VEECO INSTRUMENTS INC, 10-Q filed on 5/5/2017
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2017
Apr. 26, 2017
Document and Entity Information
 
 
Entity Registrant Name
VEECO INSTRUMENTS INC 
 
Entity Central Index Key
0000103145 
 
Document Type
10-Q 
 
Document Period End Date
Mar. 31, 2017 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-31 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
40,578,119 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q1 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 423,661 
$ 277,444 
Short-term investments
258,196 
66,787 
Accounts receivable, net
51,433 
58,020 
Inventories
64,697 
77,063 
Deferred cost of sales
4,684 
6,160 
Prepaid expenses and other current assets
19,777 
16,034 
Total current assets
822,448 
501,508 
Property, plant and equipment, net
63,684 
60,646 
Intangible assets, net
55,511 
58,378 
Goodwill
114,908 
114,908 
Deferred income taxes
4,044 
2,045 
Other assets
21,047 
21,047 
Total assets
1,081,642 
758,532 
Current liabilities:
 
 
Accounts payable
30,732 
22,607 
Accrued expenses and other current liabilities
28,480 
33,201 
Customer deposits and deferred revenue
70,785 
85,022 
Income taxes payable
2,441 
2,311 
Current portion of long-term debt
375 
368 
Total current liabilities
132,813 
143,509 
Deferred income taxes
14,063 
13,199 
Long-term debt
268,098 
826 
Other liabilities
1,652 
6,403 
Total liabilities
416,626 
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; 40,644,117 and 40,714,790 shares issued at March 31, 2017 and December 31, 2016, respectively; 40,568,473 and 40,588,194 shares outstanding at March 31, 2017 and December 31, 2016, respectively
406 
407 
Additional paid-in capital
831,761 
763,303 
Accumulated deficit
(167,489)
(168,583)
Accumulated other comprehensive income
1,678 
1,777 
Treasury stock, at cost, 75,644 shares at March 31, 2017; 126,596 shares at December 31, 2016
(1,340)
(2,309)
Total stockholders' equity
665,016 
594,595 
Total liabilities and stockholders' equity
$ 1,081,642 
$ 758,532 
Consolidated Balance Sheets (Parenthetical) (USD $)
Mar. 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
40,644,117 
40,714,790 
Common stock, shares outstanding
40,568,473 
40,588,194 
Treasury stock, shares
75,644 
126,596 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Consolidated Statements of Operations
 
 
Net sales
$ 94,386 
$ 78,011 
Cost of sales
60,186 
46,055 
Gross profit
34,200 
31,956 
Operating expenses, net:
 
 
Research and development
14,989 
22,110 
Selling, general, and administrative
20,466 
19,839 
Amortization of intangible assets
2,867 
5,251 
Restructuring
1,338 
100 
Asset impairment
463 
 
Other, net
(78)
(71)
Total operating expenses, net
40,045 
47,229 
Operating income (loss)
(5,845)
(15,273)
Interest income
793 
306 
Interest expense
(4,135)
(38)
Income (loss) before income taxes
(9,187)
(15,005)
Income tax expense (benefit)
(10,282)
528 
Net income (loss)
$ 1,095 
$ (15,533)
Income (loss) per common share:
 
 
Basic (in dollars per share)
$ 0.03 
$ (0.40)
Diluted (in dollars per share)
$ 0.03 
$ (0.40)
Weighted average number of shares:
 
 
Basic (in shares)
39,619 
39,113 
Diluted (in shares)
40,140 
39,113 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Consolidated Statements of Comprehensive Income (Loss)
 
 
Net income (loss)
$ 1,095 
$ (15,533)
Other comprehensive income (loss), net of tax:
 
 
Unrealized gains (losses) on available-for-sale securities
(114)
50 
Foreign currency translation
15 
39 
Total other comprehensive income (loss), net of tax
(99)
89 
Total comprehensive income (loss)
$ 996 
$ (15,444)
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Cash Flows from Operating Activities
 
 
Net income (loss)
$ 1,095 
$ (15,533)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
Depreciation and amortization
5,799 
8,593 
Non-cash interest expense
2,185 
 
Deferred income taxes
(6,001)
465 
Share-based compensation expense
4,186 
4,388 
Asset impairment
463 
 
Provision for bad debts
92 
160 
Changes in operating assets and liabilities:
 
 
Accounts receivable
6,495 
(6,958)
Inventories and deferred cost of sales
13,761 
1,274 
Prepaid expenses and other current assets
(3,743)
(6,660)
Accounts payable and accrued expenses
642 
(2,210)
Customer deposits and deferred revenue
(14,238)
(1,510)
Income taxes receivable and payable, net
130 
(893)
Long-term income tax liability
(4,877)
 
Other, net
343 
86 
Net cash provided by (used in) operating activities
6,332 
(18,798)
Cash Flows from Investing Activities
 
