VEECO INSTRUMENTS INC, 10-Q filed on 11/1/2016
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2016
Oct. 20, 2016
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, 2016 
 
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
 
40,608,880 
Document Fiscal Year Focus
2016 
 
Document Fiscal Period Focus
Q3 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 274,018 
$ 269,232 
Short-term investments
62,835 
116,050 
Accounts receivable, net
50,463 
49,524 
Inventories
86,651 
77,469 
Deferred cost of sales
3,165 
2,100 
Prepaid expenses and other current assets
19,099 
22,760 
Assets held for sale
12,129 
5,000 
Total current assets
508,360 
542,135 
Property, plant and equipment, net
57,557 
79,590 
Intangible assets, net
61,812 
131,674 
Goodwill
114,908 
114,908 
Deferred income taxes
1,384 
1,384 
Other assets
21,047 
21,098 
Total assets
765,068 
890,789 
Current liabilities:
 
 
Accounts payable
27,455 
30,074 
Accrued expenses and other current liabilities
38,421 
49,393 
Customer deposits and deferred revenue
79,699 
76,216 
Income taxes payable
1,825 
6,208 
Current portion of long-term debt
361 
340 
Total current liabilities
147,761 
162,231 
Deferred income taxes
13,146 
11,211 
Long-term debt
920 
1,193 
Other liabilities
6,503 
1,539 
Total liabilities
168,330 
176,174 
Stockholders' equity:
 
 
Preferred stock, 500,000 shares authorized; no shares issued and outstanding
   
   
Common stock, $0.01 par value; 120,000,000 shares authorized; 40,837,811 shares issued and 40,596,820 shares outstanding at September 30, 2016; 40,995,694 shares issued and 40,526,902 shares outstanding at December 31, 2015
408 
410 
Additional paid-in capital
761,975 
767,137 
Accumulated deficit
(163,585)
(45,058)
Accumulated other comprehensive income
2,266 
1,348 
Treasury stock, at cost, 240,991 shares at September 30, 2016; 468,792 shares at December 31, 2015
(4,326)
(9,222)
Total stockholders' equity
596,738 
714,615 
Total liabilities and stockholders' equity
$ 765,068 
$ 890,789 
Consolidated Balance Sheets (Parenthetical) (USD $)
Sep. 30, 2016
Dec. 31, 2015
Consolidated Balance Sheets
 
 
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
40,837,811 
40,995,694 
Common stock, shares outstanding
40,596,820 
40,526,902 
Treasury Stock, Shares
240,991 
468,792 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Consolidated Statements of Operations
 
 
 
 
Net sales
$ 85,482 
$ 140,744 
$ 238,842 
$ 370,494 
Cost of sales
52,027 
86,494 
141,991 
232,038 
Gross profit
33,455 
54,250 
96,851 
138,456 
Operating expenses, net:
 
 
 
 
Research and development
19,892 
19,200 
63,545 
57,904 
Selling, general, and administrative
18,396 
21,905 
58,230 
69,153 
Amortization of intangible assets
5,261 
5,891 
15,785 
21,832 
Restructuring
1,798 
469 
3,993 
3,509 
Asset impairment
56,035 
 
69,662 
126 
Other, net
795 
207 
884 
(795)
Total operating expenses, net
102,177 
47,672 
212,099 
151,729 
Operating income (loss)
(68,722)
6,578 
(115,248)
(13,273)
Interest income
283 
256 
879 
787 
Interest expense
(23)
(95)
(166)
(345)
Income (loss) before income taxes
(68,462)
6,739 
(114,535)
(12,831)
Income tax expense
1,136 
1,433 
2,677 
9,360 
Net income (loss)
$ (69,598)
$ 5,306 
$ (117,212)
$ (22,191)
Income (loss) per common share:
 
 
 
 
Basic (in dollars per share)
$ (1.78)
$ 0.13 
$ (2.99)
$ (0.56)
Diluted (in dollars per share)
$ (1.78)
$ 0.13 
$ (2.99)
$ (0.56)
Weighted average number of shares:
 
 
 
 
Basic (in shares)
39,131 
40,846 
39,193 
39,729 
Diluted (in shares)
39,131 
40,979 
39,193 
39,729 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Consolidated Statements of Comprehensive Income (Loss)
 
