VEECO INSTRUMENTS INC, 10-Q filed on 11/1/2018
Quarterly Report
v3.10.0.1
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2018
Oct. 24, 2018
Document and Entity Information    
Entity Registrant Name VEECO INSTRUMENTS INC  
Entity Central Index Key 0000103145  
Document Type 10-Q  
Document Period End Date Sep. 30, 2018  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Entity Current Reporting Status Yes  
Entity Filer Category Large Accelerated Filer  
Entity Common Stock, Shares Outstanding   47,793,001
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q3  
v3.10.0.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Sep. 30, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 213,506 $ 279,736
Restricted cash 828 847
Short-term investments 52,063 47,780
Accounts receivable, net 90,816 98,866
Contract assets 7,441 160
Inventories 149,832 120,266
Deferred cost of sales 2,986 15,994
Prepaid expenses and other current assets 23,400 33,437
Total current assets 540,872 597,086
Property, plant, and equipment, net 80,626 85,058
Intangible assets, net 89,398 369,843
Goodwill 307,131 307,131
Deferred income taxes 2,183 3,047
Other assets 30,356 25,310
Total assets 1,050,566 1,387,475
Current liabilities:    
Accounts payable 65,042 50,318
Accrued expenses and other current liabilities 40,430 58,068
Customer deposits and deferred revenue 64,443 112,032
Income taxes payable 1,819 3,846
Total current liabilities 171,734 224,264
Deferred income taxes 7,170 36,845
Long-term debt 284,369 275,630
Other liabilities 9,206 10,643
Total liabilities 472,479 547,382
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; 48,633,204 and 48,229,251 shares issued at September 30, 2018 and December 31, 2017, respectively; 47,793,001 and 48,144,416 shares outstanding at September 30, 2018 and December 31, 2017, respectively. 486 482
Additional paid-in capital 1,060,733 1,051,953
Accumulated deficit (475,284) (212,870)
Accumulated other comprehensive income 1,812 1,812
Treasury stock, at cost, 840,203 and 84,835 shares at September 30, 2018 and December 31, 2017, respectively. (9,660) (1,284)
Total stockholders' equity 578,087 840,093
Total liabilities and stockholders' equity $ 1,050,566 $ 1,387,475
v3.10.0.1
Consolidated Balance Sheets (Parenthetical) - $ / shares
Sep. 30, 2018
Dec. 31, 2017
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 0 0
Preferred stock, shares outstanding 0 0
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 48,633,204 48,229,251
Common stock, shares outstanding 47,793,001 48,144,416
Treasury stock, shares 840,203 84,835
v3.10.0.1
Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Consolidated Statements of Operations        
Net sales $ 126,757 $ 129,308 $ 443,110 $ 336,025
Cost of sales 80,372 78,779 284,651 215,150
Gross profit 46,385 50,529 158,459 120,875
Operating expenses, net:        
Research and development 23,544 24,061 72,793 57,669
Selling, general, and administrative 20,186 29,771 70,842 71,574
Amortization of intangible assets 4,183 12,500 28,102 21,722
Restructuring 2,057 5,010 7,669 9,605
Acquisition costs 249 783 2,906 16,277
Asset impairment   2 252,343 1,139
Other, net 39 (140) 325 (228)
Total operating expenses, net 50,258 71,987 434,980 177,758
Operating income (loss) (3,873) (21,458) (276,521) (56,883)
Interest income 823 357 2,266 1,932
Interest expense (5,602) (5,105) (16,113) (14,301)
Income (loss) before income taxes (8,652) (26,206) (290,368) (69,252)