 
Capital expenditures
(4,187)
(3,988)
Proceeds from the sale of investments
27,411 
10,930 
Payments for purchases of investments
(219,141)
 
Other
 
(213)
Net cash provided by (used in) investing activities
(195,917)
6,729 
Cash Flows from Financing Activities
 
 
Proceeds (tax withholdings) from stock option exercises and employee stock purchase plan
585 
(22)
Restricted stock tax withholdings
(461)
(27)
Purchases of common stock
 
(13,349)
Proceeds from long-term debt borrowings
335,752 
 
Principal payments of long-term debt
(89)
(82)
Net cash provided by (used in) financing activities
335,787 
(13,480)
Effect of exchange rate changes on cash and cash equivalents
15 
39 
Net increase in cash and cash equivalents
146,217 
(25,510)
Cash and cash equivalents - beginning of period
277,444 
269,232 
Cash and cash equivalents - end of period
423,661 
243,722 
Supplemental Disclosure of Cash Flow Information
 
 
Interest paid
31 
39 
Income taxes paid
672 
966 
Non-cash operating and financing activities
 
 
Net transfer of inventory to property, plant and equipment
$ 81 
 
Basis of Presentation
Basis of Presentation

 

Note 1 - Basis of Presentation

 

The accompanying unaudited Consolidated Financial Statements of Veeco have been prepared in accordance with U.S. GAAP as defined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 270 for interim financial information and with the instructions to Rule 10-01 of Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements as the interim information is an update of the information that was presented in Veeco’s most recent annual financial statements. For further information, refer to Veeco’s Consolidated Financial Statements and Notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”). In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal, recurring nature. Certain amounts previously reported have been reclassified in the financial statements to conform to the current presentation.

 

Veeco reports interim quarters on a 13-week basis ending on the last Sunday of each quarter. The fourth quarter always ends on the last day of the calendar year, December 31. The 2017 interim quarters end on April 2, July 2, and October 1, and the 2016 interim quarters ended on April 3, July 3, and October 2. These interim quarters are reported as March 31, June 30, and September 30 in Veeco’s interim consolidated financial statements.

 

Revenue recognition

 

Veeco 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. Veeco 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, Veeco 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. Veeco 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.

 

Veeco 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. Veeco’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 Veeco’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 Veeco 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 new products, new applications of existing products, or for products with substantive customer acceptance provisions where Veeco 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. Veeco has a demonstrated history of consistently completing installations in a timely manner and can reliably estimate the costs of such activities. Most customers engage Veeco 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, Veeco 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 many cases Veeco’s products are sold with a billing retention, typically 10% of the sales price, which is billed by Veeco 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. Veeco 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.

 

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, but can adopt early for annual periods beginning after December 15, 2016. The Company is still completing its evaluation of the impact of adopting this standard; however, the Company currently expects 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. 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 currently believes there will be a net acceleration of a small percentage of its revenue under ASC 606 as compared to its current revenue recognition model. ASC 606 provides for different transition alternatives, and the Company is evaluating which method of adoption to select.

 

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. 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.

 

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. The Company is evaluating the anticipated effect the ASU will have 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.

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

 

Note 2 - Income (Loss) Per Common 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 (loss) 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 4, “Liabilities,” 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 (loss) 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 three months ended March 31, 2017 and 2016 are as follows:

 

 

 

Three months ended March 31,

 

 

 

2017

 

2016

 

 

 

(in thousands, except per share amounts)

 

Net income (loss)

 

$

1,095

 

$

(15,533

)

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

Basic

 

$

0.03

 

$

(0.40

)

Diluted

 

$

0.03

 

$

(0.40

)

 

 

 

 

 

 

Basic weighted average shares outstanding

 

39,619

 

39,113

 

Effect of potentially dilutive share-based awards

 

521

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

40,140

 

39,113

 

 

 

 

 

 

 

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

 

N/A

 

722

 

 

 

 

 

 

 

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

 

N/A

 

66

 

 

 

 

 

 

 

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

 

1,499

 

2,295

 

 

 

 

 

 

 

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

 

N/A

 

 

Assets
Assets

 

Note 3 - Assets

 

Investments

 

Short-term investments are generally classified as available-for-sale and 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” in the Consolidated Balance Sheets. These securities may 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.

 

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. Veeco classifies certain assets 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. Veeco 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 and/or estimation methodologies could have a significant effect on the estimated fair value amounts.

 

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

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

March 31, 2017

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

79,962

 

$

 

$

 

$

79,962

 

Government agency securities

 

 

9,997

 

 

9,997

 

Corporate debt

 

 

2,401

 

 

2,401

 

Commercial paper

 

 

8,994

 

 

8,994

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

79,962

 

$

21,392

 

$

 

$

101,354

 

Short-term investments

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

180,013

 

$

 

$

 

$

180,013

 

Government agency securities

 

 

29,998

 

 

29,998

 

Corporate debt

 

 

30,242

 

 

30,242

 

Commercial paper

 

 

17,943

 

 

17,943

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

180,013

 

$

78,183

 

$

 

$

258,196

 

 

 

 

 

 

 

 

 

 

 

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

 

 

There were no transfers between fair value measurement levels during the three months ended March 31, 2017.