 
 
 
Net income (loss)
$ (69,598)
$ 5,306 
$ (117,212)
$ (22,191)
Other comprehensive income (loss), net of tax
 
 
 
 
Unrealized gain (loss) on available-for-sale securities
(7)
(17)
32 
Reclassifications from AOCI into net income
 
 
 
(1)
Reclassifications from AOCI into net income - Minimum pension liability
866 
 
866 
 
Foreign currency translation
(7)
(63)
20 
(93)
Total other comprehensive income (loss), net of tax
852 
(80)
918 
(85)
Comprehensive income (loss)
$ (68,746)
$ 5,226 
$ (116,294)
$ (22,276)
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Cash Flows from Operating Activities
 
 
Net income (loss)
$ (117,212)
$ (22,191)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
Depreciation and amortization
26,010 
30,766 
Deferred income taxes
1,529 
1,794 
Share-based compensation expense
12,133 
14,038 
Asset impairment
69,662 
126 
Gain on sale of lab tools
 
(841)
Provision for bad debts
160 
 
Changes in operating assets and liabilities:
 
 
Accounts receivable
(1,184)
13,484 
Inventories and deferred cost of sales
(10,909)
(13,029)
Prepaid expenses and other current assets
3,661 
332 
Accounts payable and accrued expenses
(13,995)
368 
Customer deposits and deferred revenue
3,568 
(7,929)
Income taxes receivable and payable, net
80 
2,323 
Other, net
2,189 
2,609 
Net cash provided by (used in) operating activities
(24,308)
21,850 
Cash Flows from Investing Activities
 
 
Capital expenditures
(10,717)
(11,069)
Proceeds from the sale of investments
131,297 
68,647 
Payments for purchases of investments
(78,376)
(17,000)
Proceeds from sale of building
693 
 
Proceeds from sale of lab tools
 
2,648 
Other
(230)
(662)
Net cash provided by investing activities
42,667 
42,564 
Cash Flows from Financing Activities
 
 
Proceeds from stock option exercises
473 
1,344 
Restricted stock tax withholdings
(1,184)
(2,129)
Purchases of common stock
(13,349)
 
Proceeds from employee stock purchase plan
719 
 
Repayments of long-term debt
(252)
(233)
Net cash used in financing activities
(13,593)
(1,018)
Effect of exchange rate changes on cash and cash equivalents
20 
(93)
Net increase in cash and cash equivalents
4,786 
63,303 
Cash and cash equivalents - beginning of period
269,232 
270,811 
Cash and cash equivalents - end of period
274,018 
334,114 
Supplemental Disclosure of Cash Flow Information
 
 
Interest paid
179 
104 
Income taxes paid
$ 1,456 
$ 6,040 
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, 2015 (“2015 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 2016 interim quarters end on April 3, July 3, and October 2, and the 2015 interim quarters ended on March 29, June 28, and September 27. 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 majority of 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.

 

Veeco’s system sales arrangements, including certain upgrades, generally do not contain provisions for the right of return, forfeiture, refund, or other purchase price concessions. 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.

 

Veeco’s contractual terms with customers in Japan generally specify that title and risk and rewards of ownership transfer upon customer acceptance. A distributor is used for almost all sales to customers in Japan. Title passes to the distributor upon shipment; however, due to customary local business practices, generally the risk and rewards of ownership of the systems transfer to the end-customers upon their acceptance. As a result, for customers in Japan, Veeco recognizes revenue upon receipt of written acceptance from the end-customer.

 

Veeco 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

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, as amended: Revenue from Contracts with Customers,  which has been codified as Accounting Standards Codification 606 (“ASC606”). ASC606 requires Veeco’s revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which Veeco expects to be entitled in exchange for those goods or services. ASC606 outlines a five-step model to make the revenue recognition determination and requires new financial statement disclosures. Publicly-traded companies are required to adopt ASC606 for reporting periods beginning after December 15, 2017. ASC606 provides for different transition alternatives. Veeco has not yet determined which method of adoption will be selected. Veeco is evaluating the impact of adopting ASC606 on its consolidated financial statements and related financial statement disclosures.  A preliminary assessment of ASC606 indicates that the billing retention will no longer impact the timing of revenue recognition.  As a result, a small portion of revenue for system sales arrangements may be recognized earlier under ASC606 than it is under current U.S. GAAP.