Income tax expense (benefit) 301 (2,466) (27,954) (26,334)
Net income (loss) $ (8,953) $ (23,740) $ (262,414) $ (42,918)
Income (loss) per common share:        
Basic (in dollars per share) $ (0.19) $ (0.51) $ (5.55) $ (1.00)
Diluted (in dollars per share) $ (0.19) $ (0.51) $ (5.55) $ (1.00)
Weighted average number of shares:        
Basic (in shares) 46,982 46,941 47,283 43,100
Diluted (in shares) 46,982 46,941 47,283 43,100
v3.10.0.1
Consolidated Statements of Comprehensive Income (Loss) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Consolidated Statements of Comprehensive Income (Loss)        
Net income (loss) $ (8,953) $ (23,740) $ (262,414) $ (42,918)
Other comprehensive income (loss), net of tax:        
Unrealized gain (loss) on available-for-sale securities 4 70 4 10
Foreign currency translation (4) 1 (4) 25
Total other comprehensive income (loss), net of tax   71   35
Total comprehensive income (loss) $ (8,953) $ (23,669) $ (262,414) $ (42,883)
v3.10.0.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Cash Flows from Operating Activities    
Net income (loss) $ (262,414) $ (42,918)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:    
Depreciation and amortization 41,110 32,295
Non-cash interest expense 8,739 7,641
Deferred income taxes (28,872) (22,600)
Share-based compensation expense 12,720 19,976
Asset impairment 252,343 1,139
Provision for bad debts   99
Changes in operating assets and liabilities:    
Accounts receivable and contract assets 769 (6,360)
Inventories and deferred cost of sales (17,748) 9,328
Prepaid expenses and other current assets 10,037 (331)
Accounts payable and accrued expenses (4,006) 3,129
Customer deposits and deferred revenue (47,589) 19,030
Income taxes receivable and payable, net (3,552) (16)
Long-term income tax liability   (4,877)
Other, net (915) (259)
Net cash provided by (used in) operating activities (39,378) 15,276
Cash Flows from Investing Activities    
Acquisitions of businesses, net of cash acquired (2,662) (399,478)
Capital expenditures (5,788) (17,403)
Proceeds from the sale of investments 65,365 307,757
Payments for purchases of investments (72,303) (279,945)
Proceeds from held for sale assets   2,284
Net cash provided by (used in) investing activities (15,388) (386,785)
Cash Flows from Financing Activities    
Proceeds (net of tax withholdings) from option exercises and employee stock purchase plan 3,007 2,546
Restricted stock tax withholdings (3,029) (7,797)
Proceeds from long-term debt borrowings   335,752
Purchases of common stock (11,457)  
Principal payments on long-term debt   (1,193)
Net cash provided by (used in) financing activities (11,479) 329,308
Effect of exchange rate changes on cash and cash equivalents (4) 25
Net increase (decrease) in cash, cash equivalents, and restricted cash (66,249) (42,176)
Cash, cash equivalents, and restricted cash - beginning of period 280,583 277,444
Cash, cash equivalents, and restricted cash - end of period 214,334 235,268
Supplemental Disclosure of Cash Flow Information    
Interest paid 9,655 4,667
Income taxes paid 4,269 1,767
Non-cash operating and financing activities    
Net transfer of inventory to property, plant and equipment $ 1,170 $ 33
v3.10.0.1
Basis of Presentation
9 Months Ended
Sep. 30, 2018
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, 2017 (“2017 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.

