VEECO INSTRUMENTS INC, 10-K filed on 2/22/2017
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2016
Feb. 14, 2017
Jul. 1, 2016
Document and Entity Information
 
 
 
Entity Registrant Name
VEECO INSTRUMENTS INC 
 
 
Entity Central Index Key
0000103145 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2016 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Public Float
 
 
$ 655,733,038 
Entity Common Stock, Shares Outstanding
 
40,595,406 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 277,444 
$ 269,232 
Short-term investments
66,787 
116,050 
Accounts receivable, net
58,020 
49,524 
Inventories
77,063 
77,469 
Deferred cost of sales
6,160 
2,100 
Prepaid expenses and other current assets
16,034 
22,760 
Assets held for sale
 
5,000 
Total current assets
501,508 
542,135 
Property, plant and equipment, net
60,646 
79,590 
Intangible assets, net
58,378 
131,674 
Goodwill
114,908 
114,908 
Deferred income taxes
2,045 
1,384 
Other assets
21,047 
21,098 
Total assets
758,532 
890,789 
Current liabilities:
 
 
Accounts payable
22,607 
30,074 
Accrued expenses and other current liabilities
33,201 
49,393 
Customer deposits and deferred revenue
85,022 
76,216 
Income taxes payable
2,311 
6,208 
Current portion of long-term debt
368 
340 
Total current liabilities
143,509 
162,231 
Deferred income taxes
13,199 
11,211 
Long-term debt
826 
1,193 
Other liabilities
6,403 
1,539 
Total liabilities
163,937 
176,174 
Stockholders' equity:
 
 
Preferred stock, $0.01 par value; 500,000 shares authorized; no shares issued and outstanding
   
   
Common stock, $0.01 par value; 120,000,000 shares authorized; 40,714,790 and 40,995,694 shares issued at December 31, 2016 and 2015, respectively; 40,588,194 and 40,526,902 shares outstanding at December 31, 2016 and 2015, respectively.
407 
410 
Additional paid-in capital
763,303 
767,137 
Accumulated deficit
(168,583)
(45,058)
Accumulated other comprehensive income
1,777 
1,348 
Treasury stock, at cost, 126,596 and 468,792 shares at December 31, 2016 and 2015, respectively.
(2,309)
(9,222)
Total stockholders' equity
594,595 
714,615 
Total liabilities and stockholders' equity
$ 758,532 
$ 890,789 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2016
Dec. 31, 2015
Consolidated Balance Sheets
 
 
Preferred stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
500,000 
500,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value (in dollars per share)
$ 0.01 
$ 0.01 
Common stock, authorized shares
120,000,000 
120,000,000 
Common stock, shares issued
40,714,790 
40,995,694 
Common stock, shares outstanding
40,588,194 
40,526,902 
Treasury stock, shares
126,596 
468,792 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Consolidated Statements of Operations
 
 
 
Net sales
$ 332,451 
$ 477,038 
$ 392,873 
Cost of sales
199,593 
299,797 
257,991 
Gross profit
132,858 
177,241 
134,882 
Operating expenses, net:
 
 
 
Research and development
81,016 
78,543 
81,171 
Selling, general, and administrative
77,642 
90,188 
89,760 
Amortization of intangible assets
19,219 
27,634 
13,146 
Restructuring
5,640 
4,679 
4,394 
Asset impairment
69,520 
126 
58,170 
Changes in contingent consideration
 
 
(29,368)
Other, net
223 
(697)
(3,182)
Total operating expenses, net
253,260 
200,473 
214,091 
Operating income (loss)
(120,402)
(23,232)
(79,209)
Interest income
1,180 
1,050 
1,570 
Interest expense
(222)
(464)
(715)
Income (loss) before income taxes
(119,444)
(22,646)
(78,354)
Income tax expense (benefit)
2,766 
9,332 
(11,414)
Net income (loss)
$ (122,210)
$ (31,978)
$ (66,940)
Income (loss) per common share:
 
 
 
Basic (in dollars per share)
$ (3.11)
$ (0.80)
$ (1.70)
Diluted (in dollars per share)
$ (3.11)
$ (0.80)
$ (1.70)
Weighted average number of shares:
 
 
 
Basic (in shares)
39,340 
39,742 
39,350 
Diluted (in shares)
39,340 
39,742 
39,350 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Consolidated Statements of Comprehensive Income (Loss)
 
 
 
Net income (loss)
$ (122,210)
$ (31,978)
$ (66,940)
Available-for-sale securities:
 
 
 
Change in net unrealized gains or losses
(6)
(49)
51 
Reclassification adjustments for net (gains) losses included in net income
18 
 
(65)
Net changes related to available-for-sale securities
12 
(49)
(14)
Minimum pension liability:
 
 
 
Change in minimum pension liability
 
15 
(145)
Reclassification adjustments for net (gains) losses included in net income
866 
 
 
Net changes related to minimum pension liability
866 
15 
(145)
Currency translation adjustments:
 
 
 
Change in currency translation adjustments
(19)
(87)
149 
Reclassification adjustments for net (gains) losses included in net income
(430)
 