 

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. Veeco does not expect this ASU will have a material impact on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02: Leases, which generally requires Veeco’s 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, Veeco 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. Veeco is evaluating the impact of adopting the ASU on its consolidated financial statements.

 

Veeco 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 Veeco’s consolidated financial statements.

 

Change in Accounting Principle

 

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

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

Note 2 - Income (Loss) Per Common Share

 

Basic income (loss) per common share is computed using the two-class method by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted income per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares and common share equivalents outstanding during the period. The dilutive effect of outstanding options to purchase common stock and non-participating restricted share awards and restricted share units is considered in diluted income per common 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 common share for the three and nine months ended September 30, 2016 and 2015 are as follows:

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands, except per share amounts)

 

Net income (loss)

 

$

(69,598

)

$

5,306

 

$

(117,212

)

$

(22,191

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.78

)

$

0.13

 

$

(2.99

)

$

(0.56

)

Diluted

 

$

(1.78

)

$

0.13

 

$

(2.99

)

$

(0.56

)

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

39,131

 

40,846

 

39,193

 

39,729

 

Effect of potentially dilutive share-based awards

 

 

133

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

39,131

 

40,979

 

39,193

 

39,729

 

 

 

 

 

 

 

 

 

 

 

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

 

469

 

 

469

 

1,076

 

 

 

 

 

 

 

 

 

 

 

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

 

140

 

 

45

 

165

 

 

 

 

 

 

 

 

 

 

 

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

 

2,030

 

2,264

 

2,042

 

2,066

 

 

Assets
Assets

Note 3 - Assets

 

Investments

 

Marketable securities 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 September 30, 2016 and December 31, 2015:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

September 30, 2016

 

 

 

 

 

 

 

 

 

Short-term investments

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

40,043 

 

$

 

$

 

$

40,043 

 

Government agency securities

 

 

5,016 

 

 

5,016 

 

Corporate debt

 

 

13,789 

 

 

13,789 

 

Commercial paper

 

 

3,987 

 

 

3,987 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

40,043 

 

$

22,792 

 

$

 

$

62,835 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

9,999 

 

$

 

$

 

$

9,999 

 

Government agency securities

 

 

4,998 

 

 

4,998 

 

Commercial paper

 

 

2,999 

 

 

2,999 

 

 

 

 

 

 

 

 

 

 

 

Total

 

9,999 

 

7,997 

 

 

17,996 

 

Short-term investments

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

94,918 

 

 

 

94,918 

 

Government agency securities

 

 

12,988 

 

 

12,988 

 

Corporate debt

 

 

8,144 

 

 

8,144 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

94,918 

 

$

21,132 

 

$

 

$

116,050 

 

 

There were no transfers between fair value measurement levels during the three and nine months ended September 30, 2016.

 

At September 30, 2016 and December 31, 2015, 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, 2016

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

40,033

 

$

10

 

$

 

$

40,043

 

Government agency securities

 

5,016

 

 

 

5,016

 

Corporate debt

 

13,799

 

 

(10

)

13,789

 

Commercial paper

 

3,987

 

 

 

3,987

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

62,835

 

$

10

 

$

(10

)

$

62,835

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

94,935

 

$

6

 

$

(23

)

$

94,918

 

Government agency securities

 

12,985

 

3

 

 

12,988

 

Corporate debt

 

8,144

 

1

 

(1

)

8,144

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

116,064

 

$

10

 

$

(24

)

$

116,050

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities in a loss position at September 30, 2016 and December 31, 2015 consist of:

 

 

 

September 30, 2016

 

December 31, 2015

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Estimated

 

Unrealized

 

Estimated

 

Unrealized

 

 

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

 

 

(in thousands)

 

Government agency securities

 

$

 

$

 

$

64,922

 

$

(23

)

Corporate debt

 

13,789

 

(10

)

3,353

 

(1

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

13,789

 

$

(10

)

$

68,275

 

$

(24

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2016 and December 31, 2015, 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 September 30, 2016 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 minimal realized gains for the three and nine months ended September 30, 2016 and 2015. 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 and $0.2 million at September 30, 2016 and December 31, 2015, respectively.