 

At March 31, 2017 and December 31, 2016, the amortized cost and fair value of available-for-sale securities consist of:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

 

(in thousands)

 

March 31, 2017

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

180,101

 

$

 

$

(88

)

$

180,013

 

Government agency securities

 

30,021

 

 

(23

)

29,998

 

Corporate debt

 

30,265

 

 

(23

)

30,242

 

Commercial paper

 

17,943

 

 

 

17,943

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

258,330

 

$

 

$

(134

)

$

258,196

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Commerical Paper

 

2,994

 

 

 

2,994

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

66,807

 

$

 

$

(20

)

$

66,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities in a loss position at March 31, 2017 and December 31, 2016 consist of:

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Estimated

 

Unrealized

 

Estimated

 

Unrealized

 

 

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

 

 

(in thousands)

 

U.S. treasuries

 

$

180,013

 

$

(88

)

$

20,002

 

$

(5

)

Government agency securities

 

29,998

 

(23

)

10,012

 

(8

)

Corporate debt

 

29,041

 

(23

)

13,774

 

(7

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

239,052

 

$

(134

)

$

43,788

 

$

(20

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

The available-for-sale securities at March 31, 2017 all contractually mature in one year or less. Actual maturities may differ from contractual maturities. Veeco may sell these securities prior to maturity based on the needs of the business. In addition, borrowers may have the right to call or prepay obligations prior to scheduled maturities.

 

There were no realized gains for the three months ended March 31, 2017 and 2016. The cost of securities liquidated is based on specific identification.

 

Accounts receivable

 

Accounts receivable is presented net of an allowance for doubtful accounts of $0.3 million at both March 31, 2017 and December 31, 2016.

 

Inventories

 

Inventories are stated at the lower of cost or net realizable value using standard costs that approximate actual costs on a first-in, first-out basis. Inventories at March 31, 2017 and December 31, 2016 consist of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(in thousands)

 

Materials

 

$

42,165

 

$

46,457

 

Work-in-process

 

20,992

 

25,250

 

Finished goods

 

1,540

 

5,356

 

 

 

 

 

 

 

Total

 

$

64,697

 

$

77,063

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

Prepaid expenses and other current assets primarily consist of supplier deposits, prepaid value-added tax, lease deposits, prepaid insurance, and prepaid licenses. Veeco had deposits with its suppliers of $7.9 million and $7.8 million at March 31, 2017 and December 31, 2016, respectively.

 

Property, plant, and equipment

 

Property, plant, and equipment at March 31, 2017 and December 31, 2016 consist of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(in thousands)

 

Land

 

$

5,669

 

$

5,669

 

Building and improvements

 

51,102

 

50,814

 

Machinery and equipment(1)

 

104,222

 

99,370

 

Leasehold improvements

 

3,884

 

3,652

 

 

 

 

 

 

 

Gross property, plant and equipment

 

164,877

 

159,505

 

Less: accumulated depreciation and amortization

 

101,193

 

98,859

 

 

 

 

 

 

 

Net property, plant and equipment

 

$

63,684

 

$

60,646

 

 

 

 

 

 

 

 

 

 

(1) Machinery and equipment also includes software, furniture and fixtures

 

For the three months ended March 31, 2017 and 2016, depreciation expense was $2.9 million and $3.3 million, respectively.

 

Goodwill

 

Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. There were no changes to goodwill during the three months ended March 31, 2017.

 

Intangible assets

 

Intangible assets consist of purchased technology, customer-related intangible assets, patents, trademarks (both long-lived and indefinite-lived), covenants not-to-compete, and software licenses 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 amortized on a straight-line basis if such pattern cannot be reliably determined.

 

The components of purchased intangible assets were as follows:

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

 

 

Accumulated

 

 

 

 

 

Accumulated

 

 

 

 

 

Gross

 

Amortization

 

 

 

Gross

 

Amortization

 

 

 

 

 

Carrying

 

and

 

Net

 

Carrying

 

and

 

Net

 

 

 

Amount

 

Impairment

 

Amount

 

Amount

 

Impairment

 

Amount

 

 

 

(in thousands)

 

Technology

 

$

149,198

 

$

115,454

 

$

33,744

 

$

149,198

 

$

113,904

 

$

35,294

 

Customer relationships

 

47,885

 

29,909

 

17,976

 

47,885

 

28,659

 

19,226

 

Trademarks and tradenames

 

2,590

 

1,986

 

604

 

2,590

 

1,948

 

642

 

Indefinite-lived trademark

 

2,900

 

 

2,900

 

2,900

 

 

2,900

 

Other

 

748

 

461

 

287

 

2,026

 

1,710

 

316

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

203,321

 

$

147,810

 

$

55,511

 

$

204,599

 

$

146,221

 

$

58,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other intangible assets primarily consist of patents, licenses, and non-compete agreements.