(3,142)
Net changes related to currency translation adjustments
(449)
(87)
(2,993)
Other comprehensive income (loss), net of tax
429 
(121)
(3,152)
Total comprehensive income (loss)
$ (121,781)
$ (32,099)
$ (70,092)
Consolidated Statements of Stockholders' Equity (USD $)
In Thousands, unless otherwise specified
Common Stock
Treasury Stock
Additional Paid-in Capital
Early Adoption of New Accounting Principle
Additional Paid-in Capital
Retained Earnings (Accumulated Deficit)
Early Adoption of New Accounting Principle
Retained Earnings (Accumulated Deficit)
Accumulated Other Comprehensive Income
Early Adoption of New Accounting Principle
Total
Balance at the beginning of the period at Dec. 31, 2013
$ 397 
 
 
$ 721,352 
 
$ 53,860 
$ 4,621 
 
$ 780,230 
Balance (in shares) at Dec. 31, 2013
39,666 
 
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
 
 
Net loss
 
 
 
 
 
(66,940)
 
 
(66,940)
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
(3,152)
 
(3,152)
Share-based compensation expense
 
 
 
18,813 
 
 
 
 
18,813 
Net issuance under employee stock plans
 
 
9,974 
 
 
 
 
9,981 
Net issuance under employee stock plans (in shares)
694 
 
 
 
 
 
 
 
 
Balance at the end of the period at Dec. 31, 2014
404 
 
 
750,139 
 
(13,080)
1,469 
 
738,932 
Balance (in shares) at Dec. 31, 2014
40,360 
 
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
 
 
Net loss
 
 
 
 
 
(31,978)
 
 
(31,978)
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
(121)
 
(121)
Share-based compensation expense
 
 
 
17,986 
 
 
 
 
17,986 
Net issuance under employee stock plans
 
 
(988)
 
 
 
 
(982)
Net issuance under employee stock plans (in shares)
636 
 
 
 
 
 
 
 
 
Purchases of common stock
 
(9,222)
 
 
 
 
 
 
(9,222)
Purchase of common stock (in shares)
 
469 
 
 
 
 
 
 
 
Balance at the end of the period at Dec. 31, 2015
410 
(9,222)
 
767,137 
 
(45,058)
1,348 
 
714,615 
Balance (in shares) at Dec. 31, 2015
40,996 
469 
 
 
 
 
 
 
 
Balance at the beginning of the period at Oct. 27, 2015
 
 
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
 
 
Cumulative effect of change in accounting principle (ASU 2016-09)
 
 
1,315 
 
(1,315)
 
 
 
 
Purchases of common stock
 
 
 
 
 
 
 
 
(22,300)
Balance at the end of the period (ASU 2016-09)
 
 
 
 
 
 
 
 
Balance at the end of the period at Dec. 31, 2016
 
 
 
 
 
 
 
 
594,595 
Balance at the beginning of the period at Dec. 31, 2015
410 
(9,222)
 
767,137 
 
(45,058)
1,348 
 
714,615 
Balance (in shares) at Dec. 31, 2015
40,996 
469 
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
 
 
Cumulative effect of change in accounting principle (ASU 2016-09)
 
 
1,315 
 
(1,315)
 
 
 
 
Net loss
 
 
 
 
 
(122,210)
 
 
(122,210)
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
429 
 
429 
Share-based compensation expense
 
 
 
15,741 
 
 
 
 
15,741 
Net issuance under employee stock plans
(3)
19,948 
 
(20,890)
 
 
 
 
(945)
Net issuance under employee stock plans (in shares)
(281)
(1,072)
 
 
 
 
 
 
 
Purchases of common stock
 
(13,035)
 
 
 
 
 
 
(13,035)
Purchase of common stock (in shares)
 
730 
 
 
 
 
 
 
700 
Balance at the end of the period (ASU 2016-09)
 
 
 
 
 
 
 
 
Balance at the end of the period at Dec. 31, 2016
407 
(2,309)
 
763,303 
 
(168,583)
1,777 
 
594,595 
Balance (in shares) at Dec. 31, 2016
40,715 
127 
 
 
 
 
 
 
 
Balance at the beginning of the period at Sep. 30, 2016
 
 
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
 
 
Cumulative effect of change in accounting principle (ASU 2016-09)
 
 
1,315 
 
(1,315)
 
 
 
 
Net loss
 
 
 
 
 
 
 
 
(4,998)
Balance at the end of the period (ASU 2016-09)
 
 
 
 
 
 
 
 
Balance at the end of the period at Dec. 31, 2016
 
 
 
 
 
 
 
 
$ 594,595 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Cash Flows from Operating Activities
 
 
 
Net income (loss)
$ (122,210)
$ (31,978)
$ (66,940)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
32,650 
39,850 
24,573 
Deferred income taxes
940 
2,648 
(11,330)
Share-based compensation expense
15,741 
17,986 
18,813 
Asset impairment
69,520 
126 
58,170 
Gain on sale of lab tools
 
(1,261)
(1,549)
Provision (recovery) for bad debts
171 
43 
(1,814)
Gain on cumulative translation adjustment
(430)
 
(3,142)
Changes in contingent consideration
 
 
(29,368)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(8,667)
10,715 
(25,390)
Inventories and deferred cost of sales
(5,389)
(12,312)
6,513 
Prepaid expenses and other current assets
6,726 
(39)
(2,245)
Accounts payable and accrued expenses
(24,202)
9,470 
(5,534)
Customer deposits and deferred revenue
8,807 
(20,738)
55,536 
Income taxes receivable and payable, net
547 
759 
20,279 
Other, net
1,952 
520 
5,497 
Net cash provided by (used in) operating activities
(23,844)
15,789 
42,069 
Cash Flows from Investing Activities
 
 
 