 

Inventories

 

Inventories are stated at the lower of cost or net realizable value on a first-in, first-out basis. Inventories at September 30, 2016 and December 31, 2015 consist of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Materials

 

$

50,370 

 

$

42,373 

 

Work-in-process

 

30,960 

 

30,327 

 

Finished goods

 

5,321 

 

4,769 

 

 

 

 

 

 

 

Total

 

$

86,651 

 

$

77,469 

 

 

 

 

 

 

 

 

 

 

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 $13.1 million and $14.6 million at September 30, 2016 and December 31, 2015, respectively.

 

Assets held for sale

 

During the second quarter of 2016, the Company undertook initiatives to streamline operations, enhance efficiency, and reduce costs.  As part of that initiative, the Company listed its facility in Yongin-city, South Korea for sale.  At that time, Veeco determined that the carrying value of the building exceeded its fair market value, less cost to sell, and recorded an impairment charge.  During the third quarter of 2016, Veeco engaged potential buyers and re-evaluated market conditions for the building.  As a result, Veeco updated its assessment of fair market value and increased the carrying value of the building by $1.6 million, which is still lower than the original pre-impairment carrying value.  The increase in the carrying value was recorded as a contra-impairment charge in the Consolidated Statements of Operations.

 

During the third quarter of 2016, Veeco sold its building in Hyeongok-ri, South Korea, which had been designated as held for sale in the second quarter of 2016, at a price which approximated carrying value.  The Company also continues to market one of its properties in St. Paul, Minnesota.  The carrying value of assets held for sale reflects Veeco’s estimate of fair value less costs to sell using the sales comparison market approach.

 

Property, plant, and equipment

 

Property, plant, and equipment at September 30, 2016 and December 31, 2015 consist of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Land

 

$

5,061 

 

$

9,592 

 

Building and improvements

 

47,242 

 

54,622 

 

Machinery and equipment(1)

 

98,220 

 

110,075 

 

Leasehold improvements

 

3,771 

 

5,554 

 

 

 

 

 

 

 

Gross property, plant and equipment

 

154,294 

 

179,843 

 

Less: accumulated depreciation and amortization

 

96,737 

 

100,253 

 

 

 

 

 

 

 

Net property, plant, and equipment

 

$

57,557 

 

$

79,590 

 

 

 

 

 

 

 

 

 

 

 

(1)

Machinery and equipment also includes software, furniture and fixtures

 

For the three and nine months ended September 30, 2016, depreciation expense was $3.5 million and $10.2 million, respectively, and $3.2 million and $8.9 million for the comparable 2015 periods.  During the second quarter of 2016, and as part of the Company’s efforts to streamline operations, enhance efficiency, and reduce costs, the Company removed certain lab equipment that was no longer required and recorded a non-cash impairment charge of $6.1 million.  In addition, during the second quarter of 2016, land and buildings with a net carrying value of $13.7 million were classified as assets held for sale on the Consolidated Balance Sheets.  During the third quarter of 2016, the Company decided to significantly reduce future investments in its Atomic Layer Deposition (“ALD”) technology development and, as a result, recorded a charge for impairment of its ALD assets, including a $3.3 million impairment of property, plant, and equipment.

 

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 nine months ended September 30, 2016.

 

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.

 

During the third quarter of 2016, the Company decided to significantly reduce future investments in its ALD technology development and, as a result, recorded a charge for impairment of its ALD assets, including $54.3 million for the full impairment of the intangible purchased ALD technology. The impairment charges were based on projected cash flows that required the use of unobservable inputs.

