improvements

 

54,449

 

50,814

 

10 – 40 years

 

Machinery and equipment(1)

 

126,829

 

99,370

 

3 – 10 years

 

Leasehold improvements

 

10,073

 

3,652

 

3 – 7 years

 

 

 

 

 

 

 

 

 

Gross property, plant, and equipment

 

197,020

 

159,505

 

 

 

Less: accumulated depreciation and amortization

 

111,962

 

98,859

 

 

 

 

 

 

 

 

 

 

 

Net property, plant, and equipment

 

$

85,058

 

$

60,646

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Machinery and equipment also includes software, furniture and fixtures

 

Depreciation expense was $14.6 million, $13.4 million, and $12.2 million for the years ended December 31, 2017, 2016, and 2015, respectively. During 2016, the Company decided to reduce future investments in certain technologies and, as a result, recorded an impairment charge of $3.3 million of property, plant, and equipment.

 

As part of the Company’s efforts to reduce costs, enhance efficiency, and streamline operations, the Company removed certain lab equipment that is no longer required and recorded a non-cash impairment charge of $6.2 million for the year ended December 31, 2016. Additionally, as part of that initiative, the Company listed its two facilities in South Korea for sale. When each facility was reclassified as held for sale, the Company determined that the carrying values of the buildings exceeded their fair market values, less cost to sell, and recorded net impairment charges of $4.5 million for the year ended December 31, 2016. Both facilities were sold before the end of 2016 at prices that approximated the revised carrying values.

 

Finally, during the year ended December 31, 2016, the Company recorded an impairment charge of approximately $1.2 million related to an owned property in St. Paul, Minnesota. The property was sold during 2017, resulting in an additional impairment charge of $0.7 million for the year ended December 31, 2017. There were no assets held for sale as of December 31, 2017 and 2016. All impairment charges were recorded in “Asset impairment” in the Consolidated Statements of Operations.

 

Accrued Expenses and Other Liabilities
Accrued Expenses and Other Liabilities

 

Note 9 — Accrued Expenses and Other Liabilities

 

The components of accrued expenses and other current liabilities were as follows:

 

 

 

December 31,

 

 

 

2017

 

2016

 

 

 

(in thousands)

 

Payroll and related benefits

 

$

32,996

 

$

18,780

 

Warranty

 

6,532

 

4,217

 

Interest

 

4,430

 

 

Professional fees

 

3,942

 

1,827

 

Merger consideration payable

 

2,662

 

 

Installation

 

2,271

 

1,382

 

Sales, use, and other taxes

 

2,144

 

1,282

 

Restructuring liability

 

1,520

 

1,796

 

Other

 

3,842

 

3,917

 

 

 

 

 

 

 

Total

 

$

60,339

 

$

33,201

 

 

 

 

 

 

 

 

 

 

Customer deposits and deferred revenue

 

Customer deposits totaled $41.5 million and $22.2 million at December 31, 2017 and 2016, respectively, which are included in “Customer deposits and deferred revenue” in the Consolidated Balance Sheets.

 

Other liabilities

 

The Company maintains an executive non-qualified deferred compensation plan that was assumed from Ultratech that allows qualifying executives to defer cash compensation. At December 31, 2017, plan assets approximated $3.4 million representing the cash surrender value of life insurance policies and is included within “Other assets” in the Consolidated Balance Sheets, while plan liabilities approximated $4.7 million and is included within “Other liabilities” in the Consolidated Balance Sheets. Other liabilities also included asset retirement obligations of $3.3 million, medical and dental benefits of $2.2 million, and acquisition related accruals of $0.4 million at December 31, 2017. At December 31, 2016, other liabilities primarily consisted of a non-current income tax payable of $4.9 million.

 

Restructuring Charges
Restructuring Charges

 

Note 10 — Restructuring Charges

 

During 2016, the Company undertook restructuring activities as part of its initiative to streamline operations, enhance efficiencies, and reduce costs, as well as reducing future investments in certain technology development, which together impacted approximately 75 employees. These activities were substantially completed in 2017. In addition, during 2017, the Company began the acquisition integration process to enhance efficiencies, resulting in additional employee terminations and other facility closing costs.