Acquisitions of businesses, net of cash acquired
 
(68)
(144,069)
Capital expenditures
(11,479)
(13,887)
(15,588)
Proceeds from the sale of investments
152,301 
88,647 
318,276 
Payments for purchases of investments
(103,394)
(84,244)
(157,737)
Payments for purchase of cost method investment
 
(1,594)
(2,388)
Proceeds from sale of property, plant, and equipment
9,512 
 
 
Proceeds from sale of lab tools
 
3,068 
9,259 
Other
(230)
1,000 
350 
Net cash provided by (used in) investing activities
46,710 
(7,078)
8,103 
Cash Flows from Financing Activities
 
 
 
Proceeds from stock option exercises and employee stock purchase plan
1,656 
2,233 
12,056 
Restricted stock tax withholdings
(2,601)
(3,215)
(2,075)
Purchases of common stock
(13,349)
(8,907)
 
Repayments of long-term debt
(340)
(314)
(290)
Net cash provided by (used) in financing activities
(14,634)
(10,203)
9,691 
Effect of exchange rate changes on cash and cash equivalents
(20)
(87)
149 
Net increase in cash and cash equivalents
8,212 
(1,579)
60,012 
Cash and cash equivalents - beginning of period
269,232 
270,811 
210,799 
Cash and cash equivalents - end of period
277,444 
269,232 
270,811 
Supplemental Disclosure of Cash Flow Information
 
 
 
Interest paid
225 
485 
159 
Income taxes paid
1,699 
7,091 
3,320 
Non-cash operating and financing activities
 
 
 
Net transfer of inventory to property, plant and equipment
$ 1,827 
 
 
Significant Accounting Policies
Significant Accounting Policies

Note 1 — Significant Accounting Policies

 

(a) Description of Business

 

Veeco Instruments Inc. (together with its consolidated subsidiaries, “Veeco,” or the “Company”) operates in a single segment: the design, development, manufacture, and support of thin film process equipment primarily sold to make electronic devices including light emitting diodes (“LEDs”), power electronics, wireless devices, hard disk drives, and semiconductors.

 

(b) Basis of Presentation

 

The accompanying audited Consolidated Financial Statements of the Company have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). The Company reports interim quarters on a 13-week basis ending on the last Sunday of each period, which is determined at the start of each year. The Company’s fourth quarter always ends on the last day of the calendar year, December 31. During 2016 the interim quarters ended on April 3, July 3, and October 2, and during 2015 the interim quarters ended on March 29, June 28 and September 27. The Company reports these interim quarters as March 31, June 30, and September 30 in its interim consolidated financial statements.

 

(c) Use of Estimates

 

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

 

(d) Principles of Consolidation

 

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

 

(e) Foreign Currencies

 

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

 

(f) Revenue Recognition

 

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

 

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

 

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

 

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

 

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

 

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

 

The Company’s contractual terms with customers in Japan generally specify that title and risk and rewards of ownership transfer upon customer acceptance. As a result, for customers in Japan, revenue is recognized upon the receipt of written 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, the risks and rewards of ownership of the system transfer to the end-customers upon their acceptance. As such, the Company recognizes revenue upon receipt of written acceptance from the end customer.

 

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

 

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

 

(g) Warranty Costs

 

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

 

(h) Shipping and Handling Costs

 

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

 

(i) Research and Development Costs

 

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

 

(j) Advertising Expense

 

The cost of advertising is expensed as incurred and totaled $0.8 million, $0.9 million, and $0.6 million for the years ended December 31, 2016, 2015, and 2014, respectively.

 

(k) Accounting for Share-Based Compensation

 

Share-based awards exchanged for employee services are accounted for under the fair value method. Accordingly, share-based compensation cost is measured at the grant date based on the fair value of the award. The expense for awards is recognized over the employee’s requisite service period (generally the vesting period of the award).

 

The Company has elected to treat awards with only service conditions and with graded vesting as one award. Consequently, the total compensation expense is recognized straight-line over the entire vesting period, so long as the compensation cost recognized at any date at least equals the portion of the grant date fair value of the award that is vested at that date.

 

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

 

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

 

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

 

(l) Income Taxes

 

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

 

See Note 1(u), “Recently Adopted Accounting Standards,” for additional information concerning the Company’s early adoption of ASU 2015-17: Balance Sheet Classification of Deferred Taxes.

 

(m) Concentration of Credit Risk

 

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

 

The Company maintains an allowance reserve for potentially uncollectible accounts for estimated losses resulting from the inability of its customers to make required payments. The Company evaluates its allowance for doubtful accounts based on a combination of factors. In circumstances where specific invoices are deemed to be uncollectible, the Company provides a specific allowance for bad debt against the amount due to reduce the net recognized receivable to the amount reasonably expected to be collected. The Company also provides allowances based on its write-off history. The allowance for doubtful accounts totaled $0.3 million and $0.2 million at December 31, 2016 and 2015, respectively.

 

To further mitigate the Company’s exposure to uncollectable accounts, the Company may request certain customers provide a negotiable irrevocable letter of credit drawn on a reputable financial institution. These irrevocable letters of credit are typically issued to mature between zero and 90 days from the date the documentation requirements are met, typically when a system ships or upon receipt of final acceptance from the customer. The Company, at its discretion, may monetize these letters of credit on a non-recourse basis after they become negotiable, but before maturity. The fees associated with the monetization are included in “Selling, general, and administrative” in the Consolidated Statements of Operations and were insignificant for the years ended December 31, 2016, 2015, and 2014.