 

Other assets

 

Veeco has an ownership interest of less than 20% in a non-marketable investment, Kateeva, Inc. (“Kateeva”). Veeco does not exert significant influence over Kateeva and therefore the investment is carried at cost. There was no change to the $21.0 million carrying value of the investment during the three months ended March 31, 2017. The investment is included in “Other assets” on the Consolidated Balance Sheet. 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.

Liabilities
Liabilities

 

Note 4 - Liabilities

 

Accrued expenses and other current liabilities

 

The components of accrued expenses and other current liabilities at March 31, 2017 and December 31, 2016 consist of:

 

 

 

March 31,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(in thousands)

 

Payroll and related benefits

 

$

13,538

 

$

18,780

 

Warranty

 

4,209

 

4,217

 

Professional fees

 

2,806

 

1,827

 

Installation

 

1,411

 

1,382

 

Sales, use, and other taxes

 

436

 

1,282

 

Restructuring liability

 

1,219

 

1,796

 

Interest

 

1,915

 

 

Other

 

2,946

 

3,917

 

 

 

 

 

 

 

Total

 

$

28,480

 

$

33,201

 

 

 

 

 

 

 

 

 

 

Other liabilities include accruals for costs related to customer training, royalties, and travel.

 

Warranty

 

Warranties are typically valid for one year from the date of system final acceptance, and Veeco 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 are 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 product warranty reserves for the three months ended March 31, 2017 include:

 

 

 

(in thousands)

 

Balance - December 31, 2016

 

$

4,217

 

Warranties issued

 

973

 

Consumption of reserves

 

(1,327

)

Changes in estimate

 

346

 

 

 

 

 

Balance - March 31, 2017

 

$

4,209

 

 

 

 

 

 

 

Restructuring accruals

 

During the three months ended March 31, 2017, additional accruals were recognized and payments made related to previous years’ restructuring initiatives. During the second and third quarters of 2016, the Company undertook  restructuring activities as part of its initiative to streamline operations, enhance efficiency, and reduce costs. As a result of these actions, the Company notified approximately 50 employees of their termination from the Company. In addition, during the third quarter of 2016, the Company decided to significantly reduce future investments in its Atomic Layer Deposition (“ALD”) technology development, which impacts approximately 25 additional employees. Over the next few quarters, the Company expects to incur additional restructuring costs of $2 to $4 million as it finalizes all of these activities.

 

 

 

Personnel

 

 

 

 

 

 

 

Severance and

 

Facility

 

 

 

 

 

Related Costs

 

Related Costs

 

Total

 

 

 

(in thousands)

 

Balance - December 31, 2016

 

$

1,796

 

$

 

$

1,796

 

Provision

 

661

 

677

 

1,338

 

Payments

 

(1,238

)

(677

)

(1,915

)

 

 

 

 

 

 

 

 

Balance - March 31, 2017

 

$

1,219

 

$

 

$

1,219

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer deposits

 

Customer deposits totaled $21.5 million and $22.2 million at March 31, 2017 and December 31, 2016, respectively.

 

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, 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 (the “Indenture”), 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 which 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 reduced the value of the equity component recognized in stockholders’ equity.

 

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

 

 

 

March 31,

 

 

 

2017

 

 

 

(in thousands)

 

Principal amount

 

$

345,000

 

Unamortized debt discount

 

(70,527

)

Unamortized transaction costs

 

(7,104

)

 

 

 

 

Net carrying value

 

$

267,369

 

 

 

 

 

 

 

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

 

 

 

Three months
ended March 31,

 

 

 

2017

 

 

 

(in thousands)

 

Cash Interest Expense

 

 

 

Coupon interest expense

 

$

1,915

 

Non-Cash Interest Expense

 

 

 

Amortization of debt discount

 

1,985

 

Amortization of transaction costs

 

200

 

 

 

 

 

Total Interest Expense

 

$

4,100

 

 

 

 

 

 

 

The Company determined the Convertible Senior Notes is a Level 2 liability in the fair value hierarchy and estimated its fair value as $361.3 million at March 31, 2017.

 

Mortgage Payable

 

Included within long-term debt is a mortgage note payable that has a carrying value of $1.1 million and $1.2 million at March 31, 2017 and December 31, 2016, respectively, and is secured by certain land and buildings with a carrying value of $3.0 million at March 31, 2017 and December 31, 2016. The annual interest rate on the mortgage is 7.91%, and the final payment is due on January 1, 2020. The Company determined the mortgage is a Level 3 liability in the fair-value hierarchy and estimated its fair value as $1.1 million and $1.2 million at March 31, 2017 and December 31, 2016, respectively, using a discounted cash flow model.