 

The components of purchased intangible assets at September 30, 2016 and December 31, 2015 consist of the following:

 

 

 

September 30, 2016

 

December 31, 2015

 

 

 

 

 

Accumulated

 

 

 

 

 

Accumulated

 

 

 

 

 

Gross

 

Amortization

 

 

 

Gross

 

Amortization

 

 

 

 

 

Carrying

 

and

 

Net

 

Carrying

 

and

 

Net

 

 

 

Amount

 

Impairment

 

Amount

 

Amount

 

Impairment

 

Amount

 

 

 

(in thousands)

 

Technology

 

$

222,358 

 

$

185,341 

 

$

37,017 

 

$

222,358 

 

$

120,496 

 

$

101,862 

 

Customer relationships

 

47,885 

 

27,111 

 

20,774 

 

47,885 

 

22,470 

 

25,415 

 

Trademarks and tradenames

 

2,590 

 

1,910 

 

680 

 

2,730 

 

1,937 

 

793 

 

Indefinite-lived trademark

 

2,900 

 

 

2,900 

 

2,900 

 

 

2,900 

 

Other

 

2,026 

 

1,585 

 

441 

 

6,241 

 

5,537 

 

704 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

277,759 

 

$

215,947 

 

$

61,812 

 

$

282,114 

 

$

150,440 

 

$

131,674 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 nine months ended September 30, 2016. 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 September 30, 2016 and December 31, 2015 consist of:

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Payroll and related benefits

 

$

22,830 

 

$

30,917 

 

Warranty

 

4,849 

 

8,159 

 

Professional fees

 

1,795 

 

2,224 

 

Installation

 

1,826 

 

1,110 

 

Sales, use, and other taxes

 

953 

 

1,132 

 

Restructuring liability

 

2,053 

 

824 

 

Other

 

4,115 

 

5,027 

 

 

 

 

 

 

 

Total

 

$

38,421 

 

$

49,393 

 

 

 

 

 

 

 

 

 

 

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 nine months ended September 30, 2016 include:

 

 

 

(in thousands)

 

Balance - December 31, 2015

 

$

8,159

 

Warranties issued

 

3,223

 

Consumption of reserves

 

(5,739

)

Changes in estimate

 

(794

)

 

 

 

 

Balance - September 30, 2016

 

$

4,849

 

 

 

 

 

 

 

Restructuring accruals

 

During the nine months ended September 30, 2016, additional accruals were recognized and payments made related to previous years’ restructuring initiatives. During the second and third quarters of 2016, the Company undertook additional 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 and recorded restructuring charges related to these actions of $2.9 million, consisting of $2.8 million of personnel severance and related costs and $0.1 million of facility closing costs. In addition, during the third quarter of 2016, the Company decided to significantly reduce future investments in its ALD technology development, which impacts approximately 25 additional employees. As a result, the Company recorded personnel severance and related restructuring charges of $0.9 million in the third quarter of 2016.  Over the next few quarters, the Company expects to incur additional restructuring costs of $4 to $7 million as it finalizes all of these activities.

 

 

 

Personnel

 

 

 

 

 

 

 

Severance and

 

Facility

 

 

 

 

 

Related Costs

 

Closing Costs

 

Total

 

 

 

(in thousands)

 

Balance - December 31, 2015

 

$

824

 

$

 

$

824

 

Provision

 

3,721

 

274

 

3,995

 

Changes in estimate

 

(2

)

 

(2

)

Payments

 

(2,490

)

(274

)

(2,764

)

 

 

 

 

 

 

 

 

Balance - September 30, 2016

 

$

2,053

 

$

 

$

2,053

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer deposits

 

Customer deposits totaled $25.8 million and $28.2 million at September 30, 2016 and December 31, 2015, respectively.

 

Long-term debt

 

Debt consists of a mortgage note payable with a carrying value of $1.3 million and $1.5 million at September 30, 2016 and December 31, 2015, respectively. The mortgage note payable is secured by certain land and buildings. One of the buildings is currently held for sale. The annual interest rate on the mortgage is 7.91%, and the final payment is due on January 1, 2020. Veeco estimated the mortgage fair value as $1.3 million and $1.6 million at September 30, 2016 and December 31, 2015, 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 and less than $0.1 million at September 30, 2016 and December 31, 2015, respectively.

Commitments and Contingencies
Commitments and Contingencies

Note 5 - Commitments and Contingencies

 

Minimum lease commitments

 

At September 30, 2016, Veeco’s total future minimum lease payments under non-cancelable operating leases have not changed significantly from the disclosure in the 2015 Form 10-K.