 

(n) Fair Value of Financial Instruments

 

The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses reflected in the consolidated financial statements approximate fair value due to their short-term maturities. The fair value of debt for footnote disclosure purposes, including current maturities, is estimated using a discounted cash flow analysis based on the estimated current incremental borrowing rates for similar types of instruments.

 

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

 

All financial instruments purchased with an original maturity of three months or less at the time of purchase are considered cash equivalents. Such items may include liquid money market accounts, U.S. treasuries, government agency securities, and corporate debt. Investments that are classified as cash equivalents are carried at cost, which approximates fair value. The Company’s cash and cash equivalents includes $1.5 million and $18.0 million of cash equivalents at December 31, 2016 and 2015 respectively.

 

A portion of the Company’s cash and cash equivalents is held by its subsidiaries throughout the world, frequently in each subsidiary’s respective functional currency, which is typically the U.S. dollar. Approximately 54% and 50% of cash and cash equivalents were maintained outside the United States at December 31, 2016 and 2015, respectively.

 

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

 

(p) Inventories

 

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

 

(q) Business Combinations

 

The Company allocates the fair value of the purchase consideration of the Company’s acquisitions to the tangible assets, intangible assets, including in-process research and development (“IPR&D”), if any, and liabilities assumed, based on estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When a project underlying reported IPR&D is completed, the corresponding amount of IPR&D is amortized over the asset’s estimated useful life. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred in “Selling, General, and Administrative” in the Consolidated Statements of Operations. See Note 5, “Business Combinations,” for additional information.

 

(r) Goodwill and Indefinite-Lived Intangibles

 

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

 

The Company may first perform a qualitative assessment of whether it is more likely than not that the reporting unit’s fair value is less than its carrying amount, and, if so, the Company then applies the two-step impairment test. The two-step impairment test first compares the fair value of the Company’s reporting unit to its carrying amount. If the fair value exceeds the carrying amount, goodwill is not impaired, and the Company is not required to perform further testing. If the carrying amount exceeds fair value, the Company determines the implied fair value of the goodwill and, if the carrying amount of the goodwill exceeds its implied fair value, then the Company records an impairment loss equal to the difference.

 

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

 

(s) Long-Lived Assets and Cost Method Investment

 

Long-lived intangible assets consist of purchased technology, customer-related intangible assets, patents, trademarks, 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 straight-lined if such pattern cannot be reliably determined.

 

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

 

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

 

(t) Recent Accounting Pronouncements

 

The FASB issued ASU 2014-09, as amended: Revenue from Contracts with Customers, which has been codified as Accounting Standards Codification 606 (“ASC 606”). ASC 606 requires the Company’s revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. ASC 606 outlines a five-step model to make the revenue recognition determination and requires new financial statement disclosures. Publicly-traded companies are required to adopt ASC 606 for reporting periods beginning after December 15, 2017, but can adopt early for annual periods beginning after December 15, 2016. The Company is still finalizing its assessment of the impact of adopting the ASU on its consolidated financial statements and is still evaluating which method of adoption it will select.

 

In January 2016, the FASB issued ASU 2016-01: Financial Instruments — Overall, which requires certain equity investments to be measured at fair value, with changes in fair value recognized in net income. Publicly-traded companies are required to adopt the ASU for reporting periods beginning after December 15, 2017; early adoption is permitted. The Company does not expect this ASU will have a material impact on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02: Leases, which generally requires the Company’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. The transition to the ASU will require leases at the beginning of the earliest period presented to be recognized and measured using a modified retrospective approach. The ASU is effective for fiscal years beginning after December 15, 2018, with early application permitted. The Company is evaluating the anticipated impact of adopting the ASU on its consolidated financial statements.

 

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

 

In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory, which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. Publicly-traded companies are required to adopt the update for reporting periods beginning after December 15, 2017. The Company is evaluating the anticipated effect the ASU will have on its consolidated financial statements.

 

(u) Recently Adopted Accounting Standards

 

In March 2016, the FASB issued ASU 2016-09: Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payments. The Company early adopted the ASU effective January 1, 2016. Beginning in 2016, excess tax benefits and deficiencies are recognized as income tax expense or benefit in the income statement in the reporting period incurred. The Company also made an accounting policy election to account for forfeitures when they occur. The ASU transition guidance requires that this election be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period in which the ASU is effective. Accordingly, the Company 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, the Company recorded additional deferred tax assets with an equally offsetting valuation allowance of $2.4 million.

 

In November 2015, the FASB issued ASU 2015-17: Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes by requiring that deferred income tax liabilities and assets be classified as noncurrent in our consolidated balance sheet. Publicly-traded companies are required to adopt the update for reporting periods beginning after December 15, 2016, with early application permitted. The Company early adopted the ASU effective January 1, 2015. In accordance with the ASU’s transition requirements, the Company chose to apply the amendments in the update prospectively. As such, periods prior to 2015 have not been retrospectively adjusted. The adoption of this ASU did not have a material impact on the consolidated financial statements.