 

Other Liabilities

 

Other liabilities primarily consist of income taxes payable and other liabilities not expected to be paid within one year. Non-current income taxes payable were $4.9 million at December 31, 2016. There were no non-current income taxes payable at March 31, 2017.

 

Commitments and Contingencies
Commitments and Contingencies

 

Note 5 - Commitments and Contingencies

 

Minimum lease commitments

 

At March 31, 2017, Veeco’s total future minimum lease payments under non-cancelable operating leases have not changed significantly from the disclosure in the 2016 Form 10-K.

 

Purchase commitments

 

Veeco has purchase commitments of $81.5 million at March 31, 2017, substantially all of which become due within one year.

 

Bank guarantees

 

Veeco has bank guarantees and letters of credit issued by a financial institution on its behalf as needed. At March 31, 2017, outstanding bank guarantees and letters of credit totaled $4.7 million, and unused bank guarantees and letters of credit of $66.0 million were available to be drawn upon.

 

Legal proceedings

 

On March 17, 2017, an Ultratech shareholder filed a purported class action complaint in the U.S. District Court for the Northern District of California, captioned The Vladimir Gusinsky Rev. Trust v. Ultratech, Inc., et al., Case No. 4:17-cv-01468-PJH, on behalf of itself and all other Ultratech shareholders against Ultratech, its directors at the time the acquisition was announced, Veeco, and Merger Sub.  The complaint alleges, among other things, that in connection with Veeco’s proposed acquisition of Ultratech, the defendants purportedly agreed to a supposedly inadequate price for the Ultratech shares, agreed to unreasonable deal-protection measures, and potentially engaged in supposed self-dealing.  The complaint seeks to recover under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 for alleged misstatements and omissions in the preliminary proxy statement filed on March 13, 2017.  The complaint seeks declaratory and injunctive relief, including enjoining or rescinding the transaction and rescissory damages to the extent already implemented, an order directing the dissemination of a proxy statement that is not false or misleading, and an award of attorneys’ and experts’ fees.

 

On March 22, 2017, two other Ultratech shareholders filed a purported class action complaint in the U.S. District Court for the Northern District of California, captioned De Letter et al. v. Ultratech, Inc., et al., Case No. 3:17-cv-01542-WHA, on behalf of themselves and all other Ultratech shareholders against Ultratech and its directors at the time the acquisition was announced.  The complaint alleges, among other things, that in connection with Veeco’s proposed acquisition of Ultratech, the defendants purportedly agreed to a supposedly inadequate price for the Ultratech shares and potentially engaged in supposed self-dealing.  The complaint further alleges that the sale process was flawed and tainted by the self-interest of certain directors.  The complaint seeks to recover under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 for alleged misstatements and omissions in the preliminary proxy statement filed on March 13, 2017.  The complaint seeks injunctive relief, including enjoining or rescinding the transaction and rescissory damages to the extent already implemented, compensatory damages, and an award of attorneys’ and experts’ fees.

 

The defendants have not yet responded to either complaint.  While it is too early to predict the outcome of litigation or a reasonable range of potential losses, Veeco believes these lawsuits are without merit.  Additional lawsuits arising out of or relating to the merger agreement or the merger may be filed in the future.

 

Veeco is involved in various other legal proceedings arising in the normal course of business. Veeco 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.

Equity
Equity

 

Note 6 - Equity

 

Accumulated Other Comprehensive Income (“AOCI”)

 

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

 

 

 

 

 

Unrealized

 

 

 

 

 

Foreign Currency

 

Gains (Losses) on
Available for Sale

 

 

 

 

 

Translation

 

Securities

 

Total

 

 

 

(in thousands)

 

Balance - December 31, 2016

 

$

1,797

 

$

(20

)

$

1,777

 

Other comprehensive income (loss)

 

15

 

(114

)

(99

)

 

 

 

 

 

 

 

 

Balance - March 31, 2017

 

$

1,812

 

$

(134

)

$

1,678

 

 

 

 

 

 

 

 

 

 

 

 

 

There were minimal reclassifications from AOCI into net income for the three months ended March 31, 2017.

Share-based compensation
Share-based compensation

 

Note 7 - Share-based compensation

 

Restricted share awards are issued to employees that are subject to specified restrictions and a risk of forfeiture. The restrictions typically lapse over one to five years and may entitle holders to dividends and voting rights. Other types of share-based compensation include performance share awards, performance share units, and restricted share units (collectively with restricted share awards, “restricted shares”), as well as options to purchase common stock.