 

During 2015, charges of $4.7 million were recognized related to the closing of facilities in Ft. Collins, Colorado, Camarillo, California, and Hyeongok-ri, South Korea, as well as other cost reduction initiatives, which together impacted approximately 50 employees.

 

The following table shows the amounts incurred and paid for restructuring activities during the years ended December 31, 2017, 2016, and 2015 and the remaining accrued balance of restructuring costs at December 31, 2017, which is included in “Accrued expenses and other current liabilities” in the Consolidated Balance Sheets:

 

 

 

Personnel

 

 

 

 

 

 

 

Severance and

 

Facility

 

 

 

 

 

Related Costs

 

Closing Costs

 

Total

 

 

 

(in thousands)

 

Balance at December 31, 2014

 

$

1,428

 

$

 

$

1,428

 

Provision

 

3,513

 

1,166

 

4,679

 

Payments

 

(4,117

)

(1,166

)

(5,283

)

 

 

 

 

 

 

 

 

Balance at December 31, 2015

 

824

 

 

824

 

Provision

 

4,544

 

1,098

 

5,642

 

Changes in estimate

 

(2

)

 

(2

)

Payments

 

(3,570

)

(1,098

)

(4,668

)

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

1,796

 

 

1,796

 

Provision

 

4,714

 

5,257

 

9,971

 

Payments

 

(4,990

)

(5,257

)

(10,247

)

 

 

 

 

 

 

 

 

Balance - December 31, 2017

 

$

1,520

 

$

 

$

1,520

 

 

 

 

 

 

 

 

 

 

 

 

 

Included within restructuring expense in the Consolidated Statements of Operations for the year ended December 31, 2017 is approximately $1.9 million of non-cash charges related to accelerated share-based compensation for employee terminations.

 

Commitments and Contingencies
Commitments and Contingencies

 

Note 11 — Commitments and Contingencies

 

Warranty

 

Warranties are typically valid for one year from the date of system final acceptance, and the Company estimates the costs that may be incurred under the warranty. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs and is affected by product failure rates, material usage, and labor costs incurred in correcting product failures during the warranty period. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs.

 

Changes in the Company’s product warranty reserves were as follows:

 

 

 

December 31,

 

 

 

2017

 

2016

 

2015

 

 

 

(in thousands)

 

Balance, beginning of the year

 

$

4,217

 

$

8,159

 

$

5,411

 

Warranties issued

 

5,817

 

3,916

 

7,873

 

Addition from Ultratech acquisition

 

1,889

 

 

 

Consumption of reserves

 

(6,330

)

(6,433

)

(3,551

)

Changes in estimate

 

939

 

(1,425

)

(1,574

)

 

 

 

 

 

 

 

 

Balance, end of the year

 

$

6,532

 

$

4,217

 

$

8,159

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum Lease Commitments

 

Minimum lease commitments at December 31, 2017 for property and equipment under operating lease agreements (exclusive of renewal options) are payable as follows:

 

 

 

Operating

 

 

 

Leases

 

 

 

(in thousands)

 

Payments due by period:

 

 

 

2018

 

$

5,655

 

2019

 

5,533

 

2020

 

5,529

 

2021

 

2,307

 

2022

 

2,308

 

Thereafter

 

2,919

 

 

 

 

 

 

 

 

 

Total

 

$

24,251

 

 

 

 

 

 

 

 

 

 

 

 

Lease expense was $5.3 million, $2.5 million, and $2.3 million for the years ended December 31, 2017, 2016, and 2015, respectively. In addition, the Company is obligated under such leases for certain other expenses, including real estate taxes and insurance.