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

Note 2 — Income (Loss) Per Share

 

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

 

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 years ended December 31, 2016, 2015, and 2014 are as follows:

 

 

 

 

For the year ended December 31,

 

 

 

 

2016

 

 

2015

 

 

2014

 

 

 

(in thousands, except per share amounts)

 

Net income (loss)

 

$

(122,210

)

 

$

(31,978

)

 

$

(66,940

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(3.11

)

 

$

(0.80

)

 

$

(1.70

)

Diluted

 

$

(3.11

)

 

$

(0.80

)

 

$

(1.70

)

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

39,340

 

 

39,742

 

 

39,350

 

Effect of potentially dilutive share-based awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

39,340

 

 

39,742

 

 

39,350

 

 

 

 

 

 

 

 

 

 

 

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

 

312

 

 

1,017

 

 

1,141

 

 

 

 

 

 

 

 

 

 

 

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

 

107

 

 

146

 

 

339

 

 

 

 

 

 

 

 

 

 

 

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

 

1,896

 

 

2,111

 

 

1,123

 

 

Fair Value Measurements
Fair Value Measurements

Note 3 — Fair Value Measurements

 

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

 

·

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

 

·

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

 

·

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

 

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

 

The following table presents the Company’s assets that were measured at fair value on a recurring basis at December 31, 2016 and 2015:

 

 

 

 

 

Level 1

 

 

 

Level 2

 

 

 

Level 3

 

 

 

Total

 

 

 

(in thousands)

 

December 31, 2016

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

Corporate debt

 

$

 

$

1,501 

 

$

 

$

1,501 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

1,501 

 

 

1,501 

 

Short-term investments

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

40,008 

 

 

 

40,008 

 

Government agency securities

 

 

10,012 

 

 

10,012 

 

Corporate debt

 

 

13,773 

 

 

13,773 

 

Commercial paper

 

 

2,994 

 

 

2,994 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

40,008 

 

$

26,779 

 

$

 

$

66,787 

 

 

 

 

 

 

 

 

 

 

 

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 

 

 

Cash equivalents are highly liquid investments with maturities of three months or less when purchased. These investments are carried at cost, which approximates fair value. All investments classified as available-for-sale are recorded at fair value within short-term investments in the Consolidated Balance Sheets. The Company’s investments classified as Level 1 are based on quoted prices that are available in active markets. The Company’s investments classified as Level 2 are valued using observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes, or alternative pricing sources with reasonable levels of price transparency.

Investments
Investments

Note 4 — Investments

 

At December 31, 2016 and 2015 the amortized cost and fair value of marketable securities were as follows:

 

 

 

 

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

 

 

 

 

Amortized

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Estimated

 

 

 

 

 

Cost

 

 

 

Gains

 

 

 

Losses

 

 

 

Fair Value

 

 

 

 

 

(in thousands)

 

December 31, 2016

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

40,013

 

$

 

$

(5

)

$

40,008

 

Government agency securities

 

10,020

 

 

(8

)

10,012

 

Corporate debt

 

13,780

 

 

(7

)

13,773

 

Commercial paper

 

2,994

 

 

 

2,994

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

66,807

 

$

 

$

(20

)

$

66,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 December 31, 2016 and 2015 were as follows:

 

 

 

 

 

December 31, 2016

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

Gross

 

 

 

 

 

Estimated

 

 

 

Unrealized

 

 

 

Estimated

 

 

 

Unrealized

 

 

 

 

 

Fair Value

 

 

 

Losses

 

 

 

Fair Value

 

 

 

Losses

 

 

 

(in thousands)

 

U.S. treasuries

 

$

20,002

 

$

(5

)

$

64,922

 

$

(23

)

Government agency securities

 

10,012

 

(8

)

 

 

Corporate debt

 

13,774

 

(7

)

3,353

 

(1

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

43,788

 

$

(20

)

$

68,275

 

$

(24

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2016 and 2015, there were no short-term investments that had been in a continuous loss position for more than 12 months.

 

The maturities of securities classified as available-for-sale at December 31, 2016 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 year ended December 31, 2016. There were no realized losses and minimal realized gains for 2015 and 2014, which were included in “Other, net” in the Consolidated Statements of Operations.

 

Cost Method Investment

 

The Company has an ownership interest of less than 20% in a non-marketable investment, Kateeva, Inc. (“Kateeva”). The Company does not exert significant influence over Kateeva and therefore the investment is carried at cost. The carrying value of the investment was $21.0 million at December 31, 2016 and 2015. 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.

Business Combinations
Business Combinations

Note 5 — Business Combinations

 

PSP

 

On December 4, 2014 the Company acquired 100% of Solid State Equipment, LLC (“SSEC”) and rebranded the business Veeco Precision Surface Processing (“PSP”). The results of PSP operations have been included in the consolidated financial statements since the date of acquisition. PSP designs and develops wafer wet processing capabilities. Target market applications include semiconductor advanced packaging (including 2.5D and 3D ICs), micro-electromechanical systems (“MEMS”), compound semiconductor (RF, power electronics, LED and others), data storage, photomask, and flat panel displays. PSP further extends the Company’s penetration in the compound semiconductor and MEMS markets and represents the Company’s entry into the advanced packaging market.