 

Share-based compensation expense was recognized in the following line items in the Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016:

 

 

 

 

Three months ended March 31,

 

 

 

2017

 

2016

 

 

 

(in thousands)

 

Cost of sales

 

$

657

 

$

546

 

Research and development

 

429

 

1,099

 

Selling, general, and administrative

 

3,100

 

2,743

 

 

 

 

 

 

 

Total

 

$

4,186

 

$

4,388

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2017, equity activity related to stock options was as follows:

 

 

 

Number of

 

Weighted Average

 

 

 

Shares

 

Exercise Price

 

 

 

(in thousands)

 

Balance - December 31, 2016

 

1,576

 

$

35.18

 

Granted

 

 

 

Exercised

 

 

 

Expired or forfeited

 

(77

)

37.40

 

 

 

 

 

 

 

Balance - March 31, 2017

 

1,499

 

35.06

 

 

 

 

 

 

 

 

For the three months ended March 31, 2017, equity activity related to restricted shares and performance shares was as follows:

 

 

 

 

 

Weighted Average

 

 

 

Number of

 

Grant Date

 

 

 

Shares

 

Fair Value

 

 

 

(in thousands)

 

 

 

Balance - December 31, 2016

 

1,949

 

$

23.85

 

Granted

 

37

 

26.80

 

Released

 

(53

)

31.77

 

Forfeited

 

(105

)

26.66

 

 

 

 

 

 

 

Balance - March 31, 2017

 

1,828

 

23.88

 

 

 

 

 

 

 

 

Income Taxes
Income Taxes

 

Note 8 - Income Taxes

 

Income taxes are estimated for each of the jurisdictions in which the Company operates. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carryforwards. Realization of net deferred tax assets is dependent on future taxable income. At March 31, 2017, the Company’s U.S. deferred tax assets are fully offset by a valuation allowance since the Company cannot conclude that that it is more likely than not that these future benefits will be realized before they expire.

 

At the end of each interim reporting period, the effective tax rate is aligned to expectations for the full year. This estimate is used to determine the income tax provision on a year-to-date basis and may change in subsequent interim periods. Income (loss) before income taxes and income tax expense (benefit) for the three months ended March 31, 2017 and 2016 were as follows:

 

 

 

Three months ended March 31,

 

 

 

2017

 

2016

 

 

 

(in thousands)

 

Loss before income taxes

 

$

(9,187

)

$

(15,005

)

Income tax expense (benefit)

 

$

(10,282

)

$

528

 

 

The net income tax benefit for the three months ended March 31, 2017 was comprised of a net benefit of $4.2 million and $6.1 million related to the Company’s U.S. and non-U.S. operations, respectively.

 

The net income tax benefit from the Company’s U.S. operations was primarily attributable to a tax benefit of $4.9 million for losses incurred during the three months ended March 31, 2017. Under the intraperiod tax allocation rules, the deferred tax liability created upon the issuance of the Convertible Senior Notes is treated as a source of income, which enables the Company to recognize a benefit for the U.S.loss before income taxes during fiscal 2017. The tax benefit related to the issuance of the Convertible Senior Notes will not recur in future years. This  benefit was partially offset by a deferred provision of approximately $0.9 million related to tax amortization on indefinite-lived intangible assets.

 

The net income tax benefit from the Company’s non-U.S. operations was primarily attributable to the Company’s determination in the first quarter of 2017 that it was more likely than not that it will meet the requirements of an existing foreign tax incentive agreement.  As a result the Company remeasured this uncertain tax position and recognized a $6.3 million benefit during the first quarter, which is comprised of a reversal of a $4.9 million tax liability established in previous periods and the recognition of a deferred tax benefit of $1.4 million related to certain foreign net operating losses generated in prior years that are now determined to be realizable.

 

For the three months ended March 31, 2016, the Company did not provide a current tax benefit on U.S. pre-tax losses since the Company could not conclude that it is more likely than not that the benefits would be realized. The tax expense is primarily related to indefinite-lived intangible assets that are amortized for tax purposes but not for financial reporting purposes. The deferred tax liability created by the tax deductible expense cannot be used to offset existing deferred tax assets. Since the Company cannot conclude that it is more likely than not that the tax deductible expense will be realized, the Company recorded a valuation allowance.

Segment Reporting and Geographic Information
Segment Reporting and Geographic Information

 

Note 9 - Segment Reporting and Geographic Information

 

Veeco operates and measures its results in one operating segment and therefore has one reportable segment: the design, development, manufacture, and support of thin film process equipment primarily sold to make electronic devices.

 

Veeco categorizes its sales into the following four end-markets:

 

Lighting, Display & Power Electronics

 

Lighting refers to Light Emitting Diode (“LED”); semiconductor illumination sources used in various applications including backlights, general lighting, automotive running lights, and head lamps. Display refers to LED displays including outdoor display/signage applications. Power Electronics refers to GaN-on-Silicon semiconductor devices such as rectifiers, inverters, and converters for the control and conversion of electric power.