 

Purchase commitments

 

Veeco has purchase commitments of $60.1 million at September 30, 2016, 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, 2016, outstanding bank guarantees and letters of credit totaled $5.3 million, and unused bank guarantees and letters of credit of $59.8 million were available to be drawn upon.

 

Legal proceedings

 

Veeco is involved in various 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

 

Minimum Pension

 

Gains (Losses) on
Available for Sale

 

 

 

 

 

Translation

 

Liability

 

Securities

 

Total

 

 

 

(in thousands)

 

Balance - December 31, 2015

 

$

2,246

 

$

(866

)

$

(32

)

$

1,348

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, before taxes

 

20

 

1,290

 

14

 

1,324

 

Provision for income taxes

 

 

(424

)

18

 

(406

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

20

 

866

 

32

 

918

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - September 30, 2016

 

$

2,266

 

$

 

$

 

$

2,266

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Late in 2015, the Company began the process to terminate a defined benefit plan it had acquired in the year 2000.  The plan had been frozen as of September 30, 1991, and no further benefits have been accrued by participants since that date.  In connection with the termination, responsibility for the payment of benefits under the plan was transferred to an insurance company during the third quarter of 2016. As a result, the Company reclassified the minimum pension liability of $1.3 million and the $0.4 million income tax benefit from AOCI to “Other, net” and “Income tax expense,” respectively, on the Consolidated Statements of Operations.

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 and nine months ended September 30, 2016 and 2015

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands)

 

Cost of sales

 

$

607 

 

$

787 

 

$

1,639 

 

$

2,102 

 

Research and development

 

993 

 

1,044 

 

3,032 

 

2,739 

 

Selling, general, and administrative

 

2,143 

 

3,288 

 

7,462 

 

9,197 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

3,743 

 

$

5,119 

 

$

12,133 

 

$

14,038 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2016, equity activity related to stock options was as follows:

 

 

 

Number of

 

Weighted
Average

 

 

 

Shares

 

Exercise Price

 

 

 

(in thousands)

 

 

 

Balance - December 31, 2015

 

2,064

 

$

32.91

 

Granted

 

 

 

Exercised

 

(193

)

12.12

 

Expired or forfeited

 

(170

)

34.28

 

 

 

 

 

 

 

Balance - September 30, 2016

 

1,701

 

$

35.13

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2016, 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, 2015

 

1,398

 

$

31.97

 

Granted

 

1,138

 

17.13

 

Released

 

(208

)

33.10

 

Forfeited

 

(173

)

28.33

 

 

 

 

 

 

 

Balance - September 30, 2016

 

2,155

 

$

24.31

 

 

 

 

 

 

 

 

 

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.  A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized.  Realization of net deferred tax assets is dependent on future taxable income.

 

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 for the three and nine months ended September 30, 2016 and 2015 were as follows:

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands)

 

Loss before income taxes

 

$

(68,462

)

$

6,739

 

$

(114,535

)

$

(12,831

)

Income tax expense

 

$

1,136

 

$

1,433

 

$

2,677

 

$

9,360

 

 

For the three months ended September 30, 2016, the $1.1 million net expense for income taxes included $0.3 million relating to Veeco’s U.S. operations and $0.8 million relating to Veeco’s non-U.S. operations. For the nine months ended September 30, 2016, the $2.7 million net expense for income taxes included $1.2 million relating to Veeco’s U.S. operations and $1.5 million relating to Veeco’s non-U.S. operations.  For the three and nine months ended September 30, 2016, Veeco did not provide a current tax benefit on U.S. pre-tax losses as the amounts are not realizable on a more-likely-than-not basis. The U.S. tax expense is primarily related to U.S. tax amortization expense of indefinite-lived intangible assets that is not available to offset existing deferred tax assets.

 

For three and nine months ended September 30, 2015, Veeco did not provide a current tax benefit on U.S. pre-tax losses as the amounts are not realizable on a more-likely-than-not basis. The U.S. tax expense is primarily related to withholding taxes and is also related to U.S. tax amortization expense of indefinite-lived intangible assets that is not available to offset existing deferred tax assets.