 

The acquisition date fair value of the consideration totaled $145.5 million, net of cash acquired, which consisted of the following:

 

 

 

Acquisition Date

 

(December 4, 2014)

 

 

 

(in thousands)

 

Amount paid, net of cash acquired

 

$

145,382 

 

Working capital adjustment

 

88 

 

 

 

 

 

Acquisition date fair value

 

$

145,470 

 

 

 

 

 

 

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The Company utilized third-party valuations to estimate the fair value of certain of the acquired tangible and intangible assets:

 

 

 

Acquisition Date

 

(December 4, 2014)

 

 

 

(in thousands)

 

Accounts receivable

 

$

9,383 

 

Inventory

 

13,812 

 

Other current assets

 

463 

 

Property, plant, and equipment

 

6,912 

 

Intangible assets

 

79,810 

 

 

 

 

 

Total identifiable assets acquired

 

110,380 

 

 

 

 

 

Accounts payable and accrued expenses

 

6,473 

 

Customer deposits

 

6,039 

 

Deferred tax liability, net

 

2,705 

 

Other

 

1,089 

 

 

 

 

 

Total liabilities assumed

 

16,306 

 

 

 

 

 

Net identifiable assets acquired

 

94,074 

 

Goodwill

 

51,396 

 

 

 

 

 

Net assets acquired

 

$

145,470 

 

 

 

 

 

 

 

The gross contractual value of the acquired accounts receivable was approximately $10.5 million. The fair value of the accounts receivables is the amount expected to be collected by the Company. Goodwill generated from the acquisition is primarily attributable to expected synergies from future growth and strategic advantages provided through the expansion of product offerings as well as assembled workforce. Approximately 80% of the value of the goodwill is deductible for income tax purposes.

 

During 2015, the Company finalized the purchase accounting, including taxes and the working capital adjustment under the purchase agreement. Based on the final adjustments, net working capital increased $0.7 million, goodwill decreased $0.1 million, deferred tax liabilities decreased $0.2 million, and a lease-related asset retirement obligation of $0.8 million was recognized.

 

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

 

 

 

Acquisition Date

 

 

 

(December 4, 2014)

 

 

 

Amount

 

Useful life

 

 

 

(in thousands)

 

 

 

Technology

 

$

39,950 

 

10 years

 

Customer relationships

 

34,310 

 

14 years

 

Backlog

 

3,340 

 

6 months

 

Non-compete agreements

 

1,130 

 

2 years

 

Trademark and tradenames

 

1,080 

 

1 year

 

 

 

 

 

 

 

Intangible assets acquired

 

$

79,810 

 

 

 

 

 

 

 

 

 

 

 

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

 

During 2014, the Company recognized $3.2 million of acquisition related costs that are included in “Selling, general, and administrative” in the Consolidated Statements of Operations.

 

The amounts of revenue and income (loss) from continuing operations before income taxes of PSP included in the Company’s consolidated statement of operations from the acquisition date (December 4, 2014) to the period ending December 31, 2014 are as follows:

 

 

 

Total

 

 

 

(in thousands)

 

Revenue

 

$

7,906

 

Loss from operations before income taxes

 

$

(3,011

)

 

The following represents the unaudited pro forma Consolidated Statements of Operations as if PSP had been included in the Company’s consolidated results for the periods indicated. These amounts have been calculated after applying the Company’s accounting policies to material amounts and also adjusting the results of PSP to reflect the additional amortization and depreciation that would have been expensed assuming the fair value adjustments to the acquired assets had been applied on January 1, 2013:

 

 

 

December 31,

 

 

 

2014

 

 

 

(in thousands)

 

Revenue

 

$

447,089

 

Loss from operations before income taxes

 

$

(68,715

)

 

Goodwill and Intangible Assets
Goodwill and Intangible Assets

Note 6 — Goodwill and Intangible Assets

 

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

 

 

 

Gross carrying

 

Accumulated

 

 

 

 

 

 

 

amount

 

 

 

impairment

 

 

 

Net amount

 

 

 

 

 

(in thousands)

 

 

 

Balance at December 31, 2014

 

$

238,158

 

$

123,199

 

$

114,959

 

Purchase price adjustments

 

(51

)

 

(51

)

 

 

 

 

 

 

 

 

Balance at December 31, 2015 and 2016

 

$

238,107

 

$

123,199

 

$

114,908

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company performed its annual goodwill impairment test during the year ended December 31, 2016. The fair value of the Company’s reporting unit exceeded the carrying amount and therefore goodwill was not impaired. In the future, a significant decline in the market price of the Company’s common stock could indicate a decline in the fair value of the Company’s reporting unit such that goodwill becomes impaired.

 

During 2014, the Company successfully demonstrated its FAST-ALD technology for flexible OLED encapsulation. But, subsequent to the Company’s annual goodwill impairment test in 2014, the incumbent deposition technology had progressed to satisfy current market requirements, which required an additional impairment test to be performed in the fourth quarter of 2014. After estimating the fair value of significant tangible and intangible long-lived assets related to the Atomic Layer Deposition (“ALD”) business, the Company recorded non-cash impairment charges of $28.0 million related to goodwill and $25.9 million related to other long-lived assets, including $17.4 million related to customer relationships, $4.8 million related to in-process research and development, and $3.6 million related to certain tangible assets.

 

During 2016, the Company decided to further significantly reduce future investments in its ALD technology development and, as a result, recorded non-cash impairment charges of its remaining 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 were as follows:

 

 

 

 

 

 

 

December 31, 2016

 

 

 

December 31, 2015

 

 

 

Weighted

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Average Remaining

 

 

 

Gross

 

 

 

Amortization

 

 

 

 

 

 

 

Gross

 

 

 

Amortization

 

 

 

 

 

 

 

Amortization

 

 

 

Carrying

 

 

 

and

 

 

 

Net

 

 

 

Carrying

 

 

 

and

 

 

 

Net

 

 

 

Period

 

 

 

Amount

 

 

 

Impairment

 

 

 

Amount

 

 

 

Amount

 

 

 

Impairment

 

 

 

Amount

 

 

 

(in years)

 

(in thousands)

 

Technology

 

7.3

 