 

Advanced Packaging, MEMS & RF

 

Advanced Packaging includes a portfolio of wafer-level assembly technologies that enable the miniaturization and performance improvement of electronic products, such as smartphones, smartwatches, tablets, and laptops. Micro-Electro Mechanical Systems (“MEMS”) includes tiny mechanical devices such as sensors, switches, mirrors, and actuators embedded in semiconductor chips used in vehicles, smartphones, tablets, and games. Radio Frequency (“RF”) includes semiconductor devices that make use of radio waves (RF fields) for wireless broadcasting and/or communications.

 

Scientific & Industrial

 

Scientific refers to advanced materials research at university research institutions, industry research institutions, industry consortiums, and government research agencies. Industrial refers to large-scale product manufacturing applications including optical coatings: thin layers of material deposited on a lens or mirror that alters how light reflects and transmits; extreme ultraviolet (“EUV”) photomask: an opaque plate that allows light to shine through in a defined pattern for use in photolithography; front end semiconductor: early steps in the process of integrated circuit fabrication where the microchips are created but still remain on the silicon wafer; and high power lasers such as fiber lasers used for industrial materials processing.

 

Data Storage

 

The Data Storage end-market refers to the archiving of data in electromagnetic or other forms for use by a computer or device, including hard disk drives used in large capacity storage applications.

 

Sales by end-market and geographic region for the three months ended March 31, 2017 and 2016 were as follows:

 

 

 

Three months ended March 31,

 

 

 

2017

 

2016

 

Sales by end-market

 

 

 

 

 

Lighting, Display & Power Electronics

 

$

54,193

 

$

22,942

 

Advanced Packaging, MEMS & RF

 

11,558

 

23,262

 

Scientific & Industrial

 

15,050

 

14,911

 

Data Storage

 

13,585

 

16,896

 

 

 

 

 

 

 

Total

 

$

94,386

 

$

78,011

 

 

 

 

 

 

 

 

 

Sales by geographic region

 

 

 

 

 

United States

 

$

17,288

 

$

26,711

 

China

 

40,326

 

8,800

 

EMEA(1)

 

22,067

 

27,462

 

Rest of World

 

14,705

 

15,038

 

 

 

 

 

 

 

Total

 

$

94,386

 

$

78,011

 

 

 

 

 

 

 

 

 

 

(1) EMEA consists of Europe, the Middle East, and Africa

 

For geographic reporting, sales are attributed to the location in which the customer facility is located.

Agreement to Acquire Ultratech
Agreement to Acquire Ultratech

 

Note 10 — Agreement to Acquire Ultratech

 

On February 2, 2017, Veeco and Ultratech, Inc. (“Ultratech”), a leading supplier of lithography, laser-processing, and inspection systems used to manufacture semiconductor devices and LEDs, signed a definitive agreement for Veeco to acquire Ultratech. The Boards of Directors of both Veeco and Ultratech have unanimously approved the transaction.

 

Ultratech shareholders will receive (i) $21.75 per share in cash and (ii) 0.2675 of a share of Veeco common stock for each Ultratech common share outstanding. Based on Veeco’s closing stock price on February 28, 2017, the transaction consideration is valued at approximately $29.07 per Ultratech share. The implied total transaction value is approximately $820 million and the implied enterprise value is approximately $553 million, net of Ultratech’s net cash balance as of December 31, 2016. The transaction is expected to close in the second calendar quarter of 2017, subject to approval by Ultratech shareholders, regulatory approvals in the United States, and other customary closing conditions.

Basis of Presentation (Policies)

 

Revenue recognition

 

Veeco 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. Veeco 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, Veeco 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. Veeco 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.

 

Veeco 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. Veeco’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 Veeco’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 Veeco 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 new products, new applications of existing products, or for products with substantive customer acceptance provisions where Veeco 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. Veeco has a demonstrated history of consistently completing installations in a timely manner and can reliably estimate the costs of such activities. Most customers engage Veeco 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, Veeco 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 many cases Veeco’s products are sold with a billing retention, typically 10% of the sales price, which is billed by Veeco 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. Veeco 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.

 

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, but can adopt early for annual periods beginning after December 15, 2016. The Company is still completing its evaluation of the impact of adopting this standard; however, the Company currently expects 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. 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 currently believes there will be a net acceleration of a small percentage of its revenue under ASC 606 as compared to its current revenue recognition model. ASC 606 provides for different transition alternatives, and the Company is evaluating which method of adoption to select.

 

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. 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.

 

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. The Company is evaluating the anticipated effect the ASU will have 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.