 

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 2018 interim quarters end on April 1, July 1, and September 30, and the 2017 interim quarters ended on April 2, July 2, and October 1. These interim quarters are reported as March 31, June 30, and September 30 in Veeco’s interim consolidated financial statements.

 

Change in Accounting Policy

 

The Company adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), as of January 1, 2018, using the full retrospective method. All amounts and disclosures set forth in this Form 10-Q reflect these changes. The most significant financial statement impacts of adopting ASC 606 are the elimination of the constraint on revenue associated with the billing retention related to the receipt of customer final acceptance and 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, is now generally recognized at the time the Company transfers control of the system to the customer, which is earlier than under the Company’s previous revenue recognition model for certain contracts that were subject to the billing constraint. The new performance obligation related to installation services is now recognized as the installation services are performed, which is later than the Company’s previous revenue recognition model.

 

The Company applied ASC 606 retrospectively and elected to use the disclosure exemption in the transition guidance under which the Company does not disclose prior period information regarding the amount of the transaction price allocated to remaining performance obligations. The cumulative effect of the adoption was recognized as a decrease to Accumulated deficit of $6.9 million on January 1, 2016. The following tables summarize the impact of adoption on the Company’s previously reported financial position and results:

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

    

As reported

    

Adjustments

    

As adjusted

 

 

(in thousands)

Balance Sheet

 

 

 

 

 

 

Contract assets

$

$

160

$

160

Deferred cost of sales

 

16,060

 

(66)

 

15,994

Deferred income taxes

 

2,953

 

94

 

3,047

Accrued expenses and other current liabilities

 

60,339

 

(2,271)

 

58,068

Customer deposits and deferred revenue

 

108,953

 

3,079

 

112,032

Additional paid-in capital

 

1,053,079

 

(1,126)

 

1,051,953

Accumulated deficit

 

(213,376)

 

506

 

(212,870)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2017

 

Nine months ended September 30, 2017

 

    

As reported

    

Adjustments

    

As adjusted

    

As reported

    

Adjustments

    

As adjusted

 

(in thousands, except per share amounts)

Statement of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

131,872

 

$

(2,564)

 

$

129,308

 

$

341,324

 

$

(5,299)

 

$

336,025

Cost of sales

 

 

78,811

 

 

(32)

 

 

78,779

 

 

215,344

 

 

(194)

 

 

215,150

Income tax expense (benefit)

 

 

(1,790)

 

 

(676)

 

 

(2,466)

 

 

(24,969)

 

 

(1,365)

 

 

(26,334)

Net income (loss)

 

 

(21,884)

 

 

(1,856)

 

 

(23,740)

 

 

(39,177)

 

 

(3,741)

 

 

(42,918)

Diluted earnings (loss) per share

 

 

(0.47)

 

 

(0.04)

 

 

(0.51)

 

 

(0.91)

 

 

(0.09)

 

 

(1.00)

 

The Company’s adoption of the standard had no impact to cash provided by or used in operating, investing, or financing activities on the Consolidated Statements of Cash Flows.

 

Revenue Recognition

 

Revenue is recognized upon the transfer of control of the promised product or service to the customer in an amount that reflects the consideration the Company expects to receive in exchange for such product or service. The Company’s contracts with customers generally do not contain variable consideration. In the rare instances where variable consideration is included, the Company estimates the amount of variable consideration and determines what portion of that, if any, has a high probability of significant subsequent revenue reversal, and if so, that amount is excluded from the transaction price. The Company’s contracts with customers frequently contain multiple deliverables, such as systems, upgrades, components, spare parts, installation, maintenance, and service plans. Judgment is required to properly identify the performance obligations within a contract and to determine how the revenue should be allocated among the performance obligations. The Company also evaluates whether multiple transactions with the same customer or related parties should be considered part of a single contract 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.

 

When there are separate units of accounting, the Company allocates revenue to each performance obligation on a relative stand-alone selling price basis. The stand-alone selling prices are determined based on the prices at which the Company separately sells the systems, upgrades, components, spare parts, installation, maintenance, and service plans. For items that are not sold separately, the Company estimates stand-alone selling prices generally using an expected cost plus margin approach.

 

Most of the Company’s revenue is recognized at a point in time when the performance obligation is satisfied. The Company considers many facts when evaluating each of its sales arrangements to determine the timing of revenue recognition, including its contractual obligations 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 many of these 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, transfer of control of the product to the customer is considered to have occurred and revenue is recognized upon system delivery since there is no substantive contingency remaining related to the acceptance provisions at that date. 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. The Company recognizes such revenue and costs upon obtaining objective evidence that the acceptance provisions can be achieved, assuming all other revenue recognition criteria have been met.

 

In certain cases the Company’s contracts with customers contain 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. Revenue recognized in advance of the amount that has been billed is recorded as a contract asset on the Consolidated Balance Sheets.

 

The Company recognizes revenue related to maintenance and service contracts over time based upon the respective contract term. Installation revenue is recognized over time as the installation services are performed. The Company recognizes revenue from the sales of components, spare parts, and specified service engagements at a point in time, which is typically consistent with the time of delivery in accordance with the terms of the applicable sales arrangement.

 

The Company may receive customer deposits on system transactions. The timing of the transfer of goods or services related to the deposits is either at the discretion of the customer or expected to be within one year from the deposit receipt. As such, the Company does not adjust transaction prices for the time value of money. Incremental direct costs incurred related to the acquisition of a customer contract, such as sales commissions, are expensed as incurred since the expected amortization period is one year or less.