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 and nine months ended September 30, 2016 and 2015 were as follows:

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands)

 

Sales by end-market

 

 

 

 

 

 

 

 

 

Lighting, Display & Power Electronics

 

$

49,427 

 

$

94,302 

 

$

97,132 

 

$

240,751 

 

Advanced Packaging, MEMS & RF

 

12,092 

 

13,541 

 

52,400 

 

40,545 

 

Scientific & Industrial

 

13,938 

 

14,897 

 

48,675 

 

46,493 

 

Data Storage

 

10,025 

 

18,004 

 

40,635 

 

42,705 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

85,482 

 

$

140,744 

 

$

238,842 

 

$

370,494 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales by geographic region

 

 

 

 

 

 

 

 

 

United States

 

$

19,104 

 

$

19,405 

 

$

66,550 

 

$

67,006 

 

China

 

21,238 

 

81,156 

 

54,621 

 

191,874 

 

EMEA(1)

 

19,703 

 

21,304 

 

61,999 

 

51,618 

 

Rest of World

 

25,437 

 

18,879 

 

55,672 

 

59,996 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

85,482 

 

$

140,744 

 

$

238,842 

 

$

370,494 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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.

 

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 majority of 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.

 

Veeco’s system sales arrangements, including certain upgrades, generally do not contain provisions for the right of return, forfeiture, refund, or other purchase price concessions. 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.

 

Veeco’s contractual terms with customers in Japan generally specify that title and risk and rewards of ownership transfer upon customer acceptance. A distributor is used for almost all sales to customers in Japan. Title passes to the distributor upon shipment; however, due to customary local business practices, generally the risk and rewards of ownership of the systems transfer to the end-customers upon their acceptance. As a result, for customers in Japan, Veeco recognizes revenue upon receipt of written acceptance from the end-customer.

 

Veeco 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

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, as amended: Revenue from Contracts with Customers,  which has been codified as Accounting Standards Codification 606 (“ASC606”). ASC606 requires Veeco’s revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which Veeco expects to be entitled in exchange for those goods or services. ASC606 outlines a five-step model to make the revenue recognition determination and requires new financial statement disclosures. Publicly-traded companies are required to adopt ASC606 for reporting periods beginning after December 15, 2017. ASC606 provides for different transition alternatives. Veeco has not yet determined which method of adoption will be selected. Veeco is evaluating the impact of adopting ASC606 on its consolidated financial statements and related financial statement disclosures.  A preliminary assessment of ASC606 indicates that the billing retention will no longer impact the timing of revenue recognition.  As a result, a small portion of revenue for system sales arrangements may be recognized earlier under ASC606 than it is under current U.S. GAAP.

 

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. Veeco does not expect this ASU will have a material impact on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02: Leases, which generally requires Veeco’s 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, Veeco 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. Veeco is evaluating the impact of adopting the ASU on its consolidated financial statements.

 

Veeco 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 Veeco’s consolidated financial statements.

 

Change in Accounting Principle

 

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

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

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(in thousands, except per share amounts)

 

Net income (loss)

 

$

(69,598

)

$

5,306

 

$

(117,212

)

$

(22,191

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.78

)

$

0.13

 

$

(2.99

)

$

(0.56

)

Diluted

 

$

(1.78

)

$

0.13

 

$

(2.99

)

$

(0.56

)

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

39,131

 

40,846

 

39,193

 

39,729

 

Effect of potentially dilutive share-based awards

 

 

133

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

39,131

 

40,979

 

39,193

 

39,729

 

 

 

 

 

 

 

 

 

 

 

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

 

469

 

 

469

 

1,076

 

 

 

 

 

 

 

 

 

 

 

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

 

140

 

 

45

 

165

 

 

 

 

 

 

 

 

 

 

 

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

 

2,030

 

2,264

 

2,042

 

2,066

 

 

Assets (Tables)

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

September 30, 2016

 

 

 

 

 

 

 

 

 

Short-term investments

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

40,043 

 

$

 

$

 

$

40,043 

 

Government agency securities

 

 

5,016 

 

 

5,016 

 

Corporate debt

 

 

13,789 

 

 

13,789 

 

Commercial paper

 

 

3,987 

 

 

3,987 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

40,043 

 

$

22,792 

 

$

 

$

62,835 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

9,999 

 

$

 

$

 

$

9,999 

 

Government agency securities

 