 

Legal Proceedings

 

On September 21, 2017, Blueblade Capital Opportunities LLC et al., on behalf of purported beneficial owners of 440,100 shares of Ultratech common stock, filed an action against Ultratech in Delaware Court of Chancery requesting an appraisal of the value of their Ultratech stock pursuant to 8 Del. C. §262. The Company believes that the merger price, which was the product of arms-length negotiations, was fair and reasonable, and intends to contest the appraisal claim. Discovery in the matter has commenced and a trial on the action is scheduled to begin in December 2018.

 

On April 12, 2017, the Company filed a patent infringement complaint in the U.S. District Court for the Eastern District of New York against SGL Carbon, LLC and SGL Carbon SE (collectively, “SGL”), alleging infringement of patents relating to wafer carrier technology used in MOCVD equipment. The complaint alleges that SGL infringes Veeco’s patents by making and selling certain wafer carriers to Veeco’s competitor, Advanced Micro-Fabrication Equipment, Inc. (“AMEC”). On November 2, 2017, the U.S. District Court granted the Company’s motion for a preliminary injunction prohibiting SGL from shipping wafer carriers using the Company’s patented technology without the Company’s express authorization.

 

On July 13, 2017, AMEC filed a patent infringement complaint against Veeco Instruments Shanghai Co., Ltd. (“Veeco Shanghai”) with the Fujian High Court in China, alleging that the Company’s MOCVD products infringed a Chinese utility model patent relating to the synchronous movement engagement mechanism in a chemical vapor deposition reactor and seeking injunctive relief and monetary damages against Veeco Shanghai. On December 7, 2017, without providing notice to Veeco and without hearing Veeco’s position on alleged infringement, the Fujian High Court issued a preliminary injunction, applicable in China, that requires Veeco Shanghai to stop importing, making, selling, and offering to sell Veeco EPIK 700 model MOCVD systems and to stop importing, selling, and offering to sell wafer carriers used as supplies for the EPIK 700 MOCVD system.

 

On February 8, 2018, Veeco, AMEC, and SGL announced that they had mutually agreed to settle the pending litigation among the parties and to amicably resolve all pending disputes, including AMEC’s lawsuit against Veeco before the Fujian High Court in China and Veeco’s lawsuit against SGL before the U.S. District Court for the Eastern District of New York. As part of the settlement, all legal actions worldwide (in court, patent offices, and otherwise), between Veeco, AMEC, and SGL, and their affiliates, will be dismissed and/or otherwise withdrawn. As a result, all business processes, including sales, service, and importation, will be continued.

 

The Company is involved in various other legal proceedings arising in the normal course of business. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows.

 

Concentrations of Credit Risk

 

The Company depends on purchases from its ten largest customers, which accounted for 67% and 73% of net accounts receivable at December 31, 2017 and 2016, respectively.

 

Customers who accounted for more than 10% of net accounts receivable or net sales are as follows:

 

 

 

Accounts Receivable

 

Net Sales

 

 

 

Year ended December 31,

 

For the Year Ended December 31,

 

Customer

 

2017

 

2016

 

2017

 

2016

 

2015

 

Customer A

 

24

%

23

%

21

%

13

%

*

 

Customer B

 

*

 

17

%

*

 

*

 

*

 

Customer C

 

*

 

*

 

*

 

*

 

20

%

Customer D

 

*

 

*

 

*

 

*

 

12

%

 

 

* Less than 10% of aggregate accounts receivable or net sales

 

The Company manufactures and sells its products to companies in different geographic locations. Refer to Note 18, “Segment Reporting and Geographic Information,” for additional information. In certain instances, the Company requires deposits from its customers for a portion of the sales price in advance of shipment and performs periodic credit evaluations on its customers. Where appropriate, the Company requires letters of credit on certain non-U.S. sales arrangements. Receivables generally are due within 30 to 90 days from the date of invoice.