 

The Company has elected to treat shipping and handling costs as a fulfillment activity, and such costs are included in cost of services when the Company recognizes revenue for the related goods. Taxes assessed by governmental authorities that are collected by the Company from a customer are excluded from revenue.

 

Income Taxes

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“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 ASC Topic 740, Income Taxes (“ASC 740”). Refer to Note 10, “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 (“period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (“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 deferred tax 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.

 

Recent Accounting Pronouncements

 

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, in July 2018, the FASB issued ASU 2018-11: Leases, Targeted Improvements, which adds a transition option whereby companies can recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The Company plans to adopt using this transition option. These ASUs are effective for fiscal years beginning after December 15, 2018. The Company is evaluating the impact of adopting these ASUs 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 the Company’s consolidated financial statements.

 

Recently Adopted Accounting Pronouncements

 

The Company adopted ASU 2016-01, Financial Instruments – Overall, as of January 1, 2018. This ASU requires certain equity investments to be measured at fair value, with changes in fair value recognized in net income. The Company measures equity investments without readily observable market prices at cost, adjusted for changes in observable prices minus impairment. Changes in measurement are included in “Other, net” in the Consolidated Statements of Operations. This ASU has not had a material impact on the consolidated financial statements upon adoption, and the Company will monitor its equity investments each reporting period for changes in observable market prices, if any, which may be material in future periods.

 

The Company adopted ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory, as of January 1, 2018. This ASU requires the Company to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. This ASU has not had a material impact on the consolidated financial statements.

 

The Company adopted ASU 2016-18, Statement of Cash Flows: Restricted Cash, as of January 1, 2018. This ASU requires the Company to include restricted cash with cash and cash equivalents when reconciling the beginning and end of period total amounts shown on the Statement of Cash Flows. This ASU has not had a material impact on the consolidated financial statements.

v3.10.0.1
Income (Loss) Per Common Share
9 Months Ended
Sep. 30, 2018
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 5, “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 and nine months ended September 30, 2018 and 2017 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

(in thousands, except per share amounts)

 

Net income (loss)

 

$

(8,953)

 

$

(23,740)

 

$

(262,414)

 

$

(42,918)

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.19)

 

$

(0.51)

 

$

(5.55)

 

$

(1.00)

 

Diluted

 

$

(0.19)

 

$

(0.51)

 

$

(5.55)

 

$

(1.00)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

46,982

 

 

46,941

 

 

47,283

 

 

43,100

 

Effect of potentially dilutive share-based awards

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Diluted weighted average shares outstanding

 

 

46,982

 

 

46,941

 

 

47,283

 

 

43,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 2

 

 

166

 

 

 2

 

 

166

 

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

 

 

16

 

 

220

 

 

17

 

 

275

 

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

 

 

2,617

 

 

1,956

 

 

2,469

 

 

1,628

 

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

 

 

8,618

 

 

8,618

 

 

8,618

 

 

v3.10.0.1
Business Combinations
9 Months Ended
Sep. 30, 2018
Business Combinations  
Business Combinations

Note 3 — 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. 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 that were subsequently settled and paid during the third quarter of 2018.

 

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

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

    

2017

    

2017

 

 

 

(in thousands, except per share amounts)

 

Net sales

 

$

129,308

 

$

406,767

 

Loss before income taxes

 

 

(24,847)

 

 

(72,091)

 

Diluted earnings per share

 

$

(0.49)

 

$

(1.23)

 

 

The pro-forma results were calculated by combining the unaudited 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 5, “Liabilities”) as if the Notes 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.