 

4,998 

 

 

4,998 

 

Commercial paper

 

 

2,999 

 

 

2,999 

 

 

 

 

 

 

 

 

 

 

 

Total

 

9,999 

 

7,997 

 

 

17,996 

 

Short-term investments

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

94,918 

 

 

 

94,918 

 

Government agency securities

 

 

12,988 

 

 

12,988 

 

Corporate debt

 

 

8,144 

 

 

8,144 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

94,918 

 

$

21,132 

 

$

 

$

116,050 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

 

(in thousands)

 

September 30, 2016

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

40,033

 

$

10

 

$

 

$

40,043

 

Government agency securities

 

5,016

 

 

 

5,016

 

Corporate debt

 

13,799

 

 

(10

)

13,789

 

Commercial paper

 

3,987

 

 

 

3,987

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

62,835

 

$

10

 

$

(10

)

$

62,835

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

94,935

 

$

6

 

$

(23

)

$

94,918

 

Government agency securities

 

12,985

 

3

 

 

12,988

 

Corporate debt

 

8,144

 

1

 

(1

)

8,144

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

116,064

 

$

10

 

$

(24

)

$

116,050

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

December 31, 2015

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Estimated

 

Unrealized

 

Estimated

 

Unrealized

 

 

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

 

 

(in thousands)

 

Government agency securities

 

$

 

$

 

$

64,922

 

$

(23

)

Corporate debt

 

13,789

 

(10

)

3,353

 

(1

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

13,789

 

$

(10

)

$

68,275

 

$

(24

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Materials

 

$

50,370 

 

$

42,373 

 

Work-in-process

 

30,960 

 

30,327 

 

Finished goods

 

5,321 

 

4,769 

 

 

 

 

 

 

 

Total

 

$

86,651 

 

$

77,469 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Land

 

$

5,061 

 

$

9,592 

 

Building and improvements

 

47,242 

 

54,622 

 

Machinery and equipment(1)

 

98,220 

 

110,075 

 

Leasehold improvements

 

3,771 

 

5,554 

 

 

 

 

 

 

 

Gross property, plant and equipment

 

154,294 

 

179,843 

 

Less: accumulated depreciation and amortization

 

96,737 

 

100,253 

 

 

 

 

 

 

 

Net property, plant, and equipment

 

$

57,557 

 

$

79,590 

 

 

 

 

 

 

 

 

 

 

 

(1)

Machinery and equipment also includes software, furniture and fixtures

 

 

 

September 30, 2016

 

December 31, 2015

 

 

 

 

 

Accumulated

 

 

 

 

 

Accumulated

 

 

 

 

 

Gross

 

Amortization

 

 

 

Gross

 

Amortization

 

 

 

 

 

Carrying

 

and

 

Net

 

Carrying

 

and

 

Net

 

 

 

Amount

 

Impairment

 

Amount

 

Amount

 

Impairment

 

Amount

 

 

 

(in thousands)

 

Technology

 

$

222,358 

 

$

185,341 

 

$

37,017 

 

$

222,358 

 

$

120,496 

 

$

101,862 

 

Customer relationships

 

47,885 

 

27,111 

 

20,774 

 

47,885 

 

22,470 

 

25,415 

 

Trademarks and tradenames

 

2,590 

 

1,910 

 

680 

 

2,730 

 

1,937 

 

793 

 

Indefinite-lived trademark

 

2,900 

 

 

2,900 

 

2,900 

 

 

2,900 

 

Other

 

2,026 

 

1,585 

 

441 

 

6,241 

 

5,537 

 

704 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

277,759 

 

$

215,947 

 

$

61,812 

 

$

282,114 

 

$

150,440 

 

$

131,674 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities (Tables)

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Payroll and related benefits

 

$

22,830 

 

$

30,917 

 

Warranty

 

4,849 

 

8,159 

 

Professional fees

 

1,795 

 

2,224 

 

Installation

 

1,826 

 

1,110 

 

Sales, use, and other taxes

 

953 

 

1,132 

 

Restructuring liability

 

2,053 

 

824 

 

Other

 

4,115 

 

5,027 

 

 

 

 

 

 

 

Total

 

$

38,421 

 

$

49,393