 

Receivable Purchase Agreement

 

In December 2017, the Company entered into a Receivable Purchase Agreement with a financial institution to sell certain of its trade receivables from customers without recourse, up to $23.0 million at any point in time for a term of one year. Under the terms of the agreement, the Company may offer to sell certain eligible accounts receivable (the “Receivables”) to the financial institution (the “Purchaser”), which may accept such offer, and purchase the offered Receivables. The Purchaser will assume credit risk of the Receivables purchased; provided, however, the Company will service the Receivables, and as such servicer, collect and otherwise enforce the Receivables on behalf of the Purchaser. Pursuant to this agreement, the Company sold $15.0 million of Receivables during the year ended December 31, 2017 and maintained $8.0 million available under the agreement for additional sales of Receivables as of December 31, 2017. The sale of accounts receivable under the agreement is reflected as a reduction of accounts receivable in the Company’s Consolidated Balance Sheet at the time of sale and any fees for the sale of trade receivables were not material for the periods presented.

 

Suppliers

 

The Company outsources certain functions to third parties, including the manufacture of some of its MOCVD and Ultratech systems. While the Company primarily relies on one supplier for the manufacturing of these systems, the Company maintains a minimum level of internal manufacturing capability for these systems. The failure of the Company’s present suppliers to meet their contractual obligations under their supply arrangements and the Company’s inability to make alternative arrangements or resume the manufacture of these systems could have a material adverse effect on the Company’s revenues, profitability, cash flows, and relationships with its customers.

 

In addition, certain of the components and sub-assemblies included in the Company’s products are obtained from a single source or a limited group of suppliers. The Company’s inability to develop alternative sources, if necessary, could result in a prolonged interruption in supply or a significant increase in the price of one or more components, which could adversely affect the Company’s operating results.

 

The Company had deposits with its suppliers of $7.6 million and $7.8 million at December 31, 2017 and 2016, respectively, that were included in “Prepaid expenses and other current assets” on the Consolidated Balance Sheets.

 

Purchase Commitments

 

The Company had purchase commitments of $181.0 million at December 31, 2017, substantially all of which will come due within one year. Purchase commitments are primarily for inventory used in manufacturing products, and are partially offset by existing deposits with suppliers.

 

Bank Guarantees

 

The Company has bank guarantees and letters of credit issued by a financial institution on its behalf as needed. At December 31, 2017, outstanding bank guarantees and letters of credit totaled $6.5 million, and unused bank guarantees and letters of credit of $66.5 million were available to be drawn upon.

 

Debt
Debt

 

Note 12 — Debt

 

Mortgage Payable

 

At December 31, 2016, the Company had a mortgage note payable associated with its property in St. Paul, Minnesota, which, during the third quarter of 2017 was fully extinguished in connection with the sale of the building. The carrying value of the property exceeded the carrying value of the mortgage note of $1.2 million at December 31, 2016. The annual interest rate on the note was 7.91%.

 

Convertible Senior Notes

 

On January 10, 2017, the Company issued $345.0 million of 2.70% convertible senior unsecured notes (the “Convertible Senior Notes”). The Company received net proceeds, after deducting underwriting discounts and fees and expenses payable by the Company, of approximately $335.8 million. The Convertible Senior Notes bear interest at a rate of 2.70% per year, payable semiannually in arrears on January 15 and July 15 of each year, commencing on July 15, 2017. The Convertible Senior Notes mature on January 15, 2023 (the “Maturity Date”), unless earlier purchased by the Company, redeemed, or converted.

 

The Convertible Senior Notes are unsecured obligations of Veeco and rank senior in right of payment to any of Veeco’s subordinated indebtedness; equal in right of payment to all of Veeco’s unsecured indebtedness that is not subordinated; effectively subordinated in right of payment to any of Veeco’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally subordinated to all indebtedness and other liabilities (including trade payables) of Veeco’s subsidiaries.

 

The Convertible Senior Notes are convertible into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election, upon the satisfaction of specified conditions and during certain periods as described below. The initial conversion rate is 24.9800 shares of the Company’s common stock per $1,000 principal amount of Convertible Senior Notes, representing an initial effective conversion price of $40.03 per share of common stock. The conversion rate may be subject to adjustment upon the occurrence of certain specified events as provided in the indenture governing the Convertible Senior Notes, dated January 18, 2017 between the Company and U.S. Bank National Association, as trustee, but will not be adjusted for accrued but unpaid interest.