 

During the second quarter of 2018, the Company lowered its projected results for the Ultratech asset group and determined that the revised projections were significantly lower than projected results at the time of the acquisition and that these revised projections required the Company to assess the Ultratech asset group for impairment. See Note 4, “Assets” - Intangible Assets, for additional information.

v3.10.0.1
Assets
9 Months Ended
Sep. 30, 2018
Assets  
Assets

Note 4 — 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 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 September 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

(in thousands)

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

36,527

 

$

 —

 

$

 —

 

$

36,527

Corporate debt

 

 

 —

 

 

8,561

 

 

 —

 

 

8,561

Commercial paper

 

 

 —

 

 

6,975

 

 

 —

 

 

6,975

Total

 

$

36,527

 

$

15,536

 

$

 —

 

$

52,063

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 U.S. treasuries

 

$

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

 

There were no transfers between fair value measurement levels during the three and nine months ended September 30, 2018.

 

At September 30, 2018 and December 31, 2017, 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)

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

36,538

 

$

 1

 

$

(12)

 

$

36,527

Corporate debt

 

 

8,573

 

 

 —

 

 

(12)

 

 

8,561

Commercial paper

 

 

6,975

 

 

 —

 

 

 —

 

 

6,975

Total

 

$

52,086

 

$

 1

 

$

(24)

 

$

52,063

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

 

Available-for-sale securities in a loss position at September 30, 2018 and December 31, 2017 consist of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

 

    

 

 

    

Gross

    

 

    

Gross

 

 

Estimated

 

Unrealized

 

Estimated

 

Unrealized

 

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

 

(in thousands)

U.S. treasuries

 

$

29,621

 

$

(12)

 

$

33,895

 

$

(19)

Corporate debt

 

 

8,561

 

 

(12)

 

 

10,886

 

 

(8)

Total

 

$

38,182

 

$

(24)

 

$

44,781

 

$

(27)

 

At September 30, 2018 and December 31, 2017, 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 September 30, 2018 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 no realized gains or losses for the three and nine months ended September 30, 2018 and minimal realized gains for the three and nine months ending September 30, 2017.

 

Accounts Receivable

 

Accounts receivable is presented net of an allowance for doubtful accounts of $0.3 million at both September 30, 2018 and December 31, 2017.

 

Inventories

 

Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Inventories at September 30, 2018 and December 31, 2017 consist of the following:

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2018

    

2017

 

 

(in thousands)

Materials

 

$

84,864

 

$

59,919

Work-in-process

 

 

41,423

 

 

37,222

Finished goods

 

 

23,545

 

 

23,125

Total

 

$

149,832

 

$

120,266

 

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 $8.9 million and $7.6 million at September 30, 2018 and December 31, 2017, respectively.

 

Property, Plant, and Equipment

 

Property, plant, and equipment at September 30, 2018 and December 31, 2017 consist of the following:

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2018

    

2017

 

 

(in thousands)

Land

 

$

5,669

 

$

5,669

Building and improvements

 

 

59,547

 

 

54,449

Machinery and equipment (1)

 

 

126,126

 

 

126,829

Leasehold improvements

 

 

8,802

 

 

10,073

Gross property, plant, and equipment

 

 

200,144

 

 

197,020

Less: accumulated depreciation and amortization

 

 

119,518

 

 

111,962

Net property, plant, and equipment

 

$

80,626

 

$

85,058

 

(1)

Machinery and equipment also includes software, furniture and fixtures

 

For the three and nine months ended September 30, 2018, depreciation expense was $4.6 million and $13.0 million, respectively, and $4.2 million and $10.6 million for the comparable 2017 periods.

 

Goodwill

 

Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. The Company is required to assess goodwill annually for impairment, which it does at the beginning of the fourth quarter, or on an interim basis whenever certain events occur or circumstances change, such as an adverse change in business climate, a decline in the adjusted market capitalization of the Company below the book value of the Company’s equity for an extended period of time, or other events that would more likely than not indicate that the fair value of the Company’s single goodwill reporting unit is less than its carrying amount. There were no changes to goodwill during the nine months ended September 30, 2018.

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 closing 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.

Based on the most recent annual impairment test as of October 1, 2018, the Company determined that the fair value of its single goodwill reporting unit exceeded its carrying amount by approximately $60 million. However, this analysis is sensitive to changes in the Company’s stock price and absent other qualitative factors, the Company may be required to record a goodwill impairment charge in future periods if the stock price declines subsequent to its annual measurement date and remains depressed for an extended period of time.