Income (Loss) Per Common Share (Tables)
Schedule of basic and diluted net income (loss) per share and weighted average shares

 

 

 

Three months ended March 31,

 

 

 

2017

 

2016

 

 

 

(in thousands, except per share amounts)

 

Net income (loss)

 

$

1,095

 

$

(15,533

)

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

Basic

 

$

0.03

 

$

(0.40

)

Diluted

 

$

0.03

 

$

(0.40

)

 

 

 

 

 

 

Basic weighted average shares outstanding

 

39,619

 

39,113

 

Effect of potentially dilutive share-based awards

 

521

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

40,140

 

39,113

 

 

 

 

 

 

 

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

 

N/A

 

722

 

 

 

 

 

 

 

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

 

N/A

 

66

 

 

 

 

 

 

 

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

 

1,499

 

2,295

 

 

 

 

 

 

 

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

 

N/A

 

 

Assets (Tables)

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

March 31, 2017

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

79,962

 

$

 

$

 

$

79,962

 

Government agency securities

 

 

9,997

 

 

9,997

 

Corporate debt

 

 

2,401

 

 

2,401

 

Commercial paper

 

 

8,994

 

 

8,994

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

79,962

 

$

21,392

 

$

 

$

101,354

 

Short-term investments

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

180,013

 

$

 

$

 

$

180,013

 

Government agency securities

 

 

29,998

 

 

29,998

 

Corporate debt

 

 

30,242

 

 

30,242

 

Commercial paper

 

 

17,943

 

 

17,943

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

180,013

 

$

78,183

 

$

 

$

258,196

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

 

(in thousands)

 

March 31, 2017

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

180,101

 

$

 

$

(88

)

$

180,013

 

Government agency securities

 

30,021

 

 

(23

)

29,998

 

Corporate debt

 

30,265

 

 

(23

)

30,242

 

Commercial paper

 

17,943

 

 

 

17,943

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

258,330

 

$

 

$

(134

)

$

258,196

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Commerical Paper

 

2,994

 

 

 

2,994

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

66,807

 

$

 

$

(20

)

$

66,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Estimated

 

Unrealized

 

Estimated

 

Unrealized

 

 

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

 

 

(in thousands)

 

U.S. treasuries

 

$

180,013

 

$

(88

)

$

20,002

 

$

(5

)

Government agency securities

 

29,998

 

(23

)

10,012

 

(8

)

Corporate debt

 

29,041

 

(23

)

13,774

 

(7

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

239,052

 

$

(134

)

$

43,788

 

$

(20

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(in thousands)

 

Materials

 

$

42,165

 

$

46,457

 

Work-in-process

 

20,992

 

25,250

 

Finished goods

 

1,540

 

5,356

 

 

 

 

 

 

 

Total

 

$

64,697

 

$

77,063

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(in thousands)

 

Land

 

$

5,669

 

$

5,669

 

Building and improvements

 

51,102

 

50,814

 

Machinery and equipment(1)

 

104,222

 

99,370

 

Leasehold improvements

 

3,884

 

3,652

 

 

 

 

 

 

 

Gross property, plant and equipment

 

164,877

 

159,505

 

Less: accumulated depreciation and amortization

 

101,193

 

98,859

 

 

 

 

 

 

 

Net property, plant and equipment

 

$

63,684

 

$

60,646

 

 

 

 

 

 

 

 

 

 

(1) Machinery and equipment also includes software, furniture and fixtures

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

 

 

Accumulated

 

 

 

 

 

Accumulated

 

 

 

 

 

Gross

 

Amortization

 

 

 

Gross

 

Amortization

 

 

 

 

 

Carrying

 

and

 

Net

 

Carrying

 

and

 

Net

 

 

 

Amount

 

Impairment

 

Amount

 

Amount

 

Impairment

 

Amount

 

 

 

(in thousands)

 

Technology

 

$

149,198

 

$

115,454

 

$

33,744

 

$

149,198

 

$

113,904

 

$

35,294

 

Customer relationships

 

47,885

 

29,909

 

17,976

 

47,885

 

28,659

 

19,226

 

Trademarks and tradenames

 

2,590

 

1,986

 

604

 

2,590

 

1,948

 

642

 

Indefinite-lived trademark

 

2,900

 

 

2,900

 

2,900

 

 

2,900

 

Other

 

748

 

461

 

287

 

2,026

 

1,710

 

316

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

203,321

 

$

147,810

 

$

55,511

 

$

204,599

 

$

146,221

 

$

58,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities (Tables)

 

 

 

March 31,

 

December 31,

 

 

 

2017

 

2016

 

 

 

(in thousands)

 

Payroll and related benefits

 

$

13,538

 

$

18,780

 

Warranty

 

4,209

 

4,217

 

Professional fees

 

2,806

 

1,827

 

Installation

 

1,411

 

1,382

 

Sales, use, and other taxes

 

436

 

1,282

 

Restructuring liability

 

1,219

 

1,796

 

Interest

 

1,915

 

 

Other

 

2,946

 

3,917

 

 

 

 

 

 

 

Total

 

$

28,480

 

$

33,201

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

Balance - December 31, 2016

 

$

4,217

 

 

Warranties issued

 

973

 

 

Consumption of reserves

 

(1,327

 

)

Changes in estimate

 

346

 

 

 

 

 

 

 

Balance - March 31, 2017