 

Holders may convert all or any portion of their notes, in multiples of one thousand dollar principal amount, at their option at any time prior to the close of business on the business day immediately preceding October 15, 2022 only under the following circumstances:

 

(i)During any calendar quarter (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

 

(ii)During the five consecutive business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per one thousand dollar principal amount of Convertible Senior Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of Veeco’s common stock and the conversion rate on each such trading day;

 

(iii)If the Company calls any or all of the Convertible Senior Notes for redemption at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or

 

(iv)Upon the occurrence of specified corporate events.

 

On or after October 15, 2022, until the close of business on the business day immediately preceding the Maturity Date, holders may convert their notes at any time, regardless of the foregoing circumstances.

 

Upon conversion by the holders, the Company may elect to settle such conversion in shares of its common stock, cash, or a combination thereof. As a result of its cash conversion option, the Company segregated the liability component of the instrument from the equity component. The liability component was measured by estimating the fair value of a non-convertible debt instrument that is similar in its terms to the Convertible Senior Notes. The calculation of the fair value of the debt component required the use of Level 3 inputs, including utilization of convertible investors’ credit assumptions and high yield bond indices. Fair value was estimated through discounting future interest and principal payments, an income approach, due under the Convertible Senior Notes at a discount rate of 7.00%, an interest rate equal to the estimated borrowing rate for similar non-convertible debt. The excess of the aggregate face value of the Convertible Senior Notes over the estimated fair value of the liability component of $72.5 million was recognized as a debt discount and recorded as an increase to additional paid-in capital, and will be amortized over the expected life of the Convertible Senior Notes using the effective interest rate method. Amortization of the debt discount is recognized as non-cash interest expense.

 

The transaction costs of $9.2 million incurred in connection with the issuance of the Convertible Senior Notes were allocated to the liability and equity components based on their relative values. Transaction costs allocated to the liability component are being amortized using the effective interest rate method and recognized as non-cash interest expense over the expected term of the Convertible Senior Notes. Transaction costs allocated to the equity component of $1.9 million reduced the value of the equity component recognized in stockholders’ equity.

 

The carrying value of the Convertible Senior Notes is as follows:

 

 

 

December 31,

 

 

 

2017

 

 

 

(in thousands)

 

Principal amount

 

$

345,000

 

Unamortized debt discount

 

(63,022

)

Unamortized transaction costs

 

(6,348

)

 

 

 

 

Net carrying value

 

$

275,630

 

 

 

 

 

 

 

Total interest expense related to the Convertible Senior Notes is as follows:

 

 

 

For the year ended
December 31,

 

 

 

2017

 

 

 

(in thousands)

 

Cash Interest Expense

 

 

 

Coupon interest expense

 

$

8,901

 

Non-Cash Interest Expense

 

 

 

Amortization of debt discount

 

9,490

 

Amortization of transaction costs

 

956

 

 

 

 

 

Total Interest Expense

 

$

19,347

 

 

 

 

 

 

 

The Company determined the Convertible Senior Notes is a Level 2 liability in the fair value hierarchy and estimated its fair value as $300.7 million at December 31, 2017.

 

Derivative Financial Instruments
Derivative Financial Instruments

 

Note 13 — Derivative Financial Instruments

 

The Company is exposed to financial market risks arising from changes in currency exchange rates. Changes in currency exchange rate changes could affect the Company’s foreign currency denominated monetary assets and liabilities and forecasted cash flows. The Company entered into monthly forward derivative contracts with the intent of mitigating a portion of this risk. The Company only used derivative financial instruments in the context of hedging and not for speculative purposes and had not designated its foreign exchange derivatives as hedges. Accordingly, changes in fair value from these contracts were recorded as “Other, net” in the Company’s Consolidated Statements of Operations. The Company executed derivative transactions with highly rated financial institutions to mitigate counterparty risk.