 

Intangible Assets

 

Intangible assets consist of purchased technology, customer relationships, patents, trademarks and tradenames, and backlog, and are initially recorded at fair value. Long-lived intangible assets 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.

 

During the second quarter of 2018, the Company lowered its projected results for the Ultratech asset group, which were significantly below the projected results at the time of the acquisition. The reduced projections were based on lower than expected unit volume of certain smartphones, which incorporate advanced packaging methods such as Fan-Out Wafer Level Packaging (“FOWLP”), and a delay in the adoption of FOWLP advanced packaging by other electronics manufacturers, both of which slowed orders and reduced revenue projections for the Company’s advanced packaging lithography systems. In addition, there has been a delay in the build out of 28nm facilities by companies in China who were expected to purchase the Company’s Laser Spike Anneal (“LSA”) systems. Taken together, the reduced projections identified during the second quarter of 2018 required the Company to assess the Ultratech asset group for impairment. As a result of the analysis, which included projected cash flows that required the use of unobservable inputs, the Company recorded non-cash impairment charges of $216.4 million and $35.9 million related to definite-lived intangible assets and in-process research and development assets, respectively, during the second quarter of 2018.

 

The components of purchased intangible assets were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

 

Accumulated

 

 

 

 

 

Accumulated

 

 

 

    

Gross

    

Amortization

    

 

    

Gross

    

Amortization

    

 

 

 

Carrying

 

and

 

Net

 

Carrying

 

and

 

Net

 

 

Amount

 

Impairment

 

Amount

 

Amount

 

Impairment

 

Amount

 

 

(in thousands)

Technology

 

$

320,888

 

$

273,821

 

$

47,067

 

$

307,588

 

$

133,121

 

$

174,467

Customer relationships

 

 

164,595

 

 

134,760

 

 

29,835

 

 

164,595

 

 

39,336

 

 

125,259

In-process R&D

 

 

30,040

 

 

25,000

 

 

5,040

 

 

43,340

 

 

 —

 

 

43,340

Trademarks and tradenames

 

 

30,910

 

 

23,560

 

 

7,350

 

 

30,910

 

 

4,321

 

 

26,589

Other

 

 

3,686

 

 

3,580

 

 

106

 

 

3,686

 

 

3,498

 

 

188

Total

 

$

550,119

 

$

460,721

 

$

89,398

 

$

550,119

 

$

180,276

 

$

369,843

 

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

 

Based on the revised intangible asset values resulting from the impairment recorded during the period ended June 30, 2018, the remaining estimated annual amortization expense, excluding in-process R&D, is expected to be as follows:

 

 

 

 

 

 

 

Amortization

 

    

(in thousands)

2018

 

$

4,184

2019

 

 

16,554

2020

 

 

15,628

2021

 

 

12,506

2022

 

 

10,172

Thereafter

 

 

25,314

Total

 

$

84,358

 

 

 

 

 

Other Assets

 

Veeco has an ownership interest of less than 20% in a non-marketable investment, Kateeva, Inc. (“Kateeva”), over which Veeco does not exert significant influence. The carrying value of the investment was $21.0 million at September 30, 2018 and December 31, 2017. Additionally, during the nine months ended September 30, 2018, the Company made a separate non-marketable investment of $3.5 million. The Company does not exert significant influence over this investment, and its ownership interest is less than 20%. Neither equity investment has a readily observable market price, and therefore the Company has elected to measure these investments at cost, adjusted for changes in observable market prices minus impairment. The investments are included in “Other assets” on the Consolidated Balance Sheets. There were no changes in observable market prices for either investment for the nine months ended September 30, 2018. These investments are subject to periodic impairment reviews; as there are no open-market valuations, the impairment analyses require judgment. The analyses include assessments of the companies’ financial condition, the business outlooks for their products and technologies, their 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.

v3.10.0.1
Liabilities
9 Months Ended
Sep. 30, 2018
Liabilities  
Liabilities

Note 5 — Liabilities

 

Accrued Expenses and Other Current Liabilities

 

The components of accrued expenses and other current liabilities at September 30, 2018 and December 31, 2017 consist of:

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2018

    

2017

 

 

(in thousands)