$

149,198 

 

$

113,904 

 

$

35,294 

 

$

222,358 

 

$

120,496 

 

$

101,862 

 

Customer relationships

 

11.9

 

47,885 

 

28,659 

 

19,226 

 

47,885 

 

22,470 

 

25,415 

 

Trademarks and tradenames

 

4.3

 

2,590 

 

1,948 

 

642 

 

2,730 

 

1,937 

 

793 

 

Indefinite-lived trademark

 

 

2,900 

 

 

2,900 

 

2,900 

 

 

2,900 

 

Other

 

2.9

 

2,026 

 

1,710 

 

316 

 

6,241 

 

5,537 

 

704 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

8.9

 

$

204,599 

 

$

146,221 

 

$

58,378 

 

$

282,114 

 

$

150,440 

 

$

131,674 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Based on the intangible assets recorded at December 31, 2016, and assuming no subsequent additions to or impairment of the underlying assets, the remaining estimated annual amortization expense is expected to be as follows:

 

 

 

 

 

Amortization

 

 

 

(in thousands)

 

2017

 

$

11,470 

 

2018

 

9,893 

 

2019

 

8,608 

 

2020

 

7,530 

 

2021

 

5,491 

 

Thereafter

 

12,486 

 

 

 

 

 

Total

 

$

55,478 

 

 

 

 

 

 

 

Inventories
Inventories

Note 7 — Inventories

 

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

 

 

 

 

December 31,

 

 

 

 

2016

 

 

 

2015

 

 

 

(in thousands)

 

Materials

 

$

46,457 

 

$

42,373 

 

Work-in-process

 

25,250 

 

30,327 

 

Finished goods

 

5,356 

 

4,769 

 

 

 

 

 

 

 

Total

 

$

77,063 

 

$

77,469 

 

 

 

 

 

 

 

 

 

 

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

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

 

Property and equipment, net, consist of the following:

 

 

 

December 31,

 

Average

 

 

 

2016

 

2015

 

Useful Life

 

 

 

(in thousands)

 

 

 

Land

 

$

5,669 

 

$

9,592 

 

N/A

 

Building and improvements

 

50,814 

 

54,622 

 

10-40 years

 

Machinery and equipment(1)

 

99,370 

 

110,075 

 

3-10 years

 

Leasehold improvements

 

3,652 

 

5,554 

 

3-7 years

 

 

 

 

 

 

 

 

 

Gross property, plant and equipment

 

159,505 

 

179,843 

 

 

 

Less: accumulated depreciation and amortization

 

98,859 

 

100,253 

 

 

 

 

 

 

 

 

 

 

 

Net property, plant and equipment

 

$

60,646 

 

$

79,590 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Depreciation expense was $13.4 million, $12.2 million, and $11.4 million for the years ended December 31, 2016, 2015, and 2014, respectively. During 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 a $3.3 million impairment of property, plant, and equipment.

 

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

 

The Company also has a property in St. Paul, Minnesota that was classified as held for sale in 2014. At that time, the Company determined that the carrying value of this property exceeded the fair value, less cost to sell, and recorded an impairment charge of approximately $1.9 million for the year ended December 31, 2014. The Company continued to classify the property as held for sale throughout 2015. In early 2016, the Company recorded an additional impairment charge of approximately $1.2 million to reflect changes in market conditions that impacted the fair value of the assets. The Company continues to actively market the property for sale. However, the Company can no longer make the assessment that the assets will be sold within the next twelve months. As such, the land and building no longer meet the criteria to be classified as assets held for sale on the balance sheet and were reclassified to “Property, plant and equipment, net” in the Consolidated Balance Sheets at its carrying value of $3.6 million, which approximates its fair market value.

 

During the year ended December 31, 2014, the Company classified certain property, plant, and equipment related to the Company’s research and demonstration labs in Asia as held for sale, and recorded an impairment charge of approximately $1.6 million. During the year ended December 31, 2015, the Company sold these assets for $1.0 million, which approximated carrying value.

 

Finally, during the year ended December 31, 2014, the Company recognized additional asset impairment charges of $0.7 million relating to assets that were abandoned during the year.

Accrued Expenses and Other Liabilities
Accrued Expenses and Other Liabilities

Note 9 — Accrued Expenses and Other Liabilities

 

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

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

 

 

2016

 

 

 

2015

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Payroll and related benefits

 

$

18,780 

 

$

30,917 

 

 

 

 

 

Warranty

 

4,217 

 

8,159 

 

 

 

 

 

Professional fees

 

1,827 

 

2,224 

 

 

 

 

 

Installation

 

1,382 

 

1,110 

 

 

 

 

 

Sales, use, and other taxes

 

1,282 

 

1,132 

 

 

 

 

 

Restructuring liability

 

1,796 

 

824 

 

 

 

 

 

Other

 

3,917 

 

5,027 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

33,201 

 

$

49,393 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer deposits and deferred revenue

 

Customer deposits totaled $22.2 million and $28.2 million at December 31, 2016 and 2015, respectively, which are included in “Customer deposits and deferred revenue” in the Consolidated Balance Sheets.

Restructuring Charges
Restructuring Charges

Note 10 — Restructuring Charges

 

During 2016, additional accruals were recognized and payments made related to previous years’ restructuring initiatives. In addition, in 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 $4.4 million, consisting of $3.3 million of personnel severance and related costs and $1.1 million of facility closing costs. In addition, the Company decided to significantly reduce future investments in its ALD technology development, which impacted approximately 25 additional employees. As a result, the Company recorded personnel severance and related restructuring charges of $1.2 million. Over the next year, the Company expects to incur additional restructuring costs of $2 million to $5 million as it finalizes all of these activities.

 

During 2015, charges of $2.7 million were recognized and payments made related to the 2014 closing of the Ft. Collins, Colorado and Camarillo, California facilities. In 2015, the Company announced the closing of its Hyeongok-ri, South Korea facility and reduced the workforce, including 23 employees whose positions were eliminated, resulting in restructuring costs of $1.1 million. And in an effort to better align the Company’s cost structure with the then recently observed weakness in the LED market, the Company incurred $0.9 million to reduce spending primarily through the reduction of 16 employees and 12 temporary staff.

 

During 2014, the Company announced the closing of its Ft. Collins, Colorado and Camarillo, California facilities. Business activities formerly conducted at these sites were transferred to the Company’s Plainview, New York facility, and the Company recorded $0.4 million of facility closing costs. The Company also took additional measures to improve profitability and notified 93 employees of their termination from the Company and recorded $4.0 million of personnel severance and related costs. These actions were substantially complete at the end of 2014.

 

The following table shows the amounts incurred and paid for restructuring activities during the years ended December 31, 2016, 2015, and 2014 and the remaining accrued balance of restructuring costs at December 31, 2016, which is included in “Accrued expenses and other current liabilities” in the Consolidated Balance Sheets:

 

 

 

 

 

Personnel

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and

 

 

 

Facility

 

 

 

 

 

 

 

 

 

Related Costs

 

 

 

Related Costs

 

 

 

Total

 

 

 

 

 

(in thousands)

 

 

 

Balance at December 31, 2013

 

$

533

 

$

 

$

533

 

Provision

 

4,012

 

382

 

4,394

 

Payments

 

(3,117

)

(382

)

(3,499

)

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

1,428

 

 

1,428

 

Provision

 

3,513

 

1,166

 

4,679

 

Payments

 

(4,117

)

(1,166

)

(5,283

)

 

 

 

 

 

 

 

 

Balance at December 31, 2015

 

824

 

 

824

 

Provision

 

4,544

 

1,098

 

5,642

 

Changes in estimate

 

(2

)

 

(2

)

Payments

 

(3,570

)

(1,098

)

(4,668

)

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

$

1,796

 

$

 

$

1,796

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies
Commitments and Contingencies

Note 11 — Commitments and Contingencies

 

Warranty

 

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

 

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

 

 

 

 

 

December 31,

 

 

 

 

 

2016

 

 

 

2015

 

 

 

2014

 

 

 

(in thousands)

 

Balance, beginning of the year

 

$

8,159

 

$

5,411

 

$

5,662

 

Addition for new warranties issued

 

3,916

 

7,873

 

3,484

 

Addition from PSP acquisition

 

 

 

809

 

Settlements

 

(6,433

)

(3,551

)

(3,802

)

Changes in estimate

 

(1,425

)

(1,574

)

(742

)

 

 

 

 

 

 

 

 

Balance, end of the year

 

$

4,217

 

$

8,159

 

$

5,411

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum Lease Commitments

 

Minimum lease commitments at December 31, 2016 for property and equipment under operating lease agreements (exclusive of renewal options) are payable as follows:

 

 

 

Operating

 

 

 

Leases

 

Payments due by period:

 

(in thousands)

 

2017

 

$

3,281 

 

2018

 

2,292 

 

2019

 

1,900 

 

2020

 

1,592 

 

2021

 

1,203 

 

Thereafter

 

3,605 

 

 

 

 

 

Total

 

$

13,873 

 

 

 

 

 

 

 

Lease expense was $2.5 million, $2.3 million, and $2.3 million for the years ended December 31, 2016, 2015, and 2014, respectively. In addition, the Company is obligated under such leases for certain other expenses, including real estate taxes and insurance.

 

Legal Proceedings

 

Veeco and certain other parties were named as defendants in a lawsuit filed on April 25, 2013 in the Superior Court of California, County of Sonoma. The plaintiff in the lawsuit, Patrick Colbus, sought unspecified damages and asserted claims that he suffered burns and other injuries while cleaning a molecular beam epitaxy system alleged to have been manufactured by Veeco. The lawsuit alleged, among other things, that the molecular beam epitaxy system was defective and that Veeco failed to adequately warn of the potential risks of the system. In April 2016, the parties settled the lawsuit, without any admission of wrongdoing. The settlement amount was fully covered by Veeco’s insurance.

 

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

 

Concentrations of Credit Risk

 

The Company depends on purchases from its ten largest customers, which accounted for 73% and 75% of net accounts receivable at December 31, 2016 and 2015, respectively.

 

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

 

 

 

Accounts Receivable

 

Net Sales

 

 

 

 

 

 

 

Year ended December 31,

 

For the Year Ended December 31,

Customer

 

2016

 

2015

 

2016

 

2015

 

2014

Customer A

 

23%

 

*

 

13%

 

*

 

*

Customer B

 

17%

 

*

 

*

 

*

 

*

Customer C

 

*

 

23%

 

*

 

*

 

*

Customer D

 

*

 

*

 

*

 

20%

 

*

Customer E

 

*

 

*

 

*

 

12%

 

*

Customer F

 

*

 

*

 

*

 

*

 

15%

Customer G

 

*

 

*

 

*

 

*

 

11%

 

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

 

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

 

Suppliers

 

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

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