 

A summary of the foreign exchange derivatives outstanding on December 31, 2017 is as follows:

 

 

 

Fair Value

 

Maturity Dates

 

Notional Amount

 

 

 

(in thousands)

 

Foreign currency exchange forwards

 

$

 

January 2018

 

$

622

 

 

The Company did not have any outstanding derivative contracts at December 31, 2016.

 

The following table shows the gains and (losses) from currency exchange derivatives during the years ended December 31, 2017, 2016, and 2015, which are included in “Other, net” in the Consolidated Statements of Operations:

 

 

 

Year ended December 31,

 

 

 

2017

 

2016

 

2015

 

 

 

(in thousands)

 

Foreign currency exchange forwards

 

$

(6

)

$

219

 

$

 

 

Stockholders' Equity
Stockholders' Equity

 

Note 14 — Stockholders’ Equity

 

Accumulated Other Comprehensive Income

 

The following table presents the changes in the balances of each component of AOCI, net of tax:

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

Foreign Currency

 

Minimum Pension

 

Gains (Losses) on
Available for Sale

 

 

 

 

 

Translation

 

Liability

 

Securities

 

Total

 

 

 

(in thousands)

 

Balance - December 31, 2014

 

$

2,333

 

$

(881

)

$

17

 

$

1,469

 

Other comprehensive income (loss)

 

(87

)

15

 

(49

)

(121

)

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2015

 

2,246

 

(866

)

(32

)

1,348

 

Other comprehensive income (loss), before reclassifications

 

(19

)

 

(6

)

(25

)

Amounts reclassified from AOCI

 

(430

)

866

 

18

 

454

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

(449

)

866

 

12

 

429

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2016

 

1,797

 

 

(20

)

1,777

 

Other comprehensive income (loss)

 

42

 

 

(7

)

35

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2017

 

$

1,839

 

$

 

$

(27

)

$

1,812

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company did not allocate additional tax expense (benefit) to other comprehensive income (loss) for all years presented as the Company is in a full valuation allowance position such that a deferred tax asset related to amounts recognized in other comprehensive income is not regarded as realizable on a more-likely-than-not basis.

 

During 2016, the Company finalized the process to terminate a defined benefit plan. As a result, the Company reclassified the minimum pension liability of $0.9 million, net of a tax benefit of $0.4 million, from “Accumulated other comprehensive income” in the Consolidated Balance Sheets to “Other, net” in the Consolidated Statements of Operations. Additionally the Company completed its plan to liquidate one of its subsidiaries in Korea. As a result of this liquidation, a cumulative translation gain of $0.4 million was reclassified from “Accumulated other comprehensive income” to “Other, net” in the Consolidated Statements of Operations.

 

Preferred Stock

 

The Board of Directors has authority under the Company’s Certificate of Incorporation to issue shares of preferred stock, par value $0.01, with voting and economic rights to be determined by the Board of Directors. As of December 31, 2017, no preferred shares have been issued.

 

Treasury Stock

 

The share repurchase program authorized by our Board of Directors in October 2015 expired on October 28, 2017. On December 11, 2017, our Board of Directors authorized a new program to repurchase up to $100 million of our common stock to be completed through December 11, 2019. At December 31, 2017, $3.0 million of the $100 million had been utilized, of which approximately $0.1 million is included in “Accrued expenses and other current liabilities” on the Consolidated Balance Sheets as of December 31, 2017. Repurchases are expected to be made from time to time in the open market or in privately negotiated transactions in accordance with applicable federal securities laws.

 

The Company records treasury stock purchases under the cost method using the first-in, first-out (“FIFO”) method. Upon reissuance of treasury stock, amounts in excess of the acquisition cost are credited to additional paid-in capital. If the Company reissues treasury stock at an amount below its acquisition cost and if additional paid-in capital associated with prior treasury stock transactions is insufficient to cover the difference between the acquisition cost and the reissue price, this difference is charged to accumulated deficit.

 

Stock Plans
Stock Plans

 

Note 15 — Stock Plans

 

Share-based incentive awards are provided to employees under the terms of the Company’s equity incentive compensation plans (the “Plans”), which are administered by the Compensation Committee of the Board of Directors. The 2010 Plan was approved by the Company’s shareholders. The Company’s employees, non-employee directors, and consultants are eligible to receive awards under the 2010 Stock Incentive Plan (as amended to date, the “2010 Plan”), which can include non-qualified stock options, incentive stock options, restricted share awards (“RSAs”), restricted share units (“RSUs”), performance share awards (“PSAs”), performance share units (“PSUs”), share appreciation rights, dividend equivalent rights, or any combination thereof. The Company settles awards under the Plans with newly issued shares or with shares held in treasury.

 

In 2013, the Board of Directors granted equity awards to certain employees under the Company’s 2013 Inducement Stock Incentive Plan (the “Inducement Plan”). The Company issued 124,500 stock option shares and 87,000 RSUs under this plan. Stock options under this plan vest over a three year period and have a 10-year term, and RSUs under this plan vest over a two or four year period. At December 31, 2013, the Inducement Plan was merged into the 2010 Plan and is considered an inactive plan with no further shares available for grant. At December 31, 2017 there are 2,000 option shares and no RSUs outstanding under the Inducement Plan.

 

The Company is authorized to issue up to 10.6 million shares under the 2010 Plan, including additional shares authorized under plan amendments approved by shareholders in 2016 and 2013. Option awards are granted with an exercise price equal to the closing price of the Company’s common stock on the trading day prior to the date of grant; option awards generally vest over a three year period and have a seven or ten year term. RSAs and RSUs generally vest over one to five years. Certain option and share awards provide for accelerated vesting if there is a change in control, as defined in the 2010 Plan. At December 31, 2017, there are 1.4 million option shares and 0.6 million RSUs and PSUs outstanding under the 2010 Plan.

 

During 2016 the Company’s Board of Directors approved the 2016 Employee Stock Purchase Plan (“ESPP”). The Company is authorized to issue up to 750,000 shares under the ESPP. Under the ESPP, substantially all employees in the U.S. may purchase the Company’s common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value of the Company’s common stock at the beginning or end of each six-month Offer Period, as defined in the ESPP, and subject to certain limits. The ESPP was approved by the Company’s shareholders.

 

During 2017, in connection with the acquisition of Ultratech, the Company assumed certain restricted stock units (the “Assumed RSUs”) available and outstanding under the Ultratech, Inc. 1993 Stock Option/Stock Issuance Plan, as amended (the “Ultratech Plan”). The Assumed RSUs remain subject to the terms set forth in the award agreement governing the award and the Ultratech Plan, except that the Assumed RSUs relate to shares of Company common stock and the number of restricted stock units was adjusted pursuant to the terms of the acquisition to reflect the difference in the value of a share of Company common stock and a share of Ultratech common stock prior to closing the acquisition. The Assumed RSUs were converted into 338,144 restricted stock units of the Company, and generally vest over 50 months. After the acquisition and notwithstanding any other provisions of the Ultratech Plan, no further grants will be made under the Ultratech Plan, and the Company is solely maintaining the Ultratech Plan with respect to the Assumed RSUs. At December 31, 2017, there are 0.1 million RSUs outstanding under the assumed Ultratech Plan.

 

Shares Reserved for Future Issuance

 

At December 31, 2017, the Company has 5.7 million shares reserved to cover exercises of outstanding stock options, vesting of RSUs, and additional grants under the 2010 Plan. At December 31, 2017, the Company has 0.5 million shares reserved to cover future issuances under the ESPP Plan.

 

Share-Based Compensation

 

The Company recognized share-based compensation in the following line items in the Consolidated Statements of Operations for the periods indicated:

 

 

 

For the year ended December 31,

 

 

 

2017

 

2016