Payroll and related benefits

 

$

18,498

 

$

32,996

Warranty

 

 

7,371

 

 

6,532

Interest

 

 

1,992

 

 

4,430

Professional fees

 

 

3,457

 

 

3,942

Merger consideration payable

 

 

 —

 

 

2,662

Sales, use, and other taxes

 

 

532

 

 

2,144

Restructuring liability

 

 

2,901

 

 

1,520

Other

 

 

5,679

 

 

3,842

Total

 

$

40,430

 

$

58,068

 

 

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 nine months ended September 30, 2018 include:

 

 

 

 

 

 

 

    

(in thousands)

Balance - December 31, 2017

 

$

6,532

Warranties issued

 

 

5,249

Consumption of reserves

 

 

(5,161)

Changes in estimate

 

 

751

Balance - September 30, 2018

 

$

7,371

 

Restructuring Accruals

 

During 2017, the Company initiated certain restructuring activities related to its efforts to streamline operations, enhance efficiencies, and reduce costs, as well as reduced its investments in certain technology development. In addition, during 2017, the Company began the Ultratech acquisition integration process to enhance efficiencies, resulting in reductions in headcount and other facility costs. During the nine months ended September 30, 2018, additional accruals were recognized and payments were made related to these restructuring initiatives.

 

During the second quarter of 2018, the Company initiated plans to further reduce excess capacity associated with the manufacture and support of the Company's advanced packaging lithography and 3D wafer inspection systems by consolidating these operations into its San Jose, California facility. As a result of this and other cost saving initiatives, the Company announced headcount reductions of approximately 40 employees and recorded restructuring charges related to these actions of $2.4 million for the nine months ended September 30, 2018, consisting principally of personnel severance and related costs. The Company expects the consolidation to be completed in the first quarter of 2019.

 

During the third quarter of 2018, the Company initiated additional restructuring activities to further reduce costs, including headcount reductions impacting approximately 35 employees and recorded restructuring charges related to these actions of $1.1 million, consisting principally of personnel severance and related costs. The Company expects this initiative to be completed by the end of 2018 and to provide approximately $5 million in annualized savings. Over the next few quarters, the Company expects to incur additional restructuring costs of $1 million to $2 million as it completes all of these restructuring initiatives.

 

 

 

 

 

 

 

 

 

 

 

 

    

Personnel

    

Facility

    

 

 

 

 

Severance and

 

Related Costs

 

 

 

 

 

Related Costs

 

and Other

 

Total

 

 

(in thousands)

Balance - December 31, 2017

 

$

1,520

 

$

 —

 

$

1,520

Provision

 

 

3,930

 

 

2,743

 

 

6,673

Payments

 

 

(2,898)

 

 

(2,394)

 

 

(5,292)

Balance - September 30, 2018

 

$

2,552

 

$

349

 

$

2,901

 

Included within restructuring expense in the Consolidated Statements of Operations for the nine months ended September 30, 2018 is approximately $1.0 million of non-cash charges related to accelerated share-based compensation for employee terminations.

 

Customer Deposits and Deferred Revenue

 

Customer deposits totaled $20.0 million and $41.5 million at September 30, 2018 and December 31, 2017, respectively. Deferred revenue represents amounts billed, other than deposits, in excess of the revenue that can be recognized on a particular contract at the balance sheet date. Changes in deferred revenue were as follows:

 

 

 

 

 

 

 

(in thousands)

Balance - December 31, 2017

 

$

70,536

Deferral of revenue

 

 

7,166

Recognition of previously deferred revenue

 

 

(33,224)

Balance - September 30, 2018

 

$

44,478

 

As of September 30, 2018, the Company has approximately $63.0 million of remaining performance obligations on contracts with an original estimated duration of one year or more, of which approximately 64% is expected to be recognized within one year, with the remaining amounts expected to be recognized between one to three years. The Company has elected to exclude disclosures regarding remaining performance obligations that have an original expected duration of one year or less.

 

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 carrying value of the Convertible Senior Notes is as follows:

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2018

    

2017

 

 

(in thousands)

Principal amount

 

$

345,000

 

$

345,000

Unamortized debt discount

 

 

(55,082)

 

 

(63,022)

Unamortized transaction costs

 

 

(5,549)

 

 

(6,348)

Net carrying value

 

$

284,369

 

$

275,630

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

(in thousands)

 

Cash Interest Expense

 

 

  

 

 

  

 

 

  

 

 

  

 

Coupon interest expense

 

$

2,329

 

$

2,329

 

$

6,986

 

$

6,573

 

Non-Cash Interest Expense

 

 

  

 

 

  

 

 

  

 

 

  

 

Amortization of debt discount

 

 

2,697

 

 

2,502

 

 

7,940

 

 

6,942

 

Amortization of transaction costs

 

 

271

 

 

252

 

 

799

 

 

699

 

Total Interest Expense

 

$

5,297

 

$

5,083

 

$

15,725

 

$

14,214

 

 

The Company determined the Convertible Senior Notes is a Level 2 liability in the fair value hierarchy and estimated its fair value as $292.0 million at September 30, 2018.

 

Other Liabilities

 

As part of the acquisition of Ultratech, the Company assumed an executive non-qualified deferred compensation plan that allowed qualifying executives to defer cash compensation. The plan was frozen at the time of acquisition and no further contributions have been made. At September 30, 2018 and December 31, 2017, plan assets approximated $3.6 million and $3.4 million, respectively, representing the cash surrender value of life insurance policies and is included within “Other assets” in the Consolidated Balance Sheets, while plan liabilities approximated $3.9 million and $4.7 million, respectively, and is included within “Other liabilities” in the Consolidated Balance Sheets. Other liabilities also include asset retirement obligations of $3.2 million and $3.3 million at September 30, 2018 and December 31, 2017, respectively, and medical and dental benefits of $2.1 million and $2.2 million, respectively.

v3.10.0.1
Commitments and Contingencies
9 Months Ended
Sep. 30, 2018
Commitments and Contingencies  
Commitments and Contingencies

Note 6 — Commitments and Contingencies

 

Minimum Lease Commitments

 

At September 30, 2018, the Company’s total future minimum lease payments under non-cancelable operating leases have not changed significantly from the disclosure in the 2017 Form 10-K.

 

Purchase Commitments

 

Veeco has purchase commitments of $114.0 million at September 30, 2018, 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 September 30, 2018, outstanding bank guarantees and letters of credit totaled $6.9 million, and unused bank guarantees and letters of credit of $64.0 million were available to be drawn upon.

 

Legal Proceedings

 

On June 8, 2018, an Ultratech shareholder who received Veeco stock as part of the consideration for the Ultratech acquisition filed a purported class action complaint in the Superior Court of the State of California, County of Santa Clara, captioned Wolther v. Maheshwari et al., Case No. 18CV329690, on behalf of himself and others who purchased or acquired shares of Veeco pursuant to the registration statement and prospectus which Veeco filed with the SEC in connection with the Ultratech acquisition (the “Wolther Action”). The complaint seeks to recover damages and fees under Sections 11, 12, and 15 of the Securities Act of 1933 for, among other things, alleged false/misleading statements in the registration statement and prospectus relating to the Ultratech acquisition, relating primarily to the alleged failure to disclose delays in the advanced packaging business, increased MOCVD competition in China, and an intellectual property dispute. On August 2 and August 8, 2018, two purported class action complaints substantially similar to the Wolther Action were filed on behalf of different plaintiffs in the same court as the Wolther Action. These three cases are expected to be consolidated. Veeco believes these lawsuits are without merit and intends to vigorously contest these matters.

 

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.

 

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. There were no sales of accounts receivable under the agreement for the nine months ended September 30, 2018, and as of September 30, 2018, the Company maintained $23.0 million available under the agreement for additional sales of trade receivables.

v3.10.0.1
Derivative Financial Instruments
9 Months Ended
Sep. 30, 2018
Derivative Financial Instruments  
Derivative Financial Instruments

Note 7 — Derivative Financial Instruments

 

The Company is exposed to financial market risks arising from changes in currency exchange rates. Changes in currency exchange rates 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 September 30, 2018 and December 31, 2017 is